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Concentra, which owns 201 occupational medicine clinics, saw its stock rise to 39 ¾ before the decline. After it announced that it would not meet its financial performance estimates, its stock lost over 80% of its value. The stock decline attracted several unsolicited buy-out offers from groups who considered that the market had undervalued Concentra. On August 17, 1999, Concentra stockholders approved a merger with Yankee Acquisition Corporation, in which the shareholders received $16.50 for each share of stock. With the merger, Concentra ceased being a publicly held company.

NovaCare, which owns 37 occupational medicine clinics, suffered a similar fate for somewhat different reasons. By March 31, 1999, NovaCare’s capital structure was highly leveraged from its expansion; its total debt was $596 million. On August 16, 1999, facing losses because of weak reimbursement for its long-term care business, NovaCare’s management announced a corporate restructuring that included, among other things, sale of its occupational medicine business. On October 4, 1999, NovaCare announced that it would sell its occupational medicine clinics to Select Medical Corporation, a privately held healthcare company with its headquarters in Mechanicsburg, Pennsylvania. The clinics will continue to do business under the name NovaCare, but have ceased being a publicly held company.

HealthSouth, Concentra and NovaCare own 357 occupational medicine clinics and have had and will continue to have a significant impact on the direction of the occupational medicine market. Understanding the four major factors behind the substantial decline in value of these companies and the implications of NovaCare and Concentra becoming privately owned is important for occupational health professionals.

First, healthcare sector stocks in general have been battered in recent months. This decline reflects concerns on a variety of fronts: decreasing reimbursement, declining margins, consolidation, etc. Each of these three companies has a broader corporate focus than just occupational medicine; their stock declines reflect, in part, general trends in the market.

Second, the 1998 collapse of the physician practice management market made investors wary of the occupational medicine market. On November 11, 1998, in a pivotal moment in the direction of healthcare, MedPartners, the nation’s largest physician management company, announced that it was divesting itself of its 238 physician clinics and more than 13,000 affiliated doctors in 42 states. Other affected companies followed. PhyMatrix announced that it would divest and exit physician practice management. FPA Medical Management declared bankruptcy. Columbia/HCA divested itself of its physician practices. The collapse of the physician practice management market challenged the fundamental business model that a publicly held company could raise money in the capital markets, purchase physician practices, and run them, producing an adequate return to off-set the increased administrative costs and capital costs inherent in the model. Since rapidly growing occupational medicine companies use a similar model, the market de-valued these companies.

Third, growth by acquisition becomes progressively more difficult over time — particularly in a market where multiple acquirers are seeking the same clinics. Interviews with the key insiders who participated in many of the recent clinic acquisitions reveal that many felt the clinics purchased were over-valued and brought with them significant problems. Nonetheless, these publicly held companies, fueling their expansion by acquisition, needed these acquisitions to support their short term stock prices despite the acquired clinics’ problems. In addition, growth by acquisition places a premium on immediate revenues, so existing clinics were over-valued relative to new clinics because new clinics could not immediately boost the acquirer’s bottom line. In a sense, the drive for immediate revenues forced these companies to acquire obsolescence.

Fourth, the behaviors of these three companies illustrate the business axiom that it is easier to grow a company through acquisition than it is to successfully manage the results. This is not true only in the occupational medicine market; the recent collapse of Rite Aid provides yet another illustration of this axiom. Ultimately, acquiring companies have to consolidate these acquisitions, improve their performance and run them profitably. Concentra expressed this viewpoint in their 1998 Annual Report: "Facing a changing marketplace, we took several sweeping, decisive steps to strengthen Concentra’s long-term performance….[W]e reoriented our priorities from top-line expansion to bottom-line profitability which will result in slower, more controlled growth."

What should occupational health providers learn from these developments?