Summary: Rick Scott, the former hospital executive who is now a candidate to become Governor of Florida epitomizes the power that concentrated wealth now has to influence American politics—and, perhaps, buy elections. As Jane Mayer explains in her superb New Yorker piece about the multi-billionaire Koch brothers: “they are trying to shape and control and channel the populist uprising into their own [libertarian] politics… They are out to destroy progressives.”
Of course there are real questions as to whether the “populist uprising” of tea-baggers is a genuine grass-roots movement– or a made-for-TV spectacle produced, directed and funded by conservative wealth. But what is certain is that Rick Scott, like the Koch brothers, is using it to present himself as a politician who represents the will of the people.
The Koch brothers operate in the shadows. Rick Scott has stepped into the limelight. But their goals are the same. To advance a conservative agenda and “break Obama.” That also means killing health care reform.
Now it appears that Scott could become the next governor of the Sunshine state. Yesterday, the Miami Herald reported that GOP leaders are flocking to Scott: “Only a week ago, state and national party leaders treated Scott as a dangerous pariah, but now they're eagerly embracing him and hoping for forgiveness.”
“‘Rick articulated a common sense, pro-jobs, conservative message, and that resonated with voters big time. . . . He has our full support,’” said House speaker-designate Dean Cannon, who along with Senate president-designate Mike Haridopolos, funneled more than a million dollars to bankroll TV ads basically depicting Scott as a crook.
“Watching the passel of legislators fawn over Scott at a finance meeting Monday at the University Club in Tampa, it was clear that Mr. Outsider is on the verge of being the kingpin of insiders,”the paper observed.
Yesterday, Florida Governor Jed Bush joined Rick Scott on a “Unity Tour.”
In part 1 of this post, I described how Scott teamed up with financier Richard Rainwater to form the Columbia Hospital Corporation, a for-profit hospital chain that would merge with a second chain, Hospital Corporation of America (HCA) and ultimately be charged with the largest case of Medicare fraud in U.S. history. Columbia/HCA would wind up paying nearly $2 billion in criminal and civil fines, while Scott walked away with cash and stock worth over $300 million. He used that money to win the gubernatorial nomination.
In part 2 below, I describe how Tommy Frist Jr., tapped Scott to become CEO of Columbia/HCA. With Scott at the helm, the company then took off. A ruthless acquirer, Scott displayed a take-no prisoner attitude as he snapped up hospitals, with an eye to monopoly control in as many markets as possible.
Although Scott presented himself as a free marketer who could make hospitals more efficient, the truth is that while he cut his hospitals’ costs, they charged customers more than others, without any proof of higher quality. In fact, doctors and nurses would complain that patients were in danger.
Whatever Scott might say about how free market competition could rein in the cost of health care, that was not his goal. He had one aim: to grow his company, and the price of its stock.
Black Monday, October 19, 1987: the date will be forever remembered on Wall Street as the day that some $500 billion of wealth simply disappeared from the face of the earth as the Dow Jones Industrial Average (DJIA) shed nearly one fourth of its value. Perhaps it is not a coincidence that this was also the day that Forth Worth investor Richard Rainwater teamed up with Rick Scott, a mergers and acquisitions lawyer from Dallas, each pitching in $150,000 to found Columbia Hospital Corporation. Within a matter of years, it would become the largest for-profit hospital company in the world.
For Rainwater, it must have seemed a propitious moment to make a deal. A teenage Texas drag racer turned Wall Street legend, Rainwater had built a billion-dollar-plus fortune by investing when no one else wanted to– buying into beleaguered businesses at discount prices.
That October, Scott and Rainwater snapped up two ailing hospitals in El Paso, and this was just the beginning of their acquisitions binge. It was a turbulent time in the for-profit hospital industry, and Scott began scooping up troubled hospitals right and left, always at a low price. USA Today quoted an admirer who described Scott as one of those entrepreneurs “who gets rich seizing opportunity in an industry reeling in confusion and fear. ‘This is a great time to be in the business,’ said Scott. ‘It's complete chaos. That's when you do well.’”
In 1993 Scott, scored his first megadeal: the $3.2 billion acquisition of Galen Health Care, formerly the hospital arm of Humana Inc. Galen, which was worth $4 billion, merged into Columbia, valued at $1 billion.. In other words, the small fish swallowed the big fish—head-first.
Tommy Frist Jr. Comes A’courting
Two days after Columbia acquired Galen, Richard Rainwater received a call from Dr. Tommy Frist, Jr., chairman of HCA (the Hospital Corporation of America) a for-profit chain that he had founded, along with his father, Dr. Thomas Frist Sr., and Jack Massey, the promoter who turned Harland Sander’s recipe for Kentucky fried chicken into a fast-food success. Frist wanted to meet Scott.
It was the summer of 1993: “Clinton was in office, serious healthcare reform was apparently careening toward passage, and the industry was responding with a sudden burst of consolidations,” Joe Flower explained in a 1995 profile of Scott that appeared in Healthcare Forum Journal. Tommy Frist was the brother of Senator Bill Frist, and keenly aware of what was happening in Washington. He felt it was time for a more aggressive strategy. “‘Coming out of my strategic planning process,’ he says, ‘I felt that there would be a window of 36 to 48 months in which the large, well-financed, aggressive organization that had access to equity (in other words the taxable, publicly-held corporation), would be the most significant player in the reform process. That's when I picked up the phone and called Rick Scott. He was out there putting together exactly the kind of local networks that I envisioned. He was doing it. He had the vision. He had the commitment. And now he had a good group of assets. He was a very attractive partner.’"
Within one month, HCA agreed to a merger, creating a $10 billion behemoth: Columbia/HCA. Scott was named CEO of the new company; Tommy Frist stayed on as Chairman.
As this story unfolds, it is worth remembering that Tommy Frist sought out Scott and chose him to run the Frist family business. Why turn control over to Rick Scott—someone who knew how to buy hospitals, but had no experience running them?
Granted, Scott was driven and ambitious, but why not put him in charge of mergers and acquisitions while naming someone else CEO to oversee what those hospitals, and Scott himself—who had never run a business except a donut business—was doing?
Growth For the Sake of Growth
The HCA merger only whetted Scott’s appetite. As I recalled in part 1 of this post when I first met Rick Scott in 1994, he looked hungry—he would always be hungry. “Plenty” would never be “enough.”
USA Today reports that after landing the deal with HCA, Scott “talked about gobbling up more hospitals and growing eight times. ‘There's no reason we can't have 25% of the beds in the country.’”
In fact, by 1994, Columbia/HCA owned 200 hospitals, and Scott told Time magazine that "we could have 1000" hospitals within 10 years.
“But the company is running out of big frogs to swallow,” Joe Flower noted in 1995. “It owns five percent of the hospital industry, 45 percent of the for-profit sector. It is three times the size of next-biggest for-profit chain, the merging National Medical Enterprises and American Medical, and some 25 times the size of the third-biggest, Health Management Associates.
If Columbia/HCA wishes to keep growing, it must increasingly turn its hungry eyes on individual hospitals and small systems – nearly every day a fax comes through telling of a new acquisition, joint venture or management contract .”
Scott began looking for non-profits that were in trouble. Rainwater believed that they could do for hospitals "what McDonald’s has done in the food business and what WalMart has done in the retailing business.” They wanted to blanket the country with Columbia/HCA franchises that offered cheap, efficient care.
But universal coverage was not their goal. To Scott, a patient was a customer, period, and he questioned whether hospitals should be required to throw their doors open to one and all: “Do we have an obligation to provide health care for everybody?” he asked. “Where do we draw the line? Is any fast-food restaurant obligated to feed everyone who shows up?”
They were focused, not on patients, but on profits. Their goal was growth, and they believed speed was essential. Sometimes they bought a hospital just to close it down, so that it wouldn’t compete with a nearby Columbia property. Scott cared little about the needs of the communities where he bought. “His arrogance and disdain for the concern for communities, was appalling,” said Paul Torrens, MD, MPH, professor of health services management at the UCLA School of Public Health.
But “not everyone” would “roll over and play dead for him,” Joe Flower reported. “A. David Jimenez, CEO of Huguley Memorial of Fort Worth, an Adventist institution, said, "They came here a while back. They wanted 50 percent and control, they said, so that they could present a united front to the insurance companies and large employers. I told them first that it's a church institution and not for sale, and second that I would be happy to take any contract they would take, because I'm confident my costs are lower."
In Ohio “Attorney General Betty Montgomery was so outraged by what she characterized as the ‘peremptory, bullying’ tactics that Columbia employed in its failed attempts to acquire Blue Cross/Blue Shield of Ohio and Massillon Community Hospital that she took the company's Ohio chief aside and delivered a blunt threat,” Business Week reported. “Says Montgomery: I told him that if you want to do business in Ohio, just play it straight from now on. Otherwise, I will fight you in court any time, anywhere.’"
In 1997, when Lawrence Hospital, a community-owned facility in Lawrence, Kan., refused three buyout offers from Columbia, the company took an option on property nearby and sought to build a competing hospital. “‘We like to say here that they approached us in a very aggressive manner to marry them,’ Ray Davis, chairman of the hospital board, told the New York Times. ‘And when we said no, they decided they were going to kill us.’”
Earlier that year, the Times reported, “at a meeting where hundreds of local residents showed up to oppose Columbia's efforts, the city commission unanimously voted to block construction. Columbia is suing the city.”
Columbia/HCA—A Stock, Not a Company
Scott was able to buy so many hospitals so quickly because Wall Street was financing the acquisitions. In Money-Driven Medicine, Gerard Anderson, director of the Center for Hospital Finance and Management at Johns Hopkins University explains: “Throughout most of these years, Wall Street gave the company a price-earnings multiple of 18—which meant that if the hospital earns $10 million, the stock market values it at $180 million—or 18 times earnings.”
This, in turn, meant that “Columbia/HCA could multiply a hospital’s value simply by acquiring it. If the target hospital was valued at six times earnings, it would become worth three times as much [18 times earnings] when it became part of the Columbia/HCA family—and then the company could use the paper gains to buy more hospitals,” says Anderson. “So it keeps on buying hospitals. And as long as its price-earnings multiple is at 18, and it can buy hospitals at six, it can continue to acquire more hospitals and not do anything more efficient—not do anything different—it just keeps on buying.”
Of course, those paper gains were just that—on paper. If, at any point, the music stopped, and the share price of Columbia/HCA fell, the whole house of cards would collapse. Scott’s critics would call this a “Ponzi scheme.”
Ultimately, Scott epitomized those CEOs of the 1990s (Enron’s Ken Lay, et. al.) who saw their company, not as an organization that produced a product that they could be proud of–but as a stock. Share price was all. Questions about whether the company was delivering value to its customers were moot. This explains why Scott would be happy to slash nursing staff, bribe doctors to “put heads on beds” (whether or not those patients needed to be hospitalized), and lie to Medicare.
In many ways Scott was shrewd: he did cut hospital costs. But he didn’t cut prices. Indeed, as I will explain in part 3 of this post, it would turn out that he charged both patients and insurers more than other hospitals. This is how he achieved eye-popping profit margins. Whatever Scott might say about how free market competition could rein in health care spending, that was not his goal. Nor was he interested in making health care affordable for all of us.
Nevertheless, many in the media bought into the notion that that Scott, the bullying buccaneer, was in fact a brilliant free-marketeer. By 1996, he had become an icon, a man Time magazine praised as one of the 25 most influential Americans, alongside Jerry Seinfeld and Sandra Day O'Connor. "In an industry notorious for waste and inefficiency, Scott aggressively consolidates operations and imposes cost controls," Time gushed.
A few years later, Forbes put it somewhat differently “Under Scott, Columbia/HCA ‘Squeezed Blood From’ Each Hospital It Purchased.”
In part 3 of this series, I will describe how Scott cut costs and paid kick-backs to doctors—without lowering the prices that his hospitals charged patients and insurers. Rather than helping to lower the nation’s health care bill, Colubmia/HCA padded the bills that it sent to taxpayers via Medicare. Whistleblowers would testify that the company kept two sets of books, one literally labeled, “Do Not Show to Medicare.” They also reported that HCA kept two sets of books before it merged with Columbia—in other words, before Scott joined the company. This raises a question: how much did Tommy Frist know about Columbia’s book-keeping? Why was he never deposed? Why was Scott never interviewed by the FBI? What happened to shareholders who owned Columbia/HCA Stock?
In the final part of the series, I’ll look at Scott’s efforts to block health care reform, his run to become governor of Florida, the chain of walk-in clinics that he has established in that state, and the charges against them.