Vencor, Inc.

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Vencor, Inc.

3300 Capital Holding Center
400 West Market Street
Louisville, Kentucky 40202
U.S.A.
(502) 569-7300
Fax: (502) 569-7499

Public Company
Incorporated: 1983 as Vencare, Inc.
Employees: 4,040
Sales: $400 million (1994)
Stock Exchanges: New York
SICs: 8062 General Medical & Surgical Hospitals; 8069 Specialty Hospitals Except Psychiatric

Vencor, Inc. is one of the largest diversified health care providers in the United States. Entering 1996, the company’s 38-state network encompassed 35 long-term acute care hospitals, 311 nursing centers with. 42,000 beds, 23 retirement communities, and a chain of 55 retail and institutional pharmacies. Vencor more than tripled in size in 1995 when it acquired Hillhaven Corp., a leading national operator of nursing centers.

William Bruce Lunsford: Early Career

Formed in 1985, Vencor rapidly grew into a leading U.S. health care company within a span of less than ten years. A driving force behind that rampant expansion was William Bruce Lunsford, chairman, chief executive, president, and cofounder of the company. Lunsford grew up on a 120-acre midwestern farm and decided early that farming wouldn’t be his future. He attended the University of Kentucky, where he was known as an above average student and a natural leader. After completing an accounting degree, Lunsford joined the Cincinnati accounting firm of Alexander Grant & Co. in 1969. He also went to night school and earned a law degree at the Salmon P. Chase College of Law. In 1974 Lunsford left the accounting firm and joined Keating Muething & Klekamp, a law firm based in Cincinnati. As an accountant and attorney, Lunsford counseled about 40 business clients. It was through his work with the numerous business owners he advised that Lunsford became interested in starting his own enterprise.

Lunsford’s last career jaunt before starting Vencor was in the political arena. In 1979 Lunsford accepted an invitation to join John Y. Brown, Jr.’s campaign for the governorship of Kentucky. Within little more than two months Lunsford found himself the treasurer of the State Democratic Party. In 1980 he left his law practice to join Brown’s administration as deputy commerce secretary. Within a month after Brown was elected, he asked Lunsford to head his legislative team. Shortly thereafter, at the age of 33, Lunsford was cast into Brown’s inner-circle when Brown made him his youngest cabinet member.

As commerce secretary and a cabinet member, Lunsford suddenly found himself in charge of 2,000 employees and a $150 million budget. Unfortunately, Kentucky’s economy crumbled under Brown’s administration. The state unemployment rate doubled, in fact, and the number of jobs in Kentucky declined under Brown’s leadership. However, Lunsford’s job put him in daily contact with business leaders and investors, some of whom would later play an important role in the formation of Vencor. They would also inspire him to make the jump into business. “I was around a lot of people like Frank Metts and W. T. Young who had successfully started several companies from scratch,” Lunsford remembered in the January 1992 Louisville. “I love the law, but (they) made being an attorney and accountant seem pretty insignificant.”

A Niche in the Health Care Industry

Lunsford eventually teamed up in an investment venture with associate Gene Smith, a wealthy veteran of the Brown administration. Lunsford was basically seeking business opportunities at the time. The chance that he was looking for finally came when he was approached by Michael Batr, a respiratory therapist. Barr recognized an unmet need for long-term hospitals to house patients who were dependent on ventilators. That group was only marginally profitable for typical hospitals at the time, because those patients didn’t require much high-cost treatment. Barr thought that a hospital geared primarily to critically ill, long-term patients could profit by tapping Medicare and private insurers for reimbursements. Importantly, such a facility would benefit from lower operating costs because it wouldn’t need to financially support the expensive, high-tech equipment that general-purpose hospitals needed.

Lunsford had barely considered getting into the health care industry, and he didn’t know the first thing about ventilators, long-term care, or operating a hospital. But, after some cursory research, Lunsford realized that it was a growth industry and that Barr had what might be a great idea. Lunsford and Barr, with financial backing from Smith, quickly put a deal together. They incorporated the venture in 1983 as Vencare, Inc., and began looking for a hospital that they could purchase and convert as a sort of test for Barr’s concept. After searching for several months, the fledgling start-up spent $3 million to purchase LaGrange Community Hospital, a 62-bed money-losing facility in northern Indiana.

When Vencare bought LaGrange Community, the hospital was losing roughly $60,000 each month. Lunsford and Barr’s team quickly eliminated about 18 percent of the hospital’s staff, improved the facility’s layout and appearance, changed the layout to improve efficiency, and hired some new doctors. They also installed 20 new beds specifically for ventilator patients. Within three months the hospital was turning a profit. Soon thereafter Vencare leased space for 28 beds in another hospital outside of Chicago. The beds filled up quickly, and Lunsford knew that he was working with a viable concept.

Development and Expansion

During the next few years Vencare bought several more hospitals and turned them around, and in the process gained valuable experience that Vencare management used to continually improve operations and profit margins. In 1986 Vencare leased a wing of the Parkway Medical Center in Miami, and in 1988 it moved into Tampa and Fort Lauderdale before jumping into ventures in San Antonio and Dallas in 1989. By 1989 Vencare owned or leased space in seven hospitals, and had 421 beds in four states; Indiana, Illinois, Florida, and Kentucky. As a result, the company’s revenue base rose from $703,000 in 1985 to $27.4 million in 1988, and then to $54.26 million in 1989. During the same period, net income increased from a net loss of $71,000 to more than $1 million annually.

Vencor’s (the company changed its name from Vencare in 1989) success during the late 1980s was the result of a changing health care industry and Vencor’s ability to adapt to those changes. Paramount in the industry was a trend toward increasing pressure to reduce costs. Vencor reduced costs associated with caring for chronically ill patients by getting them out of the expensive general-hospital environment. It placed them in a more efficient long-term care situation, but gave them more care than they would get at a typical nursing home, for example. Vencor kept care prices down by, among other efforts, centralizing paperwork and administrative functions at its Louisville headquarters.

The result was that Vencor was able to treat patients for a fraction of what it would cost to treat them in a traditional hospital environment. Furthermore, Vencor claimed to provide better care for its patients because its facilities were geared specifically for the typical long-term acute care patient. Most of its patients were over the age of 65 and were dependent on a ventilator. Vencor was able to design a treatment system geared for that population. “We look at all of the patient’s needs holistically,” Barr said in the Louisville article. “We look at all of the patient’s needs ... we work to stimulate the patient as much as possible.” An important advantage of Vencor’s treatment method was that it got patients off of their ventilators more quickly, thus further reducing overall care costs.

Encouraged by rising demand for its services, Vencor management continued to pursue growth, but at a much more rapid pace. The company added nearly 150 beds in 1990 when it opened four new facilities in Texas, Arizona, Colorado, and Georgia. It followed that growth in 1991 by tagging on 400 beds in Michigan, Illinois, Texas, and St. Louis. Going into 1992, Vencor was operating 17 hospitals in 11 states, employing 2,500 people, generating more than $10 million annually in net income, and carrying less than $1 million in long-term debt. Furthermore, the potential for growth was huge, with a seemingly limitless number of areas in which Vencor could expand. Indeed, although the possibility of competition was ever-present, Vencor had effectively created a niche in which it was the only serious player.

Continued Growth and the Addition of the Vencare Program

Vencor added about 400 more beds to its network in 1992, with new facilities in California, Missouri, Florida, and Arizona. Then, in 1993, Vencor added nearly 700 beds in facilities in Oklahoma, Tennessee, and North Carolina, among other places. By the end of the year the company was operating 29 facilities across much of the United States. In addition, Vencor initiated its Vencare respiratory care program in 1993. Through that operation, Vencor began helping some nursing homes to set up their own acute care facilities. Vencare effectively provided a comprehensive package to such clients, helping them to set up a program that included licensed therapists, equipment, and management expertise.

Company Perspectives

We believe healthcare is moving toward patient-focused care provided in a variety of sites based on the acuity of a patient’s condition. This framework is designed to ensure that the level and cost of the care provided to a patient best meet that patient’s specific needs. Our vision is for Vencor to develop such a network for patients with cardiopulmonary disorders.

Vencor’s revenues increased to $282.2 million in 1993, a record $22.9 million of which was netted as income. By then, Lunsford had grown rich and was becoming relatively well-known in Louisville, where his company was headquartered. Lunsford darted around town in a Porsche 911 with VENCOR vanity license plates and was known as a hard-driving businessman with diverse interests including horse breeding and politics. “Within four hours he’ll buy a horse, buy a hospital, hire somebody, and hold a meeting on an under-performing unit,” said former law partner Dennis Doyle in the February 5, 1995 Courier-Journal. Lunsford was also known as a capable and respected manager, and, despite the cash windfall from Vencor, he and his family continued to live in the same home they had purchased before he started the company.

Vencor continued to add facilities to its network and to expand and diversify its successful Vencare unit in 1994. Sales for the year increased to nearly $400 million while net income grew to $31.42 million. By the end of the year the company was operating 34 facilities in 15 states. Furthermore, the Vencare effort had taken off and had managed to capture more than 600 nursing home contracts in 22 states in little more than one year of operation. At the same time, Vencor continued to strive for greater efficiency in an effort to retain control of its niche. To that end, Vencor introduced its ProTouch clinical information system, which, when installed in its facilities, would allow the company to further reduce labor and overhead costs.

Merger with Hillhaven Corp

Vencor continued to acquire and open new acute care facilities in 1995 and to pursue new contracts through Vencare. Of import, though, was a striking maneuver that changed the complexion of the entire company. In September 1995, shareholders voted in favor of a proposed merger of Vencor and The Hillhaven Corp. In effect, Vencor was acquiring Hillhaven (in a transaction valued at about $1.9 billion), and the companies were being merged under the Vencor name. Surprisingly, Hill-haven was a much larger enterprise with a revenue base of about $1.8 billion. It was primarily a nursing home operator, with about 310 facilities under its control, but it also brought to Vencor a chain of nearly 60 pharmacy outlets as well as a group of 23 retirement communities.

The giant Hillhaven merger instantly made Vencor one of the largest long-term health care providers in the United States. Lunsford’s idea with the merger was to begin positioning Vencor as a single source for employers and health-plan companies seeking long-term health care solutions, serving patients ranging from the chronically ill to less-care-intensive nursing home residents. “We’re trying to position this company as the pre-eminent long-term health care company in America,” Lunsford said in the April 29, 1995, Courier-Journal

Principal Subsidiaries

Hillhaven Corp.; Vencor Hospitals South, Inc.; Vencor Hospitals California, Inc.; Vencor Investments, Inc.; Ventech Systems, Inc.; Candle Subacute Services, Inc.; Vencare Kentucky, Inc.