Residential-Care Company Captures Growing Share of Field Ruled by Charities

The mission statement could easily belong to a charity:

“Res-Care exists to insure that all human beings have the chance to realize their full potential, no matter what the obstacle, no matter what the challenge,” it reads. “We care. We serve. With compassion, with skill, with effectiveness, with results . . . and with respect.”

But Res-Care is one of the nation’s fastest-growing companies — and a good example of the kind of corporate competitor charities are facing with increasing frequency.

Based in Louisville, Ky., Res-Care provides residential care for people with mental disabilities and other problems, a line of work previously handled almost entirely by non-profit organizations and government agencies. In each of the past six years, its revenue has risen by 25 per cent or more — to $306.1-million last year.

The company, whose stock is traded on the Nasdaq Stock Market, hopes to repeat that rate of growth for years to come by claiming an even bigger share of the more than $20-billion a year that governments spend to help the mentally impaired.

In its appeal to prospective investors, Res-Care emphasizes that organizations that currently serve people with mental disabilities, troubled kids, and others with “special needs” tend to be local and operate in a “highly fragmented” market.

“The company believes it has significant opportunities to participate in the growth and consolidation of these markets,” Res-Care’s literature states, “because of its quality programs and operating systems, its financial strength, the economies of scale it can achieve, and its experience working with special needs populations and government agencies.”

Currently, the company has operations in 24 states, as well as in Puerto Rico.

Res-Care has acquired the assets of three non-profit groups as part of its consolidation, and through a subsidiary has a longterm management contract to run the Georgia Center for Youth, a non-profit, residential program for children referred by public schools. Res-Care expects to make other such arrangements with charities.

The company has also acquired many of it employees from the non-profit world. Most of its 1,500 employees — including its president, Ronald G. Geary — previously worked at non-profit groups or in government. Mr. Geary’s resume includes a stint as president of the Cincinnati Bible College and Seminary, as well as Secretary of Revenue for the State of Kentucky.

Mr. Geary says Res-Care’s founder, James R. Fornear, chose the corporate model over the non-profit one because he felt that it allowed him greater flexibility to meet the needs of people with mental disorders. “He felt it was better because we could sell stock and raise the capital needed to continue to grow the business,” says Mr. Geary. He says the company pays no dividends and instead puts its earnings back into the business.

“And there’s plenty of market left for us to grow,” Mr. Geary says. “Our game plan is to become an even more dominant player.”

Res-Care’s success has placed it on Forbes ranking of the “200 Best Small Companies in America” for several years in a row, last year at No. 158.

Mr. Geary, as head of the company, has personally shared in that success. He earned $440,000 last year, and holds almost 800,000 shares of Res-Care stock, which were valued last week at approximately $12-million.

The company’s for-profit status, however, means that it must pay taxes. Last year, for example, the company paid more than $8-million in income taxes.

“What outweighs the fact that we have to pay taxes is that we can raise capital by offering stock to properly fund our growth,” says Mr. Geary. “A lot of non-profits have to borrow money through bond issues or bank loans. And you can only borrow so much money.”

Experts in the mental-retardation field, including state employees who monitor government contracts, give Res-Care high marks for the quality of its services. And everyone seems to agree that demand for residential care for the mentally impaired far exceeds the current supply. Most group homes operate at full capacity and carry long waiting lists.

People disagree, however, about whether for-profit companies like Res-Care provide more efficient or more desirable forms of care than non-profit groups.

Lynette Fowler, an assistant director at Gaston Residential Services, in North Carolina, says she believes that local groups like her own, which serves a single county, provide superior care.

“We have a non-profit board of directors made up of people from this community,” she says.

Those personal connections, she believes, are crucial in getting the public to support disability services. “People say, Oh Sam, or Joe, or Mary, I didn’t know you were involved with this organization,” Ms. Fowler explains. “You operate from a community base, you’re in touch with the community and sensitive to its needs.”

Charities also have the advantage, she says, of being able to supplement government dollars with donated money, time, and office space.

Ms. Fowler says that while she wholeheartedly believes in capitalism, “if money is being designated for services to help people, that’s where it should go — not to shareholders, not to corporate executives.”

But Ms. Fowler wanted more than personal preference to back up her belief that non-profit groups provide a preferred method of doing business. So she teamed up with William Van Lear, an economics professor at Belmont Abbey College and board member of the Gaston center, to compare spending by various types of group homes in North Carolina.

Using what Mr. Van Lear calls a “broad definition” of efficiency — based largely on the percentage of an organization’s budget spent on direct services to residents — the study found that non-profit homes came out on top, followed by government and then for-profit facilities. Mr. Van Lear says executive salaries and money spent on expansion by for-profit companies made the biggest differences in the study, which was published last December in the Journal of Economic Issues.

“You often hear, ‘Business can do it better, business can do it more efficiently,’ ” says Ms. Fowler. “But I really don’t think that’s the case when it comes to what we do because of the labor-intensity of our work. The economies-of-scale argument doesn’t necessarily apply when you’re talking about providing services to human beings.” — Jennifer Moore “What outweighs the fact that we have to pay taxes is that we can raise capital by offering stock to properly fund our growth.” “If money is designated for services to help people, that’s where it should go -not to shareholders.”