A BITTER PRESCRIPTION

By John Greenwald

With lights flashing and sirens screaming, ambulances all across the U.S. rushed patients to hospitals run by Columbia/HCA Healthcare last week. But those were not the only emergencies taking place at the country's largest hospital company. Even as Columbia was growing and doing record business, a fight for survival had broken out inside the executive suite after swarms of federal agents descended on various Columbia offices two weeks ago. The climax came at 8:30 a.m. last Friday, following an extraordinary board meeting held late into the previous night, when directors wrapped up the terms of the resignations of chairman and CEO Richard Scott, 45, Columbia's visionary founder, and president David Vandewater, 46. The big winner was new chairman and CEO Thomas Frist Jr., 58, a physician whose family founded HCA before Columbia acquired it in 1994.

In fact, Frist and the rest of the board had begun to fear for the survival of Columbia (1996 revenues: $19.9 billion), which has long been a lightning rod for critics of for-profit hospitals. Directors were worried that Scott's stonewalling of federal probes of Columbia's Medicare billings and home-health-care practices would only inflame the zeal of investigators and prosecutors and make a face-saving settlement impossible. And Columbia, which is based in Nashville, Tenn., was reportedly exploring a merger with Tenet Healthcare of Santa Barbara, Calif., the country's second largest hospital company. That deal would have been threatened by Columbia's prospective legal problems.

Frist, who had been serving as Columbia's vice chairman and was growing increasingly disenchanted with Scott's leadership, wasted no time in signaling his willingness to cooperate with federal investigators. Frist said he was "dead serious" about addressing Washington's concerns and would launch at least three internal probes this week to ascertain whether company managers had broken any laws.

For Scott, a lawyer by training, the abrupt departure marks the end of a wunderkind career as the health-care industry's most ambitious--and controversial--empire builder. A headstrong, self-centered manager--"He regards anyone who is not totally for him as the enemy," says an insider--Scott has always been a man in a hurry. In 1987 he and Richard Rainwater, a Fort Worth, Texas, billionaire, each invested $125,000 in a pair of struggling hospitals in El Paso, Texas. That became the seed for Columbia's present holdings of 1,062 hospitals, outpatient surgical centers and home-health-care centers in 36 states, England, Switzerland and Spain.

In the end, Scott's hubris may have cost him his empire. Amid signs of growing trouble at Columbia, he continued to pursue business as usual. In fact, the business was going badly askew. The problems worsened in March when agents descended on Columbia hospitals in El Paso, scooping up medical files by the truckload. Among other things, the feds sought evidence that Columbia, which treats some 125,000 patients a day, had overcharged Medicare by millions of dollars. Two weeks ago, federal agents seized documents from 31 Columbia locations in six states (Florida, North Carolina, Oklahoma, Tennessee, Texas and Utah). By last week, agencies ranging from the FBI and the U.S. Postal Service to the departments of Defense and Health and Human Services had obtained more than 35 warrants that target the company.

Scott's refusal to consider--much less negotiate--a possible settlement was in keeping with his pugnacious stance on health-care administration. As head of Columbia, Scott demanded that acquired hospitals hit relentlessly ambitious profit targets year after year, raising concerns in some quarters about the quality of the medical care that patients were receiving.

As the federal probes intensified last week, Scott huddled with a handful of close friends, including Columbia director Michael Long, and concluded that his defiance of Washington was no longer tenable. That must have come as a considerable relief to Frist, who with his father had founded HCA in 1968. "Frist saw the family's name being tainted, and he couldn't take it anymore," says Kenneth Abramowitz, who follows the health-care industry for the Sanford C. Bernstein investment firm. But a high-ranking FBI official derided as "ludicrous" any notion that Scott's departure will end the government's probe of Columbia. Says he: "This is an investigation that is very much ongoing."

--Reported by Sally B. Donnelly/Washington, Elisabeth Kauffman/Nashville and Stacy Perman/New York

With reporting by SALLY B. DONNELLY/WASHINGTON, ELISABETH KAUFFMAN/NASHVILLE AND STACY PERMAN/NEW YORK