Hospital Corporation of America

views updated

Hospital Corporation of America

One Park Plaza
Nashville, Tennessee 37203
(615) 327-9551
Fax: (615) 320-2685

Private Company
1960 as Park View Hospital, Inc.
Employees: 68,000
Sales: $4.27 billion

Hospital Corporation of America is among the largest U.S. hospital-management companies. Although it offers traditional services, Hospital Corporation of America (HCA) has been a trailblazer in the rapidly growing for-profit medical-services and hospital-management industry, achieving a strong international presence. The company went private in March 1989 and faced the 1990s with more than 130 acutecare and psychiatric hospitals, mostly located in the South and Southwest. HCA is ahead on its considerable debt payments, incurred when the company went private, but still faces challenges.

During the late 1950s, Thomas F. Frist Sr., a practicing Nashville, Tennessee, internist and cardiologist, became disgruntled with what he regarded as a lack of efficiency and quality care in area hospitals. To provide better care for his own patients, Frist, together with ten investors, built Nashville-based Park View Hospital in 1960, which later became the companys flagship operation. At the time, Frists goals were simple: he wanted a well-managed hospital whose capital could be used to expand and improve its health-service offerings. It was not his intent to launch a hospital business.

Frists son, Thomas F. Frist Jr., then a 29-year-old surgeon, convinced his father to build the hospital into a wide-ranging, standard-setting business enterprise, arguing that a hospital could be run most efficiently if it were part of a chain. Thus, in 1968, Hospital Corporation of America was formed to own and manage hospitals with Thomas Frist Sr. at the helm as president and Jack C. Massey, a businessman with hospital-management experience, serving as the first chairman.

The Frists and Massey were convinced that the delivery of hospital services could be vastly improved through the application of sound business principles and management practices and, in turn, that hospitals that turned a profit would attract strong investors and superior medical personnel, improve the fiscal health of the community through tax payments, and provide excellent health care at a reasonable cost to patients. Such a concept, which Frist Sr. summed up as quality attracts quality, was radical in the late 1960s, when many not-for-profit hospitals were floundering.

Jack Massey was largely responsible for propelling HCA to the forefront of hospital management. Before arriving at HCA, Massey had built Kentucky Fried Chicken into an internationally recognized chain. Together with Thomas Frist Jr., Massey recognized the value and importance of operating a chain of for-profit hospitals given the ailing state of the health-care industry. Frist Jr., who is also a pilot, began a barnstorming campaign, flying to small community hospitals throughout the South to coax them to sign up with HCA. By 1969, the Hospital Corporation of America had acquired or built 11 hospitals, and in March of that year, HCA went public, with stock rising from $18 to $40 a share in the first day of trading.

Hospital Corporation developed a novel, standardized design for the construction of community hospitals. By using a prototype and a small group of contractors, the company significantly cut time and costs. HCAs hospital construction and expansion program continued apace, concentrated in the sunbelt states. John A. Hill, former chairman and CEO of Aetna Life & Casualty, was appointed president and Thomas Frist Sr. became vice chairman and chief medical officer of HCA, in 1970.

During this time the hospital industry itself was changing, which further spurred the growth and acceptance of Hospital Corporation. The increased costs of maintaining, equipping, and replacing outdated hospitals made it impossible for many smaller communities to obtain adequate levels of financing. Consequently, the decade between 1970 and 1980 saw more than a 200% increase in the number of hospitals subsumed under multiple-hospital systems, both investor owned and not for profit.

Within three years of operation, HCA had 10,000 employees. Despite being in a capital-and labor-intensive business, subject to heavy government regulation, HCA continued to grow steadily throughout the 1970s. In 1972 Hospital Corporation put together its first board of governors, consisting of prominent physicians from throughout the HCA network of hospitals. The organization of the board of governors was one in a series of attempts HCA has made to shed its image of franchised health care and to attain respect within the medical establishment. By 1973, Hospital Corporation had become the worlds largest publicly owned hospital-management company, representing 51 hospitals with a total of 7,900 beds. In 1973, HCA also entered the international marketplace, taking on management of the King Faisal Specialist Hospital and Research Centre in Riyadh, Saudi Arabia.

Much of HCAs rapid growth and success resulted from the companys ability to abide by a relatively safe plan for growth and from the broad-based approach it took to attracting investors, led by finance officer Sam A. Brooks. Brookss main task was to locate new sources of capital to finance HCAs expansion. Because the company was young, as was the chain-hospital business, HCA could not command the financing it needed to maintain operations, much less expand. Moreover, loans to hospitals were considered bad investments at the time because of speculation that the federal government would institute a national health insurance program and thus put investor-owned hospital companies like HCA out of business.

Though all these factors posed problems, HCA still grew to 10,000 beds by 1975. In the previous year HCA had expanded its foreign operations to include Central America. Its reputation for hospital management flourished during this period and investors began to see the advantages investor-owned-and-operated hospitals had over nonprofit hospitals, not the least of which was an almost guaranteed return on investment. HCAs multi-facility operation permitted it to finance its hospitals as a group, rather than individually, with long-term mortgages, thus creating an attenuated riskan innovative financing tool in the hospital industry. The speed and efficiency of building hospitals from a prototype, with established contractors, continued to be a precedent-setting cost-cutting device. Economies of scale, such as bulk purchasing also greatly lowered costs.

Throughout the 1970s, HCA had an annual growth rate of 35%, with revenues in 1968 totaling $29 million and increasing to more than $1 billion in 1980. Industry observers attributed Hospital Corporations consistently strong performance to the predictability of the hospital-management business, as well as good strategic planning and the companys financial conservativism. HCA never took on a financial burden greater than it could handle, comfortably riding a 60:40 debt-to-equity ratio.

Another key to HCAs successful operation was its decentralized management. Each hospitals administrator developed the hospitals own budget, set up individual pricing systems, and determined services. Corporate headquarters, through a computerized monitoring system, then measured each hospitals efficiency in relation to that of other hospitals within the HCA network. Inefficiencies could thereby be redressed quickly while still allowing hospitals to function autonomously.

With the launching of its management contracts division, HCA Management Company, and Parthenon Insurance Company in 1977, HCA ushered in a period of heightened expansion and diversification. HCA Management Company was established to help coordinate activities and to serve as a support center for independently owned HCA-managed hospitals across the United States. The Parthenon Insurance Company was established as a wholly owned subsidiary of HCA, offering general and professional liability insurance coverage to company hospitals.

In 1978 the corporation celebrated its tenth anniversary with 100 hospitals and 28,000 employees. Thomas F. Frist Jr. became president and chief operating officer of HCA, and Donald S. MacNaughtonretired chairman and CEO of the Prudential Insurance Company of Americajoined the company as chairman of the board and CEO. MacNaughton used his connections to open new doors to outside capital, and HCA acquired three Australian hospitalsthe companys first foreign equity holding. Hospital Corporation also entered the Eurodollar market in 1978, and was favorably received. Jack Masseys move to the chairmanship of the executive committee that year allowed the company to establish a new pace and tone, which, with the help of MacNaughtons efforts to assemble a prestigious board of directors, eventually helped HCA establish a blue-chip image.

During the early 1980s, many hospitals turned to HCA because of its ability to raise capital. Some analysts predicted that $160 billion would be needed during the coming decade to revamp the nations hospitals, money that for-profit multiple-hospital systems like HCA could more easily provide. HCA had another advantage in the millions of dollars it saved by building new hospitals in half the usual time. HCA was able to charge patients 25% less than the national average while still providing the latest in medical care and technology, and its reputation as a good employer attracted employees.

Changes in the federal governments reimbursement system for Medicare and Medicaid patients during this time hurt many poorly managed non-profit hospitals and altered the industry as a whole, but actually worked in HCAs favor by creating economic incentives. It was an opportunity for reinforcement of HCAs basic business tenets.

HCA was the first company on the New York Stock Exchange to pass the billion-dollar mark in sales in its first ten years of operation and it continued to grow by leaps and bounds. In April 1980, HCA acquired General Health Services, which owned 14 hospitals and various ancillary healthcare services. Company operations began branching out of the South and into the northeastern United States, as well as further overseas.

In 1981, Hospital Corporation bought rival Hospital Affiliates International (HAI), a wholly owned subsidiary of INA Corporation. HAI operated 154 hospitals, giving HCA control of about one-fifth of all privately owned U.S. hospitals. HCA also purchased the Health Care Corporation, which spawned HCAs extensive psychiatric-hospital network. As a result of these acquisitions, HCA later faced a Federal Trade Commission antitrust challenge. It was determined in 1987 that HCA had a monopoly in a portion of the Tennessee market, which the company rectified by selling two hospitals and terminating the management contract with a third.

By 1983, multiple-hospital systems were booming. Of the four leading U.S. hospital-management firmsHCA, Humana Corporation, National Medical Enterprises, and American Medical InternationalHCA emerged as the leader. Revenues exceeded $4 billion; the company covered a broad geographical area, with HCAs hospitals being the only hospitals in more than a third of the cities it covered; and HCA profitability was virtually insured by government regulations limiting hospital constructionhence reducing competitionand the fact that Medicare and Medicaid payments produced almost 45% of HCAs revenues at that time.

HCA also diversified into other new markets. HCA Psychiatric Company, the new subsidiary stemming from the 1981 purchase of Health Care Corporation, grew into a network of 53 hospitals, becoming one of the nations largest owners and managers of psychiatric facilities. By 1983, HCA ran 30 projects in seven foreign countries. The company continued, however, to concentrate an owning and managing hospitals in the United States, limiting the growth of its foreign operations to 25% annually.

With Thomas Frist Jr. then the companys CEO, HCA made attempts to diversify into the service sector of the health-care industry. Although in 1982 HCA sold the 18 nursing homes it had acquired via HAI, in exchange for an 18% interest in Beverly Enterprises, the nations largest nursing home-management company. HCA later sold its Beverly investment for a pretax gain of $42.24 million. In 1985 HCA also purchased Kansas-based Wesley Medical Center, a nonprofit teaching hospital affiliated with the University of Kansas School of Medicine. HCAs biggest gamble on diversification at this time came with its attempted merger with American Hospital Supply Corporation (AHSC). The deal fell through when a rival hospital supplier outbid HCA. The company realized a $64.4 million gain on the failed merger, however, when it terminated the merger agreement.

Despite diversification, HCAs profits had begun to wane during the early 1980s. In 1986 HCAs money-losing health insurance units were folded into a joint venture with the Equitable Life Assurance Society of America, called EQUICOR-Equitable HCA Corporation. The venture combined Equitable Group and Health Insurance with HCA Health Plans, a division of HCA. In 1987, Frist also began a reorganization plan to streamline HCA, then worth $4.9 billion, by selling 104 of the corporations less-profitable, rural general hospitals to a new employee-owned company, Health-Trust, creating the largest employee stock-ownership plan (ESOP) in the nation. Also in 1987 a private investor group offering $3.85 billion made an unsuccessful takeover bid for HCA. The board refused to consider the offer, but it launched speculation which placed further pressure on the company.

After the thwarted takeover, Frist completed the sale of the primarily rural, less-profitable hospitals to the employeeowned HealthTrust. He then accelerated the restructuring of HCA, slashing both management ranks and general overhead by $75 million, until the company was left primarily with its most solid projects. By late 1988 Frist planned to concentrate on the profitable psychiatric and medical and surgical hospital businesses.

In March 1989 Frist Jr. and chief financial officer Roger Mick, along with other HCA managers, had taken the company private via a $4.9 billion leveraged buyout. This left HCA in a difficult fiscal condition by mid-1989. To meet its loans, HCA continued dismantling, and even considered selling, its most profitable units: the 53 psychiatric hospitals and the drug-treatment centers. Instead of the hospitals, HCA sold its interest in the Equitable joint venture, its management company, its clinical-laboratory division, and its international holdings.

The newly private company was ahead on debt repayment by $300 million in its first fiscal quarter. HCAs new ownersFrist Jr. and an equity group that includes Goldman, Sachs; Morgan Guaranty; the Rockefeller group; and Texas financier Richard Rainwaterwill have to run a tight ship in the 1990s, keeping capital spending up to maintain their hospitals.

Principal Subsidiaries

Autauga Acquisition Corp.; Diamond-head Development Corp.; Montgomery Center for Psychiatry, Inc.; Prattville Aquisition Corp.; HCA Health Services of Arkansas, Inc.; HCA Allied Health Services of San Diego, Inc.; HCA Hospital Services of San Diego, Inc.; Hospital Corporation of California; Los Robles Regional Medical Center; HCA Psychiatric Company; Health Services Acquisition Corp.; Lakeland Manor, Inc.; University Hospital, Inc.; Bay Hospital, Inc.; Central Florida Regional Hospital, Inc.; HCA Development Corporation of Florida; HCA Family Care Center, Inc.; HCA Healthcare-Florida, Inc.; HCA of Florida, Inc.; Largo Medical Center, Inc.; Lawnwood Medical Center, Inc.; Marion Community Hospital, Inc.; New Port Richey Hospital, Inc.; Okaloosa Hospital, Inc.; Okeechobee Hospital, Inc.; Putnam Hospital, Inc.; Tallahassee Medical Center, Inc.; Tamarac Hospital Corporation, Inc.; West Florida Regional Medical Center, Inc.; Clayton Acquisition Corp.; Coliseum Park Hospital, Inc.; Dublin Community Hospital, Inc.; HCA Health Services of Georgia, Inc.; Med Corp., Inc.; Medical Center-West, Inc.; Palmyra Park Hospital, Inc.; Redmond Park Health Services, Inc.; Redmond Park Hospital, Inc.; West Paces Ferry Hospital, Inc.; West Paces Services, Inc.; HCA of Idaho, Inc.; HCA-Indiana, Inc.; HCA Health Services of Iowa, Inc.; HCA Health Services of Kansas, Inc.; Frankfort Hospital, Inc.; Greenview Hospital, Inc.; HCA Health Services of Massachusetts, Inc.; HCA Physician Services of Mississippi, Inc.; Forum Springfield, Inc.; HCA Health Services of Missouri, Inc.; HCA Health Services of New Hampshire, Inc.; HCA Health Services of New Jersey, Inc.; Guadalupe Medical Center, Inc.; Hobbs Community Hospital, Inc.; HCA-Raleigh Community Hospital, Inc.; HCA Health Services of Ohio, Inc.; HCA Affiliated Services of Oklahoma, Inc.; HCA Health Services of Oklahoma, Inc.; HCA of Oregon, Inc.; HCA Pennsylvania Health Services, Inc.; HCA Health Services of Rhode Island, Inc.; Aiken Community Hospital, Inc.; HCA South Carolina Health Services, Inc.; Myrtle Beach Hospital, Inc.; North Trident Regional Hospital, Inc.; Athens Community Hospital, Inc.; Bradley Community Hospital, Inc.; The Center for Health Studies, Inc.; Community and Occupational Health Services, Inc.; General Care Corp.; HCA Capital Corporation; HCA Development Company, Inc.; HCA Finance, Inc.; HCA Government Services, Inc.; HCA Home and Clinical Services, Inc.; HCA Information Services, Inc.; HCA Medical Services, Inc.; HCA Physician Services, Inc.; HCA Properties, Inc.; HCA Realty, Inc.; Health Enterprises, Inc.; Hospital Capital Corporation; Hospital Corporation of Tennessee; Hospital Realty Corporation; Indian Path Hospital, Inc.; Park Plaza Realty, Inc.; Parkridge Hospital, Inc.; Parthenon Financial Services, Inc.; TransMed Clinical Services Company; TransMed Medical Supply Company; WDC, Inc.; Fort Worth Medical Plaza, Inc.; HCA-Arlington, Inc.; HCA Piano Imaging, Inc.; HSP of Texas, Inc.; Lockhart Acquisition Corp.; Navarro Memorial Hospital, Inc.; Rio Grande Development Corp.; Womans Hospital of Texas, Incorporated; HCA Health Services of Utah, Inc.; Ambulatory Services Management Corporation of Chesterfield County, Inc.; Brandermill Medical Ancillaries, Inc.; Chippenham Hospital, Inc.; Circle Terrace Hospital Corporation; HCA Health Services of Norfolk, Inc.; HCA Health Services of Portsmouth, Inc.; Johnston-Willis Limited; Lewis-Gale Hospital, Incorporated; HCA Health Services of West Virginia, Inc.; Raleigh General Hospital; Teays Valley Health Services, Inc.

Further Reading

HCA: Champion In a New Growth Industry, Duns Business Month, December 1982; HCA History, Hospital Corporation of America Corporate typescript [n.d.].

Carol I. Keeley

About this article

Hospital Corporation of America

Updated About content Print Article