Hospitals Shake off Scandals as Healthcare Reform Revives Interest in the Industry

Last Updated May 3, 2010 1:20 PM EDT

When it comes to troubled hospital chains, "forgive and forget" seems to be the prevailing mantra-something HCA's private-equity investors likely had in mind when they decided to explore the initial public offering that has created some buzz in recent days. The promise of 32 million previously uninsured patients flooding HCA's 250-plus hospitals and clinics has all but erased memories of the chain's scandal-plagued history.

For those who need a refresher course on HCA's troubles, here goes: In 2003, the hospital chain paid the federal government $1.7 billion in fines to settle what was then the largest health care fraud case in U.S. history. The allegations against HCA ranged from improperly billing the government for unnecessary lab tests, to offering physicians financial rewards for recruiting new patients.

HCA pled guilty to more than a dozen charges, sparking an outcry over the need for improved governance practices in the nation's hospitals. The company got the message, as evidenced by the 38-page code of conduct that HCA requires every employee to sign -- and that it now posts prominently on its Web site.
HCA's band of private investors, led by KKR and Bain Capital, are no doubt inspired by the recent success of other previously troubled hospital chains. Five years ago, Tenet Healthcare (THC) was beset by allegations that it over-charged federal health plans and performed unnecessary cardiac surgeries at a California hospital. Much like HCA, Tenet has shed underperforming assets and lowered debt, in addition to getting a handle on ethics and governance. Over the past year, Tenet's shares have risen threefold.

The mere prospect of healthcare reform has been enough to bolster other hospital groups. Shares of Community Health Systems (CYH), a 29-state chain, have doubled in the past year and are now just shy of $40 a share. The Southeastern-based Health Management Associates has tripled to $9.

HCA's private investors have done more than just repair the hospital company's damaged reputation. HCA has also focused on the sweet spots of the hospital market. It has sold off hospitals in rural areas of Virginia, Oklahoma, Tennessee and other states, and beefed up high-margin services such as outpatient surgery and medical imaging in places like California and Florida -- where an aging population creates a constant demand. It's all the more reason patients and investors alike have all but forgotten HCA's past sins.