National Medical Enterprises, Inc.

2700 Colorado Avenue
Santa Monica, California 90404
U.S.A.
(213) 315-8000
Fax: (213) 315-8329

Public Company
Incorporated: 1968
Employees: 44,000
Sales: $3.93 billion
Stock Exchanges: New York Pacific London

As one of the nation’s largest health-care providers, National Medical Enterprises has continually adjusted its own strategies to accommodate a rapidly changing market. National Medical Enterprises (NME) spent its first decade building and acquiring medical facilities and related services. Industry changes during the mid-1980s prompted NME to shift its emphasis from acute-care to specialty hospitals. The company’s Specialty Hospital Group, a division consisting of psychiatric, substance-abuse, and rehabilitation services, was NME’s major strength in the late 1980s. A previous strength, the long-term care operations acquired in 1980 with The Hill-haven Corporation, was spun off as an independent company in 1990. With this move, NME then concentrated on its specialty and general hospitals and on related services, where it hopes to limit the cost-reimbursement problems and cost-containment regulations plaguing other sectors of the healthcare industry.

NME’s founder and CEO, Richard K. Earner, has degrees in accounting and law. Co-founders Leonard Cohen and John Bedrosian are also attorneys. Earner’s interest in the enterprise was piqued by his own work as a financial consultant and hospital attorney. In 1968 he joined forces with Cohen and Bedrosian, although the company is often dated to 1969, when NME acquired its first hospitals in California—four general and three convalescent—and offered public stock. That same year, NME also purchased a medical office building and three potential building sites.

The building, owning, and operating of numerous hospitals allowed NME to develop cost-cutting skills. Attention to both cost management and physician input became trademarks as NME concentrated on building services around community hospitals. Interest in efficiency also led to NME’s early diversification into hospital equipment and supplies, a hospital-consulting firm, and even a construction company that specialized in building hospitals. In the early 1970s the focus was on growth. The company launched seven construction projects in 1971, in addition to another hospital purchase, and had tripled in size within a year. In 1973 NME took its first steps outside of California by acquiring a general hospital in Seattle, Washington, and by building another in El Paso, Texas.

By this time, the hospital-management and cost-cutting techniques of NME were already being hired out. There were both domestic and international divisions within NME to oversee management services provided to other hospitals by 1974. Management of non-NME-owned hospitals and healthcare-equipment rental were significant income sources during the company’s growth years.

Throughout this period, the central concept was to profit from cost-efficient, well-managed hospitals that satisfied both doctors and patients. NME applies standard business practices in its health-care ventures. As Earner told Forbes, “in many ways, running a hospital chain is like operating a hotel or retail chain.” The first decade was devoted to building a diversified, multi-facility hospital company with an eye on market needs. These efforts culminated in the 1979 purchases of Medfield Corporation and The Hillhaven Corporation. Medfield added five Florida-based hospitals, including one psychiatric institution, to NME; the Tacoma, Washington-based Hillhaven was the nation’s third-largest chain of nursing homes.

By the end of 1979, NME was the nation’s fourth-largest publicly owned hospital chain, with the majority of its revenues coming from acute-care hospitals. These two major acquisitions presaged the new decade’s changes. Up until this point NME, like the rest of the hospital industry, operated with an eye to the Medicare and Medicaid legislation passed in 1965, which assured reimbursement for medical care of the poor, disabled, or elderly. This assurance spawned enormous growth in the investor-owned hospital industry, a growth which in turn eventuated problems of reimbursement.

NME began to shift focus from acute-care hospitals to alternative facilities such as nursing homes, and to develop its products-and-services segment, which included health-care equipment rental for home use and visiting-nurses agencies before this problem became visible. In addition, management-services contracts were booming. In 1980, NME signed a five-year, $150 million contract with Saudi Arabia to help develop health-care facilities in that country. More international contracts came in 1981, and by the end of that year NME had more than $1 billion in sales.

The health-care business was the second-largest industry in the United States during the early 1980s, second only to food and agriculture. NME acquired National Health Enterprises in 1982, whose 66 additional long-term care facilities made NME the nation’s second-largest nursing home owner. In order to better manage its own size, NME subdivided into four operating groups; international (largely consultant work), hospital, nursing homes, and medical products and services. In 1983, NME bought the Psychiatric Institutes of America (PIA), one of the nation’s largest mental-health-care providers, based in Washington, D.C.

From 1981 to 1983, corporate revenues doubled. Entry into the private psychiatric industry allowed NME to profit from a sector whose size doubled every two years throughout the 1980s. In 1983, NME further streamlined its specialty interests by forming Recovery Centers of America (RCA), a subsidiary comprised of substance-abuse-recovery operations.

By 1984, the hospital business began a decline, the result of overexpansion and of cost-containment efforts by both government and private health-care interest groups. NME continued to look to what it considered more stable and growth-likely medical-service alternatives. These included its equipment-leasing and home-care services, and even extended to health insurance and a Miami-based health-maintenance organization (HMO) acquired in 1984.

By 1985 NME was the second-largest publicly owned health-care-services company in the nation, but changes within the industry mandated changes and restructuring. The following year, NME sold its recent HMO purchase, as well as a number of unprofitable outpatient clinics and acute-care hospitals. Emphasis was placed on the specialty facilities— especially rehabilitation and substance-abuse centers and psychiatric hospitals—in an effort to bypass the nonpayment problem by shifting away from Medicaid- or Medicare-dependent services. The Rehab Hospital Services Corporation (RHSC) of Pennsylvania had been merged with NME in 1985 for this purpose. The company also began developing academic medical-center-complex strategies.

As the industry, and NME’s stock, wobbled in the late 1980s, the company concentrated on internal reorganization instead of expansion. Restructuring produced the new subdivisions of hospitals, specialty hospitals, long-term care, and retail services in 1986. NME also continued divesting the acute-care hospitals hit by the drop in occupancy rates, shorter stays, and other results of the health-care cost-containment squeeze. Within one year, the company had unloaded a quarter of its businesses, including ten acute-care hospitals. Many other hospitals were converted to specialty services. NME’s specialty hospitals division—consisting of PI A, RHSC, and RCA—became the company’s new core business and growth field. NME’s specialty hospitals supplanted the acute-care hospitals, which had accounted for 90% of NME’s revenues in 1969, and in 1990 NME spun off its long-term-care facilities and related operations, as The Hillhaven Corporation.

NME retains a 14% equity interest in Hillhaven, and the parent company expects this change to help it avoid the short-term challenges created by current health-care legislation and the recompensation crackdown. Medicaid accounts for 50% of Hillhaven’s revenues, but less than 3% of the specialty hospitals division’s revenues, and less than 6% of the general hospitals division’s revenues.

Because government programs have not kept pace with the rising cost of health care but private insurance rates have, NME has begun to focus on services that are less dependent on Medicare and Medicaid. With this safeguard and the steady growth in specialty-services industries in the late 1980s, NME may have found its niche.

Still one of the nation’s largest health-care providers, NME holds fast to its policy of high-quality, cost-effective care. By concentrating on specialty services such as psychiatric, rehabilitative, and substance-abuse recovery and by limiting itself to profitable acute-care hospitals, NME seems bound to ride out the changes in United States health care.