In a year marked by turbulence in managed care and the passage of a landmark federal balanced-budget act, it was the fall from grace of a single for-profit company that dominated the pages of in 1997.
For a company that started the year buying and building hospitals and branching further into areas like home care and purchasing, Columbia/HCA Healthcare Corp. now seems a shell of its former self. It's even changing its name as if it wants to shed any evidence of its former hubris.
After indictments, federal billing probes, raids on its facilities, the dismissal of former top executives Richard Scott and David Vandewater, the company wants to spin off hospitals and drop entire lines of business. Indeed, this may be the last year Columbia dominates healthcare business news.
Of course, that was far from the only news we covered this year . . .
OK, so managed care isn't a bogeyman for doctors after all. The American Medical Association reports that physicians' average net income rose 7.2% in 1995, just one year after a 3.6 drop that the AMA blamed on managed care when it leaked the data to the New York Times. This year, the AMA says managed care is "not necessarily the most important factor" affecting physician income.
This is not the Blues' year. This month, a state court judge rules that St. Louis-based Blue Cross and Blue Shield of Missouri violated its legal status when it moved most of its business into a new for-profit subsidiary in 1995. It is believed to be the first court ruling to address the legality of converting a not-for-profit Blues plan into a for-profit enterprise, a trend sweeping the nation's Blues plans. Later in the year, Indianapolis-based Anthem Insurance Cos. is sued by the state of Kentucky, which seeks to reclaim $230 million the state says Anthem illegally pocketed from its acquisition of the Kentucky Blues plan in 1993. Connecticut, where Anthem also operates a plan, quickly follows suit, seeking $550 million. And Blue Cross and Blue Shield of Ohio loses its national Blues name and trademarks rights after its failed attempt to transfer assets to Columbia/HCA Healthcare Corp.
Just weeks after sending out a memo asking members to publicize the community benefits of their facilities, the American Hospital Association releases a report showing an aggregate profit jump of nearly 24% in 1995, to about $17 billion.
After more than a decade of hospital industry pressure, endless nitpicking by health services researchers and clinicians, and internal miscues, the Joint Commission on Accreditation of Healthcare Organizations unveils its latest plan to base accreditation, at least in part, on providers' performance. Christened "Oryx, the next evolution in accreditation," the program for the first time requires healthcare organizations to gather and submit data about the results of care.
The feds raid Columbia's El Paso, Texas, facilities. Agents from the FBI, the Internal Revenue Service, a U.S. attorney's office, HHS and the U.S. Defense Department seize box after box of medical and financial documents from four Columbia hospitals and at least 30 physicians offices in El Paso. Four months later, about 25 federal warrants are served in at least seven states on former and current Columbia facilities and several companies that do business with Columbia. The wide-ranging probe focuses on potential Medicare and Medicaid billing fraud. The raids produce one early result: Three midlevel Columbia executives, including the director of reimbursement in its Nashville headquarters, are charged with conspiracy to defraud the federal government.
Big physician practice management companies start to cut deals with big providers. MedPartners agrees to form a provider network serving major markets in Southern California with Tenet Healthcare Corp. Later in the year, PhyMatrix completes an acquisition of U.S. Management Systems, the physician management arm of New York's Beth Israel Medical Center, and signs a 40-year deal to manage more than 2,000 physicians connected with the medical center through a 50-50 joint venture management services organization with Beth Israel.
The HMO merger wave continues, as Foundation Health Corp.'s merger with Health Systems International closes. The deal follows PacifiCare Health Systems' acquisition of FHP, WellPoint Health Networks' acquisition of the health plan business of John Hancock Mutual Life Insurance Co., and Kaiser Permanente's affiliation with Group Health Cooperative of Puget Sound. Later in the year, Blue Shield of California buys UniHealth's CareAmerica managed-care subsidiaries.
More bad news for managed care. In the span of a single week, Texas passes first-in-the-nation legislation to strip managed-care plans of their immunity against lawsuits in state court alleging patient harm from treatment decisions, the New York State Insurance Department launches an investigation into the claims-paying practices of HMOs and other health insurance companies, and Connecticut passes a bill offering patients the chance to overrule their health plans if they are denied coverage for medical treatments.
Doctor-owned HMOs, touted by medical societies and physician groups as the answer to for-profit managed care, are falling far short of their ambitious early goals, mainly because of a lack of capital. Physician Healthcare Plan of New Jersey becomes the latest to admit it can no longer survive as a stand-alone health plan. Less than four months after receiving a statewide license, it hires an investment banking firm to identify its "strategic options."
In a move fraught with implications for hospitals across the country, a federal grand jury indicts two Kansas osteopathic doctors and charges them with taking more than $2 million in kickbacks from five hospitals and defrauding Medicare. The five hospitals, led by Baptist Medical Center, Kansas City, Mo., weren't charged, but Baptist announces it is looking to resolve its role in the alleged kickback scheme.
Not-for-profit Baylor Health Care System in Dallas comes up with a novel way to fight off the advances of investor-owned hospital companies. After parent Baylor University announces it wants to sell the system's 13 hospitals for $1.2 billion, five of the hospitals change their articles of incorporation to slip out of the control of the university board of regents.
The federal balanced-budget saga includes a spectacle characterized as "the rich and the near-rich arguing in public about their money." Primary-care physicians and specialists fight a nasty zero-sum lobbying battle over whether HCFA should shift about $4 billion a year in Medicare practice-expense compensation to primary-care office visits from specialty and surgical procedures in 1998. Congress' verdict: Primary-care doctors get about $330 million in 1998; specialists win a one-year delay and a phase-in of the new compensation formula.
The other shoe drops for Columbia. Richard Scott, who co-founded Columbia in Texas in 1987, is ousted as chairman and chief executive officer and replaced by Thomas Frist Jr., M.D. Later in the year, Frist leads a restructuring of the company that includes the spinoff of 108 hospitals and the splintering of the company into five parts. Three new companies will be publicly traded under their own names and will have separate boards. Meanwhile, Columbia reports a 69% decrease in net income for the third quarter ended Sept. 30 to $97 million, or 16 cents per share. The loss resulted primarily from costs associated with the ongoing federal fraud probe.
After months of acrimony, Congress and President Clinton approve a deal to balance the federal budget by the year 2002. The plan would reduce the growth of Medicare spending by slightly more than $115 billion from fiscal 1998 through 2002. Nearly $39 billion of that growth reduction comes from hospitals, which will see a one-year freeze on payments in fiscal 1998. While they will lose money, hospitals and doctor groups can now form provider-sponsored organizations to contract directly with Medicare patients beginning in 1999. One of the most sweeping and controversial initiatives in the legislation provides $24 billion in new state grant money for expanding children's health insurance coverage, funded in part through higher cigarette taxes.
The American Medical Association just can't seem to win. It signs an agreement with Sunbeam Corp. to let the appliancemaker use an AMA seal of approval on home-care products, a deal that almost immediately blows up in its face. Criticism of the arrangement over ethical concerns eventually costs AMA top executive P. John Seward, M.D., his job, along with four other top AMA staffers. After trying to get out of the deal to save face, the association faces a lawsuit by Sunbeam for breach of contract and near-mutiny from state medical associations.
Regulate us, please. Opening a major rift along ownership lines in the managed-care industry, a group of not-for-profit HMOs and consumer organizations led by Kaiser Permanente calls for new healthcare consumer-protection standards, which would be enforced by an "an appropriate government entity" with authority to the rules. The industry trade group, the American Association of Health Plans, calls such a move "micromanagement."
What gag [email protected] After two years of heavily publicized reports that HMOs limit free discussion between patients and their physicians through contract "gag clauses," the General Accounting Office, Congress' investigative arm, says they don't exist. A GAO report says the agency couldn't find any gag clauses in the contracts it reviewed from 529 HMOs. The GAO defined gag clauses as those that "specifically restricted physicians from discussing all appropriate medical decisions with their patients."
Mirroring the consolidation wave rippling through their memberships, VHA and University HealthSystem Consortium agree to combine their group purchasing operations into a limited liability company with pro forma purchasing volume of $11.2 billion this year, by far the largest purchasing group.
Never has the federal government seemed to have so little power against hospital mergers that could threaten local competition. The Federal Trade Commission backs off a long challenge to Butterworth Health System and Blodgett Memorial Medical Center in Grand Rapids, Mich. In Long Island, N.Y., a federal judge clears a merger, saying the systems tax-exempt status would avoid anti-competitive behavior. "I don't think this decision should be read as the agencies aren't going to be vigilant in looking at markets and challenging where appropriate," Robert Leibenluft, chief of the FTC's healthcare antitrust division, says of the Grand Rapids case.
Speaking of the FTC, it gives its blessing to HealthSouth Corp.'s $1.7 billion acquisition of Horizon/CMS Healthcare Corp. without requiring an antitrust settlement from the companies despite its months-long investigation of the sale. The purchase secures HealthSouth's position as the nation's largest operator of inpatient rehabilitation hospitals.
As the stock market tumbles 500 points in one day, Oxford Health Plans' announcement Oct. 27 of a third-quarter loss of $68.5 million could have been better timed. Oxford reveals that because of computer problems it has underestimated what it owes providers for patient care and is behind in collecting premiums from enrollees and employers. Oxford's stock price falls 62% to $25.88 per share. It would fall to below $17 per share within two months.
In a stunning departure from its market-by-market growth strategy, PhyCor announces it will buy chief rival MedPartners. The $8 billion merger will give Nashville-based PhyCor affiliations with 35,000 physicians, or nearly 6% of nonfederal U.S. doctors, making it by far the nation's largest physician manager. The deal surprised analysts and doctors alike. Considered the industry vanguard, PhyCor built a folksy reputation by affiliating with strong group practices in cash deals. Swallowing competing companies in stock acquisitions has been a hallmark of MedPartners, a 4-year-old industry upstart based in Birmingham, Ala.
Those pesky computers. First they are blamed for Oxford Health Plans' woes. Now PacifiCare Health Systems says it will have a net loss of as much as $115 million, or $2.50 per share, for the fourth quarter and blames part of the problem on a computer system changeover in Utah that caused a claims backlog. PacifiCare's Class B stock tumbles $13.87 to $51.62.
The Catholic Health Association signals it will continue to fight for-profit medicine. It chooses the Rev. Michael Place, the senior healthcare adviser in the Chicago archdiocese for most of this decade, as its president and chief executive officer, effective in February. Place, an outspoken opponent of the profit motive in healthcare, will succeed John Curley Jr., a layman who announced his retirement in February after having held the CHA's top executive post for the past 18 years.