In the end, it was the old guard not liking how the new guard was messing with its legacy. Now the question is whether the old guard is willing to entrust its legacy to another hot shot.
On Friday-nine days after federal agents raided dozens of Columbia/HCA Healthcare Corp. facilities across the country and two days after published reports linked Columbia with its major competitor in a possible deal-Richard Scott, the company's chief architect, resigned.
David Vandewater, president and chief operating officer, also handed in his resignation. Thomas Frist Jr., M.D.-co-founder of Hospital Corporation of America with his father in 1968 and most recently Columbia board vice chairman-now reigns as Columbia's chairman and chief executive officer.
Frist, 58, reputed to be the primary force behind the change in leadership, said he didn't know whether there would be more departures and wouldn't comment on Scott's and Vandewater's severance agreements. Frist also told MODERN HEALTHCARE that he needed time to evaluate the needs of the company before deciding whether to make new senior executive hires.
"At any institution, there is a time for a different style to take it to the next level and address the issues out there," Frist told reporters at a press conference on Friday.
Frist would not confirm that the company is talking to Tenet Healthcare Corp., its chief competitor, about a possible merger.
His first priority, he said, would be to address the "imminent concerns in Washington and all government and regulatory concerns."
Although he said he knew "very little" about the allegations against Columbia, Frist repeatedly said the company and its board are committed to helping federal investigators "find out what the facts are."
While Frist was very complimentary to his predecessors, he did say that had the two stayed in office "they could have been an impediment."
He also reminisced about his father, Thomas Frist, who helped found HCA, and the values he placed on healthcare. The younger Frist said his father believed in putting employees' and patients' well-being first, and good results for investors would follow. Columbia acquired HCA in 1994.
"We need to have the perception out there that we do care," Frist said.
The resignations happened nine days after federal officials swarmed over Columbia hospital offices in at least seven states looking for evidence of billing fraud. Some 18 hospitals and 15 other facilities connected with Columbia were hit in the raid, according to a company filing with the Securities and Exchange Commission.
The latest development also happened two days after published reports said Columbia is talking to rival Tenet of Santa Barbara, Calif., about a possible merger.
Scott, who built the nation's largest for-profit chain, said in a statement he always has "acted honorably and in the best interest of the company."
It is important that Columbia responded to the allegations of fraud by bringing in someone like Frist, said Richard Wade, the American Hospital Association's senior vice president for communications.
"Given all the things swirling about, this is an enormous stabilizing signal to the industry," Wade said.
Meanwhile, Tenet's business partners-many of which spurned Columbia to team up with Tenet-don't seem to mind if the two for-profit chains link up, creating a behemoth of about 500 hospitals.
"If there is an agreement that goes through, Tenet will maintain its commitment and its integrity," said George Ivey, a spokesman for Georgia Baptist Health Care System in Atlanta.
Tenet expects to complete its acquisition of Georgia Baptist on Aug. 31. Georgia Baptist agreed to be acquired by Tenet last December, about a year after it scrapped a proposed joint venture with Columbia.
Ivey said the main reason for killing the first deal was mismatched corporate philosophies. Tenet is a better fit, he said.
Georgia Baptist could have "risked losing the kind of community interaction we've had in the past 100 years" had it completed the joint venture with Columbia, Ivey said.
Still, he doesn't think a Columbia-Tenet consolidation would lead to the same result. "Nobody can see the future that clearly, but because of Columbia's problems, Tenet will become the dominant player," Ivey said.
For Birmingham, Ala.-based MedPartners, the joining of the two chains would be welcome because there would be one less company to analyze in each market, said Larry House, chairman and CEO of the nation's largest physician practice management company.
In April, MedPartners and Tenet entered an agreement to co-market their physicians and hospitals in Southern California (April 14, p. 6). The pair said they would be considering other joint networks elsewhere.
House said MedPartners has various types of relationships in several markets with Columbia.
"Certainly, it would be simpler dealing with one organization than two," he said.
On the flip side, a deal with Tenet isn't fazing one of Columbia's big partners.
Executives of Avon, Conn.-based Value Health said Columbia's proposed $1.1 billion cash acquisition of the benefits management company is on track.
Late last week, the companies were waiting for a go-ahead from the California Department of Corporations-the final clearance needed to close the deal.
But while business partners of Tenet and Columbia don't seem concerned, some not-for-profit hospital representatives are.
Monty Veazey, president and CEO of Georgia Alliance of Community Hospitals, said a Columbia-Tenet presence in the Atlanta area alone would create obstacles for his 80 not-for-profit hospital members.
"A combined Tenet and Columbia would be an even more formidable entity for a local hospital to reckon with. They're a big player we have to compete with," he said.
Although executives of Tenet and Columbia have yet to formally confirm their negotiations, Tenet foreshadowed such a move with several recent actions.
For example, one day before reports of negotiations, the company disseminated an internal speech given to company staffers by Tenet Chairman and CEO Jeffrey Barbakow at a July 18 leadership conference in Colorado Springs, Colo.
The speech details a renewed push by Tenet to bridge the gap between the for-profit and not-for-profit ownership sectors-a bridge blown up by Columbia as it built itself into the largest hospital chain.
Also on July 18, Tenet decided to join the AHA for the first time-a decision mentioned by Barbakow in his speech and expected to be announced this week.
"The AHA is the premier not-for-profit trade organization in the hospital industry, yet fewer than 10 of our hospitals have been members. Now all of us will be," he said. "This will put us side-by-side with our not-for-profit colleagues."
And after the stock market closed on July 23-the day the reported talks between Tenet and Columbia were disclosed-Tenet settled an ongoing fraud investigation of its own stemming from its January acquisition of OrNda HealthCorp (See p. 14).
Whether the actions were an attempt to position Tenet as an alternative to Columbia or to grease the path to a deal with Columbia is unclear, but several public relations experts said they represent pretty good timing either way.
"I don't think either party would approach something of this magnitude without it being a solid business opportunity," said Roy D. Vaughn, partner at Katcher, Vaughn & Bailey, Nashville. "But I think the timing is incredible."
Many companies in trouble force out top executives, settle outstanding legal problems and merge with another company to salvage their reputations.
If that is the case with Columbia, it made a good choice in Tenet.
One of its predecessors, National Medical Enterprises, hired Barbakow in 1993 when the company was the target of a nationwide fraud investigation. NME's co-founders exited the scene shortly after, and less than a year later, the company paid a $379 million settlement to resolve the investigation (July 4, 1994, p. 2).
NME also had hired former HHS Inspector General Richard Kusserow to clean up the company's Medicare and Medicaid billing practices and procedures and to implement a compliance program to avoid similar problems in the future.
Barbakow "is incredibly knowledgeable, has very, very good relations with regulators, and the best compliance program," said Nancy Weaver, an analyst with the Stephens investment firm, Little Rock, Ark. "And these are the issues for Columbia right now. This is one solution to fraud allegations."
Even if the companies reach an agreement, it would have a big federal antitrust hurdle to clear because their hospitals are competitors in several markets (See p. 14).
The developments surrounding Columbia also have had ripple effects in other parts of the country.
In Massachusetts, for example, languishing legislation to curb for-profit inroads into the state's 82-hospital acute-care market suddenly got hot amid the heightened publicity about Columbia.
The bill, sponsored by the state Senate's top healthcare legislator, was attached to budget legislation and cleared the Senate late last week.
The bill seeks a moratorium on the conversion of not-for-profit acute-care hospitals and HMOs to for-profit status until at least Jan. 31, plus creation of a commission by Dec. 1 to debate the proper place of for-profit corporations in healthcare, said Sen. Mark Montigny (D-New Bedford). "Let others convince us that for-profit healthcare should not be banned," said Montigny, the bill's sponsor.
Montigny had been trying to convince others lawmakers to act on the bill since March. Now it's on a fast track, needing approval from a budget conference committee before going to the governor.
Montigny acknowledged that Columbia's mounting woes helped focus attention on his proposal. "I don't have any problem using that to grease the skids a little," he said.
After the resignations were announced, Columbia's stock closed down slightly at $35.94 per share on Friday from $36.25 a day earlier. Tenet's stock closed at $30.56 per share Friday, up slightly from Thursday's close of $30.
-With Scott Hensley and John Morrissey