Shortly after Columbia/HCA Healthcare Corp. bought half of Cleveland's largest Catholic health system, the top executive of Ohio's largest insurance company picked up the phone and called Columbia's Richard Scott.
That call from Jack Burry Jr., chairman and chief executive officer of Cleveland-based Blue Cross and Blue Shield of Ohio, to Scott, president and CEO of Columbia, prompted a change in strategy for the nation's largest healthcare provider. Although Columbia's founder often had scorned the notion of entering the insurance business, an opportunity to pick up $2 billion in annual premiums was too good to pass up.
"In the past, we never had a big payer say they wanted to be our partner," explained Dan Moen, Columbia's architect for the Blues deal and president of the newly formed Columbia-sponsored networks division.
Coincidentally, at the same time Burry was calling Scott, another member of Burry's board was calling Thomas Frist Jr., Columbia's vice chairman, to talk about the same thing. The Blues was actively seeking a partner, and two of its top officials saw the growing Nashville, Tenn.-based company as a strong potential ally.
As the months passed and Congress debated shifting more seniors into HMOs, Columbia's strategy began to crystallize, sources said. The new tactic is to buy into insurance companies or HMOs, but only in markets where it makes sense.
"We wouldn't have moved this quickly if Congress wasn't talking about moving patients into managed care," Moen said. Medicare accounted for almost 40% of Columbia's admissions in 1995 (See chart).
Moen, who was highly regarded within Columbia for building its $4-billion division in Florida, was soon brought into the Cleveland discussions. In addition to his success in Florida, his credentials included working at Humana during its ill-fated journey into managed care in the 1980s. "David Jones (president and CEO of Humana) always said it was the right strategy at the wrong time," Moen noted.
In December 1995, Moen was promoted to the new sponsored-networks subsidiary, where he would be responsible for partnerships like the one in discussions in Cleveland.
"He has a lot of experience on the pitfalls of having an integrated delivery system," said Edwin Gordon, senior director of Furman Selz, a New York-based investment bank. Gordon, too, was brought into discussions, along with David Colby, who recently resigned as Columbia's senior vice president and treasurer.
Although the Blues started out talking with 10 possible partners, the competition to buy most of the insurer's operations soon shrunk to three companies. Columbia won the bid for $299.5 million. Blues officials did not identify the other two bidders.
Now that the Blues deal is under way in Ohio, Columbia executives said that strategy will be appraised market by market. In some markets, buying an insurer may not work, they said.
Gloria Mayer, president of Friendly Hills HealthCare Network, La Habra, Calif., agrees. In California, executing that strategy "would be like shooting yourself in the foot," she noted. "There's too many diverse health plans."
Partnerships that don't include equity purchases work better in that state, she said.
Wall Street analysts have been positive but notably see little financial risk. "It's not a deal that's going to dilute Columbia's earnings," said Todd Richter, healthcare analyst at Dean Witter Reynolds.
On the other hand, while inpatient volumes sink at the nation's hospitals, Columbia sees managed care as a strong financial opportunity. "It's the fastest way to increase earnings," noted Dan Hoemke, president and CEO of Covantage, a consulting subsidiary of PacifiCare Health Systems, Cypress, Calif.
In addition, the deal isn't big enough to alarm insurers, he said. "Most managed-care companies are not going to see them as a threat," Hoemke noted.
Columbia's decision to start in Cleveland with a local insurance company is much different than the broad national scope that hospital chains took in the past. For example, Humana unveiled its plan, Humana Care Plus, then attempted to export it to all its markets.
Humana had only 80 hospitals compared with Columbia's 340. In addition, 10 years ago, investor-owned hospital chains were far less integrated, owning fewer ambulatory surgery centers and urgent-care centers than their tax-exempt competitors, according to a Northwestern University study.
Nearly 10 years later, Columbia has emerged as a dominant outpatient provider; it owns the nation's largest outpatient surgery chain and one of the largest home-care companies.
In 1995, 36% of its revenues, or about $6 billion, came from outpatient business.