The Nashville network

It was just one measly little hospital transaction—one Nashville businessman contacting a local lawyer to complete a purchase agreement for a small hospital that a group of doctors wanted to buy in 1968.

George Bishop can tell you how important that one hospital transaction was for Waller Lansden Dortch & Davis.

The Nashville businessman was Jack Massey, a key partner to the co-founders of HCA, Thomas Frist Sr. and Thomas Frist Jr. The lawyer was Richard Lansden, one of the founding partners of the firm that bears his name. The measly little hospital was Park View Hospital in Nashville—the first facility for a company then known as Hospital Corporation of America.

As HCA grew from a startup into a sprawling chain of hospitals, Waller Lansden served almost all of the company’s legal needs, says Bishop, a Waller Lansden partner who primarily works with healthcare clients. So much so, he adds, that through 1981, HCA had just three in-house lawyers.

“We got to know all of the players in this part of the world, proprietary healthcare,” Bishop says. “And we developed a deep bench of healthcare lawyers familiar with hospital operations and legal issues.”

That’s not all that developed from the Park View deal. Nashville, of course, became the capital of for-profit healthcare services companies. Those companies are connected most strongly by money and people. Money made at one Nashville-based company often has provided seed capital for another startup based there, too. Then, that entrepreneur hires away former colleagues from the company that made the executive wealthy. As the company grows, it hires experienced healthcare lawyers and accountants, either as outside service providers or to become employees. Many of them first got to know the executives at the growing startup while working for one of the established companies in town.

Those connections have created a family of sorts that is difficult at times for outsiders to penetrate.

“It’s incredible how tight that community is. Everybody knows everyone,” says Josh Nemzoff, a transactions consultant who has negotiated with most of the companies in Nashville on behalf of not-for-profit hospital clients during the past 25 years. “I’m not saying that in a critical way. It’s not a negative. But a lot of people don’t realize that they all know each other.”

The familiarity leads to a lot of hospital deals among members of this extended family. Nashville-area companies made deals to sell hospitals or their entire companies with other companies that had strong ties to the area—such as the corporate headquarters, an HCA spinoff or HCA alumni among their founders—in more than a quarter of the cases from 2001 through this year (See chart, p. 32). There have been about a dozen Nashville-area hospital companies operating at any given time during that time frame, compared with a total number of hospital systems that has ranged from about 300 to 369 during that same period, according to recent editions of the American Hospital Association Guide.

Nemzoff had a yearlong stint at HealthTrust, when it was an independent company, and lived in Nashville for a total of six years in the ’90s. The Philadelphia-area consultant says he almost always sells his clients’ hospitals by a competitive-bid process, something that doesn’t always sit well with Nashville’s clubby atmosphere. “Everyone has a shot, a fair shot,” he says. “It’s totally different how they operate amongst each other, where everything is behind closed doors until the deal is done and then it’s announced.”

Jeff Villwock has worked with Nashville-area companies for about as long as Nemzoff, first as a healthcare stock analyst based in New York and later as an investment banker based in Atlanta. Villwock visits the city about 10 times a year as a managing partner at Genesis Capital in Atlanta.

“I don’t think I’ve ever seen a situation there where there was some smoke-filled room where people are making decisions,” Villwock says. “Healthcare is a sport in Nashville, very competitive. If you’re going to open a hospital across the street from your buddy, you might pick up the phone and say, ‘Hey, George, we’re going to build a hospital across the street from you and beat your brains in. You wanna play golf on Sunday?’ It’s very competitive and genial.”

That closeness comes with a cost: It’s tough to keep a secret in Nashville, Villwock says. In 2000, he says, he knew that Quorum Health Group was going to be sold even before Triad Hospitals, an HCA spinoff, announced its purchase of Quorum in October 2000. He knew because all of its business development workers were looking for new jobs. Triad completed the deal in April 2001.

The Nashville Health Care Council has a “family tree” poster that depicts the ties between scores of companies based in the area. The top section is the HCA branch, but its dominance extends to the other two main branches. One represents HealthTrust, a spinoff of HCA that was reacquired in 1995 during the healthcare giant’s Columbia/HCA Healthcare Corp. incarnation. The other represents Hospital Affiliates, a company HCA acquired in the early ’80s.

Chief executive officers are the most visible people in Nashville healthcare, and a look at their associations provides several links between companies based in the region.

CEOs of three of the biggest hospital companies in the area have or recently were on the boards of other Nashville healthcare companies. Bill Carpenter, president and CEO of LifePoint Hospitals, Brentwood, Tenn., has served on the board of Psychiatric Solutions, Franklin, Tenn., since 2004, a securities filing shows. Wayne Smith, chairman, president and CEO of Community Health Systems, Franklin, has served on the board of Spheris, a Franklin-based medical transcription provider, since 2001, when it was known as Total eMed, according to a Community spokeswoman. Charles Martin Jr., chairman and CEO of Vanguard Health Systems, Nashville, left the board of NotifyMD, Franklin, in July (Aug. 28, 2006, p. 20). Smith also served on the board of Gordian Health Solutions, Franklin, till the company was purchased by Blue Cross and Blue Shield of Tennessee in 2005.

Directorships are just the most visible link between the CEOs and other Nashville healthcare players. Numerous CEOs worked for HCA and related companies. Martin worked for HCA and then went along with HealthTrust when HCA spun it off. David Vandewater was chief operating officer of Columbia Healthcare Corp., which merged with HCA, and is now president and CEO of Ardent Health Services, Nashville.

Ardent itself was formed by the transformation of an HCA spinoff company, Behavioral Healthcare Corp., into a company focused on acute-care hospitals, starting in 2001 with a major equity investment by Welsh, Carson, Anderson & Stowe. When Ardent decided to exit the behavioral-health business entirely in 2005, it did so by selling its psychiatric facilities to Psychiatric Solutions—founded by Joey Jacobs, a former HCA Tennessee division president, with equity backing from R. Clayton McWhorter, who worked at HCA and HealthTrust and became chairman of Columbia/HCA when it reacquired HealthTrust.

Jon Lehman, associate dean for healthcare at the Owen Graduate School of Management at Vanderbilt University, says there’s no better place than Nashville to start a healthcare services company. He should know, as he developed and later sold a company that provided cardiology and radiology imaging services to midsize hospitals before starting the healthcare MBA program at Owen. The sheer number of people with years of experience in healthcare services provides a useful vetting process for ideas in services.

The close-knit community, however, is less receptive to ideas outside of the services comfort zone, such as biotechnology or medical devices, Lehman says. “Nashville knows what it knows, and it knows what it doesn’t know,” he says.

One advantage of the ties among these companies is that best practices tend to be spread around with the executives as they move from company to company, almost by default, Lehman adds.

Just around the corner

Hospitals and executives aren’t alone in moving from company to company. Many people at lower levels of the organizational chart do, too.

“You can progress through your whole career without leaving Maryland Farms,” says Paul Frankenberg, referring to the office park in Brentwood that is or has been home to, among others, Community Health Systems, LifePoint Hospitals and QHR, which is what the hospital management arm of Quorum Health Group is now called. Frankenberg is co-founder and president of Kraft Search Associates, an executive search firm in Nashville. Occasionally, Frankenberg says, executives lament that it’s a little too easy for employees to find jobs at other companies, but the flip side is that there is a deep talent pool in which to find a replacement.

Paul Dorsa is a good example. Dorsa earned a pharmacy degree at Xavier University in New Orleans and an MBA at Louisiana State University in Baton Rouge, and then worked for Humana’s hospital division for two years before reaching his goal. “I always wanted to work for HCA because, in all the literature, they were the company that you wanted to work for,” Dorsa says.

Dorsa started working for HCA in 1984 as part of the hospital management unit that became Quorum Health Group when it was spun off in the late ’80s. He eventually moved to Quorum’s corporate office in Brentwood to work on acquisitions. Dorsa stayed until another HCA spinoff, Triad Hospitals, bought Quorum in 2001. He went to work for Triad’s spinoff twin, LifePoint Hospitals, and then took a job about two years ago working on acquisitions for dialysis provider DaVita, El Segundo, Calif., but he didn’t have to leave Brentwood, as DaVita has a regional office there.

In other words, from 1984 through 2005, Dorsa worked for HCA or one of its spinoffs.

Most of the for-profit companies have already gotten out of the business of owning dialysis centers, Dorsa says, so he doesn’t do a lot of direct business with Nashville-area companies. But hospital CEOs he knows from working in Nashville tip him off to opportunities with not-for-profit hospitals often. He also got a call recently from a hospital CEO who used to work for HCA but now works for a not-for-profit hospital that wants to sell a dialysis center.

“I know enough people that I can pick up the phone, make phone calls, ask questions and get answers,” Dorsa says.

Hal Andrews works for another healthcare company with a Nashville presence—Cogent Healthcare—which provides hospitalist services to hospitals. Andrews, a senior vice president with Irvine, Calif.-based Cogent, got his start in Nashville healthcare as a lawyer at Waller Lansden, where, he says, even as a first-year associate he was working with Nashville giants such as Joel Gordon, founder of Surgical Care Affiliates. Andrews also worked in business development for privately held Essent Healthcare, Nashville, which operates five hospitals, and the Heritage Group, a Nashville-based healthcare investment and advisory firm.

Waller Lansden has graduated a handful of lawyers to the healthcare companies in town, Bishop says. Most prominent is LifePoint’s Carpenter. He got his start in healthcare as a Waller Lansden lawyer working on HCA’s account, and then joined LifePoint as general counsel at its spinoff from HCA in 1999. He succeeded Ken Donahey as president and CEO in June 2006. When it came time to hire a new general counsel for LifePoint, Carpenter went back to his old firm and hired Paul Gilbert, who also holds the titles of senior vice president and secretary.

The Nashville office of accounting firm Ernst & Young tells a similar story of serving HCA and other Nashville healthcare companies and providing some of their executives, too. Most prominently, former Ernst & Young accountant Milton Johnson is HCA’s executive vice president and chief financial officer. Another Ernst & Young alumnus, Michael Culotta, is CFO of LifePoint.

Jon Weaver, a partner and Southeast health sciences industry leader with Ernst & Young, says other veterans of his firm also work in one capacity or another at Ardent, Iasis Healthcare, HCA, Psychiatric Solutions and Vanguard. The firm cultivates these former co-workers, he says. “One of the things that we do to try to keep connected with those folks is offer training programs to our alumni, friends and clients,” Weaver says. “We have a culture at Ernst & Young that celebrates professional growth, within the firm or without the firm.”

Ernst & Young’s healthcare practice in Nashville got its start—surprise, surprise—working with HCA around the time of its founding, Weaver says. The firm also has worked with spinoffs and other companies founded by HCA alumni. Today, the Nashville office of Ernst & Young has four partners working full time on healthcare accounts and three who work part time. Healthcare makes up about half of the business for the office, which includes 200 accountants, Weaver says.

“As (HCA’s) business grew, ours did as well,” Weaver says. “Our practice has grown the way Nashville has grown.”

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