Some people work a lifetime to earn their status in society, while others are born into their rank.
The same can be said for hospital companies. Some are built from scratch and grow hospital by hospital. Others, like the two being launched this week by Columbia/HCA Healthcare Corp., have a predetermined place in the world and a track record against which to measure future performance.
This week marks a turning point in the evolution of Nashville-based Columbia, for many years known as the for-profit hospital industry's primary consolidator.
The company that once made its reputation gobbling up other companies is about to kick two hospital divisions out of the nest to fend for themselves in the marketplace, reflecting a trend among the industry's larger companies to pare down and focus on their core markets.
The two new companies, LifePoint Hospitals and Triad Hospitals, will have the luxury of beginning their lives with management teams put in place by Columbia Chairman and Chief Executive Officer Thomas Frist Jr., M.D. They will leave the starting gate with numerous hospitals under their corporate umbrellas and a vision of where they are headed.
As independent, publicly traded companies, they will keep some of the benefits of a relationship with a large company but leave behind some of the problems associated with Columbia. LifePoint and Triad are scheduled to be spun off May 7, when they will become independent, publicly traded companies listed on the NASDAQ trading system. Columbia shareholders will receive one share in each new company for every 19 Columbia shares they held on April 30.
"From my history of 30 years building companies, reorganizing them, shrinking them, you've probably seen 60 to 70 different hospital companies over the years," Frist says. "This is just another generation, and we will learn and see how they do."
Benefits for all. Those watching the deal from inside and outside the company seem to agree that the spinoff is likely to benefit operations and finances for Columbia and the two spinoffs. Columbia will be able to focus more on its core markets, and Triad and LifePoint can pursue strategies more suitable to their respective markets.
"From Columbia's point of view, you get rid of hospitals operating at lower margins than the ones that are remaining," says Sheryl Skolnick, senior healthcare analyst with BancBoston Robertson Stephens in New York. "What you'll see is a smaller company with less revenue but better profitability."
Even after the two companies are spun off, Columbia will still be a mammoth hospital company compared with most. It will still own 240 hospitals, but that number is expected to drop to 220 eventually, says Columbia spokesman Jeff Prescott.
The spinoffs, meanwhile, will have more flexibility in dealing with their specific markets, Skolnick says.
"It's significantly easier to manage a smaller hospital company with a single strategy than a behemoth like Columbia/HCA," she says.
Small-city base. Triad Hospitals, which will trade under the symbol TRIH, is the new name for what was the Pacific Group. It is based in Dallas and boasts 33 hospitals in Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas.
James "Denny" Shelton has been named chairman and CEO. Shelton has been with Columbia since 1994 as president and CEO of its Central Group, which included 105 hospitals in Arkansas, Louisiana, Oklahoma and Texas. Before joining Columbia, he served as executive vice president at National Medical Enterprises, a predecessor to Santa Barbara, Calif.-based Tenet Healthcare Corp.
"The strength of the organization, the bulk of the organization, is built around small cities," Shelton says of his new fiefdom.
Three-quarters of Triad's hospitals are in the South, West and Southwest, in small cities where they are the only hospitals or one of two in the community. The rest are in larger urban areas with high population growth. More than half of Triad's hospitals are in Arizona, New Mexico and Texas. Five hospitals-Beaumont (Texas) Medical and Surgical Hospital; Huntington Beach (Calif.) Hospital; Research Psychiatric Center in Kansas City, Mo.; Silsbee (Texas) Doctors Hospital; and West Anaheim (Calif.) Medical Center, -are being held by Triad for sale sometime after the spinoff.
Selling these hospitals will improve the company's balance sheet quickly, Shelton says.
"Those will go to reduce our debt," he says.
Most of Triad's hospitals are in communities big enough to support a significant specialty and subspecialty base, Shelton says. He lists, for example, Brownwood, Texas; Huntsville, Ala.; Longview, Texas; and McMinnville, Ore.
Shelton constructed several partnerships that Columbia struck with not-for-profit organizations, a history of collaboration that will help the new company, Frist says.
"Denny has a lot of credibility himself in the industry and has already worked out relationships with others in other communities to make his hospitals more well-positioned," Frist says.
Already, Shelton mentions the possibility of potential partnerships with Phoenix-based Samaritan Health System and Lutheran Health Systems of Fargo, N.D., two not-for-profit systems that announced merger plans in January.
"Our biggest competition is really just to take care of our facilities, to cut out-migration of services, make it so that people stay in their community for healthcare," Shelton says.
He also says he plans to make physician relationships a high priority.
"If there's one culture I want to establish in this company, it's that we have to make room at our side of the table for physicians."
Within Columbia, the Triad hospitals reported revenues of $1.6 billion, or 9% of Columbia's revenues, during 1998. Net losses totaled $87 million.
Shelton says that in recent quarters, however, the hospitals have shown signs of improvement.
"We've seen significant growth in the last quarter in almost every facility," he says. "We've seen these hospitals rebounding nicely."
Shelton says he is committed to continuing the capital projects begun at the hospitals under Columbia. He adds that Triad will look at selective acquisitions in smaller cities in the Southwest and the Northwest, targeting the purchase of one or two hospitals per year beginning in 2000, he says.
And the relationship with Columbia may come in handy.
"If the parent company continues to downsize, we'd be in a position to look at potential opportunities," Shelton says.
New chance at life. The LifePoint hospitals, formerly Columbia's America Group, may be getting a new lease on life. Scott Mercy will be at the helm of Nashville-based LifePoint, which will trade under the symbol LPNT, and its 23 rural hospitals in Alabama, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming.
Another veteran of the Nashville healthcare scene, Mercy joined Columbia last year in anticipation of the spinoff. Before that he was president and CEO of Brentwood, Tenn.-based America Service Group, a provider of healthcare services for correctional facilities.
He joined the management team at the Hospital Corporation of America in 1983, long before it merged with Columbia. In the early 1990s he was senior vice president of financial operations at Columbia.
"The challenge this group of hospitals had within the Columbia system is obvious, because they were the smallest within the system," Mercy says. "They were always kind of hanging on to the integrated strategy and likely to be the last ones to get resources."
One of the main problems was dwindling physicians, so Mercy has emphasized physician recruitment. In 1996, 17 physicians left Lifepoint Hospitals, and in 1997, another 34 doctors left.
During 1998 and the first quarter of 1999, 100 physicians have been recruited, Mercy says.
Twenty-one of the LifePoint hospitals are the only providers in their communities. In the near future, the company will work to improve and expand existing facilities. In the short term, expansions are likely to generate a higher return on investment than buying new hospitals, Mercy says.
LifePoint also plans to divest three of its hospitals by the end of the second quarter. Mercy declined to disclose which ones are for sale. All the LifePoint hospitals reported a total $498 million in revenues last year and a net loss of $21.8 million, which includes a charge related to the three impending sales.
"We do not anticipate reporting losses going forward," Mercy says.
Some of the physician recruitment efforts contributed to the 1998 losses, but they will pay off in the long term, he says.
Mercy says that at Frist's encouragement, "1998 was basically a restructuring year for us, where we did the right things without thinking about the effect on the income statement."
The hospitals hold a great potential for profits because of their prior neglect in the Columbia system, he says.
Gone are the days of branding hospitals with the Columbia name, and these two new companies are more intent than ever on showcasing their hospitals' emphasis on the community rather than forcing a corporate image.
Bonds and separation. LifePoint and Triad will benefit significantly from ties to their former parent. Although they will be independent, they have signed contracts with Columbia to maintain their information systems and computer support, and they will participate in Columbia's group purchasing organization.
But in one important way, the two will be removed from Columbia's shadow. If the federal government's investigations into Columbia relate to Triad or LifePoint hospitals, the liability will be Columbia's responsibility. The indemnification agreement refers not only to the investigation but to all malpractice claims and other liabilities that arose before the two companies were separated.
Frist says Columbia's acquisition spree in the early 1990s may have overreached, and this spinoff is an effort to return to a manageable scale and a patient focus.
"The patients, the physicians, looked at Columbia as a giant, monolithic entity that was almost threatening in its sheer size," he says.
"Now we're closing up those cracks and making sure the patients come first," Frist says. "We will all do better."
Frist has already put his money where his mouth is, buying about $50 million worth of Columbia stock in March, when shares were less than $20 per share and just before his company released an earnings statement highlighting increased profits.
As of April 5, Frist owned 15.2 million shares of Columbia stock, making up about 2.6% of the company. Columbia's stock has been trading in the mid-$20s recently, against a backdrop of a 52-week high of $34.63 and a 52-week low of $17.