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Columbia/HCA reports a fall in its earnings

Columbia/HCA Healthcare Corp., under pressure from an ongoing federal investigation, reported a 57 percent drop in earnings in the third quarter due in part to a slower rise in hospital admissions and higher operating costs.

The Nashville, Tenn., company said it earned $129-million, or 21 cents per share, for the quarter, compared with $299-million, or 44 cents per share, for the same period a year ago. The earnings decline was the first in five years for Columbia, the nation's largest health care chain. Columbia dominates the Tampa Bay market with 11 hospitals, 10 surgery centers and 27 home health agencies.

The company also took a restructuring charge of $64-million, or 6 cents per share, for the quarter to pay for lawyers and accountants hired to review Columbia's operations in light of the massive government investigation. An unspecified portion of that charge was also paid as severance to 11 top Columbia executives who have been replaced since late July, including founder and former chief executive Rick Scott and president David Vandewater.

The government's investigation, which has focused on Columbia's operations in Florida, has resulted in the indictment of three managers on charges of overbilling for services at Fawcett Memorial Hospital in Port Charlotte. A federal prosecutor has said that the corporation itself is the target of the investigation and that more indictments will be forthcoming.

Battered by bad publicity, Columbia officials warned in early September that their earnings would be lower than expected. However, some analysts were still unprepared for the negative news.

Peter Emch, analyst with BT Alex.Brown in Baltimore, said, "I was surprised at the magnitude of the earnings shortfall, given the hospital admitting trends."

In the third quarter, Columbia's hospitals had a 1 percent increase in admissions, less than the 2.4 percent increase in the third quarter a year ago. Victor Campbell, Columbia's senior vice president, said the slowdown in admissions could not be attributed to any particular region of the country.

"Net-net for the quarter, we saw an increase, albeit less than we're happy with," said Campbell. "The problem is, it happened very quickly, and costs have not been adjusted to reflect lower admission growth."

The company reported higher expenses for salaries, benefits and bad debt. Campbell also blamed lower revenues on an increase in managed care admissions over the past year. Managed care companies typically contract to pay less for hospital services than private insurers.

In reporting its quarterly earnings, Columbia excluded income from its home health, Value Health and pharmacy units, all subsidiaries slated to be sold. Campbell said about 200 companies have expressed an interest in buying all or part of Columbia's home health division, though no decisions are expected until after the first of the year.

One factor that has not yet affected Columbia's finances is the company's decision to buy out physicians who invested in about 35 limited partnerships. Buyout offers were recently sent to investors in five markets, including Tampa Bay. Campbell said it was too early to anticipate the cost of the buyouts.

Eugene Melnitchenko, analyst with Dallas-based Principal Financial Securities, said that though Columbia's third-quarter earnings were lower than expected, he believes the stock has value over the long term.

"Earnings are irrelevant at this point," Melnitchenko said. "The price of Columbia's stock will be supported by their underlying assets. Even if the company liquidates, it's worth about $30 per share."

Many investors apparently shared Melnitchenko's views. Despite reduced earnings, Columbia's shares were down just 50 cents on Wednesday, closing at $27.50.

Melnitchenko anticipates Columbia's earnings will remain depressed for the next several quarters, but that doesn't worry him. "Right now, they're putting out fires," he said. "When they decide which way to move, I expect you'll see a company better focused on acute-care hospitals and not the confusing mess Rick Scott built."

As part of Columbia's ongoing reorganization, the company has reassigned an Orlando executive named in an FBI affidavit as one of the principal subjects of the government's investigation.

Carl Lynn Dick, 53, has been replaced as chief financial officer of Florida's Central Division by Gerald "Jay" Picerno. Picerno, 37, is former chief financial officer for Columbia's 20-hospital Georgia division. Dick has been named director of finance, a new position in which he reports to Picerno.

Though the FBI claims Dick participated in a coverup of Medicare overbilling, no criminal charges have been lodged against him. Dick did not return phone calls for comment.

Emily Clemente, a spokesman for the Central Division, denied Dick had been demoted. She said the new assignment came as a result of the recent expansion of the Central Florida district to include Tampa, Orlando and Volusia County and 18 hospitals.

"After the reorganization, they went through the interview process and selected Picerno," Clemente said. "He had the experience working with a large number of hospitals."

Also affected by the combination of the Tampa and Orlando divisions is Arnie Stenberg, former chief financial officer in Tampa. Stenberg will be reassigned to Columbia's Florida Group office in Fort Lauderdale, though his new job duties have not yet been determined.