Wall Street generally shunned hospital companies in 1999. But stepping in where general investors feared to tread were hospital company executives, whose large personal investments in their own companies perhaps spoke more than their words about the bright future they expect for their companies in the new millennium.
While for-profit hospital operators were describing their dire situations to Congress in hopes of persuading lawmakers to return some of the dollars the Balanced Budget Act of 1997 took from their Medicare coffers, hospital executives were making multimillion dollar investments in their companies out of their own pocketbooks.
Early signs show their investments are beginning to pay off.
Columbia/HCA Healthcare Corp., Nashville, the largest for-profit hospital company, seems to be emerging from a rough couple of years. Still under a cloud of federal criminal and civil fraud investigations, the company also experienced a major internal restructuring and spinoff of about one-third of its hospitals. After its most recent earnings quarter ended Sept. 30, Columbia officials said the company had finally turned the corner.
Columbia Chairman and Chief Executive Officer Thomas Frist Jr., M.D., bought about 4.5 million shares of Columbia stock this year, or about $100 million worth, at an average price of slightly more than $22 per share. In August alone, in two separate purchases, he bought $26.8 million worth of Columbia shares.
"I think it's an indication of his faith in the company," says Columbia spokesman Jeff Prescott. "He feels good about where we are going and feels it was the right thing to do."
Columbia does not have a corporate lending program for its executives, and Frist used his personal resources. In addition to being the right thing to do, the investment seems to have been savvy. Columbia stock is trading at about $27 per share, and if the company settles its Medicare fraud investigations with the federal government anytime soon, its stock price would likely jump even higher.
"We've had two very, very poor years from an investment standpoint, and we're coming out of that scenario with the companies offering tremendous value," says Joseph Chiarelli, a senior investment analyst at J.P. Morgan Securities in New York. "(Insiders) were and maybe still are more aware of the details and the benefits that will accrue to the industry and to themselves."
Jeffrey Barbakow, chairman and chief executive officer of Santa Barbara, Calif.-based Tenet Healthcare Corp., took similar action with his private funds. Under his own name or family trusts, Barbakow bought about 1 million shares of Tenet stock for about $18 million during the year, mostly in August.
"I don't think you need to look much further than where the stock was in August and where it is now," notes Tenet spokesman Harry Anderson. "In hindsight it looks like a very good investment. He has confidence in Tenet and our long-term prospects. He therefore decided to make a very significant investment of his own personal funds in our stock."
Anderson characterizes Barbakow's investment as long-term. Unlike day traders and general investors who may want to see quick results, hospital company executives are in it for the long haul.
"We're bullish on the industry in the long term," says Terry Allison Rappuhn, Quorum Health Group's chief financial officer. "We think the economics are very favorable."
A Quorum executive who took advantage of a favorable opportunity was Russell Carson, Quorum's chairman of the board and a general partner at Welsh, Carson, Anderson & Stowe, a private New York investment firm. In September, his firm bought $150 million of subordinated debentures convertible to Quorum stock at $11.25 per share. During the summer, the firm also bought about $50 million worth of Quorum stock in the marketplace.
From Quorum's perspective, the investment was the most attractive way to raise capital to pay down debt and provide flexibility for acquisitions and stock buybacks.
From Welsh Carson's perspective, it was a promising investment, albeit a less risky one than a simple purchase of stock from personal funds.
"We thought the market had overestimated the nature of problems Quorum was experiencing," says Carson. "Hopefully we're at the bottom of the current cycle, and the industry continues to hold very significant promise."
Welsh Carson now owns about 28% of Quorum.
Senior executives at newer and smaller companies exercised similar acts of faith. LifePoint, the Nashville-based rural hospital company that Columbia spun off in May, has been a fertile investing ground for its senior executives.
The company provided an executive stock purchase program allowing senior management to buy up to 1 million shares in the company, or about $10 million of company stock, when LifePoint was spun off. Management bought up to the limit, says LifePoint President and CEO Scott Mercy.
"This management team is willing to bet their house basically on the success of the operating strategy," he says.
Mercy is no exception. He personally invested $2.97 million in LifePoint stock when the company was spun off and spent another $238,200 on company stock in August.
"I believe the relative value of companies that generate good cash flow should be higher than those that don't," Mercy says. "I'm willing to put my money where my mouth is."
In general, hospital companies' stock prices have exceeded the levels at which these purchases were made, and insiders and observers predict the trend will continue. Analysts hope insiders' expression of confidence will spread to general investors next year. Deborah Lawson, healthcare analyst at Salomon Smith Barney, says a slowdown in acquisitions, federal fraud investigations and an unpredictable Medicare environment conspired to taint the past couple of years for the entire hospital industry.
"It's been a really strange time," she says. "Deconsolidation has happened as much as consolidation. I think everybody's stepping back and assessing what they've got."
Insider investments, Lawson says, signal the end of a difficult spell, with market and government conditions that have made the sector a minefield for general investors.
The cornerstones of growth next year will be the calming of the Medicare reimbursement environment and the ability of some of the hospital companies to get more-favorable contracts from managed-care companies, she predicts.
When you couple that with the historically low valuations these companies are experiencing, the probability of a strong investment year seems high.
"What it demonstrates is that there's a soundness to the fundamentals of the business," Chiarelli says. "If they didn't think there was value, I don't think they'd be putting that kind of money back into the company."