Beverly Enterprises, Inc.

Beverly Enterprises, Inc.

155 Central Shopping Center
Fort Smith, Arkansas 72903
U.S.A.
(501) 452-6712
Fax: (501) 452-3760

Public Company
Incorporated: 1964
Employees: 96,000
Sales: $2.10 billion
Stock Exchanges: New York Pacific

Beverly Enterprises is the largest nursing home chain in the United States. Formed in 1964, the company was clearly the industry leader by the mid-1980s after an aggressive acquisition campaign. As the majority of the patients in Beverly homes was covered by Medicare and Medicaid, the federal cost-containment legislation of 1983 that changed the reimbursement system hurt the company at the same time that labor costs were soaring. In the late 1980s, a rash of bad publicity slashed Beverly’s occupancy, after numerous state health officials charged neglect on Beverly’s part and put the company on probation. By 1989 the company was obliged to scale down considerably in order to pay debts and return to profitability.

At the time of its incorporation, the company consisted of three convalescent hospitals in the Pasadena region of southern California. The founder, Roy E. Christensen, was a Utah accountant. In its first decade, Beverly expanded into such things as plastics, printing, real estate development, and mirror-manufacturing. As a result, the company was heavily leveraged and in the red by 1973. In 1971 Robert Van Tuyle was recruited as a director from his 40-year career in the chemical industry, and he immediately began to streamline Beverly, divesting the company of its unrelated interests and focusing on long-term health care.

In the late 1960s and early 1970s, the nursing home industry was experiencing a glut. The onset of Medicare and Medicaid in the mid-1960s had sparked a rush of new entrepreneurs in what had previously been a largely non-profitable industry. The too-rapid expansion stalled at about the time Van Tuyle joined Beverly, but he believed that the nursing home industry still had growth potential. Growth became Beverly’s trademark beginning in 1977 when it purchased Leisure Lodges, from its parent company, Stephens, of Little Rock, Arkansas. Leisure Lodges was a chain of nursing homes. The purchase doubled Beverly’s size, making it number-two in the industry. David R. Banks, who had been chairman of Leisure Lodges chain, joined Beverly as president and CEO in 1979.

Small chains and solo organizations were ripe for acquisition in the early 1980s because they were having trouble turning a profit on Medicaid reimbursements. Beverly’s size and centralization, on the other hand, permitted economies of scale. Between 1976 and 1983, Beverly’s revenues increased 12 times, primarily through acquisitions. The company grew from 47 homes in 1971 to 1, 136 homes in 1985, when it had a presence in 45 states and Canada. By 1983 Beverly was the nation’s largest operator of nursing homes. It had more than twice as many beds as the Hillhaven Corporation, its nearest competitor, and represented 7% of the industry.

A new “prospective payment plan,” the result of federal legislation, promised to increase the flow of patients into convalescent centers by forcing hospitals to release them sooner. At the same time, the 1983 legislation changing Medicaid-Medicare reimbursement made the health care industry suddenly cost-conscious. These changes also meant that the industry was subjected to greater regulation by state and federal governments. Beverly posted record profits in 1985. The company was less concerned by its growth-fueled debts and Medicaid cost-capping than by the industry wide labor problem with potential for a union battle. Turnover was high in the low-wage, high-stress work force of nursing homes.

Problems began to surface by 1986, as allegations of neglect prompted investigations by various state health officials. Between 1985 and 1988, six Beverly facilities in Missouri were threatened with license revocation. In 1986, officials in Texas suspended Medicaid payments to 24 of Beverly’s 134 nursing homes in that state, citing hazardous health-deficiencies; the state revoked the license of one home. That same year, Beverly settled a legal battle with the state of California’s department of health services by paying a record $724,000 in fines. The company was accused of care so negligent that it contributed to or caused the death of nine patients in that state. Beverly agreed to pay the fines without admitting to the specific charges and was put on probation for two years. In 1987 health care officials in Maine and Washington, D.C., denied Beverly permission to open any new homes in their domains because of its poor patient-care record. In Michigan, the health department claimed that Beverly owned almost half of the facilities facing denial of Medicaid payments because of substandard care in 1987. Regulators in Minnesota said eight deaths in Beverly homes there were related to neglect.

The sensational details of some of the specific charges—including gangrene and amputation caused by infected bedsores, and rape—damaged Beverly’s reputation and caused a drop in occupancy rates. The company lost $30.5 million on $2.1 billion in revenues in 1987. The same year, Beverly’s top management tried an unsuccessful leveraged buyout of the company.

While occupancy rates were dropping and reimbursement problems worsened, labor expenses increased by between $90 and $120 million in 1987 when Beverly had to raise its wages. Nurse salaries were still less than competitive, and there was a shortage of nurses at this time. In addition, the expanding economy was offering other options to unskilled workers. About 70% of the nursing home work force consisted of poorly paid, low-skilled nurses’ aides. With its image and occupancy problems, Beverly was obliged to remedy its employee troubles. Violations of statutory requirements for staffing, training, and patient care were not unusual in an industry whose biggest expense was labor. Labor costs accounted for 60% of Beverly’s expenses. To combat the charges of chronic neglect, Beverly started a quality improvement program in 1988 and established a $5.7 million training center in Atlanta for nurses and administrators.

Beverly’s $1.1. billion debt was beginning to pinch by 1988. The company considered filing for reorganization under bankruptcy-court protection in that year. Instead, it began selling off properties. Beverly was fined another $124,000 after a reinspection of its Oak Meadows Nursing Center in Los Gatos, California, where negligence had contributed to four patient deaths in 1985. Officials found evidence of medical record falsification, medication errors, and neglect. The facility’s license was revoked and Beverly sold the home in February 1988.

About the same time that Beverly was taken off probation in California late in 1988, Minnesota moved to revoke the license of all 42 of the company’s nursing homes in that state. The National Labor Relations Board brought a case against Beverly, charging it with more than 200 labor violations in 36 homes in six states, and accusing the company of engaging in a pattern of unfair labor practices. Management claimed that staff turnover, at 78%, not company policy, had precluded the formation of unions. At that time, about 11% of its staff was organized.

Troubles in California homes did not end with the probation. Beverly was fined more than $130,000 for patient neglect in its northern California Novato Convalescent Hospital, and the probational status of another home was extended for two more years. In the first nine months of 1988, Beverly lost $12.3 million.

The occupancy rate at Beverly’s more than 1,000 homes stabilized at 88% by 1989. Staff turnover had also been cut. At that time, the $40 billion nursing home industry, which served 1.5 million people in the United States, was in crisis. Although 63% of patient-days were to be paid by Medicaid, money from Medicaid only accounted for 41% of payments. The squeeze between rising costs and inadequate government reimbursement meant many companies were losing money. The average daily payment by Medicaid for a nursing home patient had risen an average of 4% between 1985 and 1988, but labor costs had risen 11%. Two-thirds of Beverly’s staff were aides whose wages were only 50¢ an hour more than workers at fast-food restaurants. High turnover contributed to the quality-of-care problems that plagued the industry.

Beverly underwent extensive reorganization in 1989, including the elimination of three layers of management and a substantial reduction in the number of its properties. Although there was an increase in revenues in 1989 over 1988, Beverly announced a $120 million charge in the second quarter of 1989, a charge associated with the planned sales of 35% of its homes. Proceeds of the sale of 370 homes would help the company reduce its debt, as well as trim it of homes that did not fit into a new long-term strategy. Some of these planned sales, however, were not completed by the end of 1989.

Beverly sold 11.5 million shares of common stock in March 1990, netting about $45.7 million, to be used in refinancing debt. With about $470 million in debt to be restructured, the company made a public offering of $40 million of convertible debentures in mid-1990 and had plans to complete its debt refinancing by year’s end.

Robert Van Tuyle stepped down as chairman of the board in May 1990, after 19 years of leadership. He was succeeded by David Banks. In summer 1990, the company moved its headquarters from Pasadena to Fort Smith, Arkansas.

Principal Subsidiaries

Affiliated Medical Center, Inc.; BESC, Inc.; Bonterra, Inc.; Brandy wood, Inc.; Columbia-Valley Nursing Home, Inc.; Community Nursing Home, Inc.; Gulf States Pharmacies, Inc.; Hospital Facilities Corp.; K-D Investment Co.; Liberty Nursing Homes, Inc.; Melrose Health Care Center, Inc.; Moderncare of Lumberton, Inc.; Northcrest Nursing Home, Inc.; Northgate Services, Inc.; Nursing Home Operators, Inc.; Oaks Nursing Home, Inc.; Progressive Medical Group, Inc.; Retirement Communities of America; Sheltered Care Homes, Inc.; Sherman Oaks Convalescent Hospital, Inc.; South Alabama Nursing Home, Inc.; Tampa Health Care Center, Inc.

Further Reading

More, Thomas, “Way Out Front,” Fortune, June 13, 1983; Hurst, John, “For Nursing Homes, Big Isn’t Best,” Los Angeles Times, April 7, 1988; Miles, Gregory, “This Nursing Home Giant May Need Intensive Care,” Business Week, November 7, 1988; Feder, Barnaby, “What Ails a Nursing Home Empire,” The New York Times, December 11, 1988.

—Carol I. Keeley