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Subject: Exexcutive Update
Date: Mon, 2 Nov 92 13:00:39 EST
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11/2/92


TITLE Exexcutive Update #m#ak/wm#m#Novacare Isn't Sweating Health
Reforms

Ted Bunker In New York John H. Foster takes some evident satis-
faction in bucking trends.

The chairman and chief executive of NovaCare Inc. said he expects
the company to dodge the bullet of new price and other controls
that might be A T  T H E  A N A L Y S T S


imposed by Washington next year. This despite the fact that near-
ly two- thirds of the company's revenue comes from Medicare.
Concerns over efforts to contain skyrocketing medical costs have
pressured health-care stocks, including NovaCare's. But Foster
and members of his management team maintained at a meeting Friday
of the New York Society of Securities Analysts that they are ac-
tually in position to benefit from such containment efforts.  One
reason is that NovaCare's business involves helping people debil-
itated by illness or injury regain their health and ability to
function. This ultimately foster

lowers the cost of providing care to them over the long term.
"We believe we're on the right side of the reimbursement equa-
tion," Foster said. "Rehabilitation is part of the solution."
NovaCare's success also relies on doing business in ways that are
unlike most health-care service providers. The Valley Forge,
Pa.-based company boasts a sophisticated management team in an
industry notorious for its pedestrian operational techniques.  In
about eight years, it has grown into one of the largest clusters
of clinics, hospitals and contract services in an industry re-
nowned for its fragmented, mom-and-pop characteristics. And it
has honed an ability to demonstrate the benefits of its services,
which could help it fend off attempts to lower its fees.  "You're
getting buyers of services who are demanding not just price con-
cessions but proof that therapies work, that they're doing some-
thing for


Novacare Isn't Sweating Health Reforms

the patient," said Geoffrey E. Harris, a Smith Barney, Harris Up-
ham & Co. analyst.  He said health-care service providers that
can't prove their treatments result in positive outcomes will
have a hard time justifying the prices they charge for those
treatments.  "Health-care reform is certain," Foster told the
analysts. But its shape remains murky.

While there is much uncertainty, particularly ahead of the elec-
tion, about the particulars, Foster said reforms are likely to
rely on the private sector to manage them, provide universal ac-
cess, focus on quality measurements to fix treatment prices and
determine ways of separating those who could benefit from certain
services from those who probably could not.

Measuring Effectiveness

NovaCare is regarded as a leader in devising ways to measure and
demonstrate the effectiveness of treatment. And Foster pointed
out that from its beginnings the company has focused on targeting
treatments on those they would most benefit.

Foster began NovaCare in 1984 by promising nursing home operators
not to charge for any treatments that failed to qualify for Medi-
care reimbursement.

NovaCare's record since then has consistently topped the industry
average. It has won reimbursements for services in 97% to 98% of
its cases vs. an industry average reimbursement rate of less than
80%.  Since then, NovaCare has grown rapidly, primarily through
acquisitions.  In its fiscal first quarter ended Sept. 30, earn-
ings rose 33% to $12 million, or 24 cents a share, on revenue of
$117.3 million, up 38.5%.  In fiscal 1992, the company earned
$37.5 million, or 75 cents a share, up 67%, on 52% higher revenue
of $385 million. In the year-earlier period, the company earned
$20.5 million, or 45 cents a share, on $252.5 million in revenue.
Looking ahead, Foster and chief financial officer Timothy E.
Foster said they were comfortable with analysts' expectations for
earnings of 25 to 26 cents a share for the current quarter vs. 13
cents a year ago and $1.07 to $1.15 for the full fiscal year.
NovaCare's three core businesses are speech, physical and occupa-
tional therapies under contract to hospital and nursing home pa-
tients, rehabilitation hospital care and providing orthotic and
prosthetic devices.  John Foster said the company will continue
to grow through acquisitions, although it also is focusing on im-
proving its current operations.  In the most recent quarter, the
company said its overhead and adminstrative costs ballooned by
39% to $21 million from $15 million in the prior year. Much of
that was associated with hiring new therapists, a nagging problem
for NovaCare.  The company hired 1,100 therapists in the last six
months, Foster said. But it still found itself unable to supply
as many therapists as its customers wanted. So it watched as
nearly a third of the demand for service went to competitors or
went unmet.  Turnover among the therapeutic staff runs about 25%
a year. To counter that problem, NovaCare is trying to make it-
self the employer of choice among therapists, by offering com-
petitive salaries, in-house training and opportunities for ad-
vancement.  Foster said the company uses technology and manage-
ment professionals from other service industries to improve its
relationships both with its customers and with its professional
staff.  Meanwhile, NovaCare management plans to stay the consoli-
dation course it has pursued for years, adding operations at a
rapid clip. NovaCare ranks itself among the top five providers of
rehabilitative therapy in the U.S. But in a $13 billion industry,
there is certainly room for further consolidation.


Room For Growth

With service contracts with 1,786 nursing homes, or just under
10% of the 19,000 operating in the country today, Tim Foster said
that remains a large area of opportunity. And its seven rehabili-
tation hospitals, with 434 beds, are only about 70% occupied,
leaving room for growth there as well.  NovaCare claims to be the
largest single provider of orthotic and prosthetic services and
devices - chiefly braces and artifical limbs - but it only has a
9% market share with its 106 offices nationwide.  By applying
management techniques borrowed from other service industries and
modern technology, Foster said he expects NovaCare to continue
its growth in profitability and revenue.

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