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Besieged Head of Top Hospital Chain Quits

TIMES STAFF WRITERS

A controversial deal maker whose hard-nosed business tactics have reshaped the medical industry resigned Friday as scandal engulfed the vast hospital empire he had assembled over the last decade.

Richard Scott--sometimes called the “Bill Gates of health care"--quit as chairman of Columbia/HCA Healthcare Corp. amid a massive federal investigation into the Medicare billing, physician recruiting and home-care practices of the nation’s largest for-profit health care company.

Though the federal probe focuses on other states, Columbia’s aggressive expansion has included California, where the company operates 15 hospitals, 13 surgery centers and 10 home-health-care agencies, employing more than 11,000.

Scott and No. 2 executive David Vandewater, who also resigned, denied any wrongdoing. Company officials likewise denied that their departure was prompted by suspicions of wrongdoing and said Columbia is cooperating with federal investigators.

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A Justice Department official would not comment on whether any Columbia executives, including Scott or Vandewater, are targets of the investigation.

But Columbia’s deepening problems are intensifying a debate in communities and legislatures across the country over the increasing ownership of the nation’s health care system by large, investor-owned corporations.

Scott built the company in just 10 years by acquiring hard-pressed community hospitals and other health care businesses across the nation. He zealously advocated the restructuring of a notoriously inefficient and wasteful health care system by encouraging market competition and a tighter focus on profits.

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Indeed, many health care experts view Scott as something of a visionary, crediting him with making tough business decisions that have helped to drive down medical costs in communities in which Columbia operates hospitals.

But he and his company have drawn a firestorm of criticism. Columbia has been vilified by doctors, labor unions, consumer groups and state attorneys general who contend that these for-profit health care conglomerates are placing profits ahead of quality medical care.

They also complain that Columbia has reduced charitable and community services--traditional roles of nonprofit hospitals--after it has acquired them.

Already, several states have moved to slow the rush toward for-profit hospitals. Health care analysts say the Columbia scandals will accelerate a reassessment of the free-market approach to medicine.

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Robert Blendon, professor of health policy at the Harvard School of Public Health, said the Columbia affair has “fired up the troops” already scrutinizing the proposed purchases of nonprofit hospitals--which still account for about 85% of U.S. hospitals--by for-profit operations.

“For a while there was this sense that the for-profit hospitals would sweep the nation,” Blendon said.

But the investigations of Columbia/HCA combined with a growing backlash against managed care “have led the states . . . to take a much stronger stand,” he said. “Attorneys general are getting much more aggressive in looking at these deals, so they [for-profit hospital operators] can’t just come in and buy.”

The management shake-up at Columbia, which had been rumored for several days, comes as the firm reportedly holds merger discussions with Tenet Healthcare Corp. of Santa Barbara, the nation’s second-largest hospital operator. Those talks are believed to have been prompted by Columbia’s widening legal woes.

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Some analysts speculated that Scott’s departure may signal that Columbia is serious about reaching a merger deal with much smaller Tenet.

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A merger could place Tenet chairman Jeffrey C. Barbakow in charge of the combined company. The merger would create a medical colossus with nearly $30 billion in revenue, nearly 500 hospitals and hundreds of other health care businesses.

Barbakow was brought in to oversee the settlement in the early 1990s of the last major federal probe of a hospital company, National Medical Enterprises, which was subsequently renamed Tenet.

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At the Columbia board meeting Thursday night that led to the resignations of Scott and Vandewater, the negotiations with Tenet also were reportedly on the agenda as the directors struggle to get Columbia back on its feet.

The deal would be complex because of the huge ongoing investigation of Columbia. It will be difficult to place a price tag on Columbia without knowing the results of a criminal probe or the cost of any settlement.

“If the government is beating up a guy, it’s hard to say, ‘How much will I pay for the corpse when it hits the ground?’ ” said one person familiar with the situation. “And unfortunately the government isn’t done beating them up.”

Scott’s departure was announced to employees at Columbia’s Nashville, Tenn., headquarters Friday by his replacement as chairman and chief executive, Dr. Thomas F. Frist Jr., who had been the firm’s vice chairman.

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At a news conference, Frist said the board’s decision to seek Scott’s resignation was a “very heart-wrenching and tough decision.” While praising Scott and Vandewater for “doing a great service to this country for building this company,” he said the board felt it was time for a change.

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Frist said the top managers assured him “they have no knowledge of any fraud or abuse under their watch.” Frist declined to say what sort of severance package Scott and Vandewater received.

“They accomplished what they could and it may have been an impediment . . . to going forward if they prolonged it any longer,” Frist said.

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Of the investigation, which stretches across at least seven states and involves hundreds of agents from the FBI and other agencies, Frist said: “We are saying to the people in Washington and at the state level that we are dead serious about this and we are going to address their concerns.”

On July 16, federal investigators armed with 35 search warrants searched current and former company facilities looking for documents involving hospital laboratory billing and home-health-care operations. There has been no indication that California facilities are a focus of the investigation.

Among other things, the investigation has looked at “upcoding"--the practice of upgrading the seriousness of an illness under the Medicare program to get a higher fee from the government. Experts say upcoding is fairly widespread in the hospital industry but is not necessarily illegal.

Frist said he has not been involved in Columbia’s day-to-day operations and was not “in the loop” about details of the federal investigation.

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Frist and his father founded HCA-Hospital Corp. of America in Nashville in the late 1960s. Columbia acquired HCA in 1994.

Columbia/HCA shares slipped 31 cents to $35.94 on the New York Stock Exchange on Friday. Tenet shares rose 56 cents to $30.56.

Well before the raids of Columbia offices, regulators, legislators and community representatives had become increasingly wary of the for-profit hospital trend.

Residents in the small town of Cookeville, Tenn., became so upset last year about the prospect of selling the local nonprofit hospital that 1,000 turned out at a rally to encircle and “hug” the institution. The hospital was not sold.

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This week, Rhode Island imposed a limit on the number of hospitals that for-profit companies are allowed to buy.

California Atty. Gen. Dan Lundgren moved last year to block a proposed joint venture between Columbia/HCA and San Diego’s highly regarded Sharp hospital system, saying it would leave Sharp with little cash and no ability to continue its charitable and trust obligations. Sharp pulled out of the deal last February.

Attorneys general in Michigan and Ohio have raised legal objections to the sale of nonprofit health care firms in their states to Columbia/HCA.

Times staff writer Debra Vrana contributed to this story.

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