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Columbia-HCA, HealthTrust Merger Could Mean Hospital Closures Graphic

October 5, 1994

NEW YORK (AP) _ The nation’s top two hospital chains plan to become one in a $5.4 billion merger that they say will create a super-efficient health care company, able to cut costs while maintaining quality.

Industry analysts said Wednesday that those goals will be met, at least partially, by closing hospitals that don’t make enough money.

Columbia-HCA Healthcare Corp.’s purchase of HealthTrust Inc., announced late Tuesday night, creates a health care juggernaut with 311 hospitals, 60,000 beds (6.4 percent of all U.S. hospital beds) and 125 outpatient centers in 37 states and two foreign countries.

It’s the latest example of a merger craze in the health care industry that has made multibillion dollar deals nearly routine. Hospitals, clinics, drug companies and others are growing to remain profitable in the face of pressure from customers to control costs.

Louisville-based Columbia was founded in 1987 and has been on an acquisition binge for more than a year. It is hoping to dominate local markets across the country for a wide variety of health services.

It has bought or established hospitals, outpatient surgery centers, nursing homes, home-health programs, outpatient rehabilitation centers and psychiatric centers, among others. Its biggest acquisitions have been hospital companies Galen Health Care Inc. of Louisville and Hospital Corp. of America of Nashville. This year, it bought Medical Care America, the country’s largest operator of outpatient surgery centers.

″Healthcare historically has been a fragmented industry, lacking accountability and quality standards,″ Richard L. Scott, Columbia’s founder, president and chief executive, said in announcing the merger. ″As we bring providers together into an integrated system, we can improve quality and efficiency and realize within this industry the benefits that size has created within other American industries.″

While Scott said none of Columbia’s facilities have yet been targeted for closure or sale, analysts say it’s inevitable. Many of hospitals owned by Nashville-based HealthTrust are small, underused facilities in rural areas, while some others are near Columbia’s existing hospitals.

″They’re shrewd businessmen and they’re not going to run a hospital if it’s losing very much,″ said Steven Renn, a director of HCIA, a Baltimore- based health care research firm.

But, Columbia spokeswoman Eve Hutcherson said hospital closures are a nationwide trend, as doctors and managed care providers like health maintenance organizations realize many functions can be done more cheaply in outpatient facilities.

Columbia has closed 14 hospitals in its history, she said. ″We’ve been able to save operating costs and in doing so offer better prices to our purchasers. That’s not something we apologize for,″ she said.

Like any large merger, this one will be reviewed by federal antitrust regulators. In this case, a big issue will be if the combined company will be able to control prices in any local markets. Both merger partners have a number of facilities in Texas, Florida and Tennessee.

Bernard McDonagh, who follows health company stocks for Piper Jaffray Inc. in Minneapolis, said Columbia already has 25 percent to 30 percent of the customers in many of its markets.

″That’s a concern regulators have. They’re intent not to let anyone achieve near monopoly power and if you got over 35 percent market share they’d begin to get concerned,″ he said.

In all its mergers thus far, authorities have required Columbia to divest just two hospitals, in Florida and South Carolina, and one outpatient center in Anchorage, Alaska, said Hutcherson.

Scott predicted Wednesday the latest deal would result in perhaps just one more hospital divestment, in Salt Lake City.

If regulators and shareholders of the companies approve the deal, Columbia will trade 0.88 share of its stock for each HealthTrust share. That values the company at $37.62 per share based on Columbia’s closing price Tuesday, a modest 18 percent premium over HealthTrust’s closing price of $32 per share Tuesday.

Columbia also will assume about $1.8 billion in HealthTrust debt. The combined company will have about 170,000 employees and more than $15 billion in annual revenues. Scott, Columbia’s founder, said the merger should save Columbia about $125 million a year.

HealthTrust Chairman R. Clayton McWhorter will be chairman of the new Columbia and Columbia chairman Thomas F. Frist Jr. will be vice chairman.

The two are former colleagues. Frist was chairman of Hospital Corp. of America, which created HealthTrust in 1987 by spinning off 104 hospitals to employees. McWhorter, who served as HCA president under Frist, became HealthTrust’s chairman at that time.

Columbia stock fell $2.12 1/2 to $40.62 1/2 on the New York Stock Exchange Wednesday, reflecting investor concern about the implications of the deal, while HealthTrust’s shares rose $2.25 to $34.25.

One clear loser in the merger deal is another hospital company, National Medical Enterprises Inc. in Santa Monica, Calif. NME, which is emerging from a patient fraud scandal, had reportedly been discussing the purchase of HealthTrust and Dallas-based hospital company American Medical Holdings. Analysts said that combination is doomed now.

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