December 2005 Steady Hand Joey Jacobs helps build Psychiatric Solutions into Nashville’s next great health care company By Drew Ruble
PHOTO BY JOHN SCHWEIKERT
The modest offices of Franklin-based Psychiatric Solutions Inc. (PSI) hardly reflect the white-hot growth the company has experienced over the past few years. The lobby is nondescript. The boardroom is cookie-cutter in style. About the only identifiable indulgence is a salt-water fish tank that company founder, chairman, president and CEO Joey Jacobs has placed in the company’s tiny break room. The tank seems less out of place when viewed with the aid of metaphor. After all, PSI has become the biggest fish in the behavioral health industry.
Meet Jacobs and hear him tell his company’s story, and the Spartan nature of PSI’s headquarters begins to make sense. Raised on a farm in McMinnville, Joey Jacobs isn’t the flashy corporate type prone to indulging in executive excesses. He often dresses casually, communicates in a down-to-earth manner and is focused on his company and his family, not trophies and perks. Even the fact that the company he started in 1997 with $10.5 million in raised capital is now nearly a billion dollar (revenue) market leader doesn’t seem to have changed Jacobs much. He still signs every check that goes out from PSI’s corporate offices. He still flies Southwest Airlines. He’s as likely to flag down a member of his senior management team by calling out down the hall as he is to send a memo by e-mail. And he insists that his employees call him Joey.
What keeps him grounded? Jacobs’ climb, though steep of late, hasn’t been without difficulties. His story is a study in perseverance, prescience and execution. And it’s a story that culminated this summer in PSI becoming the largest provider of inpatient psychiatric care in America, a feat which earns Jacobs the title of Business Tennessee’s CEO of the Year.
Seeing Over the Waves
A 1975 graduate of Middle Tennessee State University, Jacobs went to work in Smithville as an accountant for what was then a little hospital corporation called HCA. Four months later, the ambitious, affable Jacobs was named hospital CFO. Twenty-one years and a merger with Colombia later, Jacobs would leave HCA as the Tennessee division president over 29 facilities (including several psychiatric hospitals), 13,000 employees and $1.2 billion in revenue. Few in Nashville’s health care industry would have predicted that the new company Jacobs would form would someday surpass in scope the HCA division he once led. But it has.
Backed by Salix Ventures, Clayton Associates, Acacia Ventures and Oak Investments, PSI was not an immediate home run. Largely a physician practice management company at its inception, the business was barely off and running when the federal government passed the Balanced Budget Act of 1997, triggering a ratcheting down of insurance reimbursements for outpatient psychiatric services alongside a two-thirds cut in the length of stay for patients. The health care industry as a whole had fallen on hard times. For behavioral health, it was even worse. PSI nearly went out of business. Jacobs slogged it out, though, pinching pennies, managing a business with small margins and keeping it all together as he waited for industry conditions to improve.
From his vantage point inside an industry in collapse, Jacobs became convinced that in the course of trying to correct what providers were doing, payers had over-corrected, taking too much capacity out of the mental health industry. He set to overhauling PSI’s blueprint, exiting the service business in favor of a focus on the inpatient side, specifically the acquisition of psychiatric hospitals. Jacobs realized that the freestanding psych hospitals that had survived the late 1990s—40% had closed—were probably positioned to do well going forward. The decision to change into a pure player in the behavioral space was prescient—a clear call on approaching industry conditions made from the bottom of a market trough.
The Weather Gage
Jacobs’ timing was impeccable. PSI’s fortunes began to turn. Thirty-two states and the federal government passed mental health parity laws, putting back more covered benefits and funding for behavioral health. Inpatient care rebounded, incident and payment rates were climbing again. (PSI is reimbursed by payers at a daily rate of roughly $600 per patient.) In fact, due to the shakeout, there was pent-up demand. Jacobs and his behavioral health company were poised to take advantage.
Cogent Healthcare CEO Gene Fleming, Jacobs’ former boss at HCA, says, “Where the state of the industry was when Joey joined it really didn’t make any sense.” But he adds, “Joey realized psychiatric care is just too valuable a service for it not to be successful over a longer period of time.”
The acquisitions materialized rapidly over the next few years. In 2001, the company bought four facilities. In 2002, the company went public through the unconventional means of a reverse merger with PMR Corp., gaining $5 million in cash as a byproduct. In 2003, it purchased 19 facilities. In 2004, 10 more. With every new transaction and positive quarterly earnings report, PSI’s stock kept rising.
Then in 2005 PSI paid $560 million for 20 mature, well-run facilities owned by Nashville-based rival Ardent Health Services. (Jacobs says he nearly bought the same 20 hospitals from Vencor in 2001 but was outbid by Welsh Carson). The 20 Ardent facilities generated around $300 million in sales last year, compared to $487 million in total sales posted by PSI. The acquisition constituted the purchase of 4% of the market in one transaction, expanded PSI’s operations to the West Coast and eliminated one of its biggest competitors in bidding for future acquisitions. With its completion, Jacobs had successfully taken a fragmented industry, consolidated the market and created a market leader of HCA quality and reputation.
“It’s been great satisfaction to take a business plan that is just your thoughts, go out, raise the initial money, spend the money, nearly go broke, survive and then become the leader in inpatient behavioral health,” Jacobs sums up. “It’s been a great experience.”
Lone Shark
From the time PSI shares began trading in August 2002 for $5.05, they have increased in value 11-fold, topping $56 in late October. (Forbes recently ranked PSI as having the fastest revenue growth rate among America’s 200 best small companies.) Even better, the future looks bright. There are 500 independent freestanding psyche hospitals currently operating in America that are ripe for acquisition. Jacobs says PSI aims to purchase six new facilities per year for the foreseeable future.
Additionally, the National Association of Psychiatric Health Systems estimates that 22% of the adult population suffers from some form of mental disorder. And that 22% is increasingly seeking treatment. The taboo of seeking help for mental illness has faded thanks in part to celebrities like Jane Pauley and Brooke Shields talking openly about psychiatric issues they face. In short, the market is growing to PSI, and it’s a $15 billion niche. Jacobs says he believes PSI can grow to 100 facilities and be a $2 billion revenue company. There’s not much reason to doubt him.
As a result of its growth, PSI is soon planning to move out of its current office space and into a larger space now under construction across the street. Rest assured, it won’t house a grand entrance. About the best that can be expected is that PSI’s salt-water fish tank will still be on display for those in the vicinity of the break room to see.
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