A little more than a year ago, Columbia/HCA Healthcare Corp. was roaming the nation, gobbling up hospitals like a ravenous monster.
Now in the midst of a federal probe into its billing practices and after an overhaul of its executive ranks, Columbia-still the nation's largest hospital chain-has become more of a gentle giant.
In a surprise attack on July 16 of last year, federal investigators swooped down on Columbia facilities and seized billing documents for Medicare and other federal health programs. Nine days later, Chairman and Chief Executive Officer Richard Scott and Chief Operating Officer David Vandewater resigned. That day, board Vice Chairman Thomas Frist Jr., M.D., took over as CEO and chairman.
Since then, Columbia has undergone a culture shock, scrapping its aggressive acquisition and construction strategies, branding campaign and other operational plans. Today the company is focused on "organic growth," which it says means strengthening existing operations and putting patient care first.
"Growth isn't what it once meant for this company," spokesman Jeff Prescott said.
Over the past year, Frist has injected a friendlier management style, decentralized power to local facilities, installed a new code of ethics and conduct, and revamped the company's executive management and board.
Only three of the nine people with whom Scott met on a weekly basis remain employed at the company. They are Senior Vice President Victor Campbell, Senior Vice President for Human Resources Neil Hemphill and Senior Vice President and Controller Ken Donahey.
New look. Most of the senior managers who left are working at healthcare companies, some of which, like Columbia, are based in Nashville.
Meanwhile, four of the original five group presidents-just below senior management-remain in place.
In the past 12 months, Columbia also has tried its hand at things many observers thought they would never see, such as working with a consortium of not-for-profit hospital systems to sell 22 of the chain's 335 hospitals for $1.2 billion. Historically, the situation would be reversed. At its high point in 1996, before its reputation began tarnishing, Columbia operated 341 hospitals.
Has Columbia really changed? Structurally, the changes are obvious, with plans to downsize the company and concentrate on existing operations.
But attorney Jonathan Lowe said when it comes to wheeling and dealing, Columbia's face is the same.
"The reality that Columbia is projecting a different attitude in the marketplace comes up now and then in conversation . . . but it doesn't affect the actual negotiation," said Lowe, a partner at the Atlanta-based law firm Alston & Bird. Most recently, Lowe helped the not-for-profit consortium in its negotiations with Columbia.
A cheery disposition at the negotiating table, however, is not what Lowe would expect of Columbia or any large company. For example, hard negotiations with parts suppliers by such companies as General Motors don't mean that the companies are less honorable on the production floor, he said.
Helpful attitude. As for the ongoing federal investigation, Frist has promised Columbia will cooperate fully with the government since the day he took the helm. In an interview with MODERN HEALTHCARE, he described Columbia's relationship with investigators as "certainly (not) adversarial, and that was a definite change. We have gained their confidence."
Recently, federal investigators went to Nashville without a warrant or subpoena to look at company cost reports (July 20, p. 4). To date, four Columbia executives in Florida have been indicted for an alleged conspiracy to defraud the government, and two executives elsewhere were fired by Columbia. All maintain their innocence.
While U.S. Justice Department officials wouldn't discuss the ongoing investigation, observers give Columbia high marks for its handling of the crisis.
"On the credibility front, they've done a great job in establishing a relationship (with the federal government) and continuing to try to work through the issues," said Nancy Weaver, a healthcare analyst with Stephens, a brokerage firm based in Little Rock, Ark.
Cleaning up. Soon after the raids, Columbia hired the national accounting firm Deloitte & Touche and law firm Latham & Watkins to do an internal audit of its practices. The audit has not been released, but Frist said the firms found no systemic problems of overbilling.
Columbia is negotiating a settlement with the federal government, Frist said. He declined to estimate when the investigation might be completed or a settlement reached.
In a recent report, Bear, Stearns & Co. healthcare analyst A.J. Rice said a global settlement is unlikely to be struck before the first quarter of 1999. On the plus side for Columbia, Rice said the settlement could end up involving only millions of dollars, not billions as initially suspected.
"It is possible the government may ultimately find that Columbia's track record is not materially different than that of the many independent non-profit hospitals that have already agreed to settlements with the federal government," Rice wrote.
Reflecting on the false-billing probes sweeping his industry, Frist agreed and said Columbia is no different than its compatriots. Columbia, however, should be held to a higher degree of accountability than many local hospitals because of its access to resources, Frist said.
"The provider side can't be absolutely without blame," he said.*But many of the billing investigations were caused by a lack of clarity, and rules and regulations that were not clearly defined, Frist said.
Still, the federal investigation has had a staggering impact on Columbia financially. Columbia reported a net loss of $1.3 billion for the fourth quarter ended Dec. 31, 1997, compared with net income of $414 million in the year-ago quarter. Revenues fell 9% to $4.4 billion. For the year, net income plunged 80% to $305 million, compared with $1.5 billion in the previous year. Revenues rose less than 1% to $18.8 billion.
All told, the $1.3 billion loss equaled about 7% of the company's entire 1997 revenues. Included in its losses were $843 million in restructuring charges, primarily for the sale of Value Health divisions. In addition, at the time of its earnings release, the company expected to pay $60 million in attorney and consultant fees related to the internal investigation of its billing practices.
The company's stock also has taken a beating, dropping to $29.81 per share on July 23 from $38.93 on July 15, 1997, the day before the federal raids.
Scaling back. Meanwhile, Columbia shelved 10 construction projects totaling $300 million and abandoned seven of 10 hospital deals that had been pending at the time of the raid. An eighth deal, with Medical University of South Carolina, is not being pursued but has not been canceled.
Following the launch of the federal investigation and Columbia's decision to downsize, the company managed to dump a pending acquisition of America's Health Network. It couldn't, however, unravel its $1.1 billion purchase of Value Health, but it subsequently sold three of the firm's four divisions.
In the first quarter of 1998, Columbia turned a profit. But net income dropped 43% to $197 million from $423 million in the year-ago quarter, and revenues were down slightly at $4.9 billion (May 4, p. 4).
Making new plans. Initially, Frist planned to spin off one-third of Columbia's hospitals into three separate companies, reasoning that it would be easier to realize growth in smaller companies than in larger combinations.
But after a record drop in net income for the fourth quarter and facing the difficulties of three spinoffs, Frist and his team rejiggered the strategy.
Instead of spinning off the 45-hospital Atlantic group, Columbia agreed in May to sell 22 of those facilities to the not-for-profit consortium.
Frist said he feels good about the two groups that will be spun off if the Internal Revenue Service approves the deal. Both companies, currently Columbia's Pacific and America groups, will have an employee stock option plan to attract and retain high-quality employees, he said.
"We're not liquidating (Columbia)," Frist said. "It was the right decision to reach out to the not-for-profits."
Columbia also is reaching out to its for-profit brethren. For example, it has signed a letter of intent with its largest rival, Santa Barbara Calif.-based Tenet Healthcare Corp., to sell its 80% interest in 423-bed MetroWest Medical Center in Framingham, Mass.
Columbia also has signed letters of intent to sell facilities to Brentwood, Tenn.-based Community Health Systems, Birmingham, Ala.-based HealthSouth and other for-profit companies.
Meanwhile, Columbia completed a joint venture with Brentwood-based Quorum Health Group covering each company's hospitals in Macon, Ga. And Columbia laid plans to sell its 523-bed Michael Reese Hospital and Medical Center and 213-bed Grant Hospital, both in Chicago, to doctors at the facilities and their partner, Doctors Community Healthcare Corp., Scottsdale, Ariz. The $60 million deal is expected to close in the coming months (July 13, p. 4).
The remaining company, consisting of the East and West groups, should end up with 220 hospitals and $15 billion in assets, Frist said. And for the next two to three years, its focus will be perfecting existing operations.