Hospital Corporation of America operates about the same number of hospitals as the federal government. But unlike Uncle Sam, HCA has never run a deficit.
Started in 1968 with the acquisition of one hospital in Nashville, HCA has more than doubled in size and revenues every three years. More than twice the size of its closest competitor, HCA owns 217 hospitals and manages 148 others worldwide. Twenty of these hospitals are in Virginia.
The company had profits of $111 million on revenues of $2.4 billion last year, and expects revenues of about $3.5 billion this year.
HCA surprised the industry last year by buying Hospital Affiliates International Inc., its crosstown rival in Nashville, for $650 million. The acquisition increased the number of hospitals HCA operates by 65 percent, giving the company control of about a fifth of the privately owned hospitals in the nation.
Last Monday, the Federal Trade Commission challenged HCA's takeover of Hospital Affiliates and its acquisition last December of Chattanooga-based Health Care Corp. on antitrust grounds. The agency charged that HCA's control of hospitals in a 13-county area around Chattanooga increased from 16 percent to about 32 percent, thus stifling health-care competition. The FTC also complained that HCA's control of psychiatric hospitals and services in the area increased from 7 to 38 percent.
If the agency can prove its case, HCA may be forced to sell the hospitals it acquired in the Chattanooga area, and to consult with the FTC before making future acquisitions that might lessen competition.
"We may have to spend several hundreds of thousands of dollars, but I think we will win," said HCA President Dr. Thomas F. Frist Jr. "One of the problems we have is being too big and highly visible."
Despite concern on Wall Street after the Hospital Affiliates acquisition that HCA had too much debt, the company will spend $450 million to build new hospitals this year and another $200 million on acquisitions. Top management has just completed a review of all HCA holdings and the company plans to sell as many as a dozen hospitals to bring its debt ratio down to an acceptable level by the end of this year, said HCA Chairman Donald S. MacNaughton.
Economies of scale play an important role in HCA's success. As the company's chairman likes to say, "We buy Band-Aids by the boxcar, not by the box." HCA's average 200-bed hospital saves $400,000 to $500,000 annually in operating costs through bulk purchases, according to HCA Vice President Victor L. Campbell.
Another key to the company's success is a decentralized management system that enables hospitals to meet the varying needs of both large and small communities. This system helps to spread goodwill in communities that fear that a huge public corporation like HCA might pay more attention to profits than patients.
"In the early 1970s, the investor-owned industry had a lousy reputation because a lot of people just don't go for people making money on hospitals," said Joel M. Ray, an analyst with Nashville-based J. C. Bradford and Co. "There were also claims that profit-making hospitals were skimming the cream by taking the best patients and refusing to take their share of those who could not pay."
The arrival of MacNaughton as the company's chairman in 1978 has given both HCA and the investor-owned hospital industry greater credibility and access to capital, analysts said. The company's chairman, who retired as the chief executive of Prudential Insurance Co. in 1979, contends that HCA hospitals share the responsibility for treating indigent patients equally with the other hospitals in each community.
In 160 communities, HCA controls the only hospital in town. "In those cases," the chairman said, "We do just what a hospital ought to do. Anybody who walks in the hospital and needs medical care gets it."
MacNaughton pointed out that more than 90 percent of the hospitals it manages for other owners are nonprofit, a fact that he believes proves that efficient management has found a welcome home in an industry plagued by soaring costs.
Medical costs increased by a record 12.5 percent last year, the largest gain for any major consumer item. Nearly $1 out of every $10 spent last year--9.8 percent of the gross national product--went for health care, according to the Health and Human Services Department.
Health-care costs continue to climb because the industry has little incentive to hold them down, MacNaughton said. Although the United States is one of the few industrial nations without a comprehensive national health program, 85 percent of all Americans are covered by medical insurance of some sort.
Inflation in the industry is out of control because the combination of Medicare and Medicaid plans, Blue Cross and Blue Shield coverage, and insurance provided through company-sponsored programs results in open-ended coverage, MacNaughton said. This cost-plus reimbursment system provides no incentive for doctors or patients to hold down costs, he added.
MacNaughton believes the health maintenance organization (HMO), a group-practice plan in which an individual pays a flat fee in return for comprehensive medical care, is just one way costs will be contained in the future.
"We are going to see arrangements between insurers, health-care providers like HCA, and businesses that offer their employes insurance which will hold down costs by setting rates ahead of time," MacNaughton said. In addition to these "preferred-provider arrangements," MacNaughton said the system of cost-plus reimbursement now in effect may be transformed into a "prospective reimbursement" system.
Several states, including Maryland, are experimenting with prospective reimbursement. Under this system, state officials examine the prior year's expenses for hospitals participating in state-administered Blue Cross/Blue Shield, Medicare and Medicaid Programs and then decide how much the hospital will be reimbursed for each service in the coming year.
In Maryland, state officials claim prospective reimbursement has held hospital costs 3 to 5 percent below the national average.
New competition for HCA has emerged in free-standing facilities that perform minor surgery, kidney dialysis and alcohol rehabilitation programs, MacNaughton said. HCA has started a program to provide many of these services on an out-patient basis to avoid losing revenue, he said.
MacNaughton claims that without exception, the owners of hospitals that HCA operates under contract save more through its vast array of management techniques than the fee HCA charges. In addition to centralized purchasing, HCA provides hospitals it manages with a hospital administrator and a financial officer.
While less than one percent of HCA's earnings come from managing hospitals, there are other important reasons why management contracts benefit the company.
"Many of these management contracts turn out to be very promising purchases for us," MacNaughton said. "Once the community has learned that we are not bad guys coming in to gouge the public, they are often willing to let us assume ownership."
Although HCA's overseas operations make only a small contribution to profits, they would appear large by any other standard. In many countries, such as Saudi Arabia, where the risk of ownership is deemed too great, HCA will only involve itself on a management basis.
(In 1978, the Securities and Exchange Commission accused HCA of making nearly $4.3 million in payoffs to influential Saudis under the guise of consulting fees in connection with a contract to manage the King Faisal Hospital. In consenting to a federal court order settling the case, HCA neither admitted nor denied guilt.)
The company also owns and manages hospitals in the United Kingdom, Australia, India, the Republic of Panama, and the Virgin Islands. In Brazil, it operates several hospitals and the largest private HMO outside the United States.
MacNaughton said the company will continue to concentrate on domestic operations as long as there is an opportunity to continue profitable growth.
"After that, the possibilities for international growth are infinite," he said.
As chairman, MacNaughton concentrates on long-term strategic planning. Company president Frist, one of HCA's founders, handles daily operations.
Frist, who runs more than seven miles to work several times a week, believes employes of a hospital company should be models of fitness. Three years ago he started "The HCA Aerobic Challenge," a program in which employes get paid for jogging, walking, aerobic dancing, swimming, bicycling and racquetball.
In 1981, the company paid employes a total of $11,287 for running a total of 52,498 miles. About 30 percent of the employes participated last year, with the average collecting $146.
The Aerobic Challenge has been so successful, company officials said, that HCA has provided details of the program to hundreds of interested corporations.