If that doesn't sound like a fun way of doing business, it's not intended to be. "We don't hesitate to take somebody to task," says Fleming. "If you've had a bad month, it can be excruciating." To make up for the pressure, AHM has heavy incentive compensation for hospital executives and for corporate managers; hospital administrators can achieve bonuses of up to 60% for fulfilling their business plans.
Despite its relentlessly hard-nosed, by-the-numbers ways, AHM's management also recognizes the need to invest capital in its hospitals. That hasn't been easy, given the company's scarce cash the past few years. In 1990 and 1991 AHM invested $11.2 million and $12.6 million, respectively, in its facilities. In 1992, as the company's financial situation improved, that amount nearly doubled, to $24.7 million. Some of the company's investments simply addressed deferred maintenance problems of the hospitals. "The first year, I got so tired of getting capital-expenditure requests for roofs," Volla recalls. The company has also launched six centers specializing in minimally invasive surgery -- a technique Volla believes is well suited to reducing the length of hospital stays. Finally, AHM has added needed capacity in departments such as obstetrics to several hospitals. One hospital the managers deemed particularly promising, Lake Mead Hospital, in North Las Vegas, got a $12-million face-lift. After losing $1.3 million on its operations in 1989, Lake Mead now produces 30% of the company's operating earnings.
Throughout the company, AHM concentrates its resources on basic care. For example, the company's previous management had expanded into psychiatric care and chemical-dependency treatment as a way of filling empty beds. But Volla thought it hurt the hospitals' overall operations to put psychiatric wards in small primary-care community hospitals. So he slashed such services. They now represent only 7% of the company's revenues, down from 20%. By focusing on basic community services, he says, AHM avoids getting caught up in the quest for the most expensive new technology that captivates many hospital managers.
Instead, AHM continues to try to beef up its position as a primary-care provider. In the Los Angeles market, where AHM has six hospitals, the company is forming a strategic alliance with a big not-for-profit hospital that offers all the latest high-tech services. AHM plans to send the patients who need specialty care to the big hospital and in return to join that hospital's marketing umbrella to negotiate with managed-care networks. And the company is actively trying to form networks of primary-care physicians, positioning itself both for its own strategic plan and for the picture it sees ahead for health-care reform.
Part of AHM's growth strategy involves acquisitions -- a phase for which AHM finally feels ready. There's a limit to what can be done to improve the efficiency of the existing hospitals, Colburn believes. "We've squeezed them," he says. "They're running about as efficiently as any hospitals in the industry."
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2. Financing
Back from the dead
July 28, 1993, was a big day for AHM. That was the day the company raised $100 million in subordinated debt, at 10% interest, with blue-chip investment-banking firm Goldman, Sachs, officially marking the end of a painful era.
That era had begun with the company's pell-mell, junk-bond-financed expansion -- and continued into bankruptcy and a torturous sale of assets. By the time Volla took the helm of AHM, it was a company owned by its banks. In return for letting the company out of Chapter 11, its creditors took 93% of AHM's stock, as well as $180 million in long-term debt in the form of two series of notes. All assets the company had were pledged, some more than once. And because the reorganization plan had been designed by a group of angry creditors, the notes were full of covenants so restrictive that Volla had little flexibility.
The last caught Volla unprepared. As a manager, not a financier, he had looked closely at the company's balance sheet and hospital assets before signing on; he hadn't paid much attention to its charter or debt covenants. So he was in for some rude surprises. For example, the plan allowed AHM to get a line of working capital, secured by accounts receivable, of up to $10 million. That sounded good, Volla thought. But it was only later that he discovered that under the terms of the notes, any working capital the company got would be considered "excess cash flow" and earmarked to pay long-term debt -- completely defeating its purpose.
To make matters worse, there were balloon payments lurking a few years down the road. In 1995, for example, the company would have to pay off the entire senior series of notes, totaling $110 million. "Anybody who could do the projections would say, This company is not going to make that payment," says Rich McDonald, the company's assistant treasurer.
Clearly, AHM needed to pay down debt, fast -- and Volla did, paying $20 million in the first year with cash from asset sales and operations. But just as urgently, the company needed to restructure its balance sheet to get away from the painfully restrictive covenants and the impossible repayment schedule. So as early as July 1990, the company began to explore converting some debt to equity but initially found its options limited.
After AHM became profitable in 1991, Volla and his management team gave it another try. By then the company's prospects had improved enough that they thought they could persuade some bondholders to swap debt for equity. It took five months and a lot of salesmanship, but the company finally arranged a deal. On September 27, 1991, nine institutional bondholders swapped $42.8 million in long-term debt for 11.8 million shares of common stock. In one day Volla and his managers had reduced the company's debt load by 22%. And because the transaction was so clearly beneficial to the company, the addition of new stock did not significantly dilute AHM's stock price.
