Columbia/HCA Healthcare Corp. has agreed to pay $60 million to settle a class-action shareholder suit against Medical Care America, an outpatient surgery center chain it bought last September.
The suit, filed in U.S. District Court in Dallas, blames top executives of Medical Care America for a $1 billion drop in the market value of the company's stock in 1992.
The crux of the suit centers on the highly touted $3.8 billion mergerof Dallas-based Medical Care, the nation's largest surgery center chain, and Critical Care America, a Wellesley, Mass.-based firm that owned the nation's largest independent home infusion chain. Executives from both companies said it was a business combination that would appeal to payers by bundling outpatient and home healthcare.
When the stock swap was completed on Sept. 9, 1992, Critical Care's chairman and founder, Patrick Smith, commented: "Worst-case scenario is that we'll have two great companies, each continuing to experience a very high rate of growth as before."
But that wasn't the worst. Two weeks after the merger, on Sept. 25, 1992, Medical Care America said its earnings for the third quarter, about to end Sept. 30, would be below analysts' expectations because of revenue shortfalls in the home infusion business.
The news prompted a free fall in Medical Care America's stock price to $25 from $58 in one day.
In their suit, the shareholders contended that Medical Care's top officials, Don Steen and William Wilcox, and Critical Care executives Smith and Robert Wood knew home infusion revenues were collapsing but failed to tell shareholders before the merger. Documents and officials from 11 Blue Cross and Blue Shield plans and 10 investment banking firms were subpoenaed in connection with the lawsuit.
"Intense pressure from insurance companies, (HMOs) and others to offer price discounts" was building before the merger, the plaintiffs charged.
Critical Care executives had billed the discounting in the industry as "exaggerated," the suit said. Critical Care had been viewed as the Cadillac of the home infusion industry because of its high quality and prices. A few days after the collapse in Medical Care America shares, Smith admitted the company had been "pretty arrogant" in its approach and its belief that it would be immune to discounting, the suit alleged.
Smith subsequently resigned from Medical Care America. The company sold its home infusion business to Caremark International in March 1994, and Columbia/HCA bought Medical Care America in September 1994 for $850 million.
Last August, a New York Stock Exchange arbitration panel awarded $5 million to physician shareholders who said investment banking firm CS First Boston had given them an inaccurate fairness opinion of the Medical Care/Critical Care merger. It's typical for investment banking firms to render opinions about how companies are valued in such deals. The NYSE panel ruled that CS First Boston failed to thoroughly investigate Critical Care's financial estimates in the deal (Aug. 29, 1994, p. 6).