NASHVILLE: HISTORY OF A HEALTH CARE INDUSTRY CAPITAL

Key Ingredients, Rich History Create a Vibrant Mix
Tied intricately to the hospital industry, Nashville’s health care sector today displays a more diverse mix of companies than ever. The city’s 19 publicly traded health care companies in 2006 span hospital management, disease management, surgery centers, dialysis, long-term care, correctional health care, information technology and pharmacy benefit management.

No matter the segment, three distinct characteristics have defined Nashville health care over the years: a risk-taking spirit, innovation and the ability to embrace market changes with business acumen.

The roots of Nashville's vibrant health care sector date back to 1968 when two hospital management companies, both the first of their kind, were founded: Hospital Corporation of America (HCA) and Hospital Affiliates Inc. (HAI). They set forth to streamline a predominantly not-for-profit cottage hospital industry into an organized, efficient system for hospital management. At that time, few in Nashville's business community realized they had witnessed the birth of an industry and even fewer suspected the dynamic changes to Nashville's business landscape that would follow.

Their creation planted an entrepreneurial seed in Nashville that continues to flourish. As both entities grew—they would go on to merge in 1981 with control over a fifth of all privately owned hospitals in the United States—the city produced an impressive assembly of bright health care minds who repeatedly seized the opportunity to create their own companies amidst a corporate change. The result? Four new industry segments have been created or fostered by Nashville-based companies: hospital management, freestanding outpatient surgery centers, physician practice management groups and disease management.

Alongside these entrepreneurs grew a strong professional services infrastructure capable of maneuvering deals through health care's intricate legal and accounting systems, structuring complex financing and providing sound, useful service applications to the industry. Their deep understanding of, and close proximity to the health care community, fortified Nashville's position as the health care business capital.

Capital, the key ingredient for any industry powerhouse, is also part of the Nashville equation. From budding entrepreneurs in search of pre-seed funds to seasoned veterans in need of large amounts necessary to engineer an acquisition or leveraged buyout, Nashville health care executives have access to local capital and can catch the eye of Wall Street as well. For example, the most recent MoneyTree survey conducted by PriceWaterhouseCoopers shows that Nashville-based health care services firms, with $73 million raised, comprised 28 percent of the $260.4 million invested in the Southeast in the second quarter of 2004. Additionally, a 2003 study by the Nashville Health Care Council and Owen Graduate School of Management at Vanderbilt University shows that 15 publicly traded health care companies—the city is now home to 17 publicly traded health care companies—attracted $23 billion in debt and equity financing from 1994 to 2001.

Led by entrepreneurs, supported by a strong professional infrastructure and fueled by capital, Nashville’s prolific health care sector has reaped huge benefits for the city. Based on 2003 revenue figures, Nashville's 19 publicly traded health care companies in 2006 generated more than $75 billion in annualized revenue. The more than 3,000 health care providers, facilities and management companies account for roughly $4.1 billion per year in annual payroll, which is the largest single source of payroll in the region among non-government industry sectors.

The Lynch Pin - Hospital Companies
HCA’s merger with HAI marked the beginning of trend. Over the years, whether it was the spin-off of HealthTrust in 1987 and the buyback in 1995 or the spin-off of Quorum Health Group in 1991, or the HCA spin-off of Triad Hospitals in 2001, talented hospital administrators trained at HCA have launched countless companies.

Consider HealthTrust. Upon retiring from HealthTrust, former Chairman and CEO Clayton McWhorter launched a venture capital firm named Clayton Associates in 1996 along with his son Stuart. Today, the firm has invested in more than 40 private equity deals, many of which are health care startups. Clayton Associates anchors a sprawling office park south of Nashville in picturesque Franklin, Tennessee where emerging health care companies thrive, like rapidly growing behavioral health company Psychiatric Solutions led by former HCA division president Joey Jacobs, assisted living chain LifeTrust of America, hospital chain Iasis Healthcare Corp. and transcription company Spheris.

HealthTrust’s former president and chief operating officer, Charles N. Martin, Jr., bought hospital chain Republic Health, created OrNda Healthcare Corp., grew it to the nation’s third largest investor-owned hospital chain and eventually sold it to Tenet Healthcare Corp. in 1997 for $1.8 billion. Rather than retire, Martin jumped back in the game. He launched hospital chain Vanguard Health Systems with Morgan Stanley Capital Partners in 1997, and also funded a slew of health care startups including Vger Technologies, Health Connections, Symbion ARC, Trinity Medcare and NetContent. (Vger, later named Phyve, and Health Connections, later named Coactive Systems, both sold to information technology firm First Consulting Group in 2003. FCG, thanks to its buyout of Nashville-based Codigent Solutions, runs a growing infrastructure services business in Nashville.) Martin’s crop of companies were housed in Burton Hills, yet another office complex teaming with health care businesses such as surgery center companies AmSurg Corp., Surgis, Symbion and Surgical Alliance, along with hospital operator Ardent Health Services.

In August of 2004, the Blackstone Group acquired Vanguard for $1.175 billion. Just weeks before, hospital chain Iasis Healthcare founded in 1999 and run by former HCA alum David White, was bought out by Texas Pacific Group for $1.4 billion.

Following that news, HCA spin-off LifePoint Hospitals Inc. announced its intention to buy Province Healthcare for $1.13 billion, marking the first merger of two publicly traded hospital companies since Triad bought Quorum for $1.4 billion in 2001. (Originally HCA’s hospital management company, Quorum was spun out in 1991 with HCA executive Jim Dalton at the helm. Triad, on the other hand, was spun off from HCA at the same time LifePoint was in 1999.)

LifePoint and Province represent two of many rural hospital companies hatched in the late 1990s and early part of 2000. These chains purchased small, community-based hospitals, many of which had been adversely impacted by the Balanced Budget Act of 1997, which significantly decreased payments hospitals received from the government.

Both companies’ leaders typify the Nashville health care executive and represent the prolific nature of the industry. Province CEO Marty Rash founded the company after a successful stay at Nashville-based Community Health Systems, the nation’s largest rural hospital chain founded by Dick Ragsdale and Tom Chaney in 1985 and later bought out by Forstmann Little and Co., who appointed former Humana leader Wayne Smith as CEO. Province co-founder and CFO Richard Gore would later go on to launch rural chain Attentus Healthcare with Quorum alum Bob Yeager in 2003 with approximately $75 million from Joseph Littlejohn and Levy, the original investors of Iasis.

LifePoint, which HCA spun out as part of its effort to right size following its departure from the Columbia/HCA business plan in the late 1990s, is run by longtime HCA alum Ken Donahey. LifePoint, and the Nashville health care community as a whole, suffered tragic losses when LifePoint’s previous two leaders, 38-year-old Scott Mercy and 54-year-old Jim Fleetwood, both former HCA executives, died unexpectedly in 2000 and 2001 respectively. Mercy had also served as CEO of Nashville-based America Service Group, a provider of health care services to correctional facilities, which relocated its corporate headquarters to Nashville in 1996.

Hud Connery, the chief operating officer of HealthTrust, would go on to launch Arcon Healthcare and then hospital chain Essent Healthcare in 1999 with investments from Thoma Cressey Partners. Essent grew slowly and deliberately, completing the first acquisition of a not-for-profit hospital in the state of Connecticut. By 2004, the company would generate $300 million in annualized revenue and catch the eye of New York-based Vestar Capital Partners, which led an $80 million investment in the company in 2004.

Meanwhile, NetCare Health Systems, a hospital chain launched by former HealthTrust CFO Mike Koban in the late 1990s with $50 million in capital, sold to Atlanta-based Sunlink in 2001. New American Healthcare, a similar company started by HealthTrust regional vice president Rob Martin with a $50 million investment, would sell majority of its facilities to two former management members Tim Hill and Gene Wright in 2000. The pair formed rural chain HealthMont Inc., which also sold to Sunlink in 2001.

Ardent Health Services, formerly Behavioral Healthcare Corp., became a major player in the acute care hospital sector when the company received a $187 million infusion from Welsh Carson in 2001. Former Columbia/HCA executives David Vandewater and Jamie Hopping have led an impressive acquisition strategy since taking the company over.

HCA, meanwhile, completed the largest not-for-profit hospital purchase in 2003 with the addition of Kansas City-based Health Midwest for $1.125 billion. The company continues to thrive as the nation’s largest investor-owned hospital company under the leadership of Jack Bovender, who replaced co-founder Dr. Thomas Frist Jr. as CEO and then chairman upon his retirement in 2001.

A Logical Evolution: Surgery Centers and Physician Practice Management
After HAI sold to HCA, HAI executive Joel Gordon launched Surgical Care Affiliates (SCA) to develop freestanding ambulatory surgery centers with physician partners in 1982. The company was the first of its kind. As more medical procedures were approved for the outpatient setting and physicians grew more frustrated with managed care, these companies thrived. The density of so many skilled managers from the hospital industry, all with the ability to form relationships with physicians, put Nashville in the sweet spot of this trend.

Birmingham-based HEALTHSOUTH Corp. and HCA were the acquirer of many of the surgery center chains like SCA in the mid-1990s. HEALTHSOUTH bought SCA for $1.6 billion in 1995 and also gobbled up Rock Morphis’ Nashville-based Heritage Surgical Corp. (Prior to the sale, SCA executive Ken Melkus would spin out the HMO arm of SCA, name it HealthWise of America, and eventually sell it United Healthcare for $350 million in 1996.) HCA, on the other hand, acquired Medical Care America for $850 million in 1994.

With many of the ambulatory surgical center chains acquired by the late 1990s, Nashville’s entrepreneurial pool switched its focus to physician practice management, or the business of buying physician practices. In response to managed care’s increasingly negative effects on their earnings, health care providers were focusing on building integrated delivery systems and physician practices were recognized as a key element of the system.

Nashville produced more than a dozen PPMs as they were called, ranging from UniPhy, to Ortholink, which managed orthopedic physicians, to MediSphere Health Partners, which targeted OBGYNs, to Urology Health Group, which managed urologists. The biggest PPM, however, was PhyCor headed by CEO Joe Hutts, who previously led HCA’s health plan division Equicor.

Over time, the PPM business evolved because of market forces. Looking to survive, many of these specialty PPMs such as MediSphere, Ortholink and Uniphy would return to the surgery center model. Driving the industry was physician preference, the approval of more than 70 percent of procedures for the outpatient setting and the growing baby boomer generation’s demand for health services. UniPhy would merge with Nashville-based Ambulatory Resource Centres to become Symbion and eventually go public in early 2004. The company bought MediSphere that same year. Ortholink would sell to Dallas-based United Surgical Partners and Urology Health Group would transform into a physician software company named CIMplify.

PhyCor, after not completing a proposed merger with Health Partners, would eventually file for bankruptcy and evolve into an independent practice association (IPA). Meanwhile, the company’s senior management team, including Joe Hutts, Derril Reeves and John Crawford, would go on to found ambulatory surgery center company Surgis. Backed by a $120 million investment from New Mountain Capital in 2002, Surgis grew quickly alongside its counterparts.

During this same period, Nashville-based AmSurg Corp. continued to carve out its strong niche in the surgery center market by pursuing single-specialty centers. This publicly traded company was spun off in 1997 from American HealthCorp., the predecessor to American Healthways.

Joel Gordon, meanwhile, the founder of the outpatient surgery industry segment, would move into the post of interim chairman of HEALTHSOUTH in 2003 amidst a corporate accounting probe. The company later recruited HCA Division President Jay Grinney as CEO in 2004.

Other Outpatient Service Providers
The same managerial talent needed to grow surgery center companies influenced other outpatient services providers, such as dialysis chains and imaging centers – additional key sectors in Nashville’s dynamic health care community.

Renal Care Group, founded in 1995 by former HCA Chief Financial Officer Sam Brooks, is the fourth largest publicly traded dialysis chain in the nation. Gary Brukardt, a former executive with Baptist Hospital in Nashville, moved into the CEO role after Brooks’ death in 2003. Vanderbilt University Medical Center’s Harry Jacobson, vice chancellor for Health Affairs and nephrologist by training, is on the board of Renal Care and closely tied to the company as an original founder. In 2004, Renal Care purchased Nashville-based National Nephrology Corp. for $345 million, adding 87 centers to its chain. (The same group of executives who successfully launched and sold RenCorp. to Gambro in the mid 1990s founded National Nephrology.)

Meanwhile, Joe Cashia, a previous executive with both companies, launched his own renal dialysis venture in 2002, National Renal Alliance, attracting $23 million in venture capital.

The growth of outpatient imaging centers has also contributed to Nashville’s pervasive presence across the U.S. health care system. MedInc., one of the earliest outpatient imaging center companies, formed here. The company merged with AdvaCare Diagnostics to establish Image America/Med Alliance and eventually sold to Health Images in 1995.

As new imaging technologies gained approval, such as positron emission topography in the early 2000, Nashville’s strong managerial talent was positioned to bring them to market.

Two examples of this are Frank Kyle’s Outpatient Imaging Affiliates and Tim Petrikin’s e+ healthcare. Kyle, a veteran of the local imaging center sector, was CEO of Nashville-based National Imaging Affiliates (NIA). HEALTHSOUTH bought NIA in the mid 1990s and spun out the management arm named MedSolutions, which is today based on the outskirts of Nashville in Franklin. As PET scanners gained approval from Medicaid, Kyle captured an investment from MedCare Investments of San Antonio, a private equity firm tied to the late Sam Brooks, and launched Outpatient Imaging Affiliates in 2000 to bring the technology to market.

Tim Petrikin, a former OrNda and Symbion executive, also pursued the PET market when he launched e+healthcare in 2002 with capital from Vanguard’s Charlie Martin Jr.

Disease Management
In the same way managed care emerged as a cost saving measure in the 1990s, disease management sprung forth in the late 1990s as a key strategy for stemming rising health care spending by taking costs out of the system. Led by industry leader and pioneer Nashville-based American Healthways, disease management companies work closely with patients to enhance their involvement in their own health care through contact with nurses trained in the management of chronic diseases. The strategy focuses on outcomes, keeping patients with chronic disease healthier, and keeping them out of higher-cost care centers. Originally named American Healthcorp until 1997, American Healthways has soared under the leadership of former CEO and current Chairman Tom Cigarran, and Ben Leedle, who became CEO in 2003. Today, the company has more than 1 million lives under management.

Wellness companies, who like disease management firms, work to increase patient participation in health care, are also on the rise in Nashville. Gordian Health Solutions, founded by former HealthTrust executive Yonnie Chesley, backed by Clayton McWhorter, and now under the leadership of Gregg Lehman, has grown significantly since its inception in the mid-1990s.

Long-term Care
A longtime component of Nashville health care, eldercare and long-term care has undergone many reimbursement changes over the years. Publicly traded companies like American Retirement Corp. (founded by Dr. Thomas Frist Sr. and Jack Massey), American Home Patient, Advocat and National Health Care (in Murfreesboro, Tenn.) are beginning to rebound after suffering a setback in the mid to late 1990s, when industry capacity outgrew its available patient population. Since then, stocks of the publicly traded companies have begun to gain steam again, and are expected to up tick as the rapid number of growing baby boomers is expected to propel the industry.

LifeTrust America, a privately held chain of assisted living centers founded by Clayton McWhorter, held steady under the leadership of David White, who is now CEO of hospital company Iasis. Pat Mulloy, former CEO of Apria Inc., now runs LifeTrust and oversaw the purchase of nine facilities from ManorHouse Inc., putting LifeTrust’s facility count at more than 48. It is in the top 20 nationally among long-term care providers.

Health Care Information Technology
Information technology firms such as HMS, Medstat/Inforum and Passport Health Communications developed alongside Nashville’s hospital companies. Medibuy, an e-commerce provider backed by HCA, sprouted in the height of the dotcom era. It eventually sold to Global Healthcare Exchange in 2002. In typical Nashville fashion, CEO Eddie Pearson would go on to work for an emerging health care IT company named DigiScript, which is funded in part by Envoy founders Fred Goad and Jim Keaver.

Purchased by WebMD in 2000, Nashville-based Envoy was an early electronic claims clearinghouse that thrived under Goad and Keaver’s leadership during the 1990s. The pair now runs Voyent Partners, a local investment firm. New Jersey-based WebMD, meanwhile, has a significant presence in Nashville through its WebMD Envoy subsidiary.

WebMD also bought Nashville-based Medifax EDI in 2003, a clearinghouse company similar to Envoy. Wasting no time, former Medifax CEO Buddy Bacon took the helm of local billing company, Healthcare Management Resources, in 2004. Three local investors led a $7 million investment in the company upon his arrival as CEO.

HealthStream Inc., a provider of electronic continuing medical education, attracted significant interest when it went public in April 2000 during what would be the final days of the bull market of the late 1990s. Founder and Chief Executive Bobby Frist is the nephew of U.S. Senate Majority Leader Bill Frist and HCA Co-Founder Dr. Thomas Frist Jr.

Spheris, an electronic transcription company originally named Total eMed and founded by Nashvillians John Dayani and Dick Rheem, moved back to Nashville in 2003 after its previous sale to MedaLogic/MedScape. Former Envoy executive Steve Simpson serves as CEO. Spheris, along with Passport Health, an electronic verification company with local venture capital, have both been pursuing acquisition and related growth in the last two years.

Biotechnology
Still considered a fledging industry in Nashville, the biotechnology sector is gradually building the network of capital, professional infrastructure and entrepreneurs needed to make it thrive. Early companies like Cytometry Associates, ClinTrials Research, Celeris, and multiple Vanderbilt spin offs have provided the framework for biotech in Nashville.

Since 2000, the local industry has benefited from Vanderbilt’s increased interest in commercializing research coming out of its laboratories and from the arrival of BioMimetic Pharmaceuticals, a very promising company with high caliber venture capital whose lead technology is a bone and tissue growth factor for use in dental applications. Chief Executive Samuel Lynch was instrumental in the construction of the area’s first life sciences park named the Cool Springs Life Sciences Center. Vanderbilt’s Office of Technology Transfer played a key role as well, leasing a portion of the space for its emerging technologies.

Meanwhile, A.J. Kazimi’s Cumberland Pharmaceuticals, founded in 1999 as a specialty pharmaceutical company, took root. Previously, Kazimi served as CEO of another former Nashville biotech company named Therapeutic Antibodies. In 2002, Cumberland Pharmaceuticals joined with Vanderbilt and the State of Tennessee to create Cumberland Emerging Technologies (CET), an incubator located in downtown Nashville committed to growing biotech start-ups. In early 2004, Cumberland Pharmaceuticals received FDA approval for its fourth major product, Acetadote, an injectible antidote for acetaminophen overdose.

The Arrival of Caremark Rx
In what’s been described as a great coo for Nashville’s health care and business community, publicly traded pharmacy benefit manager Caremark Rx relocated to Music City from Birmingham, Alabama in May of 2003. Nashville’s top brass, including Governor Phil Bredesen, Mayor Bill Purcell, HCA Co-Founder Dr. Thomas Frist Jr. and Vanderbilt Nursing Dean Colleen Conway-Welch, welcomed Caremark to town at a downtown press conference. Remarkably, four months after its relocation announcement, Caremark announced it would buyout competitor AdvancePCS. With more than $26 billion in annualized revenue, the combined companies edged Caremark past HCA as the largest public company in Nashville on a revenue basis.

Local Providers
Innovation and risk taking also characterize Nashville’s not-for-profit hospital community.

After years of merger talks between local providers, Ascension Health-owned

St. Thomas acquired Baptist Hospital in 2001, creating the largest faith-based health system in the area. Saint Thomas Health System includes St. Thomas Hospital, Baptist Hospital’s flagship facility near downtown Nashville, Middle Tennessee Medical Center in Murfreesboro, Baptist DeKalb and Baptist Hickman. St. Thomas Chief Executive Tom Beeman orchestrated the merger and runs the health system.

Under the leadership of Dr. Harry Jacobson, a nationally recognized nephrologist and health care entrepreneur, Vanderbilt created the $10 million Chancellor’s Fund in 1999, an investment fund to help move innovative products and ideas into the marketplace. Since then, the Chancellor’s Fund has invested in more than 14 companies, all of which were born out of Vanderbilt-generated technologies or business plans.

The school also established its position as a national leader and respected source in the health care informatics area. The Vanderbilt Center for Better Health, funded by the sale of Vanderbilt’s computerized physician order entry system to McKesson, would become a test bed of informatics programs for Vanderbilt and health care organizations across the country. The center also helped set the national agenda on health care information technology initiatives that began to take shape in early 2004.

In 1998, Vanderbilt formed a strategic, innovative alliance with Meharry Medical College, the nation’s largest historically African American institution dedicated to educating health care professionals and biomedical scientists in the United States. Founded in 1876, Meharry educates more than 15 percent of the nation’s African American physicians and dentists. Located in North Nashville, its campus is also home to Metropolitan Nashville General Hospital. Meharry Medical College’s president is Dr. John Maupin, who also sits on the boards of LifePoint Hospitals and HEALTHSOUTH.

Beyond Business
Such steep knowledge and practical wisdom have given Nashville the largest concentration of publicly traded health care services firms in any city in the country. Nashville’s leadership role in health care has also impacted state and federal health care policy. Current Tennessee Governor and former Nashville Mayor Phil Bredesen, currently in the midst of overhauling the state's TennCare program, moved to Nashville in the 1970s to work for HAI. (At the time, HAI was owned by INA Corp., the predecessor of modern day CIGNA.) His managed care and business expertise was honed through multiple startups he helped to found and lead, including Coventry Corp. and HealthAmerica, which he founded in the den of his home in 1980 and was sold to Maxicare six years later for $400 million.

At the federal level, Dr. William Frist, the brother of HCA co-founder Thomas Frist, Jr. and the son of Dr. Thomas Frist Sr., became majority leader in the U.S. Senate in 2002. In this position, Senator Frist, a former transplant surgeon at Vanderbilt University Medical Center, plays a key role in national health care reform, AIDs research and funding, bioterrorism and advancing biomedical research.

Former Nashville lawyer and Tennessee commissioner of Human Services under previous Governor Ned Ray McWherter, Nancy-Ann Min DeParle served as administrator of the Health Care Finance Administration, now called the Center for Medicare and Medicaid Services (CMS). She now sits on numerous for-profit health care boards, as well as the Medicare Payment Advisory Commission (MedPAC), and consults the venture capital arm of J.P. Morgan Partners on health care investments.

Dr. David Satcher, former president of Meharry Medical College, served as16th surgeon general of the United States and assistant secretary of Health from 1998 to 2002.

Additionally, Vanderbilt University Medical Center produced two Nobel Laureates: Earl Sutherland, who won the 1971 Nobel Prize in medicine for his discoveries pertaining to the mechanisms of the actions of hormones, and Stanley Cohen who won in 1986 for his discovery of epidermal growth factors.

Dr. Colleen Conway-Welch, dean of Vanderbilt’s Nursing School, served on the Advisory Council on Public Health Preparedness, the Medicare Coverage Advisory Committee and on the National Bipartisan Commission on the Future of Medicare. She currently serves on the boards of the National Academy of Sciences Institute of Medicine and the Healthcare Leadership Council, along with numerous other federal, not-for-profit, and company boards and advisory groups.

Securing Nashville’s Industry Power House
As for the Nashville Health Care Council’s history, the organization was founded in 1995 as an affiliate of the Nashville Area Chamber of Commerce. Realizing the industry was a vital part of Nashville’s future, the chamber moved to preserve, protect and elevate the city’s status as a health care capital in establishing the organization. An advisory committee of 27 top health care CEOs gathered to assist the chamber in its efforts and played a key role in the Council’s formation. Reflective of the industry’s overall strength, the Council’s Board of Directors – both at its founding and today – is made up of a “world class” group of health care executives. In addition, the Council’s office was initially located in the Jack C. Massey Business Center—Massey co-founded HCA with Dr. Thomas Frist Sr. and Jr—at Belmont University. Today, the organization continues to foster a supportive environment for companies ranging from startups to established relocating businesses such as Caremark. Providing senior executives with valuable information on operational and policy challenges, as well as networking and mentoring opportunities, are all part of the Council’s mission.

And last, but certainly not least, the Council nurtures the next generation of health care entrepreneurs, the key driver of future growth in Nashville’s health care community. In 2002, the Council helped to create the Young Health Care Leaders organization to support and foster the community’s rising health care professionals. Now known as Leadership Health Care, this group of up-and-coming leaders will ensure a bright, dynamic future for Nashville’s health care industry. The Council and Leadership Health Care are working to ensure the next three decades will be as promising as the last, positioning Nashville’s dynamic health care industry to play an important role in the quality and delivery of care given in our nation and beyond.

For more information, please contact the Nashville Health Care Council at 615.743.3140 or This email address is being protected from spam bots, you need Javascript enabled to view it .