What Ever Happened to NovaCare?

As many readers know, NovaCare was the name of the company that created a big splash by entering the P&O industry back in the 1980s, about the same time that Managed Care was coming to the fore. One of their key strategies was to have a vertically integrated company that maximized internal profitability, so they purchased prosthetic and orthotic practices, physical therapy offices, and rehabilitation clinics. NovaCare aggressively discounted the services they offered, and accumulated many Managed Care contracts, hoping to profit from the resulting high volume of low priced services.

I bought a few shares of Nova Care when they dropped below a dollar and never sold them, primarily so I could get the official mailings the company sends out. It was fascinating to see the "spin" NovaCare put on its operation, even as they sold off their assets one by one. The most recent documents arrived a few days ago, and are equally fascinating reading.

The company is now known as NAHC, Inc, and because they sold off all of their business units in 1999, they have had no significant income since then. Interestingly, the CEO received a salary of $250,000 and a bonus of $272,403 in 2001 and the former CFO [who resigned in 2000] received a salary of $371,243 and a bonus of $1,057,500 for the half-year he worked in 2000.

One legacy of the NovaCare years has been suspicions of impropriety. As the 2001 Annual Report notes, "The Company is a defendant in many significant lawsuits....Collectively, the damages sought to be recovered from the Company in these lawsuits are in the hundreds of millions of dollars. The likelihood of the Company succeeding in the defense of these lawsuits is inherently risky and uncertain. In addition, the Insurance Commissioner of the Commonwealth of Pennsylvania has filed a Petition for Rehabilitation against the Company's professional liability insurance carrier in order to determine if the insurance carrier is solvent."

According to the Annual Report, "The Company's remaining activities consist of managing the litigation against the Company, attempting to realize its remaining assets, general administrative matters, and the preparation for potential liquidation or investment." The legal proceedings pending include Brady v. NAHC, Inc. et al and five similar actions that allege that NovaCare officers and directors made false and misleading statements and omissions that artificially inflated the value of the stock. This is similar to the charges against Enron that are so prominent in today's news stories.

There is also a qui tam [whistle-blower] suit alleging that NovaCare submitted false or fraudulent bills for physical therapy, and litigation alleging breach of agreement in the purchase of the Sabolich facility. Hanger Orthopedic Group will split the costs and any liabilities from this latter action, although NAHC notes that they will likely file for bankruptcy protection if there is an adverse judgment.

Healthsouth Corporation is also suing for $12.6 million in connection with their purchase of the NovaCare rehabilitation hospital subsidiary. The Annual Report goes on to note that, "The Company is a defendant in many significant malpractice lawsuits....Among these are several wrongful death cases." NAHC will file for bankruptcy protection should any of these cases be successful.

The value of NAHC stock in the fourth quarter of 2001 varied from 1/10 to of one cent.



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