Columbia/HCA Healthcare Corp. is doing some spring cleaning in its Old Kentucky Home.
Two years after moving its corporate headquarters from Louisville, Ky., to Nashville, the healthcare giant has embarked on a major turnaround effort for its three remaining hospitals in its former hometown. Columbia has named a new executive to oversee the local market and brought in a husband-and-wife turnaround team to head two of the struggling hospitals.
Columbia moved to Nashville in January 1995 after calling Kentucky home since its September 1993 merger with Louisville-based Galen Health Care.
Among Galen's 73 facilities, Columbia picked up three for-profit hospitals in Louisville that it still owns, now called Columbia Audubon Hospital, Columbia Suburban Hospital and Columbia Southwest Hospital.
These former Galen hospitals have been in financial trouble since the merger. From 1993 to 1995, they posted the lowest profit margins of at least eight of the city's major acute-care hospitals (See chart, p. 62).
And the bad news has kept coming. Following the move, Columbia lost its top performer in the market when its management contract for University of Louisville Hospital went to a partnership between two competitors. And earlier this month, a federal judge ruled that Columbia Audubon broke U.S. labor laws by trying to intimidate registered nurses who wanted to unionize there.
By contrast, Columbia's two acute-care hospitals in Nashville have enjoyed healthy profit margins. The city's 180-bed Columbia Southern Hills Medical Center posted an 11.1% profit margin in 1995, and 717-bed Columbia Centennial Medical Center had a 5.46% profit margin in 1994.
Different approach. Known for its strategy of closing underperformers, Columbia has taken a different tack in Louisville. The company plans to join all three hospitals into one local healthcare system. It has pursued similar strategies of integration in markets such as Atlanta; Houston; New Orleans; Richmond, Va.; and Tampa, Fla., where it also has a number of facilities in close proximity.
Over the past six months, the company has brought in a new management team to lead the Louisville hospitals. It has put what it calls a "market executive" in charge of coordinating all three area hospitals.
Stephen L. Newman, armed with medical and business administration degrees, has accepted the challenge of aligning the hospitals' financial operations and clinical services. On April 1, the former senior vice president and chief medical officer of 326-bed Touro Infirmary in New Orleans assumed the newly created title of "president of Columbia/HCA Louisville market."
The chief executive officers of the three hospitals, themselves freshly recruited from other Columbia-owned facilities, report directly to Newman.
In October 1996, the husband-and-wife team of Jim and Tracy Rogers took over Columbia Audubon and Columbia Suburban, respectively. They previously worked for Columbia in New Orleans as CEOs of 176-bed Columbia Lakeview Regional Medical Center and 150-bed Columbia Lakeland Medical Center.
They were then joined early this year by Cathy Hibbs, who left her post as chief executive of 100-bed Columbia Logan Memorial Hospital in Russellville, Ky., to become Columbia Southwest's new CEO.
Local history. In Louisville, the new team faces a tight, highly competitive market where business groups went from putting up billboards proclaiming their love of Columbia to one where Richard Scott, Columbia's president and CEO, has been referred to as "Slick Rick."
Columbia blamed its January 1995 decision to pack up for Nashville on what Scott called an "anti-business environment." Questions concerning Columbia's corporate address first arose in February 1994 when it merged with Nashville-based Hospital Corporation of America, creating the nation's largest private healthcare system.
Columbia ended speculation about a move with an announcement in March 1994 that it planned to stay put. Louisville hung onto Columbia for the moment with promises of tax breaks, including a 50% deduction of any new capital investments from its corporate state income tax, a tax credit worth two-thirds of the state income tax withholding amounts for each employee, and a donation of up to $3 million toward the construction of a new headquarters building.
The city also threw in a renewed management contract for the 404-bed university hospital and even discounts on ballet tickets for company employees. The Greater Louisville Economic Development Partnership put up a billboard that read, "Louisville loves Columbia Healthcare."
But a few months later, in October 1994, Columbia went looking for sweeter deals when it agreed to acquire Healthtrust, another Nashville-based hospital chain. The Healthtrust deal spurred competition between Louisville, Nashville and other suitors over which city could lay out the reddest carpet for the company, then posting $15 billion in annual revenues, and its 1,600 corporate employees.
Louisville's carpet paled in comparison to Nashville's. Scott complained that Kentucky's unitary corporate tax and its 2% provider tax cost Columbia $26 million annually. Meanwhile, he saw that in Tennessee the company would not be subject to a provider tax, would be excused from $2.6 million in property taxes for 10 years, and would just miss paying a 6.75% hospital services tax repealed by the state Legislature a few months earlier.
In addition, the Tennessee attorney general's office dropped its antitrust investigation of Columbia's $5.6 billion merger with Healthtrust the day after Scott's Jan. 10, 1995, announcement that Nashville would indeed be the company's new home.
Louisville did not take the rebuke lightly. John Ed Pearce, a former associate editor of Louisville's Courier-Journal, wrote a commentary for the paper in January 1995 in which he lambasted Scott's business tactics: "And lo the scribe warned the worshipers: `Be not hasty to crown Slick Rick your king. For his heart is on business and is hardened toward civic duties and such. He loves not your city but what he can get from it."'
Market struggle. Columbia's financial problems in Louisville were compounded by the decision to relocate its headquarters.
In the aftermath of the move, Columbia lost its 25-year management contract with the university hospital. Columbia had run the facility from July 1994 to October 1995, but its contract was legally contingent on a Louisville headquarters.
When Columbia decided to move, the university hospital sought bids from other providers and awarded the contract to a not-for-profit partnership of Alliant Health System and Jewish Hospital HealthCare Services, two purebred Louisville organizations.
The financial vital signs of the 379-bed university hospital were the strongest of Columbia's Louisville facilities. In 1995, the university hospital posted an 8.16% profit margin with net income of $17.3 million on total revenues of $211.6 million, according to Medicare cost reports tabulated by HCIA, a Baltimore-based healthcare information company. Its profit margins rose impressively from 0.13% in 1994 and 0.75% in 1993.
Columbia's remaining three hospitals in Louisville control the most acute-care beds in the city-28% of them-but have been outperformed by at least six others, including the university hospital (See chart, this page). Comparative data for 156-bed Vencor Hospital-Louisville and 310-bed Veterans Affairs Medical Center-Louisville were not available.
The 480-bed Columbia Audubon is the second-largest hospital in the city, controlling 13% of Louisville's acute-care beds, according to Kentucky Hospital Association figures. Audubon posted total profit margins of -2.24% in 1995, -2.16% in 1994 and -4.60% in 1993, according to HCIA. Audubon further reported a net loss of $3.1 million on total revenues of $137.4 million in 1995. That followed net losses of $2.4 million in 1994 and $5.3 million in 1993.
The two other Columbia hospitals have fared worse. The 380-bed Columbia Suburban Hospital reported total profit margins of -4.46% in 1995, -4.34% in 1994, and -3.26% in 1993, according to HCIA. In 1995, it faced a net loss of $3.6 million on total revenues of $81.2 million.
Likewise, 150-bed Columbia Southwest Hospital reported total profit margins of -4.16% in 1995, 1.68% in 1994, and -1.21% in 1993, according to HCIA. It had a net loss of $1.2 million on total revenues of $28.9 million in 1995.
Meanwhile, Louisville's largest hospital, Alliant's 653-bed Norton Hospital, reported an 8.75% profit margin in 1995, according to HCIA. It had net income of $28 million on total revenues of $315 million that year.
The 442-bed Jewish Hospital, another of the city's dominant players, had an 8.36% profit margin and earned $20.6 million on revenues of $247 million in 1995, according to HCIA.
But the highest profit margin in the city's acute-care market that year went to Baptist Hospital East, a not-for-profit facility controlled by Baptist Healthcare System. The 442-bed hospital posted a 12.79% profit margin in 1995 and net income of $19 million on total revenues of $147 million, according to HCIA.
Fresh perspective. Newman, who is based at Audubon, acknowledges that Columbia's Louisville hospitals "have not been operated in a cost-effective manner." He blames the losses on runaway administrative expenses for supplies, staffing and recordkeeping and on a lack of managed-care contracts.
"Our early challenge is to get our arms around the back-of-the-shop expenses and grow revenues through organizational renewal," he says.
Tracy Rogers, formerly Tracy Chelf, a 1994 MODERN HEALTHCARE*Up and Comer, or rising young executive (Sept. 5, 1994, p. 29), says Columbia replaced the former CEOs to bring a "fresh perspective" to the hospitals' operations. She says the three hospitals traditionally had operated independently and competitively. "The company felt we were going to be successful with a new team," Rogers says.
She says they have begun to combine the three hospitals' information, billing, staff recruitment and food preparation systems. They also have coordinated their maternal services and established Suburban as a center for pediatric care and Audubon as a center for cardiology services. "We're looking at Louisville as one 1,100-bed hospital with three locations," she says.
Rogers says the decision to integrate rather than sell or close facilities depends on the particular market demographics. "We felt that this was the best way to preserve the uniqueness of each of the hospitals while creating a comprehensive range of services across the care continuum," she says.
Newman said it's no accident that he's one of the first physicians to hold such a high-ranking executive post at Columbia. Despite the recent headlines questioning physician ownership, he says he wants to keep doctors in the loop.
Newman says cultivating relationships with the hospitals' more than 1,000 physicians will be a high priority. He says those relationships could evolve into equity stakes in the hospitals.
"Whatever the vehicle, physicians are a very important part of the healthcare enterprise today," he says. "We want to improve the quality of care at the three hospitals and develop a system mentality and synergies among them. Our major focus is on the creation of an integrated delivery system that would involve the physicians as true partners."