Balance Sheets That Get Well Soon

It was quick--and slick. In April, South Miami Hospital was about to merge with nearby Baptist Health Systems, when Columbia-HCA Healthcare Corp. swooped in with a counter-offer. The huge for-profit hospital chain had a proposal hand-delivered to all 224 members of South Miami's foundation. It matched Baptist's offer to assume the hospital's $70 million debt load, while kicking in $20 million in fresh capital. Columbia even encouraged its doctors to call their South Miami colleagues to extol the virtues of joining up.

But instead of tempting them, the aggressive salesmanship alienated foundation members, who feared the community would lose control to profit-driven managers at Columbia headquarters, 900 miles away in Nashville. South Miami chose Baptist. "These were not the sort of people we wanted to do business with in the long term," says Dr. Melvin A. Mackler, chairman of South Miami's board.

Mackler's misgivings aren't unique. By bringing to health care the sort of hard-nosed dealmaking, consolidating, and cost-cutting tactics that have made other U.S. industries lean, agile, and profitable, Columbia's chief executive, Richard L. Scott, has created a $15 billion juggernaut in just eight short years. And the sort of resistance Columbia met in Miami is hardly likely to slow the company's growth. But the chain's brisk ascendancy has ignited a debate in the health-care industry about its tactics, ambitions, and style of operations.

"ARROGANT BULLIES." Some communities are in an uproar over Columbia's purchase of local nonprofit hospitals, some over its attempts to cut back money-losing services. On May 16, Florida regulators revoked Columbia's license to operate a 50-bed hospital in Destin after locals protested Columbia's sudden decision to curtail many patient services at the loss-ridden facility. The chain argued that there were two other hospitals just 10 miles away and that the hospital never filled more than 14 of its beds. Columbia is appealing the decision.

Rival hospitals are fuming over Columbia's hardball tactics as it tries to wrestle away market share. After Northwest Medical Center in Houston turned down an offer from Columbia, the chain laid out plans to build a new 100-bed hospital--right across the street. Northwest, which is filling only 50% of its 500 beds, says there's no need for another hospital. "They're arrogant bullies," says Northwest CEO J. Barry Shevchuk. Columbia says it needs a hospital to complete its coverage of Houston.

The most worrisome question raised by Columbia's expansion is whether its bottom-line brand of health care will end up being good for patients. Critics--including some Columbia hospital staffers--are especially concerned about the company's quest to drive down costs and boost margins. At some Columbia hospitals, the company is replacing nurses with lower-paid staffers to handle such mundane chores as taking vital signs. At the chain's Columbia East Hospital in El Paso, doctors opposed nursing cuts in the maternity ward. "We felt we were getting to the point where patient care was compromised," says Dr. Joel Hendrix, chief of obstetrics at Columbia East. Columbia backed down after meetings with doctors. It says such discussions are typical of all hospitals.

Nonprofits also complain that Columbia cherry-picks profitable patients, leaving them to handle the bulk of indigent cases. Critics charge the practice is encouraged by a program that gives physicians part-ownership of some facilities. A 1993 study by Florida's Agency for Health Care Administration warned of "a possibility of cream skimming" after examining 2,238 Medicare cases handled by doctors who had privileges at Columbia's Victoria Hospital as well as at nonprofit hospitals in Miami. The report concluded that lucrative cases were more likely to be admitted to Victoria, while less profitable ones were sent elsewhere.

Columbia denies that its doctors screen patients for profitability. The company commissioned two studies of admissions in Florida that found no evidence that its physicians were dumping charity cases. Furthermore, Columbia says it spent $1 billion on uncompensated care last year.

To be sure, a company the size of Columbia is bound to draw critics. With 326 hospitals and more than 100 outpatient surgery centers, as well as home services, it's already the biggest private health-care provider in the fation. And it's no surprise that Columbia's competitive style would raise hackles in the long-sheltered health-care industry. "I think it's part of being a large company in an industry going through significant change and being perceived as a company making change happen," says Scott.

Nor is Columbia unique in provoking controversy in health care. Throughout the industry, market forces are filling the vacuum created by Washington's failure to craft meaningful reform to deliver care and cut costs. Health-care experts worry that hospitals might not be able to strike an acceptable balance between margin and mission. But there is no standard method yet for measuring how patients fare in an increasingly cost-conscious environment. Meanwhile, some hospital administrators warn that the unprecedented flurry of dealmaking in the industry is getting out of hand.

Already, Columbia is feeling the heat of closer legal scrutiny of some its deals. On June 21, a U.S. grand jury began investigating whether the former head of Tampa General Hospital, David Bussone, made bad business decisions, such as buying a money-losing psychiatric facility, to lower the value of the hospital and make it easier for Columbia to buy. Bussone later went to work for Columbia. Both Columbia and Bussone deny wrongdoing, and the deal was never concluded. Bussone's lawyer says he applied for a job with Columbia only after he was asked to resign by Tampa General.

Scott, 42, would seem an unlikely champion of health-care reform. Eight years ago, he knew nothing about hospital management. In fact, his only management experience was running two doughnut shops he owned while attending the University of Missouri. A lawyer by training, he started out in Dallas specializing in small health-care company buyouts. There, Scott met investor Richard Rainwater. On the day of the market crash in October, 1987, they each kicked in $125,000 to start Columbia.

ONWARD. Columbia has been growing ever since. Having snapped up Galen Health Care Inc. in 1993, HCA/Hospital Corp. of America in 1994 and HealthTrust Inc. earlier this year, Columbia is three times the size of its closest for-profit competitor, Tenet Healthcare Corp., based in Santa Monica, Calif. And it's expanding into new regions. Vice-Chairman Thomas F. Frist Jr., the former head of HCA, says Columbia will spend $1 billion in the next year or so on ventures in Massachusetts, a state dominated by nonprofit hospitals.

Columbia's insatiable quest for growth is producing huge returns for shareholders. Analyst Carl Sherman of Dillon, Read & Co. estimates that profits from continuing operations may climb 28% this year, to $1.3 billion, as revenues rise 21%, to $17.6 billion. Thanks to lower costs, Columbia's operating margins may reach 21.2% this year, compared with 18.6% three years ago.

Few question Columbia's ability to wring efficiencies from the fragmented hospital industry, often by reducing capacity. When Columbia came to El Paso in 1988, it paid $60 million for two ailing hospitals and has since spent $140 million to upgrade them. Then Columbia shelled out about $20 million to buy Landmark Medical Center and shut it down. By reducing the number of beds in El Paso by 16%, Columbia has helped boost occupancy at other hospitals, including its own. "El Paso is better off today than it was before Columbia came in," says David Buchmueller, CEO of rival Providence Memorial Hospital.

Meanwhile, its awesome clout with suppliers helps it to cut expenses. For example, the chain hopes to cut costs for orthopedic implants from $100 million to $55 million a year. Altogether, Samuel A. Greco, Columbia's senior vice-president of financial operations, estimates the company saved roughly $300 million on the $2.5 billion it spent on supplies last year.

Columbia's economic impact is being felt industrywide. Thanks largely to Columbia, Amy K. Knapp, executive director of Prudential Health Care System of South Florida, reckons that managed-care companies in her region are paying hospitals 10% less than they were two years ago. "It's very clear Columbia's presence in this marketplace has stimulated the hospitals to be much more competitive than they otherwise would be," she says.

Critics charge, however, that some of that newfound competitiveness comes at the expense of nonprofit hospitals and the indigent patients they serve. In many areas where Columbia operates, nonprofit hospitals complain that they have to handle a rising share of nonemergency, charity patients. At Kendall Regional Hospital near Miami, acquired by Columbia in 1991, uncompensated and charity care dropped from $10.1 million to $8.6 million from 1992 to 1994, while nearby Baptist's load rose from $14.5 million to $19.7 million.

CONFLICT? Nonprofits charge that Columbia's physician-ownership program encourages doctors to shunt charity cases away from its hospitals. In some of its markets, Columbia groups its assets into a limited partnership and sells as much as 20% to its local physicians. And that creates an inherent conflict of interest, says Fred Hirt, president and CEO of the nonprofit Mount Sinai Hospital in Miami, a Columbia competitor. "We have a strong belief that it is not right for a person who practices in a facility to have a vested interest in ownership," he says. Columbia denies that the program creates any conflicts and says only 2.5% of its assets are owned by such investments. Columbia Chairman R. Clayton McWhorter also points out that many nonprofits have similar programs.

As for any misgivings about quality, Scott insists Columbia's care is superior. He points to 58 Columbia hospitals that have received accreditation with commendation from the Joint Commission on Accreditation of Healthcare Organizations, which grades 11,000 health-care facilities. Only 4% of U.S. hospitals have won that rating. And Columbia is spending $150 million to upgrade a computer system that tracks how its patients fare. "We're more focused on being cost-effective and quality-oriented than any company out there," Scott says.

Still, Columbia is starting to hit a few speed bumps: In April, Tarpon Springs, Fla., led by City Manager Costa S. Yatikiotis, thwarted a deal by Columbia to acquire the local community hospital, in part over concerns that Columbia would skimp on charity care. In June, the Massachusetts Attorney General said he would call a public hearing on Columbia's proposed joint venture with MetroWest Health Inc., a Framingham hospital. Among the issues: safeguarding the accessibility and affordability of care.

Not that there's much chance Columbia's expansion will slow significantly. With so many hospitals facing tough times, there's no shortage of would-be partners. "People are coming to us," Scott says. After all, if there's one thing Columbia knows how to cure, it's an ailing balance sheet.

Columbia Takes a Scalpel To Costs

INTEGRATION After buying a variety of health-care facilities, it consolidates services in each market to reduce costs, pool talent, and offer a wide menu to managed-care providers.

STAFFING Uses less-skilled, lower-paid workers to take over many of the responsibilities of higher-paid staffers. Reading EKGs, for example, may now be done by nurse's aides instead of registered nurses.

CENTRAL PURCHASING Thanks to its size, it negotiates significant price breaks with its suppliers. Company estimates it saved about $300 million on the $2.5 billion it spends yearly on supplies.

INCENTIVES In some markets, it offers physicians equity investments in local Columbia networks to encourage doctors to take a more active role in improving