Columbia/HCA Healthcare Corporation

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Columbia/HCA Healthcare Corporation

One Park Plaza
P.O. Box 550
Nashville, Tennessee 37202-0550
U.S.A.
(615) 327-9551
Fax: (615) 320-2331

Public Company
Incorporated: 1987 as Columbia Hospital Corp.
Employees: 220,000
Sales: $17 billion (1995 est.)
Stock Exchanges: New York
SICs: 8062 General Medical & Surgical Hospitals; 8063 Psychiatric Hospitals

From a $250,000 investment in 1987, Columbia/HCA Healthcare Corporation has grown to become the largest healthcare services provider in the United States, owning and operating 340 hospitals, 125 outpatient centers, and 182 home health agencies, for revenues topping $ 17 billion in 1996. Led from the beginning by Richard L. Scott, Columbia/HCA combines past industry leaders Galen Health Care—the hospital network spinoff of Humana—acquired by Columbia in 1993; Hospital Corporation of America (HCA), merged in 1994; Medical Care America, acquired in 1994; and Healthtrust, merged in 1995. Columbia/HCA operates hospitals in 36 states, and in England and Switzerland, with principal holdings focused in Texas, Florida, Louisiana, Tennessee, Kentucky, Virginia, and Georgia, and plans to add 30 to 40 hospitals each year through the end of the century. Joining Scott, who functions as president and chief executive officer, are former HCA head Thomas Frist, Jr. and former Healthtrust chief R. Clayton McWhorter, who serve as vice-chairman and chairman, respectively.

Birth of a Healthcare Giant

Richard Scott, a Kansas City, Missouri, native and graduate of the University of Missouri and Southern Methodist University Law School, was 34 years old when he teamed up with Richard Rainwater, a Fort Worth financier, to form the Columbia Healthcare Corporation in 1987. Scott had been trying to start up a hospital operation, with a goal of creating a national healthcare provider network, but his initial approaches to hospital executives, including HCA’s Frist, were rebuffed. Then Scott teamed up with Rainwater, whose credentials included acting as the Bass family financial advisor, and who also served as a director on HCA’s board. Operating out of Rainwater’s investment company, their first move was to purchase two El Paso, Texas hospitals for $60 million. Scott and Rainwater each put up $125,000 and financed the purchase with $65 million from Citicorp.

Both hospitals were poorly managed and in need of repair. Scott and Rainwater set out to reform operations, complete renovations, and along the way earned the goodwill of the hospitals’ physicians. Next, Columbia and a group of physician investors formed El Paso Healthcare System, Ltd. (EPHS) as a limited partnership, which acquired the hospitals from Columbia, along with two physician-owned diagnostic centers, in exchange for partnership shares. The physician partnership would eventually gain a 40 percent share in EPHS, setting a pattern for much of Columbia’s future dealings.

Five months after its formation, Columbia moved aggressively to consolidate its El Paso operations. EPHS purchased two new facilities, the general medical/surgical Landmark Medical Center and the adjacent Stanton Medical Building. Landmark, operating in the overbedded El Paso market, had 355 beds but only a 54-bed average daily census. EPHS’s response was to close Landmark and transfer its patients and equipment to EPHS’s existing hospitals. Landmark and the adjacent building were then sold to a local real estate developer. From this move, EPHS increased the average daily census at its other facilities by 35 patients, bringing an earnings (EBDIT) increase of $3.5 million, to $8.9 million EBDIT on 1988 revenues of $43 million.

In December 1988, Columbia and EPHS moved closer to its goal of becoming a full-service system, when EPHS opened its Sun Towers Behavioral Health Center, an 80-bed free-standing psychiatric facility. The behavioral health program from Sun Towers Hospital was transferred to the new facility, expanding the hospital’s bed count. In its first year of operation, the psychiatric facility recorded a $2.5 million EBDIT; within two years, its average daily census increased from 11 patients to 45 patients. EPHS continued to expand its system, opening its Lifecare Center, which combined a cardiopulmonary rehabilitation facility with an outpatient wellness center. In 1989, EPHS introduced its One Source medical services program, marketing to major area employers, which provided discounts at EPHS system facilities. Within a year, One Source grew to nearly 15,000 members, generating $6.5 million in revenues.

Between 1988 and 1990, EPHS’s systemwide average daily census grew from 174 patients to 303 patients. Revenues jumped to $113 million in 1989 and to nearly $135 million in 1990. EBDIT for 1990 was $27.7 million.

In 1990, EPHS continued to consolidate its El Paso position, acquiring two diagnostic imaging centers, beginning construction on a 296,000-square-foot medical office building, and initiating plans for a 29,000-square-foot oncology center. Both new facilities were connected to Sun Towers Hospital by glass-enclosed skywalks.

By 1990, however, EPHS formed only part of Columbia’s growing empire. Scott had already begun to conquer new markets, purchasing the nearly bankrupt 300-bed Victoria Hospital in Miami in 1988 and expanding this new operation to four Miami hospitals by 1990. In that year, Columbia moved into the Corpus Christi, Texas market as well. In these new markets, Scott continued his successful El Paso strategy of creating a full-service healthcare network of facilities, while creating limited partnerships with physician investors.

These partnerships would generate the most criticism for Columbia’s strategy. Such partnerships risked the danger of physician-partners overtreating their patients in an effort to drive up their own profits. Yet, these partnerships instead seemed to predict the rise of HMOs that would sweep the U.S. health insurance industry by the mid-1990s, by encouraging physicians toward greater efficiency and lower costs of treatment.

Columbia’s total revenues were already approaching the half-billion mark by 1990. Scott next engineered two important deals. The first, the merger acquisition of Smith Laboratories and its subsidiary, Sutler Corp., in a stock swap of 3.3 million shares, led Columbia to go public. The second was a landmark joint venture with Medical Care America of Dallas, then the largest surgery center network in the country, in building a $50 million hospital in Corpus Christi.

Scott was on the acquisition trail. In 1990 Columbia made a $22 million cash purchase of HEI Corporation, Inc. (which it sold off again the following year), bringing the company into the Houston market. In September 1990 the company, through a limited partnership, acquired Coral Reef Hospital for nearly $ 18 million in cash and notes, and one month later acquired Southside Community Hospital for nearly $4.5 million, bringing Columbia’s network to 11 hospitals. Its emphasis on full-service systems proved successful, and revenues grew not only by adding new hospitals to the chain, but also by attracting higher numbers of patients. More acquisitions followed over the next two years, including the $185 million acquisition of Indianapolis-based Basic American Medical, with four hospitals in the Ft. Lauderdale market. By the end of 1992, Columbia’s network had grown to 24 hospitals and over $1 billion in assets. Revenues passed $800 million, with EBITDA of $136 million.

The Mega-Mergers

By 1993, Scott, known to keep a paperweight on his desk reading “If you are not the lead dog, the view never changes,” was ready to launch Columbia as a national healthcare provider. In June of that year, Columbia announced its intention to merge with Galen Health Care, raising its number of hospitals four times and catapulting its revenues past $5 billion. Scott remained in control of the newly renamed Columbia Healthcare Corporation.

Galen, with 74 hospitals in 1993, had formerly been part of Humana. Founded in 1968, Humana had been an earlier success story in the hospital network field, building the second largest hospital chain operation in the United States by 1979. During the 1980s, Humana entered the health insurance business, and by the late 1980s, was forced to divide its operations, as its hospitals and insurance business began competing with each other, especially as rival insurance agencies began directing their customers to other providers. By the early 1990s, Humana’s hospital network was faltering, and in early 1993 the hospitals were spun off as Galen Health Care.

Under the terms of the merger, a stock swap worth $3.2 billion, Galen’s stockholders received 0.775 shares of Columbia stock for each Galen share they held. Galen brought the number of Columbia hospitals to 94, adding 15 new markets— primarily metropolitan areas—to the chain, and bringing Columbia a presence in 19 states, as well as England and Switzerland. With 22,000 licensed beds, Columbia became the largest non-governmental hospital chain in the U.S., and second only to the Veteran’s Affairs Department’s 64,700-bed system.

In October 1993, one month after the Galen merger was consummated, Scott shook up the industry again by announcing an agreement to merge Columbia with Hospital Corp. of America. HCA had been formed by Frist family and Kentucky Fried Chicken founder Jack Massey in 1968 and grew steadily, reaching 50 hospitals by 1973 and 376 hospitals, including holdings in seven countries, by 1983. When changes in Medicare payments and the rise of HMOs began to depress its per-bed census rates, HCA moved to trim its hospital count, spinning off 102 hospitals to physician investors—which became Healthtrust, Inc.—in the late 1980s. In 1989, Frist, Jr. took control of the company in a leveraged buyout, and continued to sell off hospitals for the next three years before taking the company public again in 1992. By the time of the Columbia merger, HCA added 96 hospitals to Columbia’s 94, creating the largest hospital chain in the United States.

Renamed Columbia/HCA Healthcare Corporation, the company formally merged in February 1994 in a stock swap worth $5.7 billion, creating a $10 billion company with operations in 26 states. Scott was named chief executive officer, while Frist became chairman. As HMOs, already notorious for their emphasis on tight cost control, achieved dominance in the private insurance industry, and government agencies too were beginning to tighten their reimbursement policies, Columbia/HCA moved to consolidate its formerly regional and local operations—including payroll, marketing, and purchasing—into its Louisville, Kentucky, corporate headquarters, creating in effect a national organization. Scott’s initial $125,000 investment was by then worth $200 million.

Scott continued to eye new acquisitions and joint ventures, turning now to the non-profit hospital market, including the 585-bed Cedars Medical Center of Miami, and joint ventures with university medical schools and teaching hospitals, including the University of Miami, the University of Louisville, Tulane University, Emory University, the Medical College of Virginia, and the Medical University of South Carolina. Scott’s next step was the $860 million purchase of Medical Care America, Inc., the largest provider of outpatient surgery services, in May 1994.

Scott was not yet finished, however. In September 1994, news broke that National Medical Enterprises planned to purchase Healthtrust and American Medical International, in a deal reported to be worth $10 billion that would have given NME a strong second place behind Columbia/HCA. However, in October 1994, Healthtrust instead agreed to be acquired by Columbia for $5.6 billion. Healthtrust’s 116 hospitals brought the Columbia chain to 311 facilities, making it the 12th-largest employer in the United States and the 45th-largest in revenues—$14.5 billion for the 1994 fiscal year. Importantly, the Healthtrust acquisition expanded Columbia beyond its traditionally urban base, with Healthtrust’s concentration of rural hospitals.

The Healthtrust merger was completed in April 1995, with Healthtrust stockholders receiving 0.88 Columbia shares for each share of Healthtrust stock. By then, Columbia had already completed several more acquisitions, including Colorado-based Rose Healthcare System, St. Francis Hospital of Charleston, West Virginia, and Angelo Community Hospital of San Angelo, Texas. Following the Healthtrust acquisition, Columbia announced acquisitions of The Family Clinic Ltd. of Little Rock, Arkansas, and a number of hospitals, including three in metropolitan Chicago.

By the beginning of 1996, Columbia/HCA had grown to 340 hospitals, 125 outpatient surgery centers, and a range of other healthcare facilities, including 182 home health agencies, with 70,000 licensed beds in 36 states, and England and Switzerland. Revenues had topped $17 billion, and the company held more than $18 billion in assets. In early 1996, the next step for Columbia seemed to be entering the insurance market, when the company was reported to be in negotiations with Blue Cross & Blue Shield of Ohio to enter a joint venture taking over that company’s managed care business. Since Humana’s failed attempt in the 1980s, the $700 billion healthcare market was seen to have changed enough to signal a slowdown to growth through acquisition, in favor of vertical integration of the business. With Richard Scott’s record of the last decade, it seemed certain that he would lead Columbia to become a powerhouse in this area as well.

Principal Subsidiaries

Birmingham Outpatient Surgical Center, Inc.; Columbia/HCA Montgomery Healthcare System, Inc.; Galen Medical Corporation; Montgomery Regional Medical Center, Inc.; Surgicenters of America, Inc.; HCA Health Services of California, Inc.; Kingsbury Capital Partners, Inc.; MCA Management Partnership, Ltd.; Psychiatric Company of California Inc.; Sugical Centers of Sourthern California, Inc.; Sutler Corporation; Colorado Healthcare Management Inc.; HCA Health Services of Colorado, Inc.; Health Care Indemnity, Inc.; MOVCO, Inc.; AlternaCare Corp.; Amedicorp, Inc.; CHC Holdings, Inc.; Critical Care America, Inc.; Galen Health Care, Inc.; HCA Invesments, Inc.; HCA International.