Community Psychiatric Centers History

Company History:

Community Psychiatric Centers was one of the largest chains of investor-owned psychiatric hospitals in the United States and Britain, as well as a provider of long-term critical care in the early 1990s. At the end of 1995, however, it announced plans to sell its U.S. psychiatric operations.

CPC was founded in California in 1968 by Robert L. Green and James W. Conte. The two had already been working together when they founded CPC as part of an effort to link two private neighborhood hospitals; Alhambra Psychiatric Hospital in Rosemead, California, and Belmont Hills Psychiatric Hospital near San Francisco. In so doing they founded the concept of creating a multi-hospital system by joining community-based psychiatric centers.

The development of psychotropic drugs in the 1960s to fight mental illness made it possible for psychiatric patients to stay in the hospital for much a shorter time. With psychiatric expenses no longer potentially unlimited, many insurers began to cover mental illness. Hospitals like Alhambra and Belmont were founded partly to treat patients who had to be treated in state mental institutions until the development of psychotropic drugs. When CPC linked these hospitals it reduced operating and administrative costs by centralizing functions like finance, purchasing, construction, and design. Because community hospitals (compared to state facilities) usually offered convenient locations, a good environment, and specialized treatment, CPC's founders believed that demand for their concept would increase.

In June 1969 CPC went public, with Robert Green as its first president. Its headquarters was located in San Francisco. In 1970 newly constructed facilities opened in Santa Ana and Pomona, California. The firm also bought a hospital in West Los Angeles, bringing it into a huge new market. In 1971 it expanded further, buying Fairfax Hospital in Seattle. The firm diversified beyond psychiatric care in 1973 when it bought a Los Angeles-area dialysis company that operated three units. CPC also expanded to the East, opening St. John's River Hospital in Jacksonville, Florida.

In 1975, a new federal law (the Certificate of Need law) caused a nationwide slowdown in hospital expansion, making it harder for CPC to grow. Still, by 1975 the firm operated ten hospitals with 747 beds in five states. CPC had five dialysis centers in California, and by 1977 it had become the second-largest dialysis provider in the United States. Many competitors sprang up during the firm's first 15 years, but many of them spent heavily on advertising and other overhead, leaving them indebted and inefficient.

CPC joined the New York Stock Exchange in 1978. It then bought Priory Hospital, London's largest, oldest private psychiatry hospital. CPC used it to start the Priory Hospitals Group, which became the second-largest British provider of private acute psychiatric care (only the state-run National Health Service was larger).

Investor-owned psychiatric hospital chains boomed in the 1980s. A large part of this growth was fueled by generous employee benefit packages that paid for employees to pursue in-patient care for mental health problems, as well as drug and alcohol abuse. These plans were lucrative for psychiatric hospitals, which billed an average of $500 per patient day. Hospitals had operating profits of 35 to 45 percent from such patients. In 1983 CPC diversified into home healthcare through the purchase of Personal Care Health Services Corporation.

In 1985 the Certificate of Need law was nullified in several states, and CPC began a major construction program to beef up its hospital division. It added seven new hospitals in 1986, seven more in 1987, and another four in 1988, including one in Puerto Rico. In 1989 CPC's dialysis and home health business was spun off as a separate public company called Vivra Incorporated. Chairman Robert Green left the firm to head Vivra, and James Conte took his place. Richard L. Conte, formerly general counsel, became president and chief financial officer and oversaw the United Kingdom hospital division. CPC moved its headquarters downstate, from San Francisco to Laguna Hills.

In 1990, CPC bought two more psychiatric hospitals, while in 1991 the firm built its last new psychiatric hospital to date. The firm had grown at an impressive rate, always meeting its goal of annual earnings-per-share growth of 15 to 20 percent. Its operating margins were around 35 percent and its return on equity averaged more than 20 percent. On the basis of that strength, Forbes magazine labelled the firm "the class act of the country's psychiatric hospital chains." But in the early 1990s the psychiatric market changed dramatically and CPC's growth stalled.

Corporations were rebelling against the rising cost of these mental health benefits, which were rising between 30 percent and 50 percent a year (more than twice the rise in other segments of the healthcare market). Critics charged that most plans gave hospitals no reason to release patients before their insurance benefits were exhausted. The industry was hurt by allegations that some psychiatric hospitals held patients against their will, then kicked them out when their benefits expired.

Because of the rising costs, many employers began using insurers and managed care companies to help reduce their costs. As a result, hospital admission standards were toughened and more employees were treated as outpatients. Insurers demanded shorter hospital stays and large discounts. Managed care became an important component of the psychiatry business, and it hurt revenues of psychiatric hospitals across the United States. Managed care and negotiated group discounts resulted in profit margin reduction to around 22 percent by 1991, and sometimes as low as ten percent. Since the late 1980s, moreover, the average length of patient hospitalization had shrunk from four weeks to three, then to less than two. Psychiatric hospitals across the United States were hit by these changes, and many closed.

Between 1988 and 1990, the percentage of managed rates in CPC's patient population climbed to 33 percent from only 12 percent. In the early 1990s CPC decided to adapt to this changed environment. It negotiated with managed care providers trying to increase its patient volume enough to offset the lower profits from each patient. Even so, the firm experienced its first loss in 1991. Upset about a plunge in the CPC's stock price, angry investors filed a class action suit against CPC. That same year Texas, Florida, and New Jersey launched investigations into for-profit psychiatric hospitals, causing a public relations disaster for the industry.

In the midst of these troubles, CPC head James Conte retired in 1992 and was replaced by Richard Conte, his son. CDC decided to switch gears, reformulating itself from a psychiatric hospital company into what it termed "an integrated behavioral health delivery system." The firm diversified into the growing market for long-term critical care, hoping to escape the tightening psychiatric market. CPC launched a new subsidiary, Transitional Hospitals Corp., to develop and operate long-term critical care units with CPC hospitals, as well as to acquire or lease critical care units outside of CPC. The subsidiary offered long-term hospitalization for patients who required intensive nursing care as they recovered from a catastrophic illness or accident. Such patients needed services including life-support systems, post-surgical stabilization, intravenous therapy, and wound care. When opening hospitals, Transitional looked for large markets with a large proportion of elderly residents. Many of its patients were dependent on ventilators.

In 1993 CDC decided to reduce costs of its U.S. psychiatric division, and announced it would close as many as ten of its 44 hospitals. In 1994, CDC moved its headquarters again, this time to Las Vegas. By this point, the average hospital stay of a CPC patient had dropped to less than 11 days for an adult, down from four weeks about ten years earlier. In contrast to the troubles besetting the firm in the United States, its British division experienced its best year ever in 1994, with net operating revenues of $46.2 million. The Priory Hospital Group expanded its bed capacity by a third, and bought hospitals in Bristol, Reifate, and North West Surrey, giving the group a total of 13, including one joint-venture hospital.

CPC made $10.2 million in 1994 on revenues of $427.7 million. Its Psychiatric Care Operations offered five major services and programs. Inpatient treatment was geared toward patients who needed constant supervision. Residential treatment was offered to adolescents requiring more structured care than they could get in outpatient care. The firm had 21 residential treatment centers, each with a psychiatrist and 24-hour nursing. Partial hospitalization was designed for patients not requiring constant supervision. Patients were treated for six to 12 hours a day, up to seven days a week, around other requirements like work or school. Intensive outpatient programs were offered to patients requiring routine observation. Treatment was given three to four hours a day, usually three or four days a week. Outpatient treatment was the least intensive. It generally involved 45 to 90 minutes of individual, family, or group therapy on a scheduled basis.

By early 1995 the Transitional Hospitals subsidiary operated 14 facilities from Massachusetts to California. It relocated its headquarters from Atlanta to the CPC corporate offices in Las Vegas. The firm needed to expand its headquarters anyway, and decided it would be less expensive to construct a new building that consolidated the main corporate office with the office of Transitional Hospitals Corporation, formerly located in Atlanta. The Priory Hospitals Group continued to expand, reaching 13 facilities. Two-thirds of CPC's record 1994 revenues of $428 million still came from its U.S. psychiatric division's 36 facilities, but it seemed likely that the percentage would shrink.

CPC experienced a flurry of change in 1995, a year when the revenue of the Transitional Hospital subsidiary and United Kingdom division grew larger than that of the U.S. psychiatric division. In November 1995 it announced that it would close six of its psychiatric hospitals that were losing money. The hospitals were located in Milwaukee, Laguna Hills, Fontana and Santa Ana, California, New Orleans and Skokie, Illinois. The operations of the last two were transferred to other CPC hospitals nearby. The New Orleans and Milwaukee hospitals shared space with the Transitional Hospitals subsidiary, which then expanded to take over the entire hospital.

CPC then reorganized the management of the U.S. psychiatric division, promoting William E. Hale to president. It consolidated regional operations, closing offices in Jacksonville, Sacramento and Seattle, and terminating more than 40 regional and corporate positions. In December 1995, CPC announced plans to spin-off its domestic psychiatric business to its shareholders, splitting the company into two publicly held corporations. CPC would hold onto the Priory Hospitals group and Transitional Hospitals Corp. Management felt that they were much better bets for future growth, and that dealing with the problems of the shrinking U.S. market for psychiatric care was sapping the CPC's resources. A management team lead by William Hale would remain to lead the new company.

Transitional Hospitals had grown to 14 hospitals in ten states, while Priory Hospitals Group had 15 hospitals in Britain. The two combined had a 1995 gross income of about $258 million. The mid-1990s found CPC in the midst of an important transition. Only time would show if the firm had made the correct decision in abandoning the U.S. psychiatric market in favor of the British psychiatric market and long-term critical care.

Principal Subsidiaries: Priory Hospital Group, Ltd (United Kingdom); Transitional Hospitals Corp.; Community Psychiatric Centers

Further Reading:

• "Community Psychiatric Says Authorities Study Records from Hospital," Wall Street Journal, August 18, 1995, p. C11.
• Lutz, Sandy, "Troubled Times For Psych Hospitals," Modern Healthcare, December 16, 1991, pp. 26-33.
• ------, "Bad News, Falling Profits Hamper Psych Providers," Modern Healthcare, May 24, 1993, pp. 54-57.
• Taylor, John H., "Tranquilizers, Anyone?," Forbes, December 10, 1990, pp. 214, 216.
• Wallace, Cynthia, "Psychiatric Chains Fuel Growth Through Debt and Internal Funds," Modern Healthcare, March 13, 1987, pp. 142. 144.

Source: International Directory of Company Histories, Vol. 15. St. James Press, 1996.