Beverly Enterprises boosts reserves for patient care liability costs
(7/19/02 Dow Jones Business News, AP Newswires, Arkansas Business Journal, Wall Street Journal)
By Johanna Bennett

NEW YORK -- Investors punished shares of Beverly Enterprises Inc. (BEV), after the nation's largest nursing home chain said it will report a second- quarter loss because patient liability costs rose.

Beverly, Fort Smith, Ark. , warned investors Friday morning that it will report a loss of $14 million, or 13 cents a share. The company boosted its patient liability reserves by $43. 3 million in the second quarter to cover possible losses from litigation over patient care issues filed before May 1.

Without the increase in reserves, Beverly said it would have reported a profit of 14 cents a share or more.

But what really shook investors was the company's revelation that its liability costs for the current year will exceed initial expectations and it is accruing an additional $2. 5 million a month, said Salomon Smith Barney analyst Deborah Lawson.

"The problem is they are saying, 'OK, in an ongoing basis, we underestimated our liability costs,"' Ms. Lawson said.

A Beverly spokesman declined to comment on the falling stock price.

At 4 p. m. EDT on the New York Stock Exchange, Beverly was down $2. 75, or 40%, to $4. 10. Earlier, the stock hit a 52-week low of $3. 50, far under the prior 52-week low of $5. 66, reached Feb. 13. About 4. 4 million shares exchanged hands, compared with the daily average of 345,000.

Liability issues have weighed heavily on the nursing home industry, especially in Florida where the passage of tort reform legislation in May 2001 led to an upswing in lawsuits.

More than half of the $43. 3 million in reserves -- about $22 million -- will cover liability issues in a set of Florida nursing homes that Beverly sold in January.

Beverly said the liability costs for those facilities would have resulted in $120 million in additional accruals for the current policy year.

"These dramatic and unanticipated increases in patient care liability costs demonstrate the soundness of our decision to sell our nursing home operations in Florida," Chief Executive William Floyd said in a prepared statement released Friday.

The remainder of the additional reserve funding, however, represents unanticipated growth in claims and expected losses in Alabama, Arkansas, Mississippi and California, where Beverly is under investigation.

This does little to help Beverly's new management team build up confidence in the market, said Ms. Lawson, the Salomon analyst.

"Lots of investors thought that when Beverly got out of Florida, the liability issue was resolved. For them, it comes as a surprise that there are four other states where it is an issue," she added.

California's Department of Health and Human Services informed Beverly on April 29 that it was investigating possible criminal charges against the company related to civil citation on patient care.

State authorities issued a number of civil penalties against Beverly between 1998 and 2001, most of which were resolved by Beverly paying a civil fine, the company said in a quarterly filing with the Securities and Exchange Commission. Meanwhile, Beverly continues efforts to reshape its nursing home portfolio and lobby for tort reform.