By the time the government raided Columbia/HCA Healthcare Corp. facilities this summer, Thomas Frist Jr. had been trying for nearly two years to get Richard Scott to listen to his warnings about the unnerving arrogance emanating from the company's executive suite in Nashville.
Despite Frist's pleas, Scott and his management team remained vocal and unwavering in their dream to dominate the healthcare business. But by alienating Frist, other board members, competitors, the news media and government officials, Scott was destined to lose control of the $20 billion company he had created less than a decade ago.
In Frist's case, the 44-year-old Scott had embarrassed Columbia's vice chairman of the board, largest single shareholder and co-founder of Hospital Corporation of America.
After the FBI raided Columbia's operations in El Paso, Texas, on March 19 this year, it became apparent to Frist that Scott needed more than the verbal warnings and subtle hints.
In late March he handed Scott a lengthy letter outlining problems. Frist also offered solutions.
The letter wasn't dictatorial but mentor-like, something Frist has since acknowledged he hadn't done very well in the early years of their relationship.
"He wrote of Rick leading the company into the next century," says one Columbia executive who saw the letter.
Numerous interviews by MODERN HEALTHCARE with current and former Columbia executives as well as outside observers show Scott disregarded advice and suggestions by others that might have kept him at the helm. The story that follows recounts key events in the rise and fall of Scott and the troubled history of the company he built.
Scott declined to be interviewed for this article. Several current and former Columbia officials spoke on the condition they not be identified.
Ironically, Frist had intended to wind down his involvement at Columbia before the El Paso raids prompted him to take action. In fact, he told Scott in January of this year that he wanted out of involvement with the company altogether by the end of the year.
"I went through highs and lows," Frist says. "I said, `Rick, I'm not here anymore. A year from now, I want to phase out completely.'*"
Scott proceeded to ignore Frist's letter, while simultaneously continuing a suicidal trifecta that would lead to his downfall. He angered his competitors, the media and the government, and in so doing he wrote his own obituary at the company he founded in 1988.
Just three years earlier, Scott and Frist were engaged in a mutual respect and admiration society of the highest order.
When Columbia and HCA announced their $10 billion merger in October 1993, Frist acknowledged he had "his eye on a young Rick Scott."
Frist relished Scott's ideas of developing local healthcare provider networks, telling countless reporters and colleagues: "He was doing it. He had vision."
In a February 1994 interview with MODERN HEALTHCARE, Scott praised Frist, saying, "Tommy probably has bought more tax-exempt hospitals than anybody in the country."
Scott listened to Frist back then and several years before they merged their two companies in 1994. But years earlier, Scott had gained Frist's attention.
In 1987, when Scott was a healthcare attorney specializing in mergers and acquisitions at Johnson and Gibbs in Dallas, he and two former Republic Health Corp. executives tried to launch a $3.9 billion bid for HCA. Few had heard of Scott then, and HCA board members practically laughed him out of their boardroom.
In August of that year HCA spun off 104 mostly rural hospitals to form Healthtrust in a $2.1 billion deal, leaving HCA with 78 primarily healthy urban hospitals. Healthtrust became an employee-owned corporation.
Scott proceeded to form his own company with investment luminary Richard Rainwater. Scott had a tiny office on the same floor as Rainwater's firm, Investment Limited Partnerships. They shared space in a building owned by Rainwater's former employers, the billionaire Bass Brothers of Fort Worth, Texas. In 1987 the two put up $125,000 each, formed a partnership with physicians in El Paso, and bought their first hospitals from Healthtrust-Sun Towers Hospital and Vista Hills Medical Center, both in El Paso-by July of the next year.
By September 1993, Scott's Columbia had acquired the larger, $4 billion Galen Health Care of Louisville, Ky., to become a $5 billion company. Frist had opportunities to buy Galen himself, but HCA was distracted paying down $2.2 billion in debt left from a $5.1 billion leveraged buyout in 1989.
The game plan. Within a week of the Galen deal, Rainwater arranged a meeting between Scott and Frist. Scott told Frist he would prosper through partnerships with physicians, accelerating consolidation in the bloated acute-care hospital industry, ratcheting down supply costs and building integrated healthcare delivery systems in local markets. The goal was simple: lower costs with the highest-quality service available from a healthcare provider.
At first it seemed a foolproof strategy. For a few years, Scott's drive and determination kept the company on a roll. But in the end, that determination would help lead to his downfall.
The HCA deal made Columbia the world's largest hospital company. But Scott had become so caught up in merger-mania and company growth that he didn't fully appreciate that big mergers would bring new members to Columbia's board. He would later feel the impact.
Columbia remained headquartered in Louisville after the HCA deal, with Frist agreeing to stay on as the company's chairman.
Although Frist wasn't expected to be involved in day-to-day operations of the company early on, he was often a front man in key deals.
Talks soon began with another Nashville-based hospital company led by another icon in the investor-owned hospital industry. R. Clayton McWhorter, a past HCA president and chief operating officer, had built Healthtrust into a company with 116 hospitals and $3.7 billion in annual revenues.
A Columbia/HCA-Healthtrust deal closed in March 1995 with McWhorter being promised the chairman's seat on the board and Scott vowing to consider moving the company to Nashville. Frist became Columbia's vice chairman. Columbia moved to Nashville in January, shortly before the Healthtrust deal closed.
Donald MacNaughton, the retired chairman of Healthtrust's executive committee, also would join the board. MacNaughton was a former chairman and CEO of HCA in the late 1970s and early 1980s.
"Rick never had control of his own board," says a Columbia vice president. "He didn't follow an old saying about keeping your friends close and your enemies closer." They may not have been enemies, but the new board members had legacies and reputations to protect, as well as huge financial investments.
Different styles. Frist and the others welcomed Scott and his family to Nashville with open arms. When Scott and his wife, Ann, arrived, Frist and his wife, Trish, threw them a party. It was a vivid example of lifestyle clashes between the two men.
Scott simply wasn't suited for the Nashville cocktail party circuit. Nor did he care much about it. Frist, on the other hand, was quite active in social and civic endeavors.
Scott was more reserved and because of his busy work schedule liked to spend his limited free time with family. While he was devoted to his wife and 11- and 13-year-old daughters, Allison and Jordan, Scott was competitive even at play.
Scott once told a fellow soccer coach that what he liked most about running his daughters' soccer team was that he could pick his own team. He was beginning to realize that wasn't always true in the boardroom.
The country club circuit in Nashville would always whisper that Scott and his wife never really became involved in the community. But that simply wasn't true, Scott's friends would say.
For example, Scott gave a $1 million donation to Harpeth Hall, a private school in Nashville his daughters attended.
People who knew Scott for many years before he came to Nashville say he simply didn't run in the same circles as his predecessors, who had led HCA for the past quarter-century and were established in the city's society scene.
"You could live in Nashville for 50 years and still be an outsider," says Joshua Nemzoff, a Florida native who once worked for Ernst & Young in Miami and now operates his own firm in Nashville. "It's a Frist town. It always will be."
Frist's father, Thomas Frist Sr., was a well-known physician who founded HCA with his son in 1968. His brother William Frist is a heart transplant surgeon and now a Republican U.S. senator from Tennessee.
Personalities are often the driving force behind companies, and Scott simply didn't change his individual style. Nashville couldn't alter that.
"Rick's an introverted guy," says one Columbia vice president. "He's not like Tommy (Frist) or a Clayton McWhorter."
In his first year at Nashville headquarters, walls would be built up around Scott in many forms.
Glass doors that required a special electronic pass for employees wanting to enter the corporate offices were installed on the fourth floor of Columbia's main corporate building. Not all employees had access, and those that didn't would have to be greeted by someone from the corporate offices to get inside.
Casual Fridays didn't become common until earlier this year.
Reduce speed. Scott's relentless drive to buy community hospitals drew the first of many hints by Frist to take it more slowly.
By mid-1995 Columbia was aggressively coveting hundreds of not-for-profit hospitals as a way to build delivery networks. But resentment, controversy, opposition and bad press seemed to follow Columbia and Scott most places they tried to tamper with local hospitals.
Frist became especially concerned with the situation in Houston.
Columbia executives became upset at a high asking price by the owners of Houston Northwest Medical Center. Owned by an employee stock ownership plan and OrNda HealthCorp, a for-profit hospital chain based in Nashville, Northwest was interested in a sale but only on its terms.
In response, frustrated Columbia executives decided to build an $80 million hospital across the street.
The move caused Houston Northwest's CEO, J. Barry Shevchuk, to publicly lambaste Columbia executives as "arrogant bullies."
Although he didn't run a not-for-profit hospital, Shevchuk's comments were echoed throughout the industry.
Other words by Columbia's second-in-command, COO David Vandewater, also would reverberate through the industry, as when he told the Healthcare Forum Journal in a March 1995 interview that Columbia is "not in the healthcare business. We're in the sick-care business."
The plan to build in a chronically overbedded market was one of the first signs Columbia would be violating its original strategy of consolidation. By spring of this year, Columbia had announced intentions or was planning to build more than a dozen new hospitals in areas that already suffered overcapacity.
There were other signs of reckless ambition.
In May 1995 Columbia signed a letter of intent to acquire its first stake in a Roman Catholic healthcare system. Four hospitals owned by Sisters of Charity of St. Augustine would sell 50% of their $438 million in assets.
Columbia bent over backward to get the Catholic system. In addition to a partnership with Columbia, the congregation was promised a seat on its corporate board.
"Columbia told us they have never undergone such intense scrutiny as what we put them through," Sister Judith Ann Karam, major superior of the religious order, said several months after the deal was completed in November 1995.
The deal ignited a holy war of sorts. A month after the congregation's letter of intent, the Catholic Health Association banned for-profit hospitals from its membership and began a crusade against Columbia.
The sleepy not-for-profit sector was beginning to wake up.
Aggression. Frist began hearing numerous complaints from his friends in the not-for-profit sector by the end of 1995.
An Oct. 23, 1995, Business Week cover story about aggressive profit-driven business strategies at Bausch and Lomb, headlined "Blind Ambition," would be copied countless times and distributed by Frist to Scott, Vandewater and other members of Columbia's senior management team.
"Take no prisoners. In your face. If you don't join me, I'll bury you. That type of thing," Frist recalls of the article. "I just saw that and I was trying to get to senior management."
To Frist, this type of bullying and greed wasn't the foundation on which to build a company long term.
Scott's hard-charging style was evident throughout the company by the beginning of 1996.
If Scott came to work at 6 a.m., others would be there before him. It got to the point where senior executives would try to "out-Rick Rick."
Scott preoccupied himself with work and insisted on being involved in practically all senior management meetings. He would get excited when his senior subordinates would offer up unique deals. Rather than cordially squelch the excitement when the ideas were risky, Scott would turn them loose.
It happened when Chief Financial Officer David Colby came to Scott with an idea to acquire an insurance plan. Never mind that it clearly went against the grain of the company's original strategy to focus on operating as a healthcare provider.
On March 29, 1996, Columbia announced it planned a joint venture with Blue Cross and Blue Shield of Ohio. For $299 million, the Blues would transfer most of its assets to a Columbia subsidiary.
A week later, Scott told the Ohio Hospital Association "the market is going to change really fast."
Even Wall Street, which hailed Scott as a "wunderkind" and "visionary," wasn't enthused about the deal. Despite the misgivings, Columbia's stock continued to soar.
The Blues deal reminded some industry observers of Louisville-based Humana's ill-fated attempt to simultaneously operate a hospital chain and launch HMOs.
"It was Colby's deal," a member of Scott's senior management team says. "It was a bad deal."
The Blues deal brought with it an unusual odor that would stick with the company for a long time. As part of the sale of the not-for-profit insurer, Blues executives and board members included an estimated $24 million in compensation for themselves.
A lawsuit on behalf of Blues policyholders was filed within weeks, and the Ohio attorney general also began to investigate.
The luster of Scott's star was beginning to tarnish.
Ignoring signs. Within a month after the Blues deal was announced, Colby resigned. While he was the engineer of the controversial Blues deal, he was important in Wall Street's eyes. After all, he had been there for all Columbia's mega-deals during the first eight years of the company.
Colby did not return several calls seeking an interview for this story.
In April 1996 Colby accepted a position as executive vice president, CFO and treasurer of Aurora, Colo.-based American Medical Response, an investor-owned ambulance company.
In May 1996 McWhorter relinquished the title of board chairman to Scott. Associates say that, like his longtime HCA buddy Frist, McWhorter was becoming disgusted with the direction of the company.
McWhorter also was known to have urged Scott to slow his rapid pace. At the company's 1996 spring annual leadership meeting in Nashville, McWhorter cautioned a ballroom full of Columbia executives: "There's nothing wrong with being a 500-pound gorilla, if you handle it right."
Scott and his closest associates ignored those warnings, especially with the Blues deal, which brought with it a hounding press corps that wouldn't go away.
Bad press. The enormous payments to Blues executives were the cornerstone of a "60 Minutes" segment by CBS News' Mike Wallace and producer Walt Bogdanich, a veteran journalist who has covered healthcare extensively.
Like others who tried to reach the insular Scott when the Blues deal was being pursued, the "60 Minutes" team was unsuccessful in getting an interview.
The piece ended with a strong parting shot by Wallace at Lindy Richardson, Columbia's senior vice president of marketing and public affairs, who fired off a letter to Wallace days before the Oct. 27 piece aired. Her letter accused CBS of attacking Columbia. "Ms. Richardson, we didn't attack you," Wallace said. "The attorneys general of Michigan and Ohio did."
The Blues deal died in March 1997.
As public scrutiny of Columbia by news organizations-as well as state attorneys general-intensified, Richardson's media relations department was in a tizzy.
Enter Robert Mead, a New York public relations consultant barely visible when he advised Columbia before the "60 Minutes" piece. He emerged toward the end of 1996 to help establish better relationships with major media outlets.
This past January, Scott agreed to an interview with the Nashville Tennessean, the city's morning newspaper. It would be a question-and-answer session that would run verbatim.
After the story was in print, it was clear his rare emergence on the front page of the local newspaper didn't mean a new Richard Scott. He labeled not-for-profit hospitals simply as "tax-exempts" and contended such facilities wouldn't disclose who their board directors were.
Staying successful. Although some analysts viewed those statements as gaffes, it was business as usual, and the company was doing better than ever financially.
Columbia was coming off what Scott said was the company's "best year" in 1996. Its goals for what was expected to be an equally successful 1997 were posted throughout the company. Employees were reminded of "15% earnings growth," "5% hospital admissions growth" and "40 million annual patient visits."
As Columbia touted its performance strengths, the not-for-profit hospital industry was beginning to fight back.
For the first time in five years, not-for-profit healthcare systems were acquiring hospitals at a faster rate than their for-profit brethren like Columbia. Meanwhile, Columbia's acquisitions and joint ventures with not-for-profits were cut in half in 1996 from 1995.
But as long as the company was achieving record earnings growth and its stock was soaring to an all-time high, there was little reason for Scott to worry.
On Feb. 13, Columbia Senior Vice President Victor Campbell, the company's investor relations guru, exemplified the enthusiasm Wall Street had for the company.
Standing outside a ballroom at the Plaza Hotel in New York, Campbell grinned as he looked at a hand-held electronic gadget that gives up-to-the minute stock prices. "Our stock just hit an all-time high," he crowed, moments before he would give a presentation on Columbia to investment bankers and Wall Street analysts at the Smith Barney Health Care Services Conference.
During the conference, Columbia was the only hospital company giving a presentation that said attorney general probes were slowing acquisitions of not-for-profit hospitals. It was clear state governments had focused their sights on Columbia.
The G-man cometh. It wasn't only states. Uncle Sam also was taking a close look. At 8 a.m. March 19, the federal government hit Columbia where it hurt.
Scores of federal agents arrived at the company's El Paso operations where Scott began the company nine years earlier.
"Going to El Paso could be perceived as largely symbolic, but it certainly sends a message to Columbia or anyone familiar with the company," says Scott Becker, a healthcare attorney with the Chicago-based law firm Ross & Hardies.
Frist, his fellow board members and Columbia employees waited for Scott to do something "proactive." But Scott didn't do anything. He maintained his corporate-lawyer style and bunkered in with a business-as-usual focus.
It was suggested to Scott that a third party be called in to act as a liaison between Columbia and the government. That would be someone such as former U.S. Sen. Sam Nunn of Georgia. He was a conservative to Scott's liking but also a Democrat with ties to the Clinton administration and its suddenly aggressive HHS inspector general's office.
Scott would have none of that.
By the end of April there were still no major changes in response to Frist's letter.
Meanwhile, realizing that the board of directors had taken note of Columbia's horrid relations with the media, Richardson's department began screening the content of weekly packets of news clippings sent to board members.
Put on a happy face. While a pack-journalism mentality produced countless stories on Columbia's aggressive behavior, its communications staff tried to paint a brighter picture.
In an early May packet of clippings, the marketing and public affairs department sent out favorable stories about the company. For example, one of the packets included a newspaper story headlined "Newborn is lucky, thanks to Columbia" from the Southwest Times in Pulaski, Va., and another headlined "Hospital touts quick ER service" in the Provo (Utah) Daily Herald.
When the company's May 15 annual shareholders meeting convened in Nashville, the media descended. More than a dozen reporters showed up, and the gathering was moved from corporate headquarters to the mammoth Opryland Hotel.
Columbia fed the reporters lunch and brought in a few executives to talk, primarily about such Columbia operations as its "patient information card," which Scott himself passed out to members of the media. But reporters' questions were focused more on the swirling government probes of the company's business practices.
The board of directors saw Scott agitated and unable to deal with union plants in the audience. He finally cut off questions, telling one union attorney to sit down.
By the end of the day, the media circus and protests outside the shareholders meeting overshadowed Columbia executives' efforts to focus on the company's operations.
Most of the reporters, many of whom were unfamiliar with Columbia until recent weeks, had their attention drawn away by union protesters and bomb-sniffing dogs in the lobby outside the shareholders meeting.
Coverage of the meeting proved disastrous. Newspaper stories focused on a Gilmer, Texas, woman's 87-year-old grandmother who lost her local hospital after Columbia closed it in 1995, or Columbia investing a minuscule amount of its employee retirement funds in tobacco stocks.
Columbia management also was trying to develop closer relations with board members after the El Paso raids. On evenings before board meetings, Scott would have board members flown in early for dinner. Despite giving them more face-time, Scott wasn't giving in to what some colleagues and board members really wanted: a gentler business strategy and some easing of tension between the company and the government.
In an interview with MODERN HEALTHCARE published May 26, Scott said patients would suffer if federal laws were changed to force his company to unravel what had become controversial physician partnerships. But, he noted, "If they change the law, we will change."
Although the legality of Columbia's physician partnerships and other business practices wasn't clear, the appearance of impropriety was dogging the company. At the same time, it was continuing to invest in a $100 million advertising campaign designed to make Columbia a household word.
The board stirs. With turmoil building and Scott and Frist barely speaking, Frist decided against his usual summer vacation at his home in Aspen, Colo.
The corporate roof began caving in on July 16, when federal agents served more than 30 warrants at current and former Columbia facilities in six states.
That evening, Scott appeared on the CNN national business program "Moneyline" and dismissed the company's problems as unimportant. He called federal investigations such as the one his company was undergoing "a matter of fact in healthcare today."
It was the most public example of Scott's arrogance and miscalculation. And it would be the last.
The morning after the program, board members had a conference call meeting and asked Scott about his statements. Scott said he agreed to go on the program as long as "Moneyline" host Lou Dobbs wouldn't ask about the ongoing federal probes.
Board members were baffled that Scott would be so naive to think any good reporter wouldn't have asked the Columbia top executive about the investigations, and they told him so.
For the first time, the board began to seriously discuss calling for Scott's resignation.
By the next week, former board member Richard Rainwater re-entered the picture. Rainwater's wife, Darla Moore, also a former board member, flew to Nashville after she and her husband had had several weeks of discussions with Frist.
Moore's visit brought a swarm of interest from Wall Street, especially because talk of a deal with the nation's second-largest hospital company, Tenet Healthcare Corp. of Santa Barbara, Calif., briefly entered the picture.
With the board's blessing, Moore played the role of a go-between for the board and Scott, but the board would make its own decision. For board members who didn't know her, she explained her relationship to Scott.
However, Rainwater was "actively, actively involved, and Darla was his conduit to the board," a Columbia insider says. "They were trying to make this work out for Rick and the company. It was hard."
Moore had gone off the board two years earlier at the coaxing of Scott, who was concerned about Rainwater's diversification in other healthcare ventures. For instance, Rainwater's real estate investment trust, Crescent Real Estate Equities Co. of Fort Worth, entered a $480 million sale-leaseback agreement with stockholders of Magellan Health Services of Atlanta to jointly operate about 90 psychiatric hospitals.
"(Moore) was really mad because she didn't want off the board," a former Columbia middle manager says.
Moore, however, has since said she left the board of her own volition.
But Columbia needed Moore's seat as part of a promise to Sisters of Charity of St. Augustine. The deal with the Catholic system included a promise to give the congregation a seat on the board. It went to Karam.
The board moves. Early the week of July 21, it was clear to board members that Scott didn't understand. It was over, they told him.
But Scott wouldn't accept it and lobbied board members to let him stay on to run the company with a new plan.
With a whirlwind of federal investigations in at least a half-dozen states and indictments coming, Scott proposed that outside firms be hired to handle the media and government relations. But under the plan, Scott would remain in the top executive's chair, running day-to-day operations.
Realizing board members weren't interested in his 11th-hour plan, a board meeting was called for July 24th. They accepted the resignations of Scott and President and COO Vandewater and worked into the night to hammer out what is believed to be a lucrative severance package.
The July 25 announcement of the resignations brought a sense of relief at the company's headquarters. Frist was installed as the company's top executive, but he said he wouldn't serve for a long period.
Within minutes of Frist taking over as chairman and CEO, the glass security doors into the fourth-floor corporate offices were opened for good. Soothing music replaced the Columbia theme music and promotionals typically heard when put on hold while calling headquarters.
The Friday casual day that had only recently been implemented was expanded. To get the ball rolling, Frist declared the entire month of August "casual month" at Columbia.
As for Scott and Vandewater, they were given undisclosed but presumably multimillion-dollar severance packages and stock options. Scott's shares of Columbia stock would be worth more than $300 million.
As for the future, both men have told close friends they would wait until the smoke clears and eventually start another healthcare company.
Scott took off with his family to a summer home in Beaver Creek, Colo., while Vandewater reportedly was spending his time golfing in Nashville.
Like most chief executives, Frist now spends his days checking the company's stock price and holding meetings or conference calls with key executives.
But unlike the average CEO, Frist is doing almost daily interviews with the media. He was quoted in one recent story as saying the government may have done Columbia a favor by calling attention to the company's management problems.
In addition, Frist holds almost daily meetings with lawyers and auditors, working to clean up Columbia's legal and managerial mess. And he talks about building a new and expanded board.