A silver bullet, in the form of federal investigations, has struck Columbia/HCA Healthcare Corp. in the heart, taking out its two top executives. But did it kill the predator?
Many industry executives appear to believe so, as they raise their glasses in celebratory toasts to the behemoth's demise. Such action may be premature, however. For though the present incarnation of Columbia may be moribund, it's unclear what might rise from its ashes.
The July 25 resignations of Columbia's chairman and chief executive officer, Richard Scott, and its president and chief operating officer, David Vandewater, purportedly were triggered by a board that had grown weary of accusations of impropriety. Industry observers speculated this action was intended to persuade investigators of the company's desire to come clean and begin life anew.
But there may have been a more powerful motivation behind the resignations: greed. On the date of the resignations, Columbia's stock price moved a mere quarter of a point. It lost less than two points over the next two weeks, or 5% of its market capitalization.
The resignations may have been a pre-emptive attempt to buoy the stock price during the most tumultuous time in the company's short history by removing top management before the issuance of indictments. The more than 9 million shares owned by Scott and the 14 million shares owned by new Chairman and CEO Thomas F. Frist Jr., M.D., retained the bulk of their value.
Neither Scott nor Vandewater has been indicted. But had they been indicted while they still ran the company, the stock could have plummeted as it did in March after federal agents raided Columbia's facilities in El Paso, Texas. Then, the stock began a precipitous drop from $44.37 per share on March 12 to $31.25 per share on March 31, a loss of nearly 30% of its market capitalization.
Now Frist has stepped forward as Columbia's savior, pledging to inculcate a new sense of corporate values that will transform the beast into a respectable member of the healthcare community.
If he is to succeed, Frist must complete three Herculean tasks: He must convince the industry that he is cut from different cloth than his predecessors; he must convince federal investigators that he is highly cooperative; and he must convince Wall Street that the company will maintain its vigor.
Fox guarding the hen house? Is Frist cut from different cloth? Within the first few days of his rule, he convened a conference call with Columbia's hospital administrators during which he communicated the company's new imperatives. These included not intruding in markets in which the organization is unwelcome, suspending all new projects and eliminating the company's program of physician integration. But no details were delivered to turn mere rhetoric into something measurable.
Frist is smart enough to know when to be brash and when to be demure. After all, he built Hospital Corporation of America into a 240-facility company between 1968 and 1986. By 1992, he was the highest compensated executive in the U.S., making in excess of $125 million including stock options. He may be motivated by a higher order, but compensation does seem important to Frist.
Placating the feds. The industry's scrutiny is a minor worry compared with the ongoing federal investigations. Within the past few weeks, it has been revealed that numerous former employees have filed whistleblower lawsuits against the corporation. It also was revealed that Columbia was formally under criminal investigation. More than 500 investigators representing at least five federal agencies have Columbia in their sights.
Columbia's legal entanglements are far from over and could drag on for years. That's something Wall Street can bank on. Frist has pledged his full cooperation to help resolve the allegations of wrongdoing. He's even engaged the law firm of Latham & Watkins to work with the feds. Yet, the same Frist remains locked in battle with the Internal Revenue Service over numerous tax-related issues dating back to HCA days.
Why invest in Columbia? Frist's final challenge is to deal with Wall Street, which has rewarded Columbia for its phenomenal earnings growth in recent years.
But if Frist honors his promise to transform Columbia into a kinder, more genteel organization, there is no way such earnings growth will continue. Once Columbia abandons aggressive acquisitions, market consolidation strategies, home health services, the economic integration of its physicians, and other practices, it simply won't yield the same kinds of returns to its investors.
But, as previously indicated, the stock hasn't taken a severe plunge since the resignations. Maybe this is a comment on the astuteness of Wall Street analysts who follow the company.
Shortly after the El Paso debacle, Dean Witter Reynolds analyst Todd Richter told the Wall Street Journal, "Nobody I've spoken with believes (the investigation) will broaden beyond El Paso." He was not alone in his myopia.
These analysts should start listening to people such as Kathleen Haley, assistant U.S. attorney overseeing the Columbia case, who has publicly stated that there's plenty more in store for Columbia.
Tenet's example. Although Columbia's obstacles are significant, the company can take heart from the example of Tenet Healthcare Corp., which rose from the ashes of National Medical Enterprises. Tenet paid close to $400 million in fines in 1994 as a result of NME's previous business practices. Furthermore, it agreed to pay $100 million in July this year to settle claims by former NME patients and their families. Despite these financial drains, Tenet remains a viable and highly respected company.
Columbia and its 250,000 employees are not going to vanish quickly from the healthcare landscape. The question is what will rise from its ashes. A phoenix? Or a buzzard that continues to prey on the industry?
Leifer, a former regional vice president for Columbia, is chief executive of the Leifer Group, an Overland Park, Kan., consulting firm.