“Health care licking its wounds on Wall Street:  Rugged year ends with internet companies flexing their muscles”

The Tennessean, by Keith Snider, January 2, 2000

If Nashville had a market index for health-care stocks, it would have spent last year in the toilet.

How bad was it?

Well, you could buy one share each of about 20 Nashville-based health-care companies that trade on Wall Street and spend less than $200.

Health care or at least traditional bricks-and-mortar forms of it is not the place to park your investment capital for the time being, some experts say.

The more optimistic ones say the industry has bottomed out and there is evidence of a rebound among some publicly traded health-care companies.

"It's always been a cyclical business," said Luke Simons, co-senior partner at brokerage firm J.C. Bradford & Co. in Nashville. "It's got its own internal cycle, and then every three to five years the government mucks with it."

Still, the weakened state of the $1 trillion industry raises serious questions for a city that has come to be identified with for-profit health care and relies in part on health-care jobs to power its economy.

Perhaps the biggest question is whether health care is experiencing a seismic shift fueled by technology.

The Standard & Poor's Supercomposite Healthcare Index managed to finish the year where it began, but that was thanks to a big gain in the last quarter.

Among companies trying to regroup are Tenet Healthcare Corp., based in Santa Barbara, Calif., and Nashville-based hospital companies such as industry leader Columbia/HCA Healthcare Corp., Quorum Health Group, New American Healthcare and Province Healthcare.

While there are other problems haunting hospitals, experts say the biggest factors were spending cuts in the federal Medicare program and tighter payments from insurance companies. Both have made hospitals less profitable and a bigger gamble for investors.
For that reason, companies such as Quorum that have been able to bump up earnings by buying more hospitals aren't buying and their bottom lines have suffered.

Other health-care sectors have been pounded for different reasons.

Assisted-living companies those that buy and run communities where elderly residents can get medical services have suffered because supply has outpaced demand. In Nashville, Advocat and American Retirement Corp. have watched their stocks nose-dive.
And companies that manage physician practices most notably Nashville-based PhyCor Inc. have struggled with economic and structural problems that have forced them to dump troublesome practices and focus on fewer markets.

In other words, it looks like a classic case of an entire industry in retrenchment.

But those who watch health care from the inside question whether it is in trouble or in transition.

"I think what we're experiencing is just the exciting environment here," said Jim Dalton, chief executive officer of Quorum Health Group and chairman of the Nashville Health Care Council.

Dalton, whose own stock has traded near record lows lately, said investors warned him in the late 1980s that hospitals were a risky business to be in just before the sector boomed.

"We heard the Edsel analogy, the buggy whip analogy," said Dalton, who insists hospitals will recover this time around.

J.C. Bradford began following the hospital sector recently because officials think those stocks will turn higher, Simons said.

And there are signs that is occurring, with Columbia/HCA's profit rebounding after a two-year restructuring prompted by federal fraud allegations, and other hospital companies expecting a solid final quarter.

Stocks also rallied a bit after Congress in November earmarked $7 billion of a $16 billion increase in Medicare spending for hospitals.

But the more fundamental shift appears to be in the direction of new technology.
For the first time, venture capitalists are forsaking familiar health-care sectors such as companies that run hospitals and surgery centers in favor of pharmaceutical firms and Internet-based companies that promise dazzling returns.

More than one-third of the $295 million that investors poured into health-care companies nationally in the third quarter went to Internet-related firms, according to a survey by the consulting firm PriceWaterhouseCoopers.

In Nashville, Healthstream snagged $1.8 million in venture capital on the way to an initial public offering of stock. And last month, empactHealth.com said Columbia/HCA Healthcare Corp. had pledged up to $40 million for the local start-up, which will allow hospitals to buy supplies more cheaply online.

Those information-technology firms join others based in Nashville such as Digital Medical Systems Corp., Total eMed and Passport Health Communications.

As health care evolves from bricks to clicks, the city is in a good position to capitalize, said Laura Campbell, who advises start-up firms through Laura Campbell & Associates.  "Information services aren't prepared in a vacuum," she said. "Provider input is crucial. Information technology has to know the issues the industry faces."

Nashville also is nurturing biotechnology companies some of them through the Tennessee Biotechnology Association, which was set up a year ago to help the state capture jobs in pharmaceutical research and biosciences.

With Vanderbilt University here and the Oak Ridge National Laboratory nearby, Nashville is poised to get a sizable share of biotech business, said Dennis Grimaud, president of the statewide association.

"I think there's a tremendous opportunity here," he said. "The technology is not being commercialized in Tennessee. It's being lost to other states."

Grimaud should know.

Earlier this year, Grimaud left Cytometry Associates, the drug research firm he built, to oversee leukemia drug therapy trials being done here by New Hope Pharmaceuticals, a Maryland-based company.

He's also developing two start-up firms HealthSpex, which will record genetic information on computer chips, and Health Information.com, a 'Net-based firm that will let doctors transfer patient files electronically and do diagnoses online.

Besides adapting to the market, bigger health-care companies are likely to buy smaller tech firms rather than develop and pay for technology themselves, Grimaud said.

"The health-care industry is not going to go away. The question is, what's it going to look like?" said Larry Coleman, of Coleman Swenson Hoffman Booth, a Franklin-based venture capital firm.

For example, Coleman said bottom-fishing investors will buy up pieces of three nursing home companies that are in bankruptcy and emerge with smaller, refocused companies.
Coleman's firm is investing selectively in information technology firms, including Healthstream and Passport locally.

The firm looks for $10 million-$15 million companies and typically invests $1 million-$5 million.

One venture capital firm he knows is evaluating 100 Internet companies a week, he said a frenzy that reminds him of the short-lived biotech explosion in the 1980s.

"The idea was, you get a Nobel laureate and go public," said Coleman, who had a hand in taking six biotech firms public. "A lot of them were popping up, and only a few dozen lasted."

With health-care spending expected to top $2 trillion in the first decade of the 21st century, Quorum's Dalton said "stodgy old" hospitals would survive.

Dalton said the best companies would react to changes in genetic research and the use of so-called investigative drugs, as well as to demands from savvy health-care consumers.
Nashville will have a key role in that story, he said. 

"Companies that can add value will succeed," Dalton said. "Those that don't will either change or disappear."