HealthSouth’s Digital Dream
December 1 2001 by Jennifer Pellet
Richard M. Scrushy had a vision. Never one to think small, the CEO of HealthSouth Corp., a $4.2 billion company that owns and operates more than 2,000 hospitals and outpatient surgery centers, wanted to do something special to update one of his largest facilities. After all, this particular facility was right in his own backyard, just eight miles from HealthSouth’s headquarters in Birmingham, AL. It should be the company’s crown jewel, Scrushy reasoned, a showplace of the latest innovations in medical technology, the stuff, really, of science fiction come to life.
And it could happen. A wireless communications network and a centralized medical record database would enable physicians equipped with lightweight computer pads to pull up patients’ vital signs or medical records from anywhere at any time. Replacing traditional X-ray film with digital diagnostic imaging and radiology would speed both testing and access to test results, and outfitting patient beds with interactive screens that allow caretakers to enter treatments and update records electronically would eliminate paperwork and reduce the risk of medical errors.
But Scrushy’s sci-fi dreams have a price. Such an overhaul would mean scrapping the existing $85 million building, systems, and equipment and beginning anew. The cost? A whopping $150 million, nearly three times the estimated cost of a mere upgrade. While the operating efficiencies gained would eventually recover the initial investment, it would take time, making the move a hard sell for a public company. “I don’t know anybody in the financial community who can think three years out,” Scrushy says. “They work on 90 days.”
Unwilling to let his dream perish for want of $100 million or so, Scrushy shopped for a partner. His first stop was the office of Lawrence J. Ellison at Oracle Corp., the world’s second-largest software manufacturer, with headquarters in Redwood Shores, CA. Scrushy’s pitch? “Oracle spends a billion a year on R&D. Why not spend $100 million on the largest industry in the world?” he asked.
Oracle had the expertise to build the integrated administrative and clinical system that would become the hospital’s backbone. But built-to-order Oracle systems like the one Scrushy had in mind don’t come cheap. Success meant getting Oracle founder and CEO Ellison, a man who has cultivated a public image as a swashbuckler-flying a fighter jet and racing yachts-to buy into the concept.
Luckily, Scrushy and Ellison proved kindred spirits. Their first meeting, slated for half an hour, turned into a two-hour bonding session. “Larry and I started talking about how incompatible technology systems and communication gaps have been thwarting efforts to hold down health care costs,” Scrushy says, “and at one point I was listening to him and thinking, €˜Someone’s given him a copy of my speech.’ We were just on the same page from day one.”
Relentlessly Ambitious CEOs with a Shared Goal
“When we met for the first time, we knew right away it was an ideal collaboration,” adds Ellison, who believes that the health care industry is sorely in need of an information technology overhaul. “Automation exists within the health care industry. The problem is the different pieces, the administrative, clinical, and lab systems, aren’t connected. But without HealthSouth undertaking something like this, a technology company like Oracle has nothing to work with.”
Dovetailing goals alone might have carried the Oracle/HealthSouth union forward, but the fact that the two CEOs share more than digital drive probably helped. Ellison, partly because of his miniwar with Bill Gates, is by far the more high profile of the two. But both CEOs are charismatic and relentlessly ambitious. And both have a reputation for being supreme egotists-evidenced by the tongue-in-cheek title of Ellison’s biography, The Difference Between God and Larry Ellison, and the nickname, “King Richard,” bestowed upon Scrushy by Birmingham locals.
Both are also undeniably accomplished businessmen. Ellison, 57, is a billionaire playboy, a world-class yacht racer who pilots his own jet and once tried to buy a Russian MIG fighter plane (U.S. Customs banned the purchase). A college dropout, he co-founded Oracle in 1977 and built it into the world’s second-largest independent software company, boasting revenue of more than $9.7 billion. Scrushy, 49, also flies his own jet, plays guitar in a honky-tonk band, and is famously self-absorbed, maintaining a trophy room of memorabilia in glass cases outside his office.
But he, too, is a self-made success story, a former respiratory therapist who was able to mass-market the higher-margin rehabilitation services area of medical care. He founded HealthSouth and built it into a network of outpatient clinics, day surgery offices, imaging centers, and hospitals that now command nearly 70 percent of the rehab market.
“He’s one of the most visible and flamboyant leaders in health care,” says Peter Emch, a health care analyst with Credit Suisse First Boston. “And he’s one of the only CEOs who was able to grow his company from a small business to one of the most recognizable brand names in health care.”
So when the two held a news conference six months ago to announce a joint plan to build the world’s most technologically advanced hospital, people listened. With Oracle on board and Ellison at his side, Scrushy was able to describe plans to break ground in January 2002 on a hospital with capabilities straight out of Star Trek and, more important, one that HealthSouth could afford to build.
All of this was before the events of September 11, which has shifted the country’s focus elsewhere. Between September 2000 and June 2001, Oracle lost 68 percent of its stock value. After the attack, Oracle reported that the threat of war could drive sales of its software licenses down by 15 percent, although the company expected to match its earnings from the period of a year before.
HealthSouth, however, weathered the events well, reporting that while the terrorist attacks had caused some disruption of operations, financial results would not be affected. Its stock price, at $15 in mid-October, remains on the high end of its 52-week range of $8 to $18. The company, which met analysts’ third-quarter expectations, remains comfortable with fourth quarter estimates of earnings at 22 cents a share, says Scrushy, who adds, “We do not foresee any [earnings per share] impact on our business.”
Automated Labs and Robotic Surgery
Scrushy also remains confident that the HealthSouth/Oracle partnership will deliver on its intended goal, which he described in a recent interview as an “A to Z, soup-to-nuts system that will tie all clinical systems together and integrate them with e-procurement, accounting, and administration, as well as, of course, medical documentation of records.” Plans for the 219-bed, 500,000-square-foot facility also include a wireless communication network, an automated clinical laboratory, pharmacy dispensing, remote patient monitoring, and robotic surgery.
“This would be very hard for a typical health care company to pull off,” says Jane Metzger, a vice president at First Consulting Group in Lexington, MA, and a health care industry consultant. “Most hospitals are in old buildings and constrained by the infrastructure and systems in place. They can’t rip everything out any time they want to improve on it. They have to make more practical decisions about what they can afford. This chance to design with a clean slate is an opportunity no one else has.”
While the two CEOs didn’t detail the terms of the deal, Scrushy implied that HealthSouth is not only getting the system somewhere between at cost and free, but also will take part ownership in the intellectual property the two are jointly developing. “We’re teaming up to build it,” Scrushy said, “and we will participate in the future with Oracle as they sell that product.”
Of course, Oracle isn’t a charitable institution. So what’s in it for Ellison? Oracle’s CEO has his eye on developing what may well become the system of choice for the $1.7 trillion health care industry, along with a showcase that will provide better-quality health care at a lower cost. Under the plan, a patient’s blood work or MRI test feeds directly into a central database, with no human transcription or chance for human error. The information moves quickly and with integrity. “By digitally collecting information,” Ellison says, “we can dramatically improve timeliness and accuracy of information so that doctors have the best possible information when providing therapies.”
In the aftermath of a finding by the Institute of Medicine, an arm of the National Academy of Sciences, that linked 44,000 deaths in 1999 to medical errors, the prospect of eliminating potentially deadly mistakes through technology has the medical community abuzz. “The opportunity for screwups in today’s hospitals with the different record-keeping systems and communication problems is a big problem,” says Marianne Mattera, editor of Medical Economics magazine. “So the idea of real-time monitoring and centralized records is a welcome one.”
The concept of a centralized database containing a patient’s entire medical history is the kind of timesaving and potentially life-saving innovation doctors yearn for, but the idea makes privacy watchdogs squirm. “Privacy is a huge issue, and the Health Insurance Portability and Accountability Act [which would impose standards for the security and privacy of patient information] is making people more aware than ever,” says John Wookey, Oracle’s senior vice president of health care applications. “Sure, a centralized database certainly concentrates where you can go to look for private information, but it also concentrates where you set defenses up. And most people are not killed because their records aren’t secure. They’re killed because caretakers didn’t know they were on another prescription or didn’t know about an allergy.”
A database with strong security, asserts Ellison, would actually be more secure than current record-keeping systems. “Your records are now kept in paper documents on metal shelves that anybody can go into and look at. That is, if they haven’t been lost… But that’s not a good form of privacy.”
Hospitals will also realize enormous savings through greater operating efficiencies, he adds. Ellison estimates that more than 20 percent of all the dollars spent in health care go toward record-keeping. If it’s possible to collect all of that information-from registration to lab test results to prescription records-in a centralized database, that would eliminate 10 to 20 percent of costs, he reasons.
Having Oracle on board enabled HealthSouth to lure other partners into the project. “If I were a vendor, I would want to be part of it,” acknowledges Metzger. “The whole industry is watching this. It could validate a lot of today’s thinking about what hospitals could look like if we could rebuild.” Companies that have committed to the project include Datascope, a diversified medical-device manufacturing company; GE Medical Systems, which makes diagnostic imaging technology; Hill-Rom, an international provider of health care products; Pyxis, a provider of medication and supply dispensing systems; and Carl Zeiss, a leader in the fields of optics, precision engineering, and electronic visualization. “We’ve been overwhelmed with partner opportunities since announcing the plans,” says Scrushy. “We had people come in with technology we didn’t know existed that was unbelievable, and then the following week we’d meet with another company with even better technology.”
The intensity of the project demanded CEO involvement from day one from each potential partner. “We have 300 people working every day on this,” says Scrushy. “We needed full commitment from the CEOs of our partner firms. If the CEO wasn’t willing to come to the first meeting, then he or she wasn’t in the game.”
Like Oracle, he adds, all of these partner companies are bestowing “substantial discounts” on equipment, making it possible for HealthSouth to build the $150 million facility for less than what it might have spent renovating the existing one. “The equipment is roughly $50 million before discount, and we have a $35 million trade-in on our existing equipment,” Scrushy explains. “Then there’s the $50 million to $70 million property value of our existing hospital, so HealthSouth will only be out of pocket $40 million to $50 million over a two-and-a-half year period.”
It could also be a fantastic bust. Even subsidized by lucrative partnerships, costs are steep, and earnings projections are just that-projections. “They’re taking a big risk spending all that money putting this together,” says Metzger, who doubts that this digital dream hospital can be built in other places unless operating efficiencies are revolutionized.
Yet Scrushy is already deciding where the second hospital will be. By the time the Birmingham facility is 60 percent built, construction will be starting on the second, he predicts. Scrushy has a plan to build 10 facilities, each of which could generate $200 million to $300 million in revenue. He figures that means a multibillion-dollar business in the next few years.
A lot rides on the success of the first facility, which is scheduled to open in 2003. “If he can pull this off in Birmingham, he can do it anywhere,” says Dick Jones, president of Blue Cross and Blue Shield Alabama. “He is in position, he has the resources, and he’s a good enough salesman that he can sell the concept. I would not underestimate him.”
Metzger is less certain. “It’s an ambitious experiment,” she says. “I hope it works.”