Investor-owned healthcare companies' build-it, sell-it, build-it-again behavior looks awfully like an elaborate shell game, and the latest hustler on the Street is Columbia/HCA Healthcare Corp.
After years of amassing hospitals and healthcare businesses, the Nashville-based chain is paring back. Columbia will spin off a third of its 340-hospital empire under a restructuring plan unveiled last week.
When for-profit companies rejigger their holdings, they do it in the name of shareholder value. Shareholders, however, may or may not benefit. The most obvious winners are the consultants, attorneys and investment bankers who earn fees each time a group of companies buys and sells to one another. Executives often win too, earning stock options and bonuses for their efforts.
What's less clear is how local communities fare when investor-owned chains move in and out of markets, said Dennis Andrulis, president of the National Public Health and Hospital Institute in Washington.
Andrulis said the profitmaking motivation could cause a company to enter a market for a quick buck and then close down hospitals or move out when moneymaking opportunities are sapped. Such a scenario poses serious consequences for safety-net institutions and community health at large.
So, does the buy-sell marathon really add value to the healthcare delivery system?
"That's the $64 million question," said Lori Price, an analyst with Oppenheimer & Co., New York. "I think that there can be a real value creation that occurs in the healthcare delivery system if the changes that are made are the right ones."
Whether the nation's investor-owned healthcare chains have merged, divested and acquired appropriately may not be known for some years to come.
"I would say it doesn't look good that they've had so many changes in direction," said Paul Ginsburg, president of the Center for Studying Health System Change in Washington. "That doesn't give one confidence that each move was the right move."
Columbia hails from a long line of investor-owned companies that merged and acquired their way to industry dominance before breaking their businesses apart again and then buying them back through other transformations.
Louisville, Ky.-based Humana unloaded its hospitals, creating Galen Health Care. Nashville's Hospital Corporation of America spun off Healthtrust before taking HCA private in the hospital industry's largest-ever leveraged buyout. And Healthtrust proceeded to buy Epic Healthcare Group, an offspring of Dallas-based American Medical International. AMI merged with National Medical Enterprises in 1994 to form Tenet Healthcare Corp., the nation's second-largest investor-owned healthcare company.
Now Columbia, whose empire includes the former Galen, HCA and Healthtrust facilities, is following in its forefathers' footsteps. Despite it all, the investor-owned sector still represents only 15% to 20% of the hospital market nationwide, according to the Federation of American Health Systems.
Price said Columbia's image has been so irreparably tainted that it needed to do something. Its stock has lost a third of its value since the federal government's March 19 raid on Columbia's El Paso facilities. Its cash-generating ability has dropped to 6.7 times from 8 times earnings before interest, taxes, depreciation and amortization.
"If you look at what they could finance through an LBO, you could justify a higher valuation for the assets," she said.
The for-profit healthcare sector's frequent expansion and contraction, in part, is a reaction to Wall Street's fickle nature.
"The rationalization is that capital markets are largely like women's fashions. They change at the drop of a whim," said Daniel Cain, principal and founder of Cain Brothers, New York. Columbia's restructuring plan is the latest example of that, he said.
"Obviously, behind that is -- the sum of the parts are worth more than the whole," he noted. "All they're really doing is changing the hemlines around."
"It seems like a lot of spinning of wheels," acknowledged one healthcare analyst who asked not to be identified. But he said it's just part-and-parcel of restructuring the nation's overbedded healthcare delivery system. Chains are building delivery systems and dumping assets that don't fit anymore.
If conceived and executed well, the industry's strategic reconfiguration can pay off big for management and shareholders alike.
"I don't think anybody consciously goes into a corporate reorganization thinking somebody's going to lose," said Mitchell Kornblit, a principal with Shattuck Hammond Partners, New York.