Quorum: Health Care's Kinder Conqueror

It allays community fears--unlike rival Columbia

By his own admission, Paul "Pete" Strobel doesn't know beans about for-profit health care. But the 87-year-old retired steelworker does know one thing: He hates Columbia/HCA Healthcare Corp. Strobel organized a petition drive to keep the giant hospital chain from buying his hometown hospital in Massillon, Ohio, fearing that Columbia would shut it down. "I did everything in the world to get that outfit out of town," he says.

In that sort of grassroots opposition, which Columbia faces in community after community, lies opportunity for Quorum Health Group Inc., a Brentwood (Tenn.) company that has styled itself as the nice-guy hospital chain. In April, Columbia was forced to rescind an offer for Massillon Community Hospital by the Ohio attorney general. Now, Quorum is the odds-on favorite to win when new bids are collected this summer.

Quorum has always taken a low-key approach to acquiring hospitals and assimilating them into the corporate fold. By contrast, Columbia has often unnerved target companies with its insistence on tight centralized control as well as offended local citizens with its secrecy and take-it-or-leave-it negotiating style. Now it is increasingly running into opposition from regulators and lawmakers. In March, news broke that the U.S. government had begun a sweeping investigation of Columbia's Medicare-billing and physician-referral practices. "Quorum is viewed much differently than a Columbia or Tenet [Healthcare Corp.] in that they are basically seen as benign," says Dan Bourque, senior vice-president at VHA Inc., a trade association for 1,400 not-for-profit health-care organizations across the country.

GOOD MANNERS. Quorum's good manners have come at a cost: It hasn't achieved nearly the same heft and clout as Columbia. With earnings last year of $69.2 million on revenues of $1.1 billion, Quorum is a pip-squeak compared with Columbia, which earned $1.5 billion on sales of $19.9 billion in 1996. That reflects the differences in their portfolios. Quorum owns 18 hospitals to Columbia's 344. Quorum also isn't as efficient: Last year, its operating margins were 13.9%, vs. Columbia's 15%.

But Quorum's unusual history may now give it a unique advantage. Unlike its chief rivals, Quorum began not as an acquirer but as a manager of hospitals, specifically not-for-profit hospitals. Consolidation over the last few years has left fewer acquisition opportunities among for-profit institutions, forcing hospital chains to shift their focus to nonprofits. That's a sector Quorum knows better than anybody--and handles with great diplomacy. "There's no magic formula for acquiring not-for-profit hospitals, but we approach them with a phenomenal amount of respect," says Quorum chief executive James E. Dalton Jr.

Quorum was born in 1989 when Hospital Corp. of America spun off its contract management division, a profitable but slow-growth business. (Columbia acquired the rest of HCA in 1994.) Today, Quorum manages 238 hospitals and acts as a consultant to 173 others. Its clientele spans 43 states and for the most part are private foundations, religious groups, municipal agencies, or other tax-exempt entities. Although Quorum is the biggest in the business, the $79 million in management fees that it reaped last year amounted to only 6.4% of its total revenues. But the size of the fees does not reflect the business' rising value to Quorum as it seeks to grow through acquisitions. Dalton, who joined the company in 1990 but knows it from his days as an executive with HCA in the 1980s, calls the management business "our strategic foundation."

Quorum's reputation and experience give it a leg up in vying to take over not-for-profit hospitals. Take a look at the recent battle in Ohio, a state that has become a testing ground for the latest phase of health-care consolidation because of an excess of not-for-profit hospitals. When Barberton Citizens Hospital, a 363-bed facility in blue-collar Barberton, outside Akron, first put itself on the block in late 1995, Quorum was closed out of the bidding when it showed up late.

But a local operator, Summa Health Systems, desperate to block an entrance into its market by Columbia, approached Quorum about a joint bid. Albert Gilbert, Summa's CEO, knew Quorum only by reputation but that was enough. "We'd heard good things," Gilbert says, "so we invited them to join us." Quorum and Summa enhanced their chances by enlisting a third partner: the Cleveland Clinic, the region's preeminent health- care facility. In June, 1996, Quorum and its minority partners signed a deal to acquire Barberton Citizens for $85 million, about what Columbia had offered.

While Barberton's leaders were eager to forge closer ties to Summa and the Cleveland Clinic, Quorum's willingness to guarantee a full roster of medical services for at least 10 years weighed no less heavily in its favor. By contrast, Columbia "wasn't willing to guarantee even a day," according to Michael Bernatovicz, president and CEO of Barberton Citizens. Quorum was savvy enough to work with the local community in other ways, backing a series of public meetings that culminated in a referendum. "The last thing we want to do is be part of a community that doesn't want us," Dalton says.

Compare that to Columbia. When Columbia tried to take over Massillon Community Hospital at around the same time, part of what stirred Strobel and other citizens of Massillon to action was the giant chain's secrecy. News of a proposed sale to Columbia took most Massillonians, including the mayor and the city council, by surprise. Once the news broke, Columbia refused to disclose the terms of its purchase or its plans. Hospital officials were no more forthcoming.

STALEMATE. The stonewalling didn't sit well with the townsfolk. "We argue like heck here over the renaming of a street, and now our community hospital is being sold, and we don't know the first thing about it," says John Frieg, city council president. The city council sued to block the sale, creating a stalemate that was broken this spring by Ohio Attorney General Betty Montgomery.

At Montgomery's urging, Massillon Community is now preparing to send out a request for proposals and expects a half-dozen offers, including a revised Columbia bid. "Columbia is probably at a disadvantage now because of the feelings of the people locally, and because of the attorney general," says Mervin F. Strine, president and CEO of Massillon Community. By most accounts, Quorum, which bought a second, smaller hospital in Massillon last year, has an edge. Richard L. Scott, CEO of Columbia, wouldn't comment on Massillon, but he acknowledges that dealing with small-town nonprofits requires a new approach. "Everybody in the industry is spending more time making sure the community--not just the hospital trustees--knows who they are."

The differences between the two chains don't end there. While Columbia is well known for insisting its acquired hospitals quickly meet stiff financial measures, Quorum is more laid back. It doesn't tolerate inefficiencies, but it does give its new acquisitions time to meet its standards. "It is a bit of a culture shock in that we have new financial parameters," says Barberton Citizens' Bernatovicz. "But we already do meet some, and we're being given the time needed to meet the others."

IMPRESSIVE. Dalton has worked hard to make Quorum a more profitable operator. Last year, he recruited Eugene C. Fleming from Columbia to be chief operating officer. Fleming, who was Columbia's eastern group president, promptly collapsed Quorum's separate divisions for owned and managed hospitals into a single structure with five regional presidents. The idea was to create larger hospital groupings that would be more cost-efficient and better able to pursue marketing opportunities.

That approach seems to be working. For the nine months ended Mar. 31, Quorum reported a 27% increase in revenues and a 24% gain in pretax income. While acquisitions accounted for much of this growth, Quorum benefited from a 6.5% rise in admissions at its existing hospitals--an impressive performance at a time of general industry stagnation. The extra business came from new contracts with managed-care providers and increased referrals from other Quorum-owned or managed hospitals. Investors are starting to notice. At a recent 36 1/4, Quorum's stock has returned a total of 20.2% so far this year, compared with 12.7% for the sector.

Despite Columbia's woes, Dalton is not naive enough to believe the industry Goliath will simply slink away. Even as push was coming to shove in Massillon, Columbia signed a letter of intent to acquire three other Ohio hospitals. And Columbia is hardly the only rival Quorum faces these days. "A number of venture-capital firms have started up so that now you have five or six bidders where there used to be two or three," says Nancy L. Weaver, an analyst with Stephens Inc., an Arkansas investment bank. For his part, Dalton says he will not exploit Quorum's high standing in the not-for-profit world by launching a Columbia-style acquisition blitz. Instead, Dalton is pursuing a Quorum-style blitz: He plans to pick up the pace of acquisitions from three or four hospitals a year to four or five.

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