The real Frist-HCA scandal.

The real Frist-HCA scandal.

The real Frist-HCA scandal.

Moneybox
Commentary about business and finance.
Sept. 27 2005 4:32 PM

Frist's Real HCA Scandal

It's how he and his party have helped ruin the family business.

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Frist: on the wrong wicket

Senate Majority Leader Bill Frist's 2008 presidential campaign has gotten off to a rocky start, what with the Securities and Exchange Commission and a U.S. attorney investigating whether Frist ordered the sale of his shares in HCA, the hospital company his family founded, because he knew the stock was about to plummet.

Frist welcomes the investigation, and he's probably correct that he will be cleared of wrongdoing. Sure, his blind (or perhaps seeing-eye) trust sold shares in the company ahead of a disappointing earnings report in July. But a shrewd investor (or broker) didn't need a personal tip from a company official to dump HCA in May and June. You could just look at sales by HCA executives—widely available to the public through SEC filings and on free services like Yahoo! finance—to see how company insiders were trying to get out before a crash.

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The real story about Frist and HCA is just how little he has done to help his family company. As Senate leader, he has done nothing to address the health-insurance problems that have caused HCA's stock to plummet. Republican policies have been troublesome for many health-care businesses, but they have been particularly devastating to HCA.

Here's why. HCA and other large hospital companies face a serious problem. They can't refuse to serve customers who show up at emergency rooms, even those who lack insurance. As a result, they wind up giving away or writing off a significant chunk of the services they provide. In the disappointing second quarter, between charity care, bad debts, and special discounts extended to the uninsured, HCA essentially gave away $1 billion in services, about 15 percent of its revenues.

Even with several consecutive years of economic and job growth, uninsured patients—or underinsured patients who prove unable to pay their bills—have continued to flood into HCA's hospitals. Between 2000 and 2004, the company's provision for doubtful accounts more than doubled, rising from $1.255 billion, or 7.5 percent of revenues, to $2.7 billion, or 11.4 percent or revenues in 2004. This year is looking no better. In the first quarter of 2005, uninsured emergency-room admissions were up more than 15 percent. In the second quarter of 2005, provisions for doubtful accounts ate up an even higher proportion of revenues than they did in 2004: 11.6 percent. Meanwhile, in the second quarter of 2005, the company provided $275 million in charity care, up 18.5 percent from the second quarter of 2004.

How is it that, in the midst of the purported Bush Boom, HCA each quarter has to write off a huge—and growing—chunk of its potential revenues? Long-standing macro politico-economic trends, including the increasing divorce of work and health benefits and the government's disinterest in the problem, are to blame. Four years of economic growth—the brief recession ended in the fall of 2001—simply haven't made a meaningful dent in the number of the uninsured. According to the Census Bureau, the number of Americans without health insurance rose from 45 million in 2003 to 45.8 million in 2004, holding steady at 15.7 percent of the population. Plenty of jobs may have been created in 2004. But increasingly, American jobs don't come with health-care benefits. The percentage of Americans whose health care was covered by employers fell from 60.4 percent in 2004 to 59.8 percent. (Thanks, Wal-Mart!)

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These national trends have disproportionately affected HCA because of its Southern strategy. Founded and based in Tennessee, HCA has sought growth by expanding into rapidly developing, union-hostile, business-friendly (and poor) Southern states. The company's fact sheet says it has 190 hospitals and 91 outpatient centers in 23 states, England, and Switzerland. But check out the facility location map (here's an interactive one). It looks like something you'd find on Karl Rove's laptop. Operations are concentrated in Florida, Texas, Georgia, Tennessee, Louisiana, Virginia, South Carolina, Oklahoma, Missouri, and Colorado. The only outpost in the northeast is in New Hampshire. By my count, only 15 of HCA's 281 facilities are in states that voted for John Kerry in 2004.

HCA is drawn to states in the old Confederacy and Sun Belt, such as Texas and Florida, for the same reasons that Republicans have focused so much attention on them. Employment and population are growing more rapidly there than in the congested, competitive Northeast and Rust Belt. And in theory, states in which Republicans predominate should be good for business—lower taxes, less regulation, and so on. This is true—except if you're in the business of providing health care. The regions and states in which HCA has chosen to set up shop are noteworthy for their lack of businesses that provide health care to workers. As Figure 5 in the Census report shows, the regional uninsured rates break down as follows: South, 18.3 percent; West, 17.4 percent; Midwest, 11.9 percent; and Northeast, 13.2 percent. As this Robert Wood Johnson Foundation report shows (see Figure 5 on Page 10), of the six states with the worst record on insuring the employed—Texas, Louisiana, New Mexico, Montana, and Oklahoma—four are big HCA states.

If Bill Frist were really interested in his portfolio and the long-term fortunes of HCA, he wouldn't be messing around with blind trusts. Instead, he might propose a national debate on what companies and the government can do to increase the proportion of the population that has insurance. Or he might start to echo the thinly veiled call for some form of national health care that HCA CEO Jack Bovender has been making in recent years. Or, as Republican National Committee Chairman Ken Mehlman has been doing, Frist might raise question s about his beloved institution's Southern strategy.