Columbia/HCA Healthcare Corp.'s $1.3 billion fourth-quarter loss would be like General Motors Corp. posting a $12.4 billion loss.
So massive is the hit taken by the nation's largest healthcare chain that its fourth-quarter loss alone represents 7% of the $18.8 billion it garnered in revenues for all of 1997.
If GM, the largest company in one of the nation's largest industries, lost that much money, wouldn't the nation shudder to consider the potential ripple effect throughout the economy?
It appears the troubles of Columbia, the largest company in the nation's largest industry, are being taken calmly, even as the allegations it faces in a massive federal fraud probe became clearer.
From Wall Street's perspective, it's unclear if the divestitures and scandals at Columbia are short- or long-term troubles. And its operating performance, although troubling, is a company-specific problem, not an industry issue. "The rest of the publicly held (healthcare) companies have reported pretty good earnings," said Peter Emch, an analyst with BT Alex. Brown in Baltimore. "This is a problem that has been brought on by a strategy that really hasn't worked."
Having prepared the market for massive losses earlier this month, Nashville-based Columbia last week announced its audited fourth-quarter and year-end results. Officially, it lost $1.3 billion, or $2.01 per share, in the fourth quarter ended Dec. 31, 1997, compared with a gain of $414 million, or 61 cents per share, in the year-ago quarter. Revenues dropped 9% to $4.4 billion.
For the year, the company lost $305 million, or 46 cents per share, compared with a $1.5 billion profit, or $2.24 per share, in 1996. Revenues rose a scant 0.2% to $18.8 billion.
On Feb. 13, the day it announced the losses, Columbia's stock closed at $26.69 per share, up slightly from $26.06 Feb. 12.
What worries analysts most is Columbia's $404 million loss on continuing operations in the fourth quarter.
The company must stem the hemorrhaging fast, said Sheryl Skolnick, healthcare analyst at BancAmerica Robertson Stephens, New York. Columbia's revenues aren't growing with its expenses, and the company is starting to lose physician referrals amid the controversy surrounding it. "The fundamental-operations part of this business is falling apart," Skolnick said. "I don't even know if (management) knows what's wrong."
Added David Whelan, principal at the Atlanta-based healthcare consulting firm Hamilton HMC: "If that's not corrected, or (if it's) indicative of future losses, then there have to be serious changes."
One problem is Columbia hasn't explained its operating losses adequately, observers said. Nor have company officials explained how the chain will recoup from the losses this year.
Some observers believe the company should look for short-term cost fixes, such as layoffs, or put a stranglehold on spending by local hospitals.
Cheryl Read, spokeswoman for the 11-hospital Nashville division, said Columbia's financial problems haven't hit the local area. The division is looking at ways to streamline its business and reduce costs, but this is something it has always done, Read said.
Columbia spokesman Jeff Prescott said the company hasn't ordered any directives to local facilities in terms of ways to reduce costs. Staffing issues, for example, are made at the local level and are primarily based on patient volumes, Prescott said.
The company has been focused on reducing the number of accounts receivable days to keep cash flow moving more quickly and to reduce bad debt wherever possible, but these initiatives are not happening as a result of the fourth-quarter numbers, he said. He added that the losses would neither speed the sales of individual hospitals nor have an impact on Columbia's restructuring strategy.
Meanwhile, there also is speculation that the federal government, as its fraud investigation of Columbia continues, is slowing down Medicare reimbursements to the company, scrutinizing each claim. Managed-care providers, too, could be delaying payments for more thorough review.
Columbia's losses included $843 million in restructuring charges. More than half those charges relate to the anticipated sales of Columbia's home health operations and parts of Value Health, which it acquired last August for $1.1 billion.
Prescott said the chain won't get what it paid for when it sells its home health and Value Health divisions. It recently agreed to sell Value Health's behavioral health division to FHC Health Systems of Norfolk, Va., for $230 million (Feb. 2, p. 4). That deal is pending. Columbia still is trying to sell two other of Value Health's four divisions but would not release details about those dealings.
Both Owings Mills, Md.-based Integrated Health Services and Melville, N.Y.-based Olsten Health Services have expressed interest in buying Columbia's home-care division. Olsten once owned much of Columbia's home-care operations. IHS is in talks with Columbia, although it declined to discuss their status.
Columbia also plans to divest roughly one-third of its 336 hospitals, but it might not make much progress on that front anytime soon, said Nancy Weaver, an analyst at the Stephens investment firm in Little Rock, Ark. Weaver said Columbia most likely will first try to improve cash flow at its facilities to command a higher price.
The big question is, can it? "I think people think this is the worst it's going to get," Weaver said, "and I don't think it is."
As Columbia detailed its financial troubles last week, information in a newly unsealed affidavit shed more light on its legal woes.
According to the affidavit, home care is at the center of the mess.
The affidavit was part of the case against three former Columbia executives who were indicted in June on fraud charges in federal district court in Tampa, Fla. It also was used to support the government's high-profile July raids on Columbia offices in seven states, which followed an earlier raid on its El Paso, Texas, operations.
Federal prosecutors said late last week that they expect a new criminal indictment charging at least one more person in the Columbia fraud case to be announced before March 20.
Some of the 74-page affidavit became public in October at the request of the executives' attorneys, and additional portions were unsealed Feb. 10. About 20% of the document remains protected from the public eye.
The affidavit charges Columbia with buying home-care businesses from Olsten at low cost and then paying a sister company, Atlanta-based Olsten Health Management, handsome fees for management services. Columbia is said to have paid $300,000 to $400,000 for the majority of Olsten's agencies, even though it paid millions of dollars for agencies in other markets.
The affidavit doesn't accuse Olsten of wrongdoing.
It does represent the first official notice, long rumored, that Columbia is suspected of nationwide fraud. In it, the government says it uncovered a "billing fraud scheme involving Columbia hospitals operating throughout the United States."
According to the affidavit, cooperating witnesses include a former Columbia hospital chief executive officer and a former Columbia auditor, neither of whom was named. Information on the third cooperating witness remains sealed.
The affidavit says the FBI's investigation in El Paso focuses on billing fraud, cost-report fraud, physician kickbacks and incentives, and false reports submitted to the Joint Commission on Accreditation of Healthcare Organizations.
In Utah, federal agents are examining potential laboratory billing fraud, including unbundling laboratory tests that should have been billed as a group.
Healthcare attorney Scott Becker said the new information actually could help Columbia by painting investigators as overzealous.
Becker said, for example, that it's ludicrous for the government to view Columbia's purchase of Olsten's home-care agencies as legally troublesome. Buyers commonly juggle what is paid for a business, its purchasing cost, with what is paid to the employees of the business over time, its compensation costs. That's because management costs can be reimbursable under Medicare.
"It's outrageous to attack Columbia on this," said Becker, a healthcare fraud attorney and partner with Ross & Hardies in Chicago. "This is commonly done in the business world. The question is, is it criminal, or good business sense?"
As the federal probe continues, Columbia is conducting its own internal investigation. Columbia Chairman and CEO Thomas Frist Jr., M.D., said last month that he expected the internal audit to be completed within 30 days, which would be any day now.
However, Senior Vice President Victor Campbell said Feb. 6 that he would not speculate on when the company's investigation would be done, nor would he say when Frist might meet with federal officials about their probe.
Frist told MODERN HEALTHCARE in November and again last month that he would be ready to talk with the government in early spring. Campbell declined to say whether the government has indicated a willingness to talk with the company.
The government has been taking its time going through documents and records seized in its Columbia raids. Unsealing most of the affidavit puts more pressure on federal agents to produce something -- indictments, charges, more evidence of the alleged "systemic corporate scheme" to defraud Medicare.
"The company's already under a lot of pressure," said Alice Gosfield, a healthcare fraud attorney with Gosfield and Associates in Philadelphia. "There are issues, safe to say. What's interesting is that the government is clearly indicating what areas they're interested in."
Becker downplayed the latest release of information in comparison with the earlier disclosure from the affidavit.
"The real issue is the cost reporting," Becker said. "The basic complaint that Columbia is causing hospital patients to go to its own home health agencies, that doesn't ring true to the average listener as criminal or illegal. It makes sense to want to refer to your own agencies. That's what an integrated delivery system is."
The charges against Columbia's home-care division haven't kept potential buyers away.
IHS, for example, said it would like to pick up the business. IHS Chairman and CEO Robert Elkins, M.D., said his company has been in due diligence discussions recently with Columbia, but he declined to discuss their progress.
Columbia said Olsten also has expressed interest in the business, although neither party would provide more information.
Columbia Homecare Group, based in Dallas, operates about 500 agencies in 32 states with annual revenues estimated at $200 million to $400 million, or 1% to 2% of the company.
A sale to IHS would create a company with 1,000 home-care agencies and about $1 billion in annual revenues. Olsten, however, would remain the larger of the two with $1.9 billion in annual revenues. Olsten operates 500 home health agencies in 42 states and 40 pharmacies.
Both deals have a downside. "Whoever buys the Columbia operations would have to buy all the risk, and that's a tough thing to do," said Peter Sidoti, an analyst at Schroder & Co., New York.
What also isn't clear is what a buyer will get. Because of problems stemming from the fraud investigation, as well as changes in home health reimbursement rules, Columbia's home health business is believed to have been cut in half from its peak of $1 billion in annual revenues a year ago.
Neither IHS nor Columbia would disclose the current value of the Columbia operations.
Regardless of the outcome of its Columbia talks, IHS plans to consider spinning off its $600 million home health business to shareholders so it can focus on its 2,000 post-acute-care facilities, Elkins said. He wouldn't disclose specifics of the proposed spinoff but said IHS would manage the new company. If a spinoff occurs, it would take place in the second quarter.
The spinoff would be a way for IHS to consolidate Columbia's home-care operations without increasing debt.
IHS faces several regulatory hurdles to a spinoff, but it also must respond to shareholder pressure to handle troubles at its home health operations.
Elkins said IHS' home health business lost more than $10 million last year because of changes in reimbursement. The business accounts for 17% of IHS' $3.8 billion in projected 1998 revenues.
Last month Standard & Poor's lowered IHS' corporate credit and bank loan ratings. IHS' debt stands at about $3.3 billion (Jan. 19, p. 24).
With Kristen Hallam and Bruce Japsen