Columbia/Hca: If You Can't Buy, Build

Rival hospitals say it's a strategy designed to squeeze them

When J. Barry Shevchuk, then chief executive officer of Houston Northwest Medical Center, rejected a bid by Columbia/HCA Healthcare Corp. to purchase his hospital in 1995, he knew that he was in for a fight. At one tense meeting, Columbia's negotiating team pulled out a map and pointed to a nearby plot, vowing: "If we don't come to terms, we will build a hospital there," Shevchuk recalls.

Houston Northwest subsequently sold out to OrNda Health Corp.--and Columbia made good on its threat. It now is proceeding with plans to construct Columbia Northwest Medical Center, a gleaming 110-bed facility directly adjacent to Houston Northwest, in 1999.

This is the new twist in a breakneck growth strategy that has made Columbia by far the nation's largest operator of for-profit hospitals. The company grew into a $19.9 billion behemoth almost entirely through acquisitions, expanding to 343 hospitals and 148 outpatient centers since its inception in 1990. Columbia still is buying. But now, to maintain its growth, the company also will build its own, spending over $500 million to erect 12 hospitals over the next three years.

FEDERAL PROBE. It's a striking gamble at a time when hospitals nationwide can fill just 60% of their existing beds. However, Columbia's original strategy has run into roadblocks. The company's reputation for striking tough deals and then imposing massive cost-cutting has many targeted acquisitions fiercely opposed to selling out. Also, in town after town, local politicians and community activists have joined forces to block the chain. If the widening federal investigation into alleged illegalities at some of Columbia's facilities leads to criminal indictments, the company could face even more resistance.

Already, Columbia's acquisition activity has slowed: It purchased 17 nonprofit institutions last year, down from 33 in 1995. "The environment is uncertain: Joint ventures are trickier because the states are cracking down," says Sheryl R. Skolnick, an analyst with Robertson, Stephens & Co. in New York. "Columbia's days of announcing 25 letters of intent in one quarter are over."

Columbia says it is building rather than buying only to fill gaps in its networks or where it needs facilities that provide low-cost outpatient services. "We look at each market to determine how best to position ourselves," says a spokesman.

Building is rarely cheaper than buying, however. James A. Binger, principal of EnWright Associates, an architecture firm specializing in health care, says that costs of new-hospital construction run 50% to 150% higher than renovating existing space. Indeed, Tenet Healthcare Corp., the No.2 hospital chain, is building just one new facility--and that was an obligation the company took on with an acquisition. "We're finding ample opportunities to grow through acquisition," a strategy that remains "faster and less expensive," says Tenet President Michael H. Focht Sr.

SEARCH AND DESTROY. Critics say that Columbia's building boom is just another example of the company's predatory instinct. "Columbia is saying that if you won't let us in, we'll regroup and build our own. The idea is to destroy the ones that are already there," says Uwe Reinhardt, a Princeton University economist and health-care expert.

Consider Houston Northwest. According to Sachs Group, a health-care consultancy, greater Houston has 3.47 hospital beds per 1,000 people. It needs just 2.01 beds per 1,000. What's more, Columbia already owns a hospital seven miles away from Houston Northwest. Columbia executives argue that its nearby hospital doesn't draw many of the same patients. In El Paso, where Columbia plans an 84-bed children's hospital, existing Thomason Hospital risks losing many of the pediatric and Ob/Gyn patients that make up 40% of its revenues. Columbia, says Thomason Chief Executive Peter T. Duarte, is "trying to capture the market."

Thomason Hospital is fighting back by attempting to create a proprietary managed-care plan with its physicians. Houston Northwest, similarly, sold a 22% interest to its medical staff in January--and a month later, its parent, OrNda, sold out to much larger Tenet. That may be the only way to survive in battle with Columbia, which can bring superior capital, purchasing strength, and management to every market it enters. Even then, the odds are in Columbia's favor.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE