Ramsay Youth Services, Inc.

views updated

Ramsay Youth Services, Inc.

Columbus Center

1 Alhambra Plaza, Suite 750
Coral Gables, Florida 33134
U.S.A.
Telephone: (305)569-6993
Fax: (305)569-4647
Web site: http://www.ramsay.com http://www.ramsay.com

Public Company
Incorporated: 1983 as Healthcare Services of America, Inc.
Employees: 2,455
Sales: $108.4 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: RYOU
NAIC: 622210 Psychiatric and Substance Abuse Hospitals; 541611 Administrative Management and General Management Consulting Services

Based in Coral Gables, Florida, Ramsay Youth Services, Inc. provides education and treatment programs for at-risk, troubled, and special needs youth, either on an inpatient or outpatient basis, in a range of settings: from secure detention facilities and juvenile justice commitment facilities to residential treatment facilities, group homes, schools, and community centers. Ramsay Youth operates in nine states and the Commonwealth of Puerto Rico. The types of youth the company serves include juvenile offenders as well as those with learning and development disabilities, substance abuse problems, and mental health issues. Youth services that were traditionally run directly by local governments have become increasingly privatized, prompting a number of companies to enter the business or, in the case of Ramsay Youth, to transform a subsidiary into a company mainstay.

Formation of Predecessor Healthcare Services of America in 1983

Ramsay Youth Services was originally a subsidiary of a corporation that operated a chain of psychiatric hospitals. Health-care Services of America, Inc. was incorporated in Delaware in 1983 and based in Birmingham, Alabama. It was founded by Charles A. Speir and Kerry G. Teel. Speir became the company’s chief executive officer and chairman, and Teel served as president and chief operating officer. Healthcare Services did well at first, acquiring a number of hospitals and making an initial public offering of its stock in August 1985 to fuel further growth. For the year the company would earn $3.5 million on revenues of $69.7 million. The psychiatric hospital industry in general was in an expansive mood. For-profit companies opened up new facilities to the point of oversupply, then spent heavily on advertising to fill their beds, but the landscape was changing and care providers were not quick to adjust. They were trained to think of mental health treatment as an inpatient, hospital-related practice. Third-party payers—insurance companies and health maintenance organizations—were becoming increasingly more cost conscious and shying away from inpatient treatment, looking instead to outpatient treatment or “partial hospitalization,” in which patients spent the day in a structured setting but were sent home at night. By capping the amount that they would pay for psychiatric care, insurers hoped to control costs and force caregivers to forego what was seen as unnecessary treatment. The result would be a lengthy and difficult transition period for companies that continued to pursue the old paradigm in which the more beds they controlled the more revenue they could generate.

Healthcare Services was forced to face the changing realities sooner than most of its competitors. Although revenues continued to grow in 1986, reaching $109.4 million, the company posted a loss of $17.1 million. By May 1986 Keel was out. Speir would leave two years later after Healthcare Services lost an additional $27 million in 1987 despite another gain in revenues, which now totaled $132 million. The company had tried to sell off unprofitable assets to stabilize its position, but it was still forced to default on some of its loans. When Speir stepped down, the company was on the verge of bankruptcy, and brokerage firm Smith Barney was hired to help sell the business.

Acquisition by Paul Ramsay Group in 1987

In August 1987, a controlling interest in the 19 hospitals owned by Healthcare Services was acquired by the Australian Paul Ramsay Group for $22.5 million in cash and a $5 million commitment in further loans. Entrepreneur Paul Ramsay had been involved in the healthcare business since the mid-1970s, as well as other Australian ventures. The Paul Ramsay Group operated 16 psychiatric and other hospitals in Australia, Hong Kong, and the United States. Ramsay-HMO already was established in southern Florida, primarily serving the Cuban population.

Early in 1988 Ramsay hired Ralph J. Watts to serve as the new chief executive officer for Healthcare Services. Watts had been a senior vice-president of Community Psychiatric Centers. Although Ramsay had announced plans to move the headquarters of Healthcare Services to Florida, in order to secure Watts’s service it agreed to move the company to New Orleans, where Watts lived. Later in 1988 Healthcare Services also would change its name, becoming Ramsay Health Care, Inc.

Watts quickly began to address Ramsay Health Care’s many problems. First, he worked with lenders to avoid bankruptcy, then he proceeded to cut the workforce and sell off poorly-performing assets. The company earned a profit of $5 million in 1990, followed by $8.9 million in 1990. In 1991 the company posted a $9 million profit on just $104.5 million in revenues. By early 1992, however, Watts resigned over a disagreement with the board of directors over its desire to accelerate the pace at which Ramsay Health Care moved toward the outpatient business. He was replaced by Australian Gregory Browne, who had been running Ramsay-HMO.

After three years under Watt, Ramsay Health Care appeared to be better situated than most of its competitors and was optimistic about its potential for growth. Brown hoped to increase outpatient revenues from between three and 4 percent to as much as 15 percent within two years. He looked to support that growth by expanding on the company’s building of satellite clinics in rural areas, as well as developing day-treatment mental health centers that fell somewhere in between a satellite clinic and an inpatient psychiatric hospital. Browne also hoped to establish more joint ventures with universities, such as the company had launched with the University of West Virginia when it built the school’s psychiatric hospital, then took over the operating responsibilities and shared the profits with the department of psychiatry. Not only would such relationships lend credibility to Ramsay Health Care, they would keep it on the cutting edge of research. Investors were beginning to notice Ramsay Health Care, with some industry analysts predicting an extremely bright future for the company.

As had been the case with the company after it went public in 1985, the promising future failed to materialize. Results for the industry overall and Ramsay Health Care in particular were disappointing in 1992. For the fiscal year ending June 30, 1992, the company’s net income fell to $1.97 million on $137 million in revenues. Ramsay Health Care continued to move toward providing more of an outpatient business, but the trend only accelerated faster, still leaving the company with too many unused beds and too many fixed costs. According to the National Association of Psychiatric Health Systems, the average hospital stay in 1993 was 16 days. Three years later that number would shrink to 12 days. To adjust to the changing realities, Ramsay Health Care formed a managed care division in October 1993. A year later it decided to spin off the division to create Ramsay Managed Care, with Browne also named as chairman and CEO. The hope was that as two separate companies they would be better able to pursue their own patterns of growth. Reynold Jennings, a former executive with National Medical Enterprises who had originally joined Ramsay Health Care to be groomed to replace Browne, ran the psychiatric hospitals while Browne ran the new company.

The split in operations, however, did not have the desired effect. Shortly after Ramsay Health Care reported a $17 million loss for 1995, Browne stepped down in favor of Jennings. The company lost another $16 million in 1996 before posting $3.4 million in earnings in 1997. By then it was clear that Ramsay Managed Care as a separate publicly traded company provided little advantage and that the similar name simply caused confusion. Thus, in August 1997 Ramsay Health Care reacquired Ramsay Managed Care, with management expressing optimism over the “tremendous potential” of returning the spin-off to the company.

In 1996 Ramsay Health Care moved to Coral Gables, Florida. The move from Birmingham, Alabama to New Orleans had been an accommodation for Watts, and no longer made sense for the company. The other Ramsay Group company in the United States, Ramsay-HMO, already had provided a number of executives for Ramsay Health Care. Ramsay-HMO had been sold to United HealthCare Corp. in 1994, but ties with Ramsay Health Care remained strong. It was easier to recruit executives from the HMO if the two companies were located in the same area and new hires would not have to relocate to New Orleans.

One of those former Ramsay-HMO executives, Luis E. Lamela, replaced Jennings in January 1998, becoming the new president and chief executive officer. Starting in a pharmacy position Lamela rose through the ranks to become the chief executive officer at Ramsay-HMO. After United HealthCare bought the company, Lamela served as CEO of the CAC Medical Centers division from May 1994 until December 1997. Under Lamela, Ramsay Health Care would embark on a radical change of focus.

Company Perspectives:

Ramsay focuses on the types of services and programs that address the needs of youth with multiple challenges and provides the opportunity for their successful integration back into their communities as effective individuals and productive citizens.

Emergence of Ramsay Youth Services in 1998

In February 1998 Lamela announced that Ramsay Health Care would concentrate on expanding the business of one of its subsidiaries, Ramsay Youth Services, which had been established four years earlier with the acquisition of a Utah residential center that treated juvenile sex offenders. The unit had then expanded and posted excellent results. In connection with its shift in strategy, Ramsay Health Care engaged SunTrust Equitable Securities to help in assessing possible acquisition targets as well as divesting the company of nonyouth services assets. The case for pursuing the at-risk and troubled youth business was certainly compelling. It generated between $50 billion and $65 billion a year; with local governments turning increasingly to private companies to run its youth programs it was clearly a growth area, especially in light of the fact that juvenile crime was up 60 percent over the 1980 level and that the juvenile population was expected to grow 21 percent by the year 2010. In Florida, according to state Juvenile Justice statistics, around 85 percent of the services provided in juvenile prisons were contracted out, totaling more than $320 million a year. Furthermore, almost 90 percent of Florida’s residential centers for troubled youth were privately run. Ramsay Health Care also would be able to secure funding from government programs, both state and federal. Unlike contracts with insurers, which regularly knocked down rates, government agencies paid a fixed rate for an extended period of time, providing more of a predictable revenue stream. Moreover, the youth services industry was highly fragmented, with some 10,000 independent companies providing services. Consolidation in the industry was already beginning, and Ramsay Health Care was eager to position itself as a major player. Because more than half of the money spent on at-risk and troubled youth was dedicated to education, Ramsay Health Care also would look to expand in that direction as well.

As expected, the transition was expensive. The company lost more than $54 million in 1998, due mostly to restructuring costs. Ramsay Health Care sold off half of its 12 psychiatric hospitals and converted the others into residential youth-only treatment centers. It added a seventh with the opening of a facility in Alabama. In April the company acquired two youth services facilities, one located in Florida and the other in Alabama. In August the Ramsay Educational Services division took over the management of a Florida charter school in Brevard County. Charter schools, privately run but government-funded, included many devoted to children with special education needs, a good fit for Ramsay Health Care, which already possessed much of the necessary expertise. By the end of 1998 there were some 1,200 charter schools in America, a number expected to grow to 2,000 soon. To solidify its position in education, Ramsay Health Care purchased The Rader Group, which operated four Florida charter schools. With limited experience as a juvenile services provider, Ramsay Health Care made a concerted effort to gain a share of that market as well.

To better reflect the company’s shift in focus, Ramsay Health Care officially changed its name to Ramsay Youth Services in January 1999. The financial strain of restructuring the business began to ease as the company rebuilt its revenues to $81 million and earned more than $3 million for the year. Ramsay Youth was especially successful in gaining new business in Puerto Rico, where it won educational and mental health contracts as well as juvenile justice contracts. In April 2000 Ramsay Youth signed a major contract with the Florida Department of Juvenile Justice to operate a 102-bed Youth Development Center for high-risk boys, ages 14 to 18. The $9.7 million contract was for a term of three years. Many of the company’s government contracts were for even longer terms, thus providing the level of predictable revenues essential in raising sufficient capital to allow Ramsay Youth Services to penetrate new markets and develop compatible lines of new business. For 2000 the company reported $108 million in revenues and a net profit of more than $2.8 million. After 15 years of uncertainty, and relocations from Birmingham, Alabama to New Orleans to south Florida, the corporation that was known as Healthcare Services of America, then Ramsay Health Care, and now Ramsay Youth Services, appeared to have finally found a viable business niche.

Principal Subsidiaries

Ramsay Educational Services, Inc.; Ramsay Managed Care, Inc.; Ramsay Youth Services of Alabama, Inc.; Ramsay Youth Services of Florida, Inc.; Ramsay Youth Services of Puerto Rico, Inc.