Sometimes called the Silicon Valley of healthcare, Nashville, Tenn., probably has the nation's largest concentration of investor-owned hospital and healthcare companies. Most can trace their roots in some way to HCA-Hospital Corporation of America.
When HCA merged with Columbia Healthcare Corp. in February, many Nashville executives prepared for the inevitable-that the newly merged company would reside in Columbia's hometown of Louisville, Ky., rather than HCA's Nashville base. That shift came to pass last month.
Nashville without HCA seems like Medicare without DRGs. However, investor-owned healthcare companies based in Nashville are too busy focusing on the future to ponder the loss. With healthcare price inflation moderating and merger fever sweeping the nation, these companies sense that there's no time to lose in planning their own destinies.
The relocation of HCA's headquarters is "a tremendous loss for Nashville," said James E. Dalton Jr., president and chief executive officer of Nashville-based Quorum Health Group. But Mr. Dalton's company, an HCA spinoff, has its hands full with other concerns.
Quorum is in the midst of an initial public offering of stock to finance growth and reduce debt. After buying 10 acute-care hospitals from Macon, Ga.-based Charter Medical Corp. last year, its quarterly profits jumped 300%, and its revenues rose 105%.
Now, 85% of Quorum's annual revenues of $450 million comes from the 13 hospitals it owns; the remainder comes from management contracts, which used to be Quorum's entire line of business.
Breaking away.As Quorum moves forward, it's breaking some of the old HCA ties. It formerly leased space from HCA, but this fall it will be moving into a new 50,000-square-foot headquarters in Brentwood, Tenn., a Nashville suburb. In addition, Quorum is buying its own $8 million information system from HBO & Co. Since being spun off from HCA, Quorum and HealthTrust-The Hospital Co. have continued to used HCA's data center. In fact, the 350 jobs in HCA's data center will remain in Nashville despite the corporation's move.
Columbia/HCA owns a 7% stake in Quorum by virtue of HCA's previous ownership of the company. That stake was anti-dilutive, meaning that whenever Quorum sold stock, HCA could buy stock to maintain its 7% level of ownership. However, that anti-dilutive provision doesn't apply to the public stock offering.
"We're very pleased to have Columbia/HCA as a major shareholder," Mr. Dalton said.
Along with Quorum, Nashville is home to two other investor-owned hospital chains: OrNda Healthcorp and HealthTrust, both of which are in the midst of big mergers. The three companies will operate a total of 434 hospitals when HealthTrust completes its acquisition of Epic Healthcare Group, Dallas, and OrNda finishes its deals with Summit Care, Burbank, Calif., and American Healthcare Management, King of Prussia, Penn.
That's twice as many hospitals as Columbia/HCA Healthcare Corp. Of course, the figure is boosted by Quorum's 259 contracts with hospitals it manages but doesn't own. Even so, Quorum carries a lot of clout in the healthcare industry. Hundreds of hospital CEOs are on its payroll, and it annual supply purchases total $1.8 billion.
Nashville network.As these companies battle to become giants, today's climate of constricted price increases and impending congressional action will challenge their mettle. Fortunately, they have allies among Nashville's business community and connections with at least one powerful Washington policymaker.
Officials of the Nashville Area Chamber of Commerce, which ranks healthcare as the city's top industry with its estimated economic impact of $3 billion, plan to continue marketing the city's flourishing healthcare industry. The chamber has spent $6 million the past four years to attract five key industries, one of which is healthcare. That commitment is about to be renewed for another four years at a cost of $6.5 million. "We have an environment that's conducive to healthcare," said Garrett Harper, the chamber's research manager.
In Washington, Nashville healthcare companies have an ally in Rep. James Cooper (D-Tenn.), who is trying to usher a managed-competition bill through Congress. The connection could become even more meaningful: Mr. Cooper is running for U.S. Senate, hoping to fill the seat formerly held by Vice President Al Gore.
HealthTrust's chairman, R. Clayton McWhorter, has close contact with Mr. Cooper. "If I think of something, I call him; if he thinks of something, he calls me," Mr. McWhorter said.
Strong lineage.Such easygoing communication is typical of investor-owned executives in this town, where corporate inbreeding aren't dirty words (See related story, p. 48).
In a modest headquarters building in Brentwood, Mr. Dalton can rattle off the lineage of numerous healthcare executives. Hundreds of hospital CEOs, for example, have been trained at Quorum, which was the HCA management company until it was spun off in 1989. Among its alumni are Eugene Fleming, president of Columbia/HCA's southeast division, and Joseph Hutts, chairman of PhyCor.
PhyCor, a physician group management firm, is one of the new breed of healthcare success stories in Nashville. J.C. Bradford healthcare analyst Andy May estimates PhyCor will reach $1 billion in revenues by the end of the 1990s, making it one of the city's largest healthcare firms, with 200 employees locally and 2,000 nationally.
Mr. Hutts' knowledge is obviously in demand. He's on the board of Vendell Healthcare, a Nashville-based psychiatric hospital company, and he recently was added to Quorum's board.
Although far from New York City,Nashville healthcare is well known by Wall Street. PhyCor, with $167 million in annual revenues, is in the process of raising $65 million in a secondary stock offering.
Another Nashville-based company, Healthcare Realty Trust, recently raised $100 million in its secondary offering. Healthcare Realty is one of two healthcare real estate investment trusts based in the area; the other is National Health Investors, Murfreesboro, Tenn. Together, they've raised more than $400 million in equity offerings during the past three years.
But are they stable?However, the finance industry hasn't been completely supportive of Nashville's healthcare organizations. Because hospital companies such as Quorum, OrNda and HealthTrust are so intent on growth, some fear operations could falter. As a result, they don't consider them to be stellar credit risks.
The debt of Quorum, OrNda and HealthTrust is rated as speculative by Standard & Poor's Corp., the New York-based rating agency. All have been heavily leveraged-especially OrNda with a debt represents 78% of its capitalization. That percentage will fall to 72% after it merges with American Healthcare Management and buys Summit Health.
In contrast, Columbia/HCA, whose investment-grade bonds carry a BBB+ rating from S&P, has 67.8% of its capitalization represented by debt. The chain of 197 hospitals is the only investor-owned hospital management company whose bonds carry an investment-grade rating from S&P.
"The speculative-grade nature of most of the healthcare service company universe is closely linked to the high priority growth holds in the current operating environment," said Michael Kaplan, S&P's healthcare analyst, in a recent report on healthcare bond ratings.
In fact, S&P downgraded HealthTrust's $800 million in subordinated debt to B from B+ after it announced it would buy Epic-described by S&P as a "subpar hospital chain leverage buyout"-in a $1 billion transaction.
In the case of OrNda, S&P didn't raise the low ratings of OrNda's or Summit's bonds after the three-way merger was announced, even though the companies were merging with a less-leveraged partner. What's more, American Healthcare Management's bonds might be downgraded when the deal is completed later this month, S&P said.
Spinoffs and mergers.Despite such pessimism, growth and consolidation are the bywords in healthcare today. HealthTrust estimates it can save $50 million in supplies and administrative costs in fiscal 1995 by acquiring Epic. Although HealthTrust will keep a regional office in Dallas, it's cutting management costs by terminating Epic's 12 top executives.
"Most people we retain will be relocated to Nashville," Mr. McWhorter said.
At OrNda, Summit's top executive, Don Amaral, already has moved to OrNda headquarters in Nashville, even though the companies' merger hasn't been completed. Mr. Amaral's house in Southern California was damaged in the earthquake, explained Charles Martin, OrNda's president and CEO. American Healthcare's president, Steven Volla, will remain in Pennsylvania. His role has yet to be determined.
Mr. Martin moved OrNda to Nashville from Dallas after he was hired two years ago. He formerly was president and chief operating officer of HealthTrust, and prior to that, he worked for HCA.
Second cousins.Some Nashville firms, such as HealthWise, are second-generation cousins to HCA. HealthWise, which went initially sold its stock to the public in December, is a spinoff of Surgical Care Affiliates.
Nashville-based Surgical Care, a chain of 60 outpatient surgery centers, was started by Joel Gordon after he sold his previous company, General Care Corp., to HCA in 1980.
Now, Mr. Gordon's challenge is to guide the surgery chain's fortunes in a different climate. Medicare has frozen outpatient surgery rates until October 1995. One-third of the company's $197 million in annual revenues come from Medicare, and there are fewer opportunities to pass cost increases to other payers.
"It used to be providers of healthcare services could raise their prices almost at will," said Tarpley B. Jones, the company's chief financial officer. "Those days are largely over."
Traditionally, outpatient surgery centers survived by taking business away from hospitals. Now, they're more likely to form partnerships with them. Some 35% of Surgical Care's centers will be joint ventures with hospitals by the end of this year, Mr. Gordon said. That's up from 20% currently.
Surgical Care's latest deal is a joint venture with Heartland Hospital, St. Joseph, Mo., and its physicians. Each of the three parties owns one-third of the center.
Growth in cooperation.Collaboration of all kinds will increase, Mr. McWhorter predicts. "We're going to be managing under a capitated system," he said. "I see more collaborating and networking, so we're not duplicating expensive resources."
With all of the activity under way, Nashville's reputation as a healthcare greenhouse seems safe despite the loss of HCA. After all, only 10% of the 750 HCA employees in Nashville are expected to lose their jobs or move to Louisville.
"HCA's exit to Kentucky may spur new entrances" read the headline in the Nashville Banner the day after Columbia/HCA announced the company would be based in Louisville.
Speculation has turned to former HCA COO Jack Bovender, who quit Columbia/HCA because he wanted to stay in Nashville. Mr. Bovender hasn't revealed any plans.
"We're already hearing some rumors" about start-ups, said the Chamber of Commerce's Mr. Harper. "It's hard to imagine that the spinoffs wouldn't continue."