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Published: Sunday, 10/21/2007

Questions surround Manor Care takeover

BY JON CHAVEZ
BLADE BUSINESS WRITER
Manor Care s lease is set to expire
in 2009, but officials say they want to stay downtown. Manor Care s lease is set to expire in 2009, but officials say they want to stay downtown.
JEREMY WADSWORTH Enlarge

It will be a cultural change for Manor Care Inc., the Toledo area's fourth-largest company.

But how different will be carefully watched.

The giant nursing home firm with public stock is about to become privately owned by the Carlyle Group.

A major health-care union has warned about prospects of a decline in patient care and staffing, and concerns have been raised by a New York Times story last month that said quality and performance declines were noticeable at nursing home chains after a takeover by private equity firms.

Even senior members of the U.S. Senate Finance Committee last week, citing the Times story, said they asked Carlyle and other private equity firms about their management of nursing homes.

The downtown Toledo company, with about 550 nursing homes and other health-care facilities nationwide, promises no changes after the $6.3 billion acquisition is completed. The deal could be done before year's end.

"From an operational standpoint, the new Manor Care will probably not be a lot different than the old Manor Care," said Frank Morgan, an analyst with Jefferies & Co. in New York.

"Part of what Carlyle is buying into is the business strategy developed by Manor Care. I don't think they're even looking at breaking the company up into a structurally different entity."

Carlyle of Washington is keeping Manor Care management, led by Chief Executive Paul Ormond, and plans to keep the firm in Toledo, said Stephen Guillard, the local company's chief operating officer.

The buyer was anxious to acquire Manor Care as is because its business model offers opportunities to expand, he said. It has thrived recently on patients staying for a short time for rehabilitation.

"They want to increase our revenue base, to increase occupancy," Mr. Guillard said. "There are ways to do that, but it's not by tearing the company apart."

A 'best-in-class' asset

Karen Bechtel, managing director of Carlyle's health-care portfolio, said her firm foresees profit opportunities from the nation's aging baby-boom generation - the first member of which filed for Social Security this month.

"Manor Care is a best-in-class asset," Ms. Bechtel said.

Carlyle has told Manor Care officials it plans to expand and enhance Manor Care's operations to attract even more medically complex patients. That will be done by adding staff, new services, and upgrading training of its current staff.

Manor Care shareholders approved the transaction last week. Left to be finished in the transaction are transferring the operating licenses for each facility in each state between Manor Care and Carlyle.

Members of the Service Employees International Union protest outside the Carlyle Group s Washington headquarters. Members of the Service Employees International Union protest outside the Carlyle Group s Washington headquarters.
STEPHANIE KUYKENDAL / BLOOMBERG NEWS Enlarge

The local company also is trying to renegotiate its lease in the 16-story downtown Toledo headquarters. The lease expires in 2009, but officials said the firm wants to stay downtown.

Also catching public attention is the sizable amount of Mr. Ormond's company stock, which will bring him up to $186 million when Carlyle completes the deal.

Nationally, Manor Care has a good reputation for well-managed, profitable facilities.

The Toledo company, with $167 million in profit and $3.6 billion in revenue last year, has been highly touted by industry analysts. When rivals struggled during the last 10 years, some going into bankruptcy and many being purchased, the local firm persevered and its stock has risen in the last two years.

With 60,000 employees at nursing homes, assisted-living facilities, rehabilitation centers, and hospice and home-health-care offices in 30 states, the company has 700 workers at its headquarters at 333 North Summit St. and 800 at facilities elsewhere in northwest Ohio.

Carlyle, an $87 billion investment firm founded in 1987, has no experience in nursing homes. It has invested $32 billion in nearly 700 transactions worth $158 billion in its 20-year history. It owns companies involved in aerospace and defense, energy and power, telecommunications and media, automotive and transportation, real estate, retail, technology, business services, and manufacturing.

Its only chain of health-care facilities is LifeCare Holdings Inc. of Plano, Texas. It bought the company in 2005 for $552 million.

LifeCare runs 20 long-term acute-care hospitals in nine states, including one in Dayton. Its facilities generally are on one floor of a larger, general hospital, and they treat extremely sick patients who spend more than 25 days in a hospital.

Carlyle began to tinker with LifeCare last year, but not to make staff cuts.

Its "hospital-within-a-hospital" business model had become less profitable because of lower federal reimbursement rates, so it began moving into free-standing buildings to increase its number of beds.

Beverly Laubert, long-term care ombudsman at the Ohio Office of Aging, said her office has not had any concerns about LifeCare in Dayton.

Manor Care, though, has experienced problems.

In 2001, the company was being sued in Florida so regularly that it set up a $60 million fund just to deal with those lawsuits.

Company spokesman Rick Rump said tort reform in Florida, where the company has 39 nursing homes and assisted-living facilities, has helped but it still regularly faces lawsuits there.

Of Manor Care's 44 nursing homes in Ohio, four facilities were cited this year for incidents in which patients were put in "immediate jeopardy," Ohio Department of Health records show.

At a nursing home in Urbana, northeast of Dayton, a dementia patient was raped by another patient. In Fairfield, near Cincinnati, a patient died after being left outside in a wheelchair. And in Perrysburg this year, a patient prone to wandering was left unsupervised and fell down a flight of stairs and died.

"The woman resident dying in Perrysburg, it's regrettable, very regrettable, but they do happen. It's rare. Our record is good," Mr. Rump said.

The company said the deficiencies for the latest 12-month period declined 22 percent from the previous period and are 14 percent below the state average.

Sara Morman, a spokesman for the Ohio Health Department, said regulators do not comment on the overall record of a nursing home operator, preferring to let the citations, complaint level, or licensing issues tell how a specific location performed.

Ohio surveys patients and their relatives for quality and recommendations about nursing homes in the state. Of Manor Care's 44 locations in Ohio, 27 did not receive enough feedback for ratings in the latest survey. But 11 locations received ratings above the state average of 91 percent for overall quality.

Six Manor Care facilities fell below the average, with the Urbana location the company's lowest rated at 81 percent.

Ms. Laubert, the Ohio ombudsman, said while state inspectors haven't cited Manor Care facilities for many deficiencies, her network of regional ombudsmen "sure have had a lot of complaints about them."

She said the purchase by Carlyle provides a chance for improvement.

A positive sign, she explained, is the company has enrolled all 44 sites in a voluntary national effort to improve conditions in America's nursing homes. Companies pledge to meet three of eight standardized goals toward improvement and are monitored on how they proceed.

But the Service Employees International Union, which has protested the Carlyle takeover, said patient care is likely to decline and staffing is likely to be cut as the private equity firm tries to boost the chain's profits. The union represents 1,100 Manor Care workers.

The Toledo firm operates 28 nursing homes in Michigan, where the state average for violations is about eight per facility annually. The company's facilities average about 10 violations, said Sarah Slocum, Michigan's long-term care ombudsman. But few are of a life-threatening nature.

Michigan officials are more concerned about Manor Care's business model, she said.

The company focuses on short-term rehabilitation stays for patients, in part because it generates revenues and analysts have said it boosts profits. In Ohio last year, it took in 21,000 patients, but they stayed on average only about 94 days. Most go home or to other facilities, the firm said.

Medicare, the federal health-care program for older people, is a significant payer for short-term stays, but Medicaid, providing health care for the poor, doesn't pay as much, Ms. Slocum said.

The problem, she explained, is Michigan law says the beds must be available to both, but Manor Care has dropped Medicaid certification on some beds.

"We have a problem with that and we're working on the issue to make sure it's enforced," she said. She declined to say whether any of the facilities had broken the law.

Her bigger worry is what Carlyle will do.

"Manor Care is a health-care business," she said. "Carlyle is not. Carlyle - their mission is to make money. It's a concern."

Officials of the local firm contend that the operating performance in its facilities will continue. Its staffing in Ohio exceeds state and federal requirements set by the Centers for Medicare and Medicaid Services, a federal agency.

Carlyle, according to public statements, hopes to make money by investing heavily, building facilities, and adding services and employees, rather than through cost or staff cuts.

Mr. Morgan, the analyst, said Carlyle will be able to do that.

Carlyle has a colorful history that has attracted attention.

Its list of former advisers includes former President George H.W. Bush. It sold a 7.5 percent stake in the firm last month to the Middle Eastern emirate of Abu Dhabi, and prior to 2001, its investors included the bin Laden family of Saudi Arabia, who sold its $2 million stake after Sept. 11, 2001.

Manor Care, though, has focused on moving forward. It sent letters this month to employees reaffirming its commitment to maintain quality care, staffing, and capital investment levels.

Mr. Guillard, who worked for 17 years at Harborside Healthcare, a private nursing home chain, said Carlyle has indicated that it has no desire to change Manor Care's business model.

The model, he said, is "You come to us, you get better, and you go home."

He added, "We had discussions with Carlyle all summer and this is not a situation of where they know better than [Manor Care chief executive] Paul Ormond.

" We understand health care extraordinarily well and they gave no indications they will move the company in a different direction."

Contact Jon Chavez at:

jchavez@theblade.com

or 419-724-6128.



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