Columbia/HCA Healthcare Corp. is considering spinning off more than a third of its ambulatory surgery center business into a separate company in an effort to create desperately needed shareholder value, MODERN HEALTHCARE has learned.
Industry sources say the action might take place within the next six months. They say it would make sense, given that the 148 surgery centers are a lucrative part of the company.
A spinoff could prove beneficial by separating a business that could do better on its own from other poorly performing operations.
Last November the troubled Nashville-based healthcare company announced a huge restructuring that would break it into five parts, three of which would become separate companies. The plan would have left the company with 232 hospitals and 115 surgery centers.
Now it appears the centers will be allowed to grow on their own, and companies have approached Columbia about buying all or some of them.
"Surgery centers are extremely profitable, so it would make sense to spin (them) off," said John Runningen, a principal at the Atlanta-based venture capital firm Cordova Capital.
Columbia spokesman Jeff Prescott said the company is considering spinning off a total of 55 centers, of which 20 were included in its previous restructuring plan. Prescott said the other 35 don't fit or overlap into existing markets. Columbia's new strategy is to strengthen existing networks in certain markets.
If the spinoff occurs, it would form the nation's third-largest owner, after Birmingham, Ala.-based HealthSouth Corp., which operates 176 surgery centers, and Columbia.
"It would be enough for critical mass to be a separate company," said Tom Galucci, analyst with Bear Stearns in New York. "It's something they are looking at. I don't know if they've decided exactly when it will happen."
Columbia has been telling analysts it plans to complete the sale of its home health business and deal with related regulatory hurdles for Value Health, which it acquired in August 1997. Integrated Health Services of Owings Mills, Md., has acknowledged it's in due diligence to acquire Columbia's home health business, but Columbia said late last month it plans to sell the business to more than one buyer.
Earlier this year, Columbia announced it will sell two of Value Health's four divisions for a total of $675 million. Those sales are expected to be completed during the second quarter. Columbia is still looking for a buyer for Value Health Sciences and plans to keep the remaining division.
Prescott wouldn't disclose a schedule for the spinoff despite analysts' six-month estimate. "We're looking at doing this as fast as we can, but we have no specific time frame set," he said. Prescott said Columbia is in discussions with interested companies but declined to name them.
A company focused solely on surgery centers could be a lucrative venture. Nationwide, the ambulatory surgery center industry produces about $5 billion in annual revenues. That business has boomed in recent years as Medicare reimbursement has expanded to cover 2,200 procedures today from 1,200 in 1991.
Columbia wouldn't disclose the percentage of its $18.8 billion in annual revenues that comes from its surgery centers, but analysts believe revenues for all 148 are between $600 million and $750 million.
The typical ambulatory surgery center produces between $4 million and $5 million in annual revenues, according to industry analysts. Thus, the 55 surgery centers could bring in $220 million to $275 million as a separate, publicly traded company.
Surgery centers are valuable to hospital companies like Columbia because of the potential for patient referrals from surgery centers to hospitals.
The spinoff could have a downside, however. In the process, Columbia might alienate physicians.
"The idea is that doctors who do outpatient care at surgery centers will bring their inpatient work to affiliated hospitals," Runningen said. "It's unclear how that would happen if (surgery centers) are a part of a different company."
It's unlikely Columbia would face regulatory hurdles in creating a separate surgery center company. Two-thirds of its surgery centers, or 96, were once a separate company called Medical Care America. Columbia acquired Dallas-based Medical Care in 1994 in an $858 million stock swap.
The spinoff discussions might explain why HealthSouth hasn't heard any good news about its purchase bid.
HealthSouth, the nation's largest player in outpatient surgery business, has expressed interest in Columbia's surgery centers, but its offers have gone nowhere.
"There is no commitment either way," said Richard Scrushy, HealthSouth's chairman and chief executive officer, at the Salomon Smith Barney Health Care Services Conference in New York in February. "We've had very pleasant, very good meetings, but I don't know if anything will come of (them)."
HealthSouth is the nation's largest rehabilitation and outpatient surgery provider with more than 1,500 locations in all 50 states. The company had $3 billion in revenues in 1997.
If the Columbia spinoff is completed, Chicago-based National Surgery Centers, which operates only surgery centers, would fall to fourth place based on the number of centers. It operates 40 and has annual revenues of about $100 million.
-With Patricia B. Limbacher
