Columbia/HCA Healthcare Corp.'s efforts to develop a network in Huntsville, Ala., are drawing intense scrutiny from local officials, MODERN HEALTHCARE*has learned.
Sources close to the Healthcare Authority of the City of Huntsville, who requested anonymity, said they plan to notify HCFA and HHS' inspector general's office about a proposed partnership between 120-bed Columbia Medical Center of Huntsville, formerly Crestwood Hospital, and Huntsville physicians.
Columbia Medical Center Chief Executive Officer Thomas Weiss didn't respond to interview requests. Executives at Columbia's Nashville, Tenn., headquarters declined to comment on their market strategy in Huntsville, saying they don't discuss pending deals.
But Huntsville sources said they will ask federal officials to examine a drastically reduced valuation of Columbia Medical Center in the last two years. Columbia, the nation's largest investor-owned hospital company, owns 347 hospitals in 38 states.
In late 1994 and early 1995, Columbia tried to sell Columbia Medical Center for $67.7 million to the Healthcare Authority of the City of Huntsville, but dropped its selling price to $21.5 million in an offering to Huntsville physicians this year.
Although industry measures vary somewhat, most buyers pay four to five times EBITDA for a hospital in an area in which they have no other holdings. In 1994, Columbia Medical Center's EBITDA, or earnings before interest, taxes, depreciation and amortization, was $4.9 million. Based on that figure, the price range should have been $19.6 million to $24.5 million.
The sources said that federal agencies will be asked to look at whether Columbia's sale of partnership shares violate federal fraud-and-abuse and self-referral laws, showing a financial intent to induce referrals.
It's Columbia's second attempt in the last three years to find physician investors in Huntsville and Madison County, a market of 240,000 people in north-central Alabama.
In August 1993, Columbia's president and CEO, Richard Scott, said Columbia would seek physician investors in five markets, including Huntsville. Earlier that year, Columbia inherited another Huntsville facility, 323-bed Medical Center Hospital, from its merger with Galen Health Care, a spinoff of Humana (See chart).
In March 1994, however, Columbia sold Medical Center Hospital to the city of Huntsville for $55 million, thus pulling out of a market the authority dominated with a 90% share. Public hospital authorities in Alabama are exempt from antitrust laws.
By October 1994, Columbia was back in Huntsville, as a result of its announced merger with Nashville-based Healthtrust, which owned Crestwood. But it wasn't long before Columbia was talking again with the public authority in Huntsville.
The authority was interested in Crestwood, but at a far lower price.
"The price Columbia wanted us to buy Crestwood at was outrageous," said Joseph Campbell, attorney for the healthcare authority, a city agency that owns 558-bed Huntsville Hospital and 197-bed Huntsville Hospital East, formerly Medical Center Hospital.
"Our valuation showed that 120-bed hospital to be worth between $17 million and $25 million," Campbell said. "We said `no thank you' to Columbia's ($67 million) asking price."
In a December 1994 letter to the authority, Joseph Moore, Columbia's senior vice president of development, rejected the authority's "initial $25 million offer for the hospital and (its) revised $30.5 million offer."
Executives at the healthcare authority wouldn't comment on Columbia's latest offer to physicians.
In documents obtained by MODERN HEALTHCARE, Columbia valued Crestwood at $21.5 million in June 1996. Physicians were offered a stake of $4.95 million, or 330 units at $15,000 per unit.
Physician partnerships are a critical part of the Columbia philosophy. Under such arrangements, physicians are offered an opportunity to invest in a Columbia subsidiary that runs the hospital, but not in the entire company.
The Huntsville offering memorandum doesn't mention patient referrals, but the offering principally is being made to physicians. The offering also forecasts increases in the hospital's inpatient admissions from 3,023 last year to 4,108 in 1997.
Rep. Fortney "Pete" Stark (D-Calif.), asked HCFA earlier this year to investigate whether Columbia and similar providers are involved in "questionable" business practices. Stark, the author of federal anti-fraud statutes, wanted to know whether Columbia is violating physician self-referral laws.