A Hospital Giant Comes to Town, Bringing Change
By KATHRYN JONES
Published: Sunday, November 21, 1993
WHEN Richard L. Scott rolled into town three years ago and bought two small, down-at-the-heels hospitals, he and his Columbia Healthcare Corporation made quite an impression on the local health care industry.
"Everybody thought they were crazy," said Dr. Donald Huge, medical director for Sanus/New York Life Health Plan, one of Houston's largest health maintenance organizations. "No one could figure out why they would want hospitals like that." Columbia was largely ignored.
But Columbia kept buying hospitals, here and elsewhere. In September Columbia put up $3.4 billion to acquire Galen Health Care Inc., a 73-hospital chain spun off by Humana Inc. Then last month Columbia announced a merger with the HCA-Hospital Corporation of America that will create the world's largest investor-owned hospital group.
Now, it is hard to ignore Columbia. The HCA merger, if approved, will make Columbia the largest hospital chain in Houston, with 10 hospitals and 2,800 beds, or about 16 percent of the market. It seems everyone is calling Columbia's Houston office, where Jay Grinney, president of the Southwest division, plots Columbia's acquisitions with big red dots on a wall map. Dr. Huge, whose company has been expanding its network of doctors and hospitals, was one of those callers after the Galen merger. "I called Jay and said, 'Hey, we need to have lunch, old buddy.' I was going to need him desperately."
If Rick Scott has his way, the for-profit, publicly traded Columbia will become an equally formidable presence in many other cities, including Atlanta, Chicago and Kansas City. (The company is already strong in Miami and El Paso; it has no hospitals in the Northeast.) For those cities and many others where the hospital industry is fast consolidating, Mr. Scott's performance in Houston could be a study of what happens when a powerful force like Columbia comes to town.
Mr. Scott's guiding philosophy is that bigger is better. In Houston, as in other cities, Columbia has bought hospitals and consolidated overlapping operations like marketing and cardiac treatment to save millions of dollars in overhead, and it has done this with only about 25 layoffs. Using its size, it has negotiated volume discounts from medical-supply companies for everything from surgical masks to operating-room equipment.
To fill more of its beds, it invests heavily in new medical services and better equipment to make the hospitals more attractive to health plans, patients and physicians. It also woos physicians with equity stakes.
The formula has worked for Columbia. All of its hospitals here and elsewhere are profitable. But while Columbia has lowered operating costs, its effect on the prices patients and their insurers pay is still uncertain, although there are some promising signs.
Analysts said the HCA merger will give Columbia the size to bargain with the big buyers of health services envisioned under the Clinton Administration's health reform plan.
But some health care industry experts worry that as the hospital industry consolidates, with Columbia and big competitors gaining strength in markets like Houston, these companies could someday be in a powerful position to raise prices.
Columbia, based in Louisville, was founded in 1987 by Mr. Scott, then a Dallas attorney and now chairman and chief executive, and Richard Rainwater, a Fort Worth financier who made his fortune cutting deals for Sid Bass, one of the billionaire Bass brothers.
After early successes in El Paso and Miami-Fort Lauderdale, the company moved into Houston. In addition to acquiring hospitals, Columbia has added a residential mental health center for adolescents and children. The company has also expanded or started programs including rehabilitation services, inpatient and outpatient psychiatric programs, outpatient diagnostic services, and nursing-home and home-health-care services. A recent affiliation with Medical Care America Inc. will add outpatient surgery and home-infusion care to the list.
"I want to make sure we have all the different systems that managed care needs," Mr. Scott said.
The HCA merger, which still must be approved by shareholders and regulators, would give Columbia four more west side hospitals and 1,200 more beds in Houston. Columbia closed some hospitals in El Paso and Miami; it has not done so here.
Health-care industry executives said Columbia's biggest impact has been to speed an industry consolidation in Houston. Its closest competitor, Memorial Healthcare System, last month announced an agreement that will give it more than 2,000 beds. Other hospitals are also making acquisitions and forming networks with a variety of services and doctors. And many people here say it's just a matter of time before some hospitals close.
Columbia would like to acquire even more hospitals in Houston, Mr. Scott said. It wants 25 percent to 35 percent of the market.
THE Houston area has about 100 hospitals, many owned by several companies -- Columbia, Memorial, American Medical International, Healthtrust and Epic Healthcare Group -- and others independent.
But some who watch the health care business said they are concerned that Columbia and Memorial are emerging as the two dominant hospital companies in Houston. They worry that Columbia particularly, because of its deep pockets, will gain too much power and then dictate prices.
Merrill Matthews, health policy director of the not-for-profit National Center for Policy Analysis in Dallas, compared this business to the military industry. "You could get something like the Pentagon, with a few major suppliers like a Lockheed or a General Dynamics," he said. "Nobody argues that the stuff they sell is cheap. And the little guy, where much of the innovation comes from, gets squeezed out."
MR. Scott recognizes such criticism. "I think that's a concern. I don't think it's good in any business for anyone to have a monopoly. On the other hand, you need to have size to get costs down. The truth is, for patients, physicians and whoever the payer is, I think size is very positive."
With all its hospitals profitable, Columbia, whose shares are traded on the New York Stock Exchange, earned $25.9 million, or $1.18 a share, on revenues of $819.3 million last year. In 1991, it earned $15.2 million, or 92 cents a share, on revenues of $499.4 million. However, the company said it lost $115 million in this year's third quarter after taking charges for the Galen acquisition. Nevertheless, for the year it is expected to earn $1.95 per share, according to analysts. (The HCA merger, expected to be completed in February, would result in an entity called Columbia/HCA Healthcare Corporation, with annual revenues of more than $10 billion.)
Columbia could not show how its presence has affected the prices paid by patients and insurers in Houston. But Mr. Scott said prices are generally falling. Others in the Houston health-care industry said it was too early to tell. But some have seen some good signs. "We've already seen some improvement in quoted rates to us on a per-diem basis in contracts," Dr. Huge said.
Operating expenses per patient day at Columbia's Houston hospitals fell from $801 in 1990 to $794.12 last year. Company officials pointed to several examples of how they have made hospitals more efficient and lowered operating costs.
Columbia said it immediately cut $1.5 million in overhead from its initial acquisitions in Houston. The company said it is also filling more beds. For example, the average daily number of patients in beds at the Sam Houston hospital has almost tripled to 125 from 45 in 1990, Mr. Grinney said. The company said it is attracting more patients with improvements to its hospitals and expanded services.
Columbia's size -- 94 hospitals before the HCA merger, 190 hospitals in 26 states after it -- gives it leverage with big national suppliers. Mr. Scott said Columbia has cut its hospital supply costs in Houston by more than 15 percent.
It has also eliminated some duplication of services. For example, Rosewood Medical Center had planned an $8 million expansion that would have included a comprehensive heart program. But Spring Branch, only 10 to 15 minutes away, already had such a program. Columbia's solution was to set up an outpatient cardiac catheterization unit at Rosewood; more serious cases go to the Spring Branch hospital.
"Instead of assuming that every facility has to be completely equipped, we look at it on a systemwide basis," Mr. Grinney said.
Terry Goss, executive director of the Durham Medical Center, a multi-specialty group with 17 physicians that has aligned with Columbia, recalled how doctors' complaints about outdated CAT-scan, operating-room and intensive-care-unit equipment had been ignored by the previous administration at the Heights Hospital. But when doctors raised the issue with Columbia executives, they ordered the equipment. Columbia also helped negotiate and finance a building for Durham in a good location.
And when negotiating a contract with a health plan, Columbia offers a medical network that includes not only its facilities but also the services of certain doctors. "They're bringing business to the physicians who are in independent practice," said Diane Love, an associate professor of health care administration at the University of Houston at Clear Lake City.
SOME physicians are concerned that Columbia is getting so large that it will control the local market and they won't have a say, equity stake or not. And some competitors played down Columbia's impact in a market where a growing number of services take place outside the hospital.
"We're not doing anything differently since they've been in the market," said W. Randolph Smith, executive vice president of operations at American Medical.
There will be losers. Mr. Scott said he expects 30 percent of the nation's hospitals to close in five years. Some will be in Houston.
"Slowly, they're going to go out of business," he said. "It sounds bad, but it will lower health care costs in the city." SHOULD DOCTORS OWN HOSPITALS?
WHEN the Columbia Healthcare Corporation comes to town, it woos local physicians with promises of an ownership stake in its hospitals.
But the equity stakes, which have become a cornerstone of Columbia's strategy for moving into new markets, are increasingly under fire.
Critics, including some lawmakers, contend that such business relationships are a blatant conflict because they could encourage physicians to order unnecessary treatments and jack up patient bills at hospitals where they have a financial interest.
But Columbia officials said that selling partnerships to a hospital's staff physicians helps reduce the cost of providing care by focusing physicians on the bottom line and giving them a voice in a hospital's operation.Columbia officials said they are well within current Federal guidelines for physician ownership of facilities. The guidelines give a "safe harbor" to organizations with physician ownership of 40 percent or less.
Typically, Columbia limits its aggregate physician ownership in its local hospitals to 30 percent, said Jay Grinney, president of Columbia's southwest division.
In Houston, 130 physicians own 11.5 percent of the hospitals, and that percentage will probably grow as more doctors become interested in investing.
The original partnership units sold for $15,000 each.
Photos: Jay Grinney of Columbia Healthcare plots the company's acquisitions in Houston on a wall map. (F. Carter Smith for The New York Times); Richard Scott, left, visits Willie Burton, a patient in Louisville. (Jackie Wallace for The New York Times)
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