Pediatric Services of America, Inc.

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Pediatric Services of America, Inc.

310 Technology Parkway
Norcross, Georgia 30092
U.S.A.
Telephone: (770) 441-1580
Toll Free: (800) 950-1580
Fax: (770) 263-9340
Web site:http://www.psakids.com

Public Company
Incorporated: 1989
Employees: 5,000
Sales: $302.5 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: PSAI
NAIC: 62161 Home Health Care Services

Pediatric Services of America, Inc. (PSA) provides home medical care to pediatric patients through more than 110 branch offices scattered across 28 states and the District of Columbia. PSA focuses on providing medical care to infants suffering from respiratory problems, but the company also provides nursing, pharmacy, and infusion therapy services. Based in Norcross, Georgia, PSA is headed by Joseph D. Sansone, who presided as chairman, chief executive officer, and president.

Origins

Prior to founding PSA, Sansone accumulated the experience he would need to create an industry leader in pediatric home care. His career path in the years immediately preceding PSA’s formation included two years as a senior executive of a subsidiary owned by American Medical International, Inc. The subsidiary, comprising a division of American Medical that specialized in durable medical equipment sales and rentals, was AMI Home Health Equipment Centers. Sansone served as vice-president of the subsidiary between 1985 and 1987, leaving in September 1987 to join Macón, Georgia-based Charter Medical Corporation. At Charter Medical, Sansone was given responsibility to head a Charter Medical subsidiary named Ambulatory

Services of America, a geriatric care provider that would become the foundation of PSA. Sansone, in his position as president of Ambulatory Services, was granted considerable control over the Charter Medical subsidiary, enough to entirely transform the orientation of the company. He moved Ambulatory Services away from its traditional business of caring for the elderly, a segment of the health care industry deemed over-populated, and pushed the company headlong into another health care industry niche: the home care of pediatric patients.

At first blush, the strategy behind the shift in markets was sound. The United States was inundated with health care providers for the elderly and bereft of pediatric home care providers. As outside observers looked deeper into Ambulatory Services’ dramatic change in focus, the prudence of Sansone’s decision became clearer. At the time, insurance companies, the primary payors of health care costs, were desperately seeking to reduce their payments. With hospital stays reaching upwards of $3,000 per day, home care as a means to meet the medical needs of patients of all ages was more cost-effective than institutional care. For pediatric care, the savings realized by the payors generally increased. Children suffering from bronchopul-monary dysplasia, congenital heart defects, cystic fibrosis, hemophilia, and a host of other serious medical problems required medical attention for years, rather than weeks. Accordingly, the fragile medical condition of pediatric patients, exacerbated by their age, predicated the financial argument for home care, a business that was relatively unexploited during the late 1980s. Beyond the financial benefits, pediatric home care also was an attractive alternative for parents of pediatric patients and for the patients themselves, both of whom preferred, when the situation allowed it, to remain at home rather than at a hospital. Such were the motivations behind Sansone’s redirection of Ambulatory Services’ market focus, but as it soon became apparent, Sansone desired more than to lead a Charter Medical subsidiary toward greater success.

1989 Leveraged Buyout

After two years spent transforming Ambulatory Services into a pediatric home care specialist, Sansone proposed to buy the subsidiary from Charter Medical. He enlisted the help of a bank and two venture capital concerns and completed a leveraged buyout of Ambulatory Services in 1989, renaming the enterprise Pediatric Services of America. Initially, his intent was to concentrate on premature births, which constituted ten percent of the four million babies born each year in the United States. “I thought,” Sansone explained to Forbes magazine in April 1998, “why not let preemies go home instead of sitting in the ICU while Mom stares through the window?” By positioning PSA as a specialist in pediatric home care, Sansone stood to gain from favorable industry conditions, namely, the absence of any dominant pediatric home care concerns operating on a national basis. The industry was populated by a large number of local and regional concerns, each restricted to competing for control of a relatively small market. The few nationally oriented pediatric home care providers were divisions within broader-based health care companies, whose efforts to penetrate the pediatric market represented only a facet of their overall operating strategy. Sansone theorized that a company committed specifically to providing pediatric home care through a network of national offices could dominate the industry, a theory to be made manifest by his development of PSA into a national leader.

Before the process of building PSA into a national force began, Sansone took time to ensure that the company’s administrative functions were working properly. Otherwise formidable health care companies, boasting deep and broad market presence, had fallen victim to administrative inefficiencies, unable to maintain profitability amid the tangle of paperwork involved in providing medical services and receiving payment from third-party payors. Sansone was careful to avoid the dangers of lackadaisically tracking patient services and recouping costs from insurance companies and other payors, particularly so after gaining full control over the former Ambulatory Services subsidiary. He discovered in 1989 that the company suffered from woeful bookkeeping, its profitability hobbled by accounts receivable that stretched into months rather than weeks. To fix the problems and establish a sturdy administrative foundation to support the company’s future growth, Sansone hired a skilled chief financial officer and spent two years computerizing billing and collection procedures. The commitment to improving internal efficiencies paid off, significantly reducing the duration of accounts receivable and helping PSA transform into a profitable enterprise.

1994 Debut as a Publicly Traded Company

PSA’s development into a national pediatric home care specialist did not begin in earnest until several years after its billing and collecting methods were honed for profitability. The geographic reach of the company began to extend after it completed its initial public offering (IPO) and converted to a public ownership. The IPO was completed in 1994, when PSA’s $13.6 million stock offering debuted on the NASDAQ Exchange. With the proceeds gained from the stock offering, Sansone was able to act upon the expansion strategy he had devised. His strategy for growth depended heavily on acquiring the legions of local and regional operators who constituted the overwhelming majority of the pediatric home care industry, but also included partnerships with health care providers, particularly the largest providers. Instances of PSA’s partnership agreements included a deal completed in 1995 with 15 OrNda hospitals in southern California and three agreements reached in 1996. In May 1996, PSA formed a joint venture company named PSA Home HealthCare L.P. with Miami Children’s Hospital, operator of a 268-bed facility. Later in 1996, PSA began providing comprehensive health care services to pediatric patients of New Jersey-based Hackensack University Medical Center. The company also signed a subcontract agreement in 1996 with Columbia/HCA Healthcare Corp.’s home health care division in Houston. According to the terms of the agreement, PSA supplied home nursing services, medical equipment, and intravenous therapy to children discharged from roughly 20 hospitals in the Houston area.

In an August 19, 1996 PSA press release, Sansone described the company’s decision to seek partnerships as being “complementary to our acquisition strategy,” adding, “they are worth it with the big players.” The focus for PSA’s growth, however, which was intended to spur its maturation into a national pediatric home care company, was on acquisitions. A fragmented industry, such as the pediatric home care industry, represented fertile ground for an aggressive acquirer to stake its claim on national leadership, an objective hotly pursued by Sansone. At the time of the IPO, PSA operated 41 offices in 12 states, generating $46 million in annual revenue. With the proceeds from the IPO and a secondary offering of stock in 1996 that raised an additional $23 million, the company’s stature grew significantly and swiftly. Between the 1994 IPO and 1997, the number of PSA locations tripled, fueling a fourfold increase in annual sales. By mid-1997, with $200 million in annual sales, the company operated at 123 locations spread across 25 states, having greatly increased its geographic reach through the acquisition of pediatric care providers and related companies. Generally, the acquisitions completed by PSA were relatively small, as Sansone targeted local and regional care providers, medical equipment suppliers, and pharmacies.

Company Perspectives:

PSA offers a coordinated approach to home healthcare. This approach provides the most technically advanced nursing, respiratory, durable medical equipment, and infusion therapy services to our patients while enhancing communication among physicians, case managers, third party payors, and family.

1996 Diversification

As PSA’s pediatric home care business expanded robustly, ranking as the largest in the country by 1997, Sansone ushered the company into a new business area. In February 1996, PSA entered the paramedical testing business through the acquisition of Premier Medical Services. Serving more than 1,000 insurance companies and corporate customers, Premier provided a variety of services, including collecting blood and urine samples, taking health histories, and performing electrocardiogram physical examinations. The foray into the paramedical testing field was strengthened considerably nearly two years later when the company purchased Physical Measurements Information (PMI), an acquisition that made PSA the third-largest provider of paramedical testing services in the country. Acquired from ChoicePoint Services, Inc. for $21 million, PMI dispatched nurses to perform physical examinations on individuals outside an institutional setting, frequently conducting the examination at the individual’s workplace. Like Premier, PMI served the health and life insurance industries. Its inclusion under PSA’s corporate umbrella significantly expanded the scale of Sansone’s paramedical testing services business, placing PSA on the approved provider list for more than 200 new insurance company customers and greatly extending the company’s geographic reach.

As part of the PMI acquisition, PSA also acquired an advanced computer software system under development by ChoicePoint. Called the PMI System and renamed by PSA as the SOLAR System, the software was designed for entering orders, scheduling examinations, and providing status reports, serving as an electronic communications link between PSA and its insurance company clients. The purchase of the Solar System reflected Sansone’s commitment to improving PSA’s administrative functions, following up on the pervasive changes he implemented between 1989 and 1991 with the company’s billing and collection procedures. Several months before he acquired the PMI System, Sansone had invested $1.4 million on a new computerized billing system, dubbed the Encore System. The Encore System, which was integrated with the Solar System, was an automated patient accounting system. As well as performing billing and collection services, the Encore System provided each of the PSA’s health care branch offices with immediate access to patient information, strengthening the company’s ability to track the status of patient accounts.

As PSA added a new facet to its business and bolstered the administrative underbelly of its operations, the expansion of its mainstay business progressed without disruption. By the beginning of 1998, Sansone had acquired 38 pediatric care companies since the 1994 IPO, adding facilities to care for premature infants to the purchased properties. The additions included the purchase in May 1997 of Home Vitality Inc., an Illinois-based home care pharmacy that served the greater Chicago area. In

July 1997, PSA acquired Special Medical Services, a Minnesota-based home health equipment services company. Two months later, the company purchased Home Health Nursing, a Vermont-based nursing agency, as well as two Florida companies: Individual Development Services, Inc., a day treatment center for children with special medical needs; and Medical Services Providers Inc., a medical equipment and home pharmacy supplier. The five acquisitions completed between May and September of 1997 represented a cross section of the acquisition campaign launched in 1994, indicative of the pace and geographic diversity of Sansone’s acquisitive activities. Assessed separately, the acquisitions did not significantly add to PSA’s revenue volume—most of the companies acquired only generated $1 million or $2 million in sales—but each contributed meaningfully to PSA’s geographic coverage and to the comprehensiveness of the company’s medical services. Although the company’s services focused on respiratory problems suffered by infants, PSA’s patients ranged from teenagers with leukemia who required home infusions of antibiotics to one instance in which a pair of conjoined twins required antibiotic infusions prior to separation surgery.

As PSA planned for the future, further acquisitions were expected. According to Sansone’s calculations, the pediatric segment represented one-sixth of the $40-billion-in-sales home care market, or a $6 to $7 billion business. Acquisitions were expected to fuel the company’s expansion, but as the 1990s drew to a close, PSA announced a significant divestiture. In August 1999, the company revealed that it was selling its paramedical testing division to Hooper Holmes Inc. Once completed, the divestiture would strip the company of roughly $90 million in annual revenue, but the proceeds from the sale would give Sansone the funding to further develop PSA’s medical services business, an objective the company promised to pursue as it moved past its tenth anniversary.

Principal Competitors

Apria Healthcare Group, Inc.; Coram Healthcare Corporation; ChoicePoint Inc.; RoTech Medical Corporation; American HomePatient, Inc.

Key Dates:

1989:: Sansone leads leveraged buyout of Ambulatory Service of America, Inc.
1991:: PSA completes sweeping program aimed at improving billing and collection services.
1994:: Initial stock offering touches off aggressive acquisition campaign.
1996:: PSA enters paramedical testing services business.