Columbia/Hca: Showing Signs Of Health

An overhaul is well along, but a federal probe is still unresolved

Flashback to summer 1997. Columbia/HCA Healthcare Corp. looked like it was headed for the terminal ward. Federal investigators alleging Medicare fraud had just raided the hospital giant's offices. Hundreds of agents fanned out across six states, seizing truckloads full of billing records and other documents. Soon the chairman and other top officers would be ousted in a boardroom coup. And former CEO Thomas F. Frist Jr. would come out of retirement to try to save the company.

Now, three painful years later, Frist has begun to see a payoff from a wrenching corporate makeover in which every aspect of the business has come under scrutiny. Today, the company is almost unrecognizable from the health-care colossus built by ousted Chief Executive Richard L. Scott. Gone are nearly a third of the 321 hospitals the Nashville-based company owned in 1997. Also sold are noncore businesses such as a home-health-care unit, ambulatory surgery centers, and a mental-health provider network. Margins are improving, largely thanks to streamlining and linking hospitals' back-office operations. "We needed to stop, take a deep breath, and consolidate our business," says Columbia President Jack O. Bovender Jr.

But even with Columbia's downsizing, the federal investigation lingers on. Though it's been years, the magnitude of the investigation has not made it easy for Frist to make good on an earlier promise to bring the matter to a swift close. The government is still sifting through allegations lodged in more than a dozen whistle-blower lawsuits. Included in the allegations are that Columbia defrauded Medicare by misrepresenting hospital expenses, submitted false billings to the government, and paid doctors to admit patients to their facilities. While no charges have been filed, Columbia and the Justice Dept. are in talks to settle the allegations. Neither side will comment on the specifics of the negotiations. Columbia spokesman Jeff Prescott says only that "progress is being made."

While the timing and details of a deal with the feds remain a large question mark, Frist has nonetheless been busy engineering what has been anything but a run-of-the-mill restructuring. In the process, he has transformed the company's very character and culture. Only two of today's top 15 managers held the same jobs in 1997. The most prominent of those forced out was Columbia founder Rick Scott, who was pressured to resign though with a $9.8 million severance package intact. Scott's hyperaggressive acquisitions spree made him a phenomenon in his day. Scott, who now runs a Greenwich (Conn.) investment firm, did not return phone calls.

FAMILY LEGACY. Now in place of Scott and his team of wheeler-dealers is a set of more cautious managers. And no one is more crucial than compliance chief Alan R. Yuspeh, who has put in place a sweeping program to ensure Columbia's Medicare problems are behind it. There have been huge strategic shifts, as well. Beyond selling off hospitals, Frist has abandoned his predecessor's strategy of attempting to promote a national hospital brand. Today, virtually all of the company's facilities have dropped the corporate mantle and returned to their original names.

It is a strategy that comes naturally to Frist. A former U.S. Air Force surgeon, he still waxes eloquent on the quality of care patients receive at Columbia hospitals, many of which have been part of his family's legacy since 1968. That was the year his father, Thomas Sr., founded Hospital Corp. of America, which Columbia bought in 1994 for $5.9 billion. "There's no question we have the best assets ever assembled in the health- care industry," says Frist. He's not just talking. Frist has personally bought $100 million worth of the company's stock over the past 18 months. Furthermore, Columbia has used some $3 billion of the nearly $5 billion in proceeds from asset sales to buy back Columbia shares.

What's making Frist so confident these days are the numbers. Net income grew 73%, to $657 million, last year, as operating margins rose a hefty two points, to 17.3%. That compares with 1997, the year the investigation was launched, when Columbia posted a $307 million loss. Wall Street has begun to take notice, too. After reaching a high of $43 prior to the scandal, the stock slumped to around $18 but recently inched back to about $22.

Still, Frist has a way to go. Margins are still far shy of the 20%-plus levels Columbia produced in the mid-'90s. And some analysts question its ability to sustain its profitability. The entire industry has been hit by rollbacks in federal reimbursements for Medicare treatment, rising labor costs, and by unpaid bills as the number of uninsured patients grows. Columbia has "put together a couple of good quarters, but... I want to see an ongoing growth strategy," says Sheryl R. Skolnick, an analyst at Robertson Stephens, a subsidiary of FleetBoston Financial Corp.

It's hard to see what that long-term strategy might be with the federal investigation still looming. Making matters worse is the way the bad news from the scandal dribbles out over the years. Last year, two midlevel Columbia officials were convicted of Medicare fraud in Florida and sentenced to more than two years in prison, although both are now free pending appeal. And in the latest of a series of whistle-blower lawsuits joined by the government, on Feb. 16, the Justice Dept. accused Columbia of allegedly double-billing at nine south Florida hospitals. Still, the company says it remains committed to reaching a settlement and has issued a $1 billion letter of credit to cover any eventual fine. "We'd like to get this thing behind us," says Bovender.

ETHICS POLICE. In the meantime, compliance chief Yuspeh, a former defense industry ethics expert, has spent three years gearing up a small army of ethics enforcers. He has hired about 100 new people to fill newly created overseer jobs--up from just 30 three years ago. "The message is compliance never takes a back seat to any kind of business pressure," Yuspeh says. The word is also getting out to investors. "They've clearly taken the whole ethics issue very seriously," says W. Thomas Hudson Jr., a partner at Lord Abbett & Co., which holds about a 1% stake in Columbia.

At the same time, downsizing continues. Since 1998, Columbia has exited cities such as Charlotte, Louisville, and a host of smaller markets--in short, anywhere that it can't be first or a strong second in terms of market share. In the cities where it does remain, mostly in the Sunbelt, the company is consolidating billing, accounting, and collections into a single back office for each area.

In Richmond, for example, Columbia has merged the business offices of its five hospitals, cutting administrative jobs to 120 from 180. To help automate processing, Columbia has bought high-speed scanners and other computer equipment that would be too pricey for each individual hospital to own. Through joint purchasing, meanwhile, the hospitals have reduced inventory by 35%.

A prescription for recovery? Perhaps. But even if Columbia can execute all of its restructuring plans flawlessly, the unresolved federal investigation "is burning human resources," notes Douglas D. Ramos, a portfolio manager of the Dreyfus Growth & Income Fund, which owns about 3 million shares. So far, Columbia says it has spent $193 million on restructuring and investigation-related costs. Now the question is how many more million will Columbia have to lay out before it can get completely back to the business of running its hospitals? Still, it looks like Frist has at least gotten Columbia/HCA off the critical list.

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