An Hmo Gamble For Columbia?

It's eyeing Ohio Blue Cross' managed-care operation

For years, hospital monolith Columbia/HCA Healthcare Corp. has vowed it would stay out of the insurance business, spooked by the debacle that attended Humana Inc.'s attempt in the late 1980s to consolidate acute medical-care and health-maintenance organizations. That effort crashed, forcing Humana to spin off its hospitals into a company later devoured by the acquiring Columbia dervish.

The health-care landscape, though, has shifted dramatically--and Columbia has become a $17 billion behemoth with the sort of clout that allows it to change its mind. In Cleveland, where it has a half-share in two hospitals, the company is in advanced negotiations to take over a joint venture controlling the managed-care operation of Blue Cross & Blue Shield of Ohio, according to a source close to the talks.

The deal could create an integrated system funneling more than 400,000 plan members into seven Ohio hospitals controlled by or linked to Columbia. More significant, the move into insurance would signal a turning point for the $700 billion health-care industry, likely transforming the ongoing pursuit of bulk through acquisition into a race as well for soup-to-nuts vertical reach. "We'll see hospitals going to bed with two or three other hospitals and then buying their own managed care," says Princeton University Professor Uwe Reinhardt.

LUDICROUS. Both Columbia and Blue Cross & Blue Shield of Ohio refuse to confirm their talks. While admitting that Blue Cross & Blue Shield is discussing some sort of deal with two companies, a spokesman says the idea of abandoning its managed care joint-venture is ludicrous: "The dumbest thing in the world would be to sell off your biggest marketplace." Peter Reibold, president of Columbia's Ohio division, only points out that "the company is open to discussions with a variety of organizations."

In fact, Columbia says it is eyeing 150 hospital acquisitions worldwide. Entering the HMO business, though, would be another matter--fulfilling a fantasy hospital executives have enjoyed for as long as managed care has drained their revenues. Theoretically, hospitals with captive HMOs could bypass insurers, selling medical care directly to employers. A few have pulled off such ventures, but it has proven difficult: In Humana's case, rival insurers sent their patients to other hospitals, and doctors resisted HMO cost-cutting efforts.

Today, though, "there's a greater level of acceptance of managed care from doctors, and it may be worth the risk of aggravating your competitors," says health-care consultant William F. Norsworthy. Moreover, Columbia, with 340 hospitals, has leverage with insurance companies that no company could claim a decade ago. In Florida, for example, it has contracted directly with Wal-Mart Stores to provide employees hospital care.

Indeed, competing managed-care companies haven't been pleased by rumors of Columbia's impending deal. "There will no longer be a level playing field," says Michael Eleff, chief medical officer of Aetna Health Plans of Ohio, which covers 350,000 people in the area. Yet Aetna is angling to create its own integrated systems by buying up doctors' groups; other insurers are adding hospitals. The health-care business, already in the throes of a monumental consolidation, is about to see some real action.

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