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COLUMBIA/HCA ILLS MAY DELAY MANAGED CARE MOVE

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NASHVILLE, Tenn.-Columbia/HCA Healthcare Corp.'s recent problems are likely to forestall any forays the hospital chain makes into the managed care market-at least for the near future.

But assuming it successfully puts its problems behind it, the company, which is the largest private U.S. provider of health services, could once again make further thrusts into the market. The company's current troubles are related to Medicare, not managed care.

Three Columbia/HCA executives have been indicted on charges of conspiring to submit false cost reports to Medicare and the Civilian Health and Medical Program of the Uniformed Services, the federal insurance program covering members of the military and their dependents.

In the wake of the turmoil caused by the situation, former Columbia Vice Chairman Dr. Thomas F. Frist Jr. has taken over as chairman and CEO, replacing Richard Scott, and Jack Bovender Jr. has been named president and chief operating officer.

Columbia/HCA announced several changes to its strategy Thursday, including the sale of its home care division, elimination of annual cash incentive compensation for all of its employees, discontinued sales of interest in hospitals to physicians and adoption of a comprehensive compliance program.

Dr. Frist said that he wants to make changes that will "clarify our company's business focus, institutionalize a corporate culture that emphasizes universal values of integrity, openness and cooperation" and enable the company to provide superior care.

The company has had mixed results with recent deals.

Columbia/HCA failed in its $299.9 million bid to buy Cleveland-based Blue Cross & Blue Shield of Ohio after the Ohio Department of Insurance ruled against the proposed deal (BI, March 24; March 17).

If it had been approved, the Ohio acquisition would have formed an unprecedented hybrid of horizontal and vertical operations.

Despite that setback, Columbia's acquisition of Avon, Conn.-based Value Health Inc. in a $1.3 billion stock swap was completed last week.

The deal represents a large step for Columbia into prescription management, disease management and several other managed care fields (BI, Jan. 20).

Additional steps by Columbia/HCA into the managed care arena in the immediate future are not expected, observers say.

"They're probably going to be a lot more conservative in the kinds of acquisitions they undertake and the various directions they go in now," said Clifford Hewitt, an HMO analyst with Sanford Bernstein & Co. in New York.

"This is a period in which they're clearly evaluating how they define their strategy and what they emphasize," he added. "It's a time of transition for them. You've got new priorities being set, and all that's regardless of what happens in these investigations. They're going to be marching to a different drummer."

"My guess is that Tommy Frist and Bovender are going to focus on the core operations right now, clearing that up, so getting into managed care business is going to be a lower priority," said Elizabeth Senko, an HMO analyst with Lehman Bros. in New York.

Another analyst commented that "a big part of Rick Scott's strategy at Columbia had been to get very deeply into the managed care business," and the Ohio Blue Cross deal would have been a part of it.

"I think they would have looked at becoming a fully integrated payer/provider over a period of five to 10 years, and I think that with the change at the top, that strategy will be slowed down fairly significantly, but what's in place I expect them to continue to pursue forward with," including the Value Health acquisition, the analyst said.

Manfred Nowacki, vp at A.M. Best Co. in Oldwick, N.J., said, "It's certainly going to be a major distraction to the management of Columbia/HCA, but I don't think it's going to have a longer-term impact on their strategy."

The future for the company could depend upon the outcome of the current situation.

"If Columbia/HCA is judged to be guilty in a great number of these allegations, I think they're going to have some real problems," including in making further acquisitions, said Jack Doerr, national group benefits practice leader for Sedgwick Noble Lowndes in Chicago.

But on the other hand, he said, if they are essentially acquitted of all these charges, "then I would think it would be back to something close to business as usual."

Ken Jacobsen, national health practice leader for The Segal Co. in Atlanta, said the situation calls for a wait-and-see attitude. If the company can put its problems behind it, it will be in a great position to enter the managed care as well as other health care areas, he said.

But if it develops that the alleged violations were "enormous" and Wall Street "starts to pull out, it could be a house of cards," Mr. Jacobsen said. "It's just a matter of how well the board does in the next six to 12 months," he said.

Others are confident the company will move forward in the managed care area.

"Their problems are on the Medicare side.*.*.but I don't think it's going to stop their movement into the managed care side at all, because that's where a lot of the action is," said Barry Barnett, a principal with The Kwasha Lipton Group in Fort Lee, N.J.

The company already is well-positioned to be a managed care player, Mr. Barnett added. "I think it's a part of their strategic plan," and the current situation will not stop them from continuing to move in that direction.

Rob Mains, an HMO analyst with Advest Inc. in Albany, N.Y., agreed. "I wouldn't imagine this is going to change anything with managed care," he said, while also noting its problems are related not to that segment, but to Medicare.

Although Columbia might be viewed as "somewhat of a walking wounded who got into a lot of trouble with the Medicare program," it must still grow its business "and more managed care contracting might help them," said Mr. Mains. "I certainly wouldn't imagine it leading to any kind of a slowdown" insofar as its efforts in the area are concerned, he said.

However, Thomas LeConey, an analyst with National Securities Inc. in New York, said, "I think they bought a lot of stuff that, frankly, they could sell and would never miss and it would probably help earnings a lot" if they shed these businesses, including Value Health.