When James "Denny" Shelton talks about his company, Triad Hospitals, "Dr. Frist" keeps popping up in the conversation. Similarly, when Scott Mercy, president and chief executive officer at LifePoint Hospitals, is asked about future dealmaking, he speaks of "Tommy's expectation."
The CEOs of the new hospital companies are referring to the same person, Thomas Frist Jr., M.D.,CEO at Columbia/HCA Healthcare Corp., whose company in May spawned Triad and LifePoint as two separate, publicly traded hospital companies.
While the nature of the tax-free spinoffs preclude any overlap with Columbia on their boards of directors or management teams, that does not mean the two new companies will forget their ancestry.
"Obviously, you'd always rather do business with your friends than with someone you don't know," Mercy said.
Still, if a situation arose where LifePoint's best interests conflicted with those of Columbia, his new company would have to come first, Mercy said.
"That is the obligation we have, and it would be Tommy's expectation," he said. "I think he'd be disappointed if I didn't (put LifePoint first)."
"At the same time, if we had the opportunity to do something together, I wouldn't hesitate to pick up the phone and talk to those guys (at Columbia or Triad)," he said.
Linked strategies. Although Columbia has kicked the two divisions out of the nest, the fates and strategies of the three remain somewhat intertwined.
Lessons about their future dealings may be drawn from history.
Many of the hospitals that make up LifePoint's portfolio were involved in a previous Frist spinoff. As part of Healthtrust-The Hospital Co., they have been in and out of the Columbia fold several times.
In 1987, Frist, then chairman, president and CEO at Hospital Corporation of America, orchestrated the spinoff of more than half of its hospitals into Healthtrust. After Columbia Hospital Corp. bought HCA in 1994, the newly merged company reacquired Healthtrust, bringing its hospitals back into the fold. Fifteen of LifePoint's 23 hospitals, in fact, are former Healthtrust hospitals.
Triad, when it was part of Columbia, was known as the Pacific Group. Now based in Dallas, its hospitals are primarily in small cities in the South, West and Southwest. LifePoint, formerly Columbia's America Group, is based in Nashville and has rural hospitals, primarily in the South.
Columbia shareholders automatically received shares of the two new companies when Triad and LifePoint were spun off, meaning that, at least initially, the three companies had common investors.
"I think they are committed to doing what's best for their shareholders," said John Hindelong, healthcare analyst at Donaldson, Lufkin & Jenrette in New York. "To the extent that Dr. Frist is a major shareholder in each, obviously he benefits from that kind of approach."
Management teams for the new companies were determined while their hospitals were still within Columbia, and they are headed by people who were handpicked by Frist, whose influence can also be seen on the board of at least one of the new companies.
Shelton has assembled an eight-member board of directors, six of whom come from outside the company. Two more directors have yet to be chosen to complete the 10-person board.
Of the selections so far, Shelton made two at the direct suggestion of Frist. One of those is Frist's son, Thomas Frist III, a principal of FS Partners, an investment company based in New York.
"His family obviously has a large interest in Triad and what we're doing," Shelton said. "I chose all of them except for the two. I could use the tutoring, and (Frist) was nice enough to give me some ideas."
Mercy said he chose LifePoint's board members because of their skills, not their connections. His five-member board of directors may increase to seven in the next year, he said.
Of Triad's nine executive officers, seven had been with Columbia for more than two years, and four had been with the company since 1994.
Of LifePoint's seven executive officers, all but the general counsel had histories with Columbia or HCA dating back to 1995 or earlier, with three having come from Healthtrust.
The two spinoffs have signed contracts with Columbia to maintain their information systems and computer support. Both also participate in Columbia's group purchasing organization.
The Houston connection. The link between the three companies has already manifested itself in at least one hospital swap. Columbia and not-for-profit Memorial Hermann Healthcare System, Houston, recently announced a three-way hospital trade in which Memorial Hermann is to receive three hospitals from Columbia and two hospitals Triad was holding for sale. Columbia will receive one hospital from Memorial Hermann and an undisclosed amount of cash in return (June 7, p. 16).
Jeff Prescott, a Columbia spokesman, said the three-way deal evolved partly because the Triad hospitals that were included were held for sale by Columbia before the new company was separated.
"To the extent that we are privy to that knowledge because that was the case prior to the spinoff, then sure, it's going to make sense for us to work closely with Triad or LifePoint," he said.
"That's just, I think, part of the fact of the close relationship we had with them, and the proximity of time since the spinoff," he said
But Prescott said the deal was the result of opportunity, not of a permanent strategy.
Dan Wolterman, senior vice president of operations at Memorial Hermann, has been involved in the ongoing deal with Columbia and Triad. Because negotiations lasted more than a year, Columbia took the lead in offering the Triad facilities that are part of the deal, he said. When Triad was spun off, however, Memorial Hermann entered separate contracts and memoranda of understanding with each company.
"I think (Columbia and Triad will) be collaborative," Wolterman said, "but already I see a very distinctive separateness in them."
Independent futures? Only time will tell whether Triad and LifePoint will demonstrate their independence from Columbia, said David Cyganowski, co-director of Salomon Smith Barney's healthcare group in New York.
"Obviously, over the last six months to a year since they announced they were going to spin off the companies and they had submitted applications for IRS approval, you had a tremendous amount of overlap."
So far, investors have applauded the strategy, boosting the share prices of all three companies overall, Cyganowski said.
Triad's Shelton said that his company in the future will be ready to pick up Columbia hospitals that come up for sale.
"We have a lot of experience with those hospitals," he said. "We'd be good candidates to hopefully pick up some."
LifePoint CEO Scott Mercy said the common operational elements between his company and Columbia will probably enhance the chances that LifePoint too would be open to picking up hospitals Columbia might want to sell, if they fit into LifePoint's profile. His company also has experience transferring Columbia employees and their benefits packages.
"If and when Columbia continues to go through that process, it would be a seamless transition from one company to another," he said.