Integrated Health Services Inc., once a powerhouse in the health-care industry, is clinging to the critical list with its vital signs fading.

After growing fast and paying its CEO millions during the 1990s, Integrated has been in a downward spiral in 1999. The company reported this week that it lost $1.8 billion in the third quarter as it wrote down the value of assets. It also failed to make two interest payments totaling $24.7 million, including $17 million due earlier this week. Integrated Health shares, which traded as high as $38.37 1/2 in early 1998, closed yesterday at 31 1/4 cents.

Based in Sparks, Md., Integrated runs nursing homes nationwide and provides services for patients in other companies' nursing homes. It's one of several long-term care firms brought low by a combination of high debt and changes in the Medicare payment system.

Both Vencor Inc. and Sun Healthcare Group Inc. sought protection from creditors by filing for bankruptcy reorganization this fall, and analysts said Integrated may follow.

"All this most likely points to a Chapter 11 filing," said Philip Acinapuro, a junk bond analyst for the firm Dabney Flanigan, which specializes in distressed securities. Integrated financed its rapid expansion with junk bonds.

Suspension of the Nov. 15 interest payment "is necessary to preserve liquidity to operate the business," Integrated said in a news release. The company referred questions to Executive Vice President Marc B. Levin, who did not return calls yesterday.

Integrated was a pioneer in the field of "subacute care," providing care for patients who need round-the-clock nursing services but don't need to remain in a hospital. The strategy was billed as a less-expensive alternative to continued hospitalization and helped differentiate Integrated from traditional nursing-home companies. Integrated expanded through aggressive acquisitions and more than $3 billion of borrowing. Much of Integrated Health's revenue--the company had sales of $2.9 billion in 1998--comes from Medicare, the federal insurance program for the elderly and disabled.

That reliance left the company badly exposed when the government overhauled Medicare payments under the Balanced Budget Act of 1997, trying to impose what policymakers thought was needed financial discipline. Integrated felt the squeeze in its own nursing homes, even as other nursing homes reduced demand for Integrated's contract services. "Essentially they doubled down the bet on Medicare," said Robert M. Mains, an investment analyst at Advest Inc.

Though shareholders' investments in Integrated Health nearly evaporated, the company cushioned the blow for chief executive Robert N. Elkins.

In March, the company loaned Elkins $11.5 million "to assist the company in retaining Dr. Elkins on a long-term basis in light of the significantly reduced stock price and the loss of equity incentives," according to Integrated Health's April 30 proxy statement filed with the Securities and Exchange Commission.

The loan was part of a program the company adopted to enable senior executives to buy and hold Integrated stock after the value of their stock options declined. The proxy said those loans would be forgiven over a five-year period if the borrower was still working for Integrated Health.

"This is what gives executive pay a bad name," said Graef Crystal, who edits a report on executive compensation.

"Why do they want to assist to retain him with that sort of performance?" Crystal asked. "I would loan him the money if he would go work for a competitor."

As of March 31, the company had outstanding loans to Elkins totaling $37.3 million, according to the proxy statement. One loan for $8.75 million, made in November 1998 and due to be repaid in September 1999, was used to pay taxes that resulted from the exercise of stock options, the proxy statement said.

In January, the company forgave $4,158,065 of principal and interest on another loan to Elkins, the proxy said.

The company had contributed $18.8 million to a trust for Elkins as of Dec. 31, 1998, and it had committed to make sure there would be $23.9 million in the trust by Jan. 2, 2001, the proxy said. But in the event of the company's insolvency, that money could be claimed by Integrated Health's creditors, the proxy said.

In 1997, Integrated Health agreed to pay another company wholly owned by Elkins a minimum of about $1.1 million a year for seven years to lease an aircraft, the proxy said. The lease provided that Elkins "shall have exclusive first use of the aircraft . . . even if Dr. Elkins is terminated as an employee of the Company for any reason," the proxy said.

Under the lease, the company was obligated to pay maintenance and operating costs, but Elkins was responsible for the company's "out of pocket" expenses when flying for personal reasons, the proxy said.

"There's a tremendous gap between the value that the shareholders are seeing and the value of the compensation package, and it doesn't make any sense," said Laurence Stybel, a consultant to corporate boards.

In July 1998, Integrated agreed to pay its former president, Lawrence P. Cirka, $11.3 million in severance plus $2.7 million in retirement benefits and deferred compensation.

This April, with Elkins's consent, the company took back 282,353 shares that it had contributed to an executive retirement plan for Elkins.

The company said it took that action "due to the Company's financial performance in 1998," when Integrated lost $68 million.

Elkins's 1998 cash compensation--salary and life insurance premiums--totaled $821,533.

But he isn't immune to the shareholders' pain: As of March 1, he and his wife held 2.8 million shares and options, 5.1 percent of Integrated Health's common stock.


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