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The Corporation: MANAGEMENT
IS COLUMBIA/HCA'S CEO ON THE CRITICAL LIST?
Rick Scott may have made too many enemies--including some on his own board
It was only a year and a half ago that Dr. Thomas F. Frist Jr. and Richard L. Scott flouted decorum by exchanging high fives in the dining room of Nashville's exclusive Belle Meade Country Club. But the camaraderie is long gone between Tommy Frist, the vice-chairman and largest individual stockholder of Columbia/HCA Healthcare Corp., and Rick Scott, the chairman and chief executive of the embattled hospital colossus. "I wouldn't say that Tommy is angry," says one confidant, choosing his words carefully. "He's focused. Very focused."
With revelations about the widening scope of the government's criminal investigation of Columbia appearing almost daily, a behind-the-scenes campaign to rein in Scott--or perhaps remove him altogether--seems to be coalescing around Frist, who at 58 is the very model of the patrician physician. The 24% drop in the company's stock since February is both a symptom and a cause of the growing disillusionment with Scott among large investors. Even Texas billionaire Richard Rainwater, who co-founded Columbia Hospital Corp. with Scott in 1987 and has been his biggest booster ever since, may be wavering in his support.
IN-YOUR-FACE. While Scott's personal culpability in the unfolding scandal is uncertain and likely to remain so for months, the 44-year-old CEO clearly has become a political liability. Under Scott's relentlessly aggressive leadership, Columbia has made scores of powerful enemies at every level of government. "To paraphrase Tommy, the basic problem is the in-your-face style of Scott coming home to roost," says a Frist ally.
Since March, when federal agents raided Columbia offices in El Paso and carted out documents by the truckload, Frist has met privately with Scott and urged him to adopt a more statesmanlike stance. Scott listened, but did he hear? Publicly, anyway, the CEO has not conceded that he needs to modify either the substance or style of his approach. "There are certain things beyond your control," Scott told BUSINESS WEEK in a June interview. "But what I like about this industry is that if we do a good job of taking care of patients, things will work out."
Also last month, Rainwater reaffirmed his faith in Scott and Columbia's prospects in an interview with BUSINESS WEEK. "As far as I'm concerned," said Rainwater, who still owns 9.8 million shares of Columbia stock to Scott's 9.4 million, "Rick will lead the company forever, or until he wants to step down." But on Monday, July 21, Rainwater suddenly backpedaled from his unconditional embrace of the status quo, saying only that significant developments were imminent.
Almost immediately, reports surfaced that Columbia was talking to Tenet Healthcare Corp. about a merger. Both companies declined to comment on the reports. Tenet, the industry's second-largest company, is roughly a quarter of Columbia's size. Its CEO, Jeffrey C. Barbakow, guided the company through its own scandal four years ago when he forged a settlement of massive fraud charges for $380 million. Many in Washington and in the industry believe prosecutors won't let the next violator off with just a fine, but will seek jail terms.
The rumors gave a lift to Columbia's battered stock, which had fallen as low as 32 as investors fled. The company's largest stockholder, FMR Corp.--the parent company of the Fidelity family of mutual funds--has unloaded more than half of its 56 million shares since March, paring its interest to about 4%, from 9%, according to estimates by Alpha Equity Research, a New Hampshire brokerage that tracks Fidelity for institutional investors. "It looks like they have really lost confidence in the company," says David J. O'Leary, president of Alpha. FMR has declined to comment.
Still, the disgruntlement of Frist and other Columbia directors poses the most imminent threat to Scott. Frist, who owns 14.6 million shares, founded Hospital Corporation of America with his father in 1961 and sold it to Columbia in 1994. While few HCA executives remain in Columbia's senior management ranks, no fewer than five of its ten directors were affiliated first with HCA and are considered likely to back Frist in any showdown with Scott. "These are not the sort of people who will sit quietly in the corner if they think changes are needed," says a former HCA executive.
BUSINESS WEEK has learned that soon after the March raid in El Paso, the board voted to appoint a special three-person committee to conduct an internal investigation into the company's basic business practices. The panel retained its own outside legal counsel and is expected to report its findings at the next regularly scheduled board meeting on Aug. 14. The committee includes two longtime directors of HCA: Dr. Frank Royal, a Richmond, Va., physician, and Carl Reichardt, the retired chairman of Wells Fargo Bank. The third member is from the Columbia side of the corporate marriage: T. Michael Long, a partner at investment banker Brown Brothers Harriman & Co. A Columbia spokeswoman declined all comment on board matters.
PROBABLE CAUSE. All three members of the special committee declined BUSINESS WEEK's requests for interviews, as did Frist. However, it seems highly unlikely, given the mounting gravity of the government's probe, that the panel will present management with a clean bill of health.
On July 16 and 17, a small army of FBI and other federal agents served at least 35 search warrants on Columbia facilities in seven states: Florida, Georgia, North Carolina, Oklahoma, Tennessee, Texas, and Utah. To obtain such warrants, prosecutors first must persuade a federal judge that they have probable cause to believe that a crime has occurred. According to reports in The New York Times, investigators already have found evidence of fraud in Columbia's Medicare billings and indictments will be handed down in Florida within a few months.
The primary allegations against Columbia appear to center on overbilling. The Times stated that investigators have obtained internal Columbia cost reports and worksheets that contain significantly lower expenses than in reimbursement claims submitted to government agencies. Samuel A. Greco, a senior Columbia financial official, has said that the company has done its best to submit accurate cost reports. Columbia declined to comment further on the investigations to BUSINESS WEEK.
But the federal inquiry into Columbia is not limited to its cost accounting. Investigators are also trying to determine whether unnecessary blood tests have been routinely conducted at certain hospitals. At the same time, both civil and criminal authorities are looking into the many investment partnerships Columbia has formed with physicians affiliated with its hospitals. Meanwhile, at least two states--Alabama and Texas--are conducting their own inquiries into Columbia's Medicaid billing practices.
However events play out over the next few weeks and months, Richard Rainwater is certain to be in the thick of any attempt to revamp Columbia, if only because he is as close to Tommy Frist as to Rick Scott. Rainwater got to know Frist in the early 1980s, before he met Scott, and for a time owned stock both in HCA and Columbia and served simultaneously on the boards of both companies. "Rainwater kept telling me about Rick Scott and how great he was, and I kept blowing it off," Frist told the authors of the book The For-Profit Healthcare Revolution.
However, by 1993 Frist had decided that he'd be better off joining forces with Scott and asked Rainwater to introduce him. Columbia paid $7.6 billion for HCA in early 1994 and capped a memorable year by shelling out $3.5 billion to acquire a second Nashville-based hospital company, HealthTrust Inc. The HealthTrust acquisition reunited Frist with R. Clayton McWhorter, a former president of HCA. Frist surrendered his chairman's title to McWhorter and settled into the vice-chairman's role.
Frist could not have found a more dissimilar successor than Scott, who grew up poor in Missouri, the son of a truck driver. After a stint in the Navy, Scott earned a degree in business administration at the University of Missouri and a law degree at Southern Methodist University. Scott joined a big Dallas law firm, where he specialized in merger-and-acquisition assignments for health-care companies and made partner in 1984. Three years later, he joined with two former executives of a Dallas hospital company to make an unsolicited and unsuccessful offer for HCA.
CRITICAL MASS. Not long afterward, Rainwater came calling with an offer the lawyer found irresistible: Join me in starting a hospital company from scratch. Scott put up $125,000, Rainwater matched him, and Columbia Hospital Corp. was born. The underlying strategy was simple but powerful: to establish the company as the lowest-cost, highest-volume health-care provider in as many cities as possible. In other words, Scott and Rainwater wanted to make Columbia the leading agent of the managed-care revolution that was just beginning to gather momentum in key markets.
Convinced that speed was of the essence, Scott and Rainwater launched the most prolific acquisition binge that health care had ever seen. Columbia reached critical mass in 1993 as Scott pulled off his first megadeal: the $3.2 billion acquisition of Galen Health Care, formerly the hospital arm of Humana Inc. At 18.9%, Columbia's operating margin for 1993 hugely exceeded the industry average of 13.6% (chart). The company has maintained its superior profitability ever since as the acquisitions of HCA, HealthTrust, and a half-dozen other major companies piled on the volume. In 1996, Columbia reported net income of $1.5 billion on revenues of $20 billion.
Even many of Columbia's harshest critics concede that Scott is a brilliant entrepreneur. "I think he comes in second only to Bill Gates as the businessman of the decade in that he created the business model par excellence for restructuring health care," says Peter Young, a Florida health-care consultant who has been inveighing against Columbia for years. "My problem is with the propriety of its implementation."
As Columbia grew, Scott invested heavily to create information systems that would enable him to closely monitor the performance of each of the company's hospitals and clinics. He imposed precise and highly ambitious revenue and profit goals on his nationwide corps of regional and local managers and yet allowed them considerable operating latitude--an approach that, in retrospect, seems obviously fraught with danger. "One of the basic problems is that when your compensation is tied to the profitability of your hospital or your region, it can cloud your judgment," says a former Columbia executive.
Then, too, in its ham-handed attempts to acquire not-for-profit hospitals--or "nontaxpaying" hospitals, as Scott pointedly prefers to call them--Columbia/HCA offended countless public officials all across the land. In Ohio, for example, Attorney General Betty Montgomery was so outraged by what she characterizes as the "peremptory, bullying" tactics that Columbia employed in its failed attempts to acquire Blue Cross/Blue Shield of Ohio and Massillon Community Hospital that she recently took the company's Ohio chief aside and delivered a blunt threat. Says Montgomery: "I told him that if you want to do business in Ohio, just play it straight from now on. Otherwise, I will fight you in court any time, anywhere."
In the June interview with BUSINESS WEEK, Scott insisted that Columbia had played by the rules in Ohio and everywhere else. He attributed the company's political problems to effective lobbying by not-for-profit institutions that fear having to compete with Columbia. "There are many places where an entrenched hospital doesn't want you to come in," Scott said. "These people are smart, and they're spending significant amounts of money to fight us."
This is undoubtedly the case. But Scott and his lieutenants have fanned the flames by repeatedly attacking the very concept of not-for-profit hospitals, even though they still account for more than 80% of the industry. In late 1994, according to the Washington Post, Scott told the board of a recently acquired hospital that "nontaxpaying hospitals shouldn't be in business. They're not good corporate citizens." On the same visit, David T. Vandewater, Columbia's president, was equally tactless. "The enemy is St. Mary's," he told the board, referring to a competing not-for-profit. "They've got your patients."
During Columbia's early years, Rainwater proved an effective foil to the headstrong and often impolitic Scott. But as Rainwater shifted his focus to other investments as the company grew, "there was no one [willing] to challenge him, including Tommy Frist," says one insider. Reportedly unwilling to settle for figurehead status, McWhorter resigned as chairman in early 1996, but remains a director. Scott promptly claimed the chairman's title for himself. While Frist still keeps an office next to Scott's, it is often unoccupied.
Frist's allies say that they have no doubt that he will stand and fight if need be. "Tommy has what he built on the line," says one. He also has a pile of Columbia stock worth a cool $175 million less today than before the Federal Bureau of Investigation started raiding Columbia offices earlier this year. However, his allies add, Frist does not aspire to succeed Scott as CEO, except perhaps on an interim basis.
The history of companies that have come under heavy federal investigation suggests that Scott's days as CEO are numbered. And even Scott's greatest champion might not be willing to wait much longer. Says a source close to Rainwater: "As long as Rick's there, he's a lightning rod. Rick has done well, but maybe he's not the right guy to take Columbia to the next level." Or, to put first things first, to come to terms with the U.S. government.By Anthony Bianco in New York, with Stephanie Anderson Forest in DallasReturn to top