HCA - The Healthcare Company

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HCA - The Healthcare Company

One Park Plaza
P.O. Box 550
Nashville, Tennessee 37203
U.S.A.
Telephone: (615) 344-9551
Fax: (615) 320-2331
Web site: http://www.hcahealthcare.com

Public Company
Incorporated: 1987 as Columbia Hospital Corp.
Employees: 168,000
Sales: $16.7 billion (1999)
Stock Exchange : New York
Ticker Symbol: HCA
NAIC: 62211 General Medical and Surgical Hospitals

HCA - The Healthcare Company owns and operates approximately 200 hospitals and other healthcare facilities in 24 of the United States, as well as in England and Switzerland. HCA combines past industry leaders Galen Health Care—the hospital network spin-off of Humana—acquired by Columbia in 1993; Hospital Corporation of America (HCA), merged in 1994; Medical Care America, also acquired in 1994; and Healthtrust, merged in 1995.

Birth of a Healthcare Giant in the Late 1980s

The beginnings of HCA - The Healthcare Company can be traced to 1987, when Richard Scott teamed up with Richard Rainwater to form the Columbia Healthcare Corporation. At the time, the 34-year-old Scott was a native of Kansas City, Missouri, and a graduate of both the University of Missouri and Southern Methodist University Law School. Rainwater was a Fort Worth financier.

Prior to his connection with Rainwater, Scott had been trying to start up a hospital operation, with his goal being to create a national healthcare provider network. His initial approaches to hospital executives, however (including the Hospital Corporation of America’s Dr. Thomas Frist, who later took Scott’s place at HCA) were rebuffed. Then Scott teamed up with Rainwater, who served as a director on the Hospital Corporation of America’s board, and whose credentials also included acting as the Bass family financial advisor. Operating out of Rainwater’s investment company, the duo’s 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. The new venture was named Columbia Healthcare Corporation.

Both of the newly-purchased hospitals were poorly managed and in need of repair. Scott and Rainwater set out to reform the hospitals’ operations and complete renovations; along the way, they 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. EPHS acquired the two hospitals from Columbia, along with two other 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 over bedded 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 the 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, and generated $6.5 million in revenues.

Between 1988 and 1990, EPHS’s system wide 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.

The Early 1990s

In 1990, EPHS continued to consolidate its El Paso position, by 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 the Sun Towers Hospital by glass-enclosed skywalks.

That year, 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. 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 a lot of criticism about Columbia’s strategy. Such partnerships risked the danger of physician-partners over-treating their patients in an effort to drive up their own profits. Even so, 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 in 1990. Scott next engineered two important deals. The first was the merger acquisition of Smith Laboratories and its subsidiary, Sutter Corp., in a stock swap of 3.3 million shares. The deal led Columbia to go public. The second deal was a landmark joint venture with Medical Care America of Dallas—then the largest surgery center network in the country—to build a $50 million hospital in Corpus Christi.

Scott continued on the acquisition trail. In 1990, Columbia also 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 of that year, the company, through a limited partnership, acquired Coral Reef Hospital for nearly $18 million in cash and notes. One month later, it acquired Southside Community Hospital for nearly $4.5 million, bringing Columbia’s network to 11 hospitals. The company’s 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 of the Mid-1990s

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, increasing its total number of hospitals by 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. At that time, 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. The addition of Galen brought the number of Columbia hospitals to 94, and added 15 new markets—primarily metropolitan areas—to the chain. It also gave Columbia a presence in 19 states, as well as in England and Switzerland. With 22,000 licensed beds, Columbia became the largest non-governmental hospital chain in the United States, and was second only to the Veteran’s Affairs Department’s 64,700-bed system.

Company Perspectives:

Above all else, we are committed to the care and improvement of human life. In recognition of this commitment, we strive to deliver high quality, cost effective healthcare in the communities we serve. In pursuit of our mission, we believe the following value statements are essential and timeless. We recognize and affirm the unique and intrinsic worth of each individual. We treat all those we serve with compassion and kindness. We act with absolute honesty, integrity and fairness in the way we conduct our business and the way we live our lives. We trust our colleagues as valuable members of our healthcare team and pledge to treat one another with loyalty, respect and dignity.

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 the Hospital Corporation of America (HCA). HCA had been formed by the Frist family and Kentucky Fried Chicken founder Jack Massey in 1968, and had grown steadily. HCA had been made up of 50 hospitals by 1973, and 376 hospitals by 1983, including holdings in seven countries. 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. These hospital spin-offs 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 the Columbia merger came into being, HCA had grown to include 96 hospitals, which were added to Columbia’s 94 and thus helped create 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. This created a $10 billion company with operations in 26 states. Scott was named chief executive officer, while Frist became chairman.

Meanwhile, HMOs—already notorious for their emphasis on tight cost control—achieved dominance in the private insurance industry. Similarly, government agencies were also 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. This move created, 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 to the non-profit hospital market. This market included acquisition of the 585-bed Cedars Medical Center of Miami, as well as joint ventures with university medical schools and teaching hospitals such as 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 in May 1994 of Medical Care America, Inc., the largest provider of outpatient surgery services.

Scott was not yet finished, though. 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. In October 1994, however, 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 and its concentration of rural hospitals expanded Columbia beyond its traditionally urban base.

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 also announced acquisitions of The Family Clinic Ltd. of Little Rock, Arkansas, and a number of other 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. These facilities included 182 home health agencies, with 70,000 licensed beds in 36 states, England and Switzerland. Revenues had topped $17 billion, and the company held more than $18 billion in assets. The company’s growth continued throughout the remainder of 1996 and into 1997. In November of 1996, Columbia/HCA acquired the Atlanta-based Central Health Services, Inc. Central Health was one of the largest home health providers in the United States, with 29 locations in Georgia, Florida, and Tennessee. Columbia/HCA also acquired ownership interests in several individual medical facilities in various locations, including Tennessee, Ohio, Virginia, West Virginia, and Barcelona, Spain.

In January of 1997, Columbia/HCA announced a planned merger with Value Health, Inc., a $1.9 billion specialty healthcare services company. Value Health provided specialty care benefit programs to large corporations, managed care organizations, insurance companies, and governments at the local, state, and federal level. The merger was completed in August of 1997.

Key Dates:

1987:: Richard Scott and Richard Rainwater join together to form Columbia Healthcare Corporation; form El Paso Healthcare System (EPHS), along with a group of physician investors.
1989:: EPHS introduces One Source medical services program, which provides discounts at EPHS system facilities, by marketing to major area employers.
1992:: Columbia’s network has grown to include 24 hospitals and over $1 billion in assets.
1993:: Columbia acquires Galen Health Care.
1994:: Columbia merges with Hospital Corp. of America and is renamed Columbia/HCA Healthcare Corporation.
1995:: Columbia/HCA acquires Healthtrust.
1997:: Company merges with Value Health, Inc., and later becomes the subject of a federal healthcare fraud investigation. Scott resigns, and is replaced by Dr. Thomas Frist.
1998:: Columbia/HCA completes a series of divestitures.
2000:: Company reaches an understanding with the Department of Justice to recommend an agreement to settle its civil claims actions, paying $745 million in fines; later, changes its name to HCA - The Healthcare Company.

1997-99: Scaling Back

Meanwhile, however, Columbia/HCA had run into serious trouble. In March, 1997, the company’s facility in El Paso, Texas, became the subject of a federal healthcare fraud investigation. The investigation was dramatically broadened in scope in July, when approximately 500 federal agents raided Columbia/HCA facilities in seven states. Focusing on Medicare-billing practices and home health operations, the investigation alarmed both investors and the company’s board members. Near the end of July, at the urging of the company’s board of directors, Scott resigned. At the same time, the company’s president and COO, David Vandewater, also resigned. Scott was replaced as chairman and CEO by Dr. Thomas Frist, Jr., who had been at the helm of HCA when Scott acquired it.

Frist, who had been growing increasingly displeased with Scott’s tactics, immediately steered the company in a new direction. Rather than attempt to develop a national brand, which had been Scott’s focus, Frist instead adopted a local, community focus. His new strategy, announced in August of 1997, included the sale of Columbia/HCA’s home care division, changes in laboratory billing procedures, increased reviews of Medicare coding, and the discontinuation of existing contracts with physicians that allowed them to invest in the company’s hospitals. This last point, particularly, had been a source of concern for Frist, who believed that giving physicians ownership interest induced them to refer money-making patients to Columbia, while referring less profitable ones to competitors.

Operating under its new strategy, Columbia/HCA set about becoming smaller and more focused. In January of 1998, the company entered into an agreement to sell its Value Behavioral Health subsidiary—one of the operating groups obtained in its Value Health acquisition. A month later, the company agreed to sell ValueRx, another Value Health operating group. A flurry of divestitures followed. Between July 1998 and January 1, 1999, Columbia/HCA sold 33 of its surgery centers, more than 40 of its hospitals, and all home care operations in 19 states. The company continued to prune its operations in 1999, although at a slower pace.

2000 and Beyond

In early 2000, Columbia/HCA announced that it had reached an understanding with the Civil Division of the U.S. Department of Justice to recommend an agreement to settle, subject to certain conditions, civil claims actions against the company. These claims related to the company’s coding, outpatient laboratory billing, and home health issues. The understanding called for Columbia to pay a $745 million fine.

In an effort to further its new image, the company also changed its name to HCA - The Healthcare Company. “Returning the company’s name to HCA is an affirmation of the culture and values of our more than 168,000 employees,” Frist explained in a May 25, 2000 press release. “We have restructured this company based on the principles on which the company was originally founded and our name reflects that change.” With its new direction firmly established, and the end of its 3-year federal investigation finally within sight, it appeared that HCA was prepared to face the future. Whether Frist’s vision would prove to be feasible or not remained to be seen; if so, it would almost surely result in a company that differed greatly from the aggressive healthcare giant it had previously been.

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.; Surgical Centers of Southern California, Inc.; Sutter 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 Investments, Inc.; HCA International.