Hospital giant on track for comeback

NEW YORK -- For-profit hospital giant Columbia / HCA Healthcare seemed terminal two years ago when it disclosed it was the target of an unprecedented Medicare fraud investigation.

Dozens of agents armed with search warrants spread out across the country and removed reams of billing records from Columbia offices. In an affidavit, the FBI's lead investigator alleged a "systemic corporate scheme" to defraud federal health programs.

Today, a humbled Columbia, though still under investigation, is showing new signs of life.

Its stock is up 60 percent since hitting a low of 17 in October. The spinoffs of two hospital groups, which start trading as separate companies Wednesday, signal the completion of a restructuring that has thinned its hospitals from about 340 to 221.

And the company says it is actively negotiating a settlement with the Justice Department. Justice spokeswoman Chris Watney confirms the talks but declines to elaborate.

"We've proved that bigger is not always better," says Victor Campbell, senior vice president of the Nashville company. "We've worked real hard to change the culture. The focus is on local communities."

The changes have come under Tommy Frist Jr., who came out of retirement to serve as Columbia's chief executive officer when the board ousted Rick Scott in July 1997.

Scott was once hailed as a visionary who sought to brand hospitals, much like soft drinks or running shoes, through aggressive, acquisition-fueled growth. Today, the company says nearly all of its hospitals have chosen to remove the word Columbia their names.

"Columbia is definitely a kinder, gentler company that has learned to just say no to deals," says Sanford Bernstein analyst Ken Abramowitz. "There's less focus on market share now."

The sale or spinoff of 119 hospitals in 22 months in its less profitable markets stands in dramatic contrast to the days when the company added 320 hospitals in five years.

Despite the downsizing, Columbia remains the nation's largest for-profit hospital company. Next largest: Tenet Healthcare, based in Santa Barbara, Calif., with about 130 hospitals.

Hospitals in general have suffered the past couple of years because of cuts to Medicare, a major source of revenue. Columbia says Medicare cuts could cost it $115 million in revenue this year.

And Columbia faces other woes. Four of its executives are on trial in Florida on charges they schemed to defraud Medicare through overbilling. Federal grand juries are still convened in Florida and Texas. The company says the Securities and Exchange Commission is probing possible insider trading.

A big uncertainty is how much it will cost Columbia to settle allegations with the government. Some health care experts estimate as much as $1 billion. And more than 50 lawsuits filed by shareholders and whistle blowers are pending. A federal judge in February rejected a motion to combine all the whistle-blower lawsuits, which could slow progress of a settlement.

"Until they can get out from under the overhang of the government probe, they can't have a consistent growth strategy," says analyst Sheryl Skolnick of BancBoston Robertson Stephens. Skolnick says she can't "quite understand the love affair" investors have had with Columbia stock the past three months because its financials have been so "extremely inconsistent."

Profits from operations rose in the first quarter -- typically a strong period for hospitals because it's flu and cold season -- 12 percent to $271 million or 42 cents a share, vs. $241 million or 37 cents a share, in the year-ago period. That was well above analysts' expectations of 31 cents a share.

But in the fourth quarter, Columbia disappointed Wall Street in a big way, posting profits from operations of $27 million or 4 cents a share vs. a loss of 63 cents a share the year before. Analysts had been estimating profits of 23 cents a share.

"We're not living and breathing quarter to quarter," says Campbell. "We've looked at these past two years as restructuring years, a repositioning."

Columbia's stock got a boost starting in late March after Frist bought three million shares worth $50 million. It was the first insider buying since the scandal broke and seen as a healthy prognosis by Wall Street.

The price also has been helped by the company buying back $2 billion in stock, or 12 percent of its outstanding shares, in two years. The remaining $2.5 billion from asset sales has been spent lowering debt.

Besides financial maneuvering, some say larger lessons need to be learned from Columbia's case.

"What I'm hoping is that if there is a settlement with Justice, it's tough enough to have a cautionary effect on others," says Merton Bernstein, a Washington University law professor who specializes in health care.

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