Columbia/HCA Healthcare Corp.
Few names have provoked as much interest, admiration and controversy in the history of the healthcare industry. From its humble beginnings in Texas a decade ago to its current status as the nation's largest healthcare company, Columbia has acquired a reputation for aggressive growth, acquisitions and dramatic action.
In this issue, we take an extended look at Columbia, its strategies and its performance. Reporter Bruce Japsen explores Columbia's traditional philosophy toward growth and how circumstances may be leading the healthcare giant to a new expansion tactic.
He also scrutinizes the company's sometimes rocky relations with the press at a time when its public image is being battered by government investigators, critics and competitors.
And reporter Charlotte Snow looks at Columbia's performance in its former headquarters city, Louisville, Ky. The company is lagging behind competitors in Louisville, yet it has hopes for a major turnaround.
We hope the package sheds more light on a company that has altered the course of the American healthcare system.
When Richard Scott began forming in 1987 what is now Columbia/HCA Healthcare Corp., he met with some El Paso, Texas, physicians who told him they wanted to build a new hospital.
"I told them the more logical thing is we ought to go and try to buy an existing hospital," Scott recalls.
The meeting, recounted in "The For-Profit Healthcare Revolution," a history of for-profit hospital companies by Sandy Lutz and E. Preston Gee, goes to the heart of Columbia's credo: Buy existing hospitals and reduce overcapacity in those markets.
Scott, chairman and chief executive officer of Columbia, successfully talked the El Paso physicians out of building a hospital. Instead, he and investor Richard Rainwater formed a partnership with 120 of the physicians and by July 1988 had purchased two El Paso hospitals from Healthtrust, which merged with Columbia in 1995.
If the El Paso meeting were held today, there are indications Scott might seriously consider building rather than buying. Columbia executives are preparing a new battle plan that could create additional acute-care capacity in overbedded markets across the country.
In several markets where Columbia has been unable to buy or form joint ventures with not-for-profit hospitals, it's trying to build facilities instead. The company already has begun constructing or has announced plans to build 12 hospitals in seven states. One of those facilities is an 82-bed, $38.8 million children's hospital scheduled to open in August 1999 in El Paso.
Slowdown.Faced with increased scrutiny from community groups and state attorneys general across the country, Columbia's acquisitions of not-for-profit hospitals were nearly cut in half last year. Columbia completed acquisitions or joint ventures with 17 not-for-profit hospitals in 1996, compared with 33 in 1995.
"We have goals where we would like to grow, but you have to have a willing seller at a fair price," Scott said at a February breakfast meeting with Capitol Hill healthcare reporters in Washington.
More than 80% of the nation's 5,200 nonfederal hospitals are not-for-profit, so it appears Columbia would have ample acquisition opportunities in its efforts to expand to all 50 states. Columbia currently has 342 hospitals and 285,000 employees in 38 states.
Financially, Columbia has shown steady growth since its merger with Hospital Corporation of America took it public in 1994. In 1996, its net income rose 56% to $1.5 billion. Revenues grew 13% to $19.9 billion. Analysts project 1997 net income growth of 15%.
The company's stock, meanwhile, has dipped after reaching an all-time high of $44.88 in mid-February, the same day the Dow Jones industrial average first soared past 7,000. Following a recent FBI raid at the company's El Paso facilities, Columbia's stock dropped to $31.25 as of April 9.
Despite the stock price drop, most Wall Street analysts, which have a historic infatuation with the company, have remained upbeat about Columbia's future, rating it a "strong buy" or "buy."
"I'd be perfectly happy if they never made another acquisition again. Their internal growth is what is important," says Todd Richter, senior healthcare services analyst at Dean Witter Reynolds in New York.
Skepticism grows. Other analysts, however, are beginning to frown on the company's inability to acquire not-for-profit hospitals.
"All indications are that growth will be difficult to achieve," says Sheryl Skolnick, an analyst with Robertson Stephens & Co. in New York. "The company's strategy depends heavily on its ability to continue to execute acquisitions, joint ventures and reductions in excess capacity within its existing and future hospital systems."
Some analysts say Columbia needs to add $1 billion to its revenues each year to reach its projected 15% annual earnings growth. Those observers are anxiously awaiting the closing of Columbia's $1.3 billion acquisition of Value Health, an Avon, Conn.-based pharmacy benefits management. The deal is expected to close in the next three months.
In San Diego, a proposed deal with Sharp HealthCare did not work out as Columbia had planned.
The hospital chain in November 1995 bid $202 million to buy half of Sharp's assets, a price it considered fair. Sharp operates seven hospitals in the San Diego area, four of which would have been part of the deal with Columbia.
After the California attorney general said Columbia undervalued Sharp and community groups rallied in opposition to the system's sale to Columbia, Sharp's board in February terminated its proposed agreement with Columbia.
Although Columbia says publicly it doesn't mind the scrutiny of its deals by state attorneys general, its executives are beginning to realize the investigations are driving up the cost of the deals.
Columbia also appears to be the only investor-owned chain acknowledging that its hospital acquisitions have slowed because of involvement by state attorneys general. In past cases, the attorneys general have said Columbia hasn't offered enough money for not-for-profit hospitals and has undervalued community assets, as in the Sharp deal.
A new tactic. So now, Columbia is touting something different.
"We can make it a lot cheaper than we can buy it," Victor Campbell, Columbia senior vice president in charge of investor relations, recently told Wall Street analysts and investment bankers at the annual Smith Barney Health Care Services Conference in New York.
Columbia's 12 current hospital construction projects (See map, p. 54) are the result of what the company describes as "make vs. buy analyses." Financial details were unavailable.
One of the 12 projects is in Collier County, Fla., where Columbia recently won approval to build a new hospital. The county's only acute-care facility is not-for-profit Naples (Fla.) Community Hospital, a 434-bed facility.
When the Florida Agency for Health Care Administration approved Columbia's certificate of need to build in Collier County, it was the first CON the state had approved in more than a decade for a facility that wasn't a replacement hospital (Jan. 27, p. 18).
Columbia's proposal calls for a 100-bed hospital to be built somewhere in Collier County. The total project cost will be about $73 million, according to the Florida healthcare agency.
Targeting CON. Columbia executives are hoping future building plans don't take as long and are pushing their agenda in state legislatures across the country.
"We would like to see the elimination of CON laws," Scott says. Currently, 35 states require CONs before new hospitals can be built (See map).
Columbia executives say they aren't against CON laws because they want to increase capacity. Rather, they want to be able to add services to offer managed-care plans and other insurers complete provider networks in markets they serve.
"We are building 12 new hospitals to fill out our markets," Campbell says.
Columbia's critics believe the company's campaign against CON rules is taking the place of its faltering acquisition strategy.
"If their acquisition strategy starts to slow down, what other opportunity do they have to get into the market to supply or supplement what they already have?" asks Dan Bourque, senior vice president for corporate and government affairs at VHA, an Irving, Texas-based hospital alliance. "The drive to eliminate CON in several states is to provide them the opportunity to selectively build new facilities to gain a foothold in the market."
Bourque says Columbia's growth-by-acquisition strategy may have been flawed in the first place.
"Their claims at trying to squeeze capacity out of the system are very hollow when they are building hospitals in markets that are overbedded," Bourque says. "You can't have it both ways. It's not clear what their strategy is here."
Last year, Columbia divested, consolidated, closed, merged or terminated the leases of 23 acute-care or psychiatric hospitals. Officials didn't name the hospitals involved.
Columbia's push to eliminate CON has left the hospital industry in a quandary. Hospitals historically have argued for reduced CON oversight, but Columbia has forced them to keep CONs in order to prevent the investor-owned giant from building competing facilities in their back yards.
"You are starting to see a trend toward the elimination of CON," Columbia's Scott says.
But the American Health Planning Association disagrees, saying CON oversight is typically more intense in states where for-profit chains such as Columbia are in pursuit of hospitals.
"Those who favor the elimination of CON are generally those who favor conversion of not-for-profits to proprietary," says Dean Montgomery, an AHPA board member.
In Georgia, Columbia came up short last year in lobbying the state Legislature to loosen its stringent CON laws. This year, Columbia is likely to push its CON agenda there again.
Last year, Columbia pulled 18 of its hospitals out of the Georgia Hospital Association because the association favored the state's tough CON law. The Columbia hospitals rejoined after the association said it would avoid taking positions on controversial issues that split its membership.
Columbia hospitals accounted for about 10% of the GHA's membership and $3 million annual budget.
"They want to do away with the regulatory process, and we don't think that's the best approach," says Joel Wernick, president and CEO of not-for-profit Phoebe Putney Memorial Hospital in Albany, Ga., and chairman of Georgia Alliance of Community Hospitals. "Wall Street favors growth companies. If you have to live up to the masters of Wall Street, they have two ways to grow, through acquisition or through new construction."
Regulatory barriers. Even in states where there aren't CON laws, such as Kansas, Columbia is being hassled by regulatory problems.
Columbia last year attempted to acquire or form a joint venture with city-owned Lawrence (Kan.) Memorial Hospital. When the 149-bed not-for-profit facility, the city's only acute-care provider, rejected its advances, Columbia pursued plans to build its own 70-bed hospital in Lawrence.
Columbia's plans were thwarted last December when the Lawrence Board of Commissioners rejected its application for a special-use permit to build the hospital. In February, Columbia sued the city of Lawrence over the rejected permit.
"It's the `If we cannot marry you, we will bury you' strategy," says David Jarrard, a partner with McNeely, Pigott & Fox, a Nashville-based public relations firm that represents dozens of not-for-profit hospitals, some of which Columbia has attempted to acquire.
In Lawrence and Naples, Columbia says, it is trying to end monopolies and benefit consumers.
"Naples Community Hospital is near 100%capacity, and they are turning people away," Jay Jarrell, president of Columbia's Southwest Florida division, told MODERN HEALTHCARE after the company won its CON to build a hospital in Collier County.
Actually, Naples Community has operated near 68% capacity. From 1993 to 1995, its occupancy ranged between 67% and 71%, while the hospital reduced the number of beds in service during that three-year period from 404 to 381, according to the latest available data from HCIA, a Baltimore-based healthcare information company.
Naples Community is appealing Columbia's CON and wouldn't comment.
Lawrence Memorial's occupancy rate was 46% in 1995 and has been well below 50% for the past several years, according to HCIA.
Other for-profit hospital chains don't share Columbia's opposition to CONs. Smaller for-profit chains that have had great success acquiring rural and nonurban hospitals enjoy their status as dominant or sole provider.
"We view CONs as a barrier to entry, so we like CON states," says William Schoen, president, chairman and chief executive officer of Health Management Associates, which operates 26 hospitals in primarily rural and nonurban markets in 11 states.
Hospital companies such as HMA and Community Health Systems of Brentwood, Tenn., that acquire nonurban hospitals prefer to purchase not-for-profit facilities that are the sole or dominant provider in their markets because, absent a CON law, Columbia could build a hospital in those markets and foil their growth plans.
Because of the difference of opinion within its ranks, the Federation of American Health Systems, which represents for-profit hospitals, avoids a stance on CON issues.
"A lot of my members have varying opinions on certificate of need," says Federation President and CEO Thomas Scully. "Our position on certificate of need is that we don't have a position."