HCA has agreed to meet rigorous good-governance standards to settle a shareholder lawsuit. The chain will adopt stricter practices than either those proposed by the New York Stock Exchange or required by the Sarbanes-Oxley Act, the federal law approved last year to protect investors.
The agreement settles a shareholder derivative lawsuit dating from 1997, after revelations that the Nashville-based company, then known as Columbia/HCA Healthcare Corp., was the target of a massive federal probe. The so-called McCall derivative lawsuit, which represented the consolidation of several cases in U.S. District Court in Nashville, was named after former New York State Comptroller H. Carl McCall, who was the lead plaintiff in the case on behalf of the state's public-employee retirement fund.
Last week, McCall's successor, Alan Hevesi, said the governance plan "significantly raises the bar on accountability for all of corporate America. It is tougher than any existing law or regulation, and requires HCA to conduct its business to ensure shareholder interests are protected."
Other healthcare companies are responding to investors' demand for better governance. Late last month, HealthSouth Corp., Birmingham, Ala., announced it had appointed four independent advisers to assist it in its search for new board members and in establishing "state-of-the art governance principles" that the company would unveil within a few weeks.
Selected were Herbert Denton, founder and president of New York-based investment firm Providence Capital; Charles Elson, professor of corporate governance and director of the Weinberg Center for Corporate Governance at the University of Delaware; Robert Ravitz, a principal of David J. Greene & Co., a registered investment advisory firm; and B. Kenneth West, chairman of the National Association of Corporate Directors.
The move comes as HealthSouth's board faces several shareholder lawsuits. The company's shares fell 47% in value in August when it surprised investors by announcing that what it viewed as a change in Medicare reimbursement policy would reduce its profit by $175 million.
Also last week, health plan Aetna, Hartford, Conn., announced that it had begun to make key corporate governance documents publicly available on its Web site (aetna.com). It said its standards meet Sarbanes-Oxley and the proposed rule changes by NYSE.
HCA said it already practices most of the requirements in the shareholder settlement plan, but the settlement makes them binding.
One aspect of the plan that's new is a requirement that HCA switch external auditing firms every seven years. The company's audit committee can vote to override that requirement, Hevesi said. The standard is much stricter than Sarbanes-Oxley, which requires that the audit partner in charge of the audit must change every five years but does not require any change of audit firms.
HCA spokesman Jeffrey Prescott said the audit committee reviews HCA's auditor, Ernst & Young, annually and votes whether to hire the firm for each year's audit.
The settlement's other requirements, which Prescott said HCA already meets, include:
* A position of senior vice president of in- ternal audit;
* An ethics and compliance committee of the board that is separate from the audit committee;
* An audit committee made up entirely of independent board members (who haven't worked, as either an employee or a consultant, for HCA for the last five years) and including two members with accounting or financial experience;
* Two-thirds of the board seats held by nonmanagement members.
By comparison, the NYSE proposal would not require a separate ethics and compliance committee or the employment of a senior executive in charge of internal audits, and it would allow companies to outsource internal audits.
The exchange's proposal also would require only a majority of independent directors.
Under HCA's new governance plan, the company may not hire a former auditor who worked for it within the last two years, unless approved by the audit committee. On the other hand, Sarbanes-Oxley allows a company to hire former auditors, but requires them not to do any auditing work for one year after they are hired by the audited company. HCA will require its audit committee to sign off on nonaudit services provided by its auditor.
HCA also agreed to pay $14 million in the settlement, which the company said will be covered by its officers' and directors' insurance carriers. The settlement is subject to the approval of the federal judge overseeing the case.
HCA disclosed the settlement as it announced that it posted a loss for the fourth-quarter because of a $418 million charge it took for its $648.5 million settlement agreement with the Justice Department (Dec. 23-30, 2002, p. 6).
HCA said it lost $102 million, or 20 cents per share, for the fourth quarter, compared with a profit of $59 million, or 11 cents per share, in the year-ago quarter. Revenue was up 10.7% for the quarter ended Dec. 31, to $5 billion. For 2002, HCA earned $833 million, or $1.59 per share, compared with $956 million, or $1.78 per share, in 2001. For the year, revenue rose nearly 10%, to $19.7 billion.
When settlement charges are removed, HCA increased profits more than 40% for the quarter-to $312 million in the fourth quarter of 2002 versus $220 million in the fourth quarter of 2001-and 11.5% for the year-nearly $1.3 billion in 2002, compared with just more than $1.1 billion in 2001.
HCA said increasing reimbursements, especially from private health plans, and growing volume drove its results. Same-hospital equivalent admissions increased 2.6%, while same hospital net revenue rose 11.7%.