Can Dr. Frist Cure This Patient?
In suit and tie, Dr. Thomas F. Frist Jr. looks every inch the corporate statesman. But Frist, chief executive of embattled Columbia/HCA Healthcare Corp., also is a well-practiced cutup. During a busy workday in September, he exchanged his executive finery for a denim shirt and blue jeans, then dashed off to a United Way of America picnic near Columbia's headquarters. Before a huge throng of employees, Frist said he had decided not to wear a shirt identifying him as a United Way "coach." "I'm not your coach," he said. "I'm your water boy." To emphasize the point, Frist later cued two helpers to pour a barrel of icy water over the head of Columbia's president, Jack O. Bovender Jr. in the middle of Bovender's own speech.
At 59, Frist, who still happily answers to the boyhood nickname "Tommy," can't resist a good practical joke. But in dousing Bovender, an old friend and colleague, Frist also was making a statement: I am no Rick Scott. Ever since July, when he supplanted the 44-year-old Scott as chairman and CEO of Columbia, Frist has been striving to distance himself from his famously stiff and humorless predecessor. "Rick Scott couldn't go dump a pail of water on someone's head," says Frist, longtime chief of the Hospital Corporation of America, which merged with Columbia in 1994. "It's an issue of style." Frist describes his style as "more humanistic" and adds: "That's what the company needs now."
Within the health-care industry, the U.S. government's massive criminal investigation of Columbia/HCA is widely seen as an outgrowth of Scott's unyielding, often bullying drive to dominate local markets by the dozen. In contrast, Frist, who served as vice-chairman under Scott, is a nonpracticing doctor who brings to his business dealings the courtly amiability of an old-fashioned family physician and loads of Southern charm. But as Frist completes his first 100 days as Columbia's chief, he is finding that disentangling himself from Scott's legacy is easier said than done. Through his lawyer, Scott refused all comment.
TICKING CLOCK. Frist's avowed goal is not only to reform Columbia, but to reposition the $20 billion colossus that Scott built. In ad hoc fashion, Frist already has repudiated a host of Scott's policies and put two major divisions up for sale (table). He says he will present a comprehensive strategic plan to his board by yearend. Frist would be well-advised to hold tight to this schedule, for his unwillingness to publicly foreclose any conceivable option--from selling off hospitals en masse to merging with rival Tenet Healthcare Corp.--has enveloped the company in a thick cloud of rumor and uncertainty. "He's got to make up his mind soon," says a noted Wall Street dealmaker whom Frist put off recently. "Time waits for no one."
Indeed, the notoriety generated by the investigation is scaring patients away and starting to cut deeply into Columbia's earnings. On Nov. 2, the company announced that net income for the third quarter plunged 69%, to $97 million, from $311 million a year earlier. Columbia's stock has been trading at about 28, down from nearly 45 before word of the probe leaked in March.
Meanwhile, a small but high-powered group of public pension funds led by New York State Comptroller H. Carl McCall is suing Scott, Frist, and Columbia/HCA's nine other board members personally, alleging they breached their fiduciary duty to stockholders by allowing "pervasive and systematic Medicare fraud...to flourish" within the company. Several other, similar shareholder suits have been filed in which Frist is a co-defendant.
Although Columbia's directors have closed ranks behind Frist, they, too, are under fire and are unlikely to cut him much slack as they weigh the company's strategic options over the next few months. "Tommy's got to realize that this is not a family business any more, that he cannot dictate to the board," says one insider. "I do think that realization is beginning to sink in."
Even some of Frist's closest allies say privately that as the company prepares to unveil a new long-term strategy, it also needs to reassure Wall Street by beginning to plan for CEO succession. "Tommy's got to be in there to get an agreement done with the government," says one, "but he's probably not the best guy for the long haul." Frist emphatically disagrees. Asked if he thinks it wise to begin searching for a successor before coming to terms with Uncle Sam, Frist says: "That is just so far off my radar screen. If it takes three years, if it takes four years, I am going to get the culture right and the controls in place."
Under Scott, Columbia/HCA pioneered two grand strategies. At the local level, it was creating so-called integrated delivery systems in which the general hospital forms the hub of an all-encompassing care network including doctors' offices, outpatient surgery centers, home-health agencies, and so on. The idea was that by providing for patients' every need Columbia could offer better and more cost-effective care while maximizing its revenues. Secondly, Scott sought a leg up in the fierce competition to attract patients by doing all sorts of innovative things to try to establish Columbia as a mass-market consumer brand name--the Wal-Mart Stores of health care.
Within days of unseating Scott, Frist called a halt to his consumer branding drive. "Health care is a local business," Frist says. "You can't put patients first and run everything from Nashville." The new boss even gave the O.K. to local hospital managers to drop the Columbia name altogether; nearly 40 have done so to date. And he did away with many of the "scorecards" Scott used to minutely track the performance of each individual hospital.
Frist also promptly decided to sell Columbia's fast-growing home health-care division, a target of federal investigators in Florida and other states. Home care "is an important part of the health-care delivery system, but it is very difficult to monitor and control," says Frist, who hopes to set up new joint-venture arrangements to provide home care to Columbia's patients. "We don't have to control everything," he says.
How far will Frist go in dismantling the rest of the company, which includes 343 hospitals and 150 outpatient surgery centers? He's not saying. Although Frist set off a round of fevered speculation among rivals and investment bankers with early public comments that Columbia's revenues could fall to as little as $12 billion a year, he now appears to be leaning toward retaining the lion's share of the company's facilities. Indeed, he lauds them as "the finest group of assets that has ever been assembled" in the industry. However, he's likely to try to reorganize them in a way that reduces corporate overhead while pushing more operating authority down to the local level.
The question is whether downsizing and decentralizing will reinvent Columbia/HCA as a growth company or merely diminish it to just another hospital operator. "Columbia is going back to basics at a time when the basic hospital business isn't very good and all sorts of innovations are going on in health-care marketing," says Peter S. Stamos Jr., director of health-care consulting firm SAI. "The new management is going to have to do better than that."
Frist's ability to reinvigorate Columbia/HCA is open to question, but the depth of his desire to do so is not. "I was concerned at first that Tommy would not want to put forth the effort he used to, having been CEO [of HCA] for such a long time," says Donald S. MacNaughton, a Columbia director who preceded Frist as HCA's chief and groomed him for the post. "But I've never seen him work harder." To make more time for Columbia, Frist even relinquished his cherished place on the board of Vanderbilt University, ending a 14-year association.
Money is part of what is driving Frist, though he is not taking a salary. The Frist family is Columbia's largest noninstitutional shareholder, with 25 million shares. Over the past year or so, the value of this 4% stake has declined from $1.1 billion to about $700 million.
FAMILY BIZ. Equally important, Frist wants to wipe the tarnish of scandal from his family name. Columbia/HCA's misadventures have deeply embarrassed a proud, overachieving clan. Its 86-year-old patriarch, Dr. Thomas F. Frist Sr., is famed in Tennessee for having served as personal physician to five successive governors. Tommy Jr. is the eldest of three brothers, each of whom played quarterback for Montgomery Bell Academy in Nashville and became doctors like Dad. Robert, a cardiac surgeon, is the only Frist still practicing. Tommy gave up medicine 30 years ago when he left the Air Force and joined with his father in 1968 to found HCA, the first investor-owned hospital chain. William, the youngest, was a heart-lung transplant surgeon until 1994, when he won election to the U.S. Senate.
The Frists--particularly Tommy Jr.--are no less renowned in Nashville for their philanthropy. The Frist Foundation gives away $10 million a year--all to local recipients--and family members routinely make large personal donations to special projects. Most recently, the Frists pledged $11 million to convert an old post office into an arts center. "The Frists are highly regarded but not without controversy," says Edward G. Nelson, a longtime family friend who is the retired president of a large Nashville bank. "They are so competitive and so self-confident that people sometimes lose sight of their generosity. There's a saying: `There's the right way, the wrong way, and the Frist way."'
But to critics like Carl McCall, Tommy Frist's pedigree is irrelevant. In publicizing his lawsuit, McCall has stopped just short of calling for Frist to step down as CEO. "The real question is why should we feel confident that Dr. Frist will put the proper [reform] measures in place now, when he was on the board the whole time these abuses were taking place?" says McCall.
It's a fair question. Indeed, it was only four years ago that Frist explained his decision to merge with Columbia by heaping praise on Scott: "He has the vision. He has the strategy. He's implementing it as well as anyone." Until recently, Frist not only gave no outward sign of dissatisfaction with Scott but energetically promoted some of the very strategies he now harshly criticizes.
Today, Frist says that he did criticize Scott internally but that it was not his place to oppose him until the government raised the issue of legality--especially not with Columbia/HCA's stock regularly setting new highs. "Here's somebody who never missed a quarter," Frist says. "There's nothing worse than having a former CEO sitting there second-guessing. You do say as board member, `Here are my thoughts,' but once a decision is made you go out and support the team."
Frist expected to be happily retired by now. In 1993, having had enough of the "burnout job of running HCA," Frist decided to sell the company. He approached Scott through the legendary investor Richard Rainwater, who owned stock in HCA and also had co-founded Columbia with Scott in 1987. After the merger, Frist became chairman. In 1995, Columbia acquired Healthtrust Inc., a big rural hospital chain that had been spun out of HCA, and Frist took the unusual step of demoting himself to vice-chairman to make way for an old friend and colleague, R. Clayton McWhorter Jr., Healthtrust's CEO.
Frist says that his high initial opinion of Scott gradually diminished as the relentless pressure to keep earnings rising at a double-digit clip increasingly demoralized employees and his take-no-prisoners approach to acquisitions alienated executives of not-for-profit hospitals and public officials alike. But even after the government investigation began making headlines, Frist says he continued to try to fill the role of mentor to a man who didn't want one.
On Apr. 22, about three weeks after the federal probe was disclosed, Frist stayed up all night writing a nine-page memo to Scott, in which he offered a detailed critique of the company's growth strategy and urged him in effect to shift focus from conquering the health-care world to making certain his own house was in order. Frist declined to provide BUSINESS WEEK a copy of the letter but did read excerpts in which he struck a respectful and encouraging tone. "You as a CEO have an opportunity to win the respect and admiration of all," the letter concluded.
Frist says Scott never replied. The beleaguered CEO also antagonized Rainwater and his wife, Darla Moore, by dismissing the threat to Columbia posed by government investigations with what Rainwater later characterized as little more than "righteous indignation." Through intermediaries, Frist made repeated, futile attempts to schedule a meeting with Scott. He was reduced to standing outside Scott's glass-walled office, trying to catch his eye. "I would wave and he wouldn't even wave back," says Frist, who was infuriated but still not prepared to take Scott head-on. "This man doesn't smoke, doesn't cuss.... He wasn't too old, didn't have a health problem. So how do you make the transition? One of the ways to do that is a merger"--or the hope of a merger, to be more precise.
MERGER STORY. A year before, Scott had held extensive but ultimately fruitless merger talks with Jeffrey C. Barbakow, CEO of Tenet Healthcare, the second-largest hospital company. Frist knew that Rainwater and Moore also owned stock in Tenet, were friends and neighbors of Barbakow, and were keen on a Columbia-Tenet merger. On the July 4th weekend, Frist called Rainwater and Moore in California and then flew out to their home in Montecito. They spent most of a day discussing the ins and outs of a Columbia-Tenet union. Frist says that the main concern he raised was "Could it be done?" followed closely by "Richard and Darla, what do you think Scott's attitude would be?"
It appears Frist was a lot more interested in replacing Scott than merging with Tenet. Moore put in a call to Barbakow, while Frist marshaled support for Scott's ouster among his allies on Columbia/HCA's board. A few weeks later the tough-talking Moore flew to Nashville and huddled with Scott, eventually persuading him to resign without a fight. Rainwater stayed out of it. "He was too emotionally involved with Rick," Moore says.
Frist himself never confronted Scott. Instead, he joined Moore in a meeting with Barbakow while the Columbia board was deciding Scott's fate. After word of these talks leaked to the press, Wall Street analysts hailed Barbakow as Scott's heir apparent, and Columbia's stock reversed its slide and spurted upward. However, according to MacNaughton, McWhorter, and other directors, the board never seriously considered a deal with Tenet. "There was nothing to it," MacNaughton says. "There was never any question about who was going to replace Rick--Tommy."
Frist, then, appears to have used the prospect of a Tenet deal to entice Moore into smoothing his return as CEO by persuading Scott to fall on his sword. Frist insists he wouldn't have raised the idea of a merger if it didn't make business sense, but admits he tabled the idea as soon as the board named him CEO. Although she is not on the board, Moore insists the merger was seriously considered. "We just ran out of time," she says.
From his first day on the job, Frist has stressed that his most urgent task was establishing credibility with the Justice Dept. "We ought to be working with them to address their concerns," he says. "That was not the case before.... We are trying to open up and say, `Here's everything."' In Texas, Columbia withdrew legal motions designed to impede the probe, and in Florida the company voluntarily submitted to a series of audits by investigators. Justice Dept. officials declined comment.
Meanwhile, Frist expects to receive the final report of an internal investigation conducted for him by the high-powered law firm Latham & Watkins by the end of the year. Already, he has purged the senior management ranks of Scott loyalists. David T. Vandewater, Bovender's predecessor as president, left with Scott, and many others have followed him out the door. All told, Frist has replaced 11 of Columbia's 14 highest-ranking executives. Many of the new recruits are HCA alumni who are returning as a favor to Frist. "If Tommy is your friend and he asks you for help, you don't say no," says Bovender, 51, who retired as chief operating officer after the Columbia-HCA merger.
To his credit, Frist has retained the support of the Rainwaters. "Tommy has accomplished an enormous amount in 100 days--most notably, he's stabilized the company," Moore says. "Tommy's style is right for the circumstances of today. He has healed a lot of scars." In recent weeks, the Rainwaters have signaled their confidence in Frist by boosting their stake in Columbia to 12 million shares, from 8 million.
Even so, Moore says she doesn't expect Frist to remain as CEO much longer than it takes to cut a deal with the Justice Dept. "Rick Scott was a godsend to Tommy, and now Tommy finds himself back in the fray," Moore says. "I know he's committed to getting us back on the track, but this cannot be what he wants for the long term."
A skilled pilot, Frist is itching to fly around the world in his new lake-amphibian seaplane. In mid-October he finally took the plane up for the first time in what was to have been a short flight. Eight hours later, Frist reluctantly came back to earth, ready again to confront the most arduous challenge of his long career.
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