Suddenly Scott’s penny-pinching ways have thrown the 40-year-old lawyer into the spotlight as the nation’s top hospital executive. Recently he announced that his company, Columbia Hospital Corp., is merging with the much larger Galen Health Care Inc., creating the largest for-profit chain of hospitals in the country. Scott will move to Louisville to head the new firm, called Columbia Health Care Inc., and industry experts expect him to continue his discounter’s strategy in running health-care facilities. “You know what his approach is like? Wal-Mart,” says Todd Richter, a healthcare analyst at Dean Witter. “He’s not just cheaper, he also provides value for the dollar.”
Like Sam Walton, Scott has discovered the beauty of dealing in volume. He has become adept at purchasing bloated, inefficient hospitals in overserved markets and, through a combination of mergers, belt tightening and restructuring, honing them into cost-effective facilities. The result: over the past five years Columbia has accumulated 99 hospitals in 19 states, with $5 billion in annual revenues.
Scott, a Kansas City-raised attorney who ran doughnut shops with his mother to pay his way through school, has earned a reputation as an ambitious dealmaker. In 1987 he and two colleagues put together a $3.9 billion buyout offer for Hospital Corp. of America. The bid failed. But Scott caught the eye of Ft. Worth investor Richard Rainwater, best known as the former investment adviser to Texas’s Bass family. Rainwater was interested in buying inefficient hospitals and, through partnerships with doctors, turning them into profitable enterprises. Over the next five years he and Scott bought hospitals in Texas and Florida and turned their original investment of $250,000 into $250 million.
On the surface, Scott’s formula seems quite simple. He starts by locating a market that has an excess supply of hospitals. He buys at least one of the hospitals and asks doctors in the local community to join him as partners. To win their allegiance, Scott encourages them to buy an interest in the company. His goal: to create a local health-care network that is attractive to managed-care providers like HMOs and PPOs. “What you want is a system that provides one-stop shopping for managed-care providers,” Scott says.
The strategy has clearly benefited the bottom line: since 1989 Columbia’s earnings have increased sixfold, climbing to $25.4 million last year. But Scott also has attracted his share of critics. Many experts say that cutting doctors in on the profits encourages them to steer wealthy patients to the hospitals and to funnel more business to their facilities, “It’s hard for physicians to serve two masters at once,” says Dr. Ron Anderson, chairman of the Texas Board of Health.
Scott isn’t worrying. He says a study he commissioned reveals no conflict of interest, and he says his costcutting efforts prove that they don’t gouge insurers and customers. Meanwhile, he plans to continue buying 10 or 20 hospitals per year. When health-care reform comes down the road, experts predict, he won’t have to worry so much about saving those nickels. He’ll be ringing them up by the millions at the hospital cash register.
