BusinessTN

Wayne T. Smith, CEO of Franklin-based Community Health Systems, is this year's CEO of the Year. And it's entirely possible that he's unhappy about it. Sure, he's probably honored and at least somewhat flattered by the designation. His primary beef with it would be the fact that he would rather see his management team get the credit for CHS's accomplishments. Yes, he's one of those "I've been really fortunate to have great people around me" CEOs. He is more prone to using the pronoun "we" instead of "I," and though Smith admits that success starts at the top, he quickly adds, "but there's a lot of top around here." Not surprisingly, Smith hates being the center of attention, and he'd prefer to stay out of the press.

Well, no such luck. Smith's name has been in the news quite a bit lately. CHS, the largest non-urban provider of general hospital health care systems, has been making local, state and national headlines since March, when it announced its intent to purchase Texas-based Triad, an HCA spin-off that owns and manages hospitals in small cities and selected larger urban markets. The two companies finalized the deal in July, and the slightest rise and fall of CHS stock is still making news.

Yet, though it's true that the acquisition of Triad is one of the biggest strategic moves by a health care corporation this year, the acquisition is not the reason Smith merits the CEO of the Year title. Yes, he now helms the largest publicly traded health care company in the country, but the jury is still out on whether the acquisition that granted CHS that status was a wise move.

No, 61-year-old Smith has earned the designation because, since private investment firm Forstmann Little recruited him from the ranks of the retired about 10 years ago to be first president and then CEO at CHS, the company has been a stellar performer among hospital corporations. Applying a disciplined management style, Smith has slowly grown CHS with at least a couple acquisitions each year. While doing so, he has gained the respect of a tightly knit health care community that does not dole out accolades to just anyone. When he arrived in 1997, CHS was a $742 million company with 36 hospitals and about 9,000 employees. In 2006, the company owned, leased or operated 77 hospitals, employed 30,000 people and generated $4 billion in net revenue. That's a 24% compound annual growth rate—the strongest record of revenue growth among publicly traded companies in the health care industry.

Proven Pedigree
Yet, well before he arrived at CHS, Smith was an accomplished health care executive, who had already made it to the top. Born and raised in Birmingham, he earned bachelor's and master's degrees from Auburn University in 1968 and 1969. After receiving a direct commission into the military as second lieutenant, he spent three years in hospital administration at Brooke General Hospital in San Antonio, Texas. While there, he went to Trinity University part-time to pursue a master's degree in hospital administration and was able to complete his residency as part of his job. He spent his last 13 months of service at an Army hospital in Seoul, Korea, and left the military with the rank of captain in 1973.

He entered the private sector by joining Extended Care, which soon became Humana. During his 23 years at Humana, Smith rose through the ranks from hospital administration to president and COO. Along the way, there was a stint as hospital administrator at East Ridge in Chattanooga, where Vicky Gregg, now president and CEO of Blue Cross Blue Shield of Tennessee, was working as a nurse at Erlanger Hospital. Though Gregg actually met Smith in 1981 when she worked for East Ridge and Smith was vice president of Humana's central region, she says that even before that, Smith's reputation preceded him. "He was a different kind of hospital administrator. He was engaging with the nurses and the patients," she says. "In the nursing world, you heard about that because administrators typically stayed in offices and were very aloof."

But Smith proved more than just personable; he also demonstrated business sense on his way up the Humana ladder. Between 1986 and 1991, he served as executive vice president and president of the health care division. He was charged with the task of figuring out how to pull Humana from a deep financial ditch that had resulted from a fundamental flaw in Humana Health Care Plans (which had been launched two years earlier). In 1989, after four years of losses, Humana's health care division turned a $4 million profit.

"Humana almost had to shut the Health Plan down, but Wayne came over and took the right amount of time to look at it and understand it," says Gregg, who ran Humana's Louisville market at the time. "Wayne can take a very complicated situation, simplify it and make it successful."

Smith's ascent continued in 1991, when he was named executive vice president of Health Care Operations. Two years later, he became president and COO, where he stayed, until he retired in July 1996—one month after Forstmann Little and Co. acquired CHS in a $1.1 billion leveraged buyout.

With CHS co-founders Tom Chaney and Richard Ragsdale agreeing to retire after assisting with a CEO search, it wasn't long before Forstmann came knocking on Smith's door. In January 1997, Smith was named president of CHS, and about three months later, he also became CEO.

"He had done a good job at Humana, he had both hospital and managed care experience, and we thought he was the perfect person to run the company," says Tom Lister, who while with Forstmann Little oversaw CHS daily operations with another Forstmann partner, Sandra Horbach (now at The Carlyle Group). "We wanted the best CEO in the business, and Wayne was clearly that," says Lister, a partner at private equity firm Permira.

The Metrics System
When Forstmann purchased the company and Smith came on board, CHS, which Chaney and Ragsdale founded in 1985 and took public in 1991, had long been purchasing underperforming hospitals in non-urban markets where the hospitals were typically the sole providers.

"It was a great model, but Wayne raised the bar significantly, and he made that model even better," Horbach says.

He honed the company's acquisition strategy further, focusing it more tightly on those non-urban hospitals that were also not-for-profit institutions. He strengthened the company's senior management team, bringing in high-caliber talent—starting with CFO Larry Cash, who, prior to joining CHS in 1997, served as vice president and group CFO at HCA and senior vice president of finance and operations at Humana. And with Cash by his side, he applied company-wide practices and procedures, such as new internal audit measures.

It was not long before the new auditing practices uncovered a business snag. From 1994 through 1997, some CHS hospitals had been submitting false claims for reimbursement to Medicare, Medicaid and TRICARE (the defense department's health care program) for treating several diseases. In December 1997, after CHS discovered the issue, Smith notified the Department of the Health and Human Services Inspector General. CHS paid $30 million in 2000 to settle the allegations, and the Inspector General touted the case as an example of the value of self-compliance and disclosure programs.

Cash considers this type of disclosure typical of Smith's leadership. "Wayne is a very effective leader, and he's concerned about making sure we do the right thing," Cash says.

Company-wide regulatory compliance, however, was not the only thing Smith and Cash tackled.

"What is different about the way Wayne runs his company from other hospital companies is he is very systems-driven," says Jeff Villwock, managing partner at Genesis Capital, an investment banking firm in Atlanta. "From a systems standpoint, Wayne and Larry have developed their way of doing health care. They want all their hospitals to operate pretty much the same way."

They created benchmarks and metrics. They evaluated and measured people on performance attributes. They embraced communities and reached out to doctors and administrators. Hospital by hospital, they drove productivity, applying the same meticulous approach to every aspect of hospital operations—whether it be billing and collections, customer service, ER management, information systems or marketing. It's that centralized, standardized approach that has become Smith's hallmark.

"That philosophy did not exist in the industry when Wayne took over as CEO," Villwock says.

It's a philosophy that paid off. Partly through acquisitions and partly through improving what the company already owned (and divesting hospitals when necessary), CHS grew to be one of the premier hospital management companies in the nation. In June 2000, CHS went public again (though Forstmann did not sell its last shares for a few more years).

Industry peers and publications have taken notice of Smith's performance. For the last five years, he has been selected by readers of Modern Healthcare magazine as one of the "100 Most Powerful People in Healthcare." In the latest list, released in August, Smith ranks as #52. Locally, Smith, an Alabama boy and Humana alum lacking the typical HCA or Hospital Affiliates credentials typically found on the bios of most Nashville health care executives, is the 2007-2008 chairman of the Nashville Healthcare Council. In doing so, he follows in the footsteps of another so-called Nashville "outsider," Harry Jacobson, vice chancellor for health affairs at Vanderbilt University, who served as chairman last year.

"People listen when Wayne expresses his opinion," Jacobson says. "The Nashville Healthcare Council board is made up of successful health care executives, and he stands out as a leader in that group."

Tipping The Scales
Also, over the last five years, CHS has been implementing a subtle shift in its strategy, purchasing larger hospitals in mid-size markets. This shift had practically gone unnoticed until several months ago, when CHS made a $6 billion offer to purchase Triad, outbidding private equity investors, Smith and his company were thrust into the national spotlight.

When the Triad merger was finalized, CHS became a $10.2 billion company, owning or operating 133 hospitals and employing 90,000 people. By taking on Triad's 54 hospitals, Smith acquired almost as many hospitals in one transaction as he had purchased during his entire tenure at CHS. A merger of such proportions in any industry would present challenges, but this move, in particular, has some analysts questioning whether Smith and CHS may have bitten off more than they can chew.

Frank Morgan, a health care analyst with Jeffries and Co., says he thinks much of the concern stems from the fact that CHS is "levering up" its balance sheet at a time when the industry is suffering from low attendance volume and bad debt, the latter resulting from an increase in the number of uninsured and structural changes in insurance plans. Still, others express concerns that CHS paid too much for an underperforming company and point to inconsistencies between the business models and cultures of CHS and Triad.

"Community Health's strategy has been successful focusing on rural markets with limited competition and lack of exposure to managed care," says Rich Clayton, research director for CtW Investment Group, which tracks large-scale corporate transactions in its mission to advise public pension funds on issues of shareholder concern. "That doesn't jive with Triad, which owns hospitals in medium-sized cities, not in rural areas, and whose facilities are much more exposed to managed care players. Community is taking on a big turnaround project and paying a lot of money for it, and I think they are going to have a tough time making this deal work out for them."

Beyond that, though, Triad and CHS are simply two different animals.

"The biggest challenge is merging the culture of Triad's [hospital] operating people with Community's operating people," Villwock says. Smith and Triad CEO Denny Shelton have contrasting management styles. Triad, for example, is known for making large capital investments without return, while CHS, under the watchful eye of Smith and Cash, is more disciplined when it comes to capital allocation. Plus, Triad hospitals are simply accustomed to more autonomy than CHS will most likely grant them.

And while it's been said that Smith is a micro-manager who's too rigid in style to make this merger work, analysts and experts can't deny that it's a style that has yielded results. Many, like Morgan and Villwock, believe applying more discipline to Triad hospitals is exactly what it will take to improve Triad's margins. "I think if he takes that group of Triad assets and adds his level of discipline, he can get far more cash flow than Triad ever received," Villwock says.

As for Smith, well, all this analysis has him jokingly wondering if some of these analysts think CHS management "got here on a watermelon truck." Naturally, he defends his latest venture—touting a disciplined approach and his proven, experienced management team, whose rèsumès include larger hospital/market experience, not just at CHS, but also at the likes of the HCAs and Humanas. (See sidebar, pg. 32.)

He maintains that CHS has been careful not to deviate much from its strategy, and he and his team do not view Triad as a departure from the direction the company has taken during the last five years. He points to the fact that CHS has 14 hospitals that have more than $100 million in revenue and are in competitive markets equivalent in size to 23 of Triad's hospitals.

"If you take the total of the 130-plus hospitals, we still have about 65% that are sole providers, which generally means they are in smaller markets. That's 87 hospitals, so we're still [in the non-urban marketplace]," he says. "When we talk about strategy, we continue to talk about the non-urban strategy and the mid-size market strategy—the Tucsons, the Oklahoma Citys—which are really great growth markets demographically. It gives us another opportunity for expansion."

The company, Smith says, was not looking to make an acquisition of this size, but when word got out that Triad was in the market for a buyer, CHS did the research, did the math and made the bid.

"We thought they were fairly valued. We thought they were under managed," Smith says. "We've had good steady growth doing it by the ones, but as we studied it and thought about it, it gave us a platform to grow in a different market for the future. We're setting this company up for very strong growth for the next 10 years, as opposed to the next two or five years."

Smith maintains that the venture is "not too terribly risky. It's more of the same—it's just a huge opportunity."

"The risk here is if something adversely affects us so we couldn't for whatever reason pay back our debt, but in terms of operational, I don't think there's much risk," he says. "We feel very comfortable in terms of our ability to operate, to assimilate and to make these facilities work."

While Smith certainly has his fair share of naysayers, voices from his past, such as Gregg, Horbach and Lister, say he should not be underestimated. "He is pragmatic and will take a smart business risk," Gregg says. "But he doesn't do something without a lot of thought and without knowing that his company's going to benefit. I would put my money on Wayne Smith and his business savvy."

For now, with the smoke from the acquisition clearing and press attention returned elsewhere, Smith can get back to doing what many say he does best—assimilating and operating hospitals. After all, no matter where the experts stand on the wisdom of the acquisition, they all agree on one thing—Smith has his work cut out for him.

But if anyone is up for the challenge, it's Wayne T. Smith. As one CHS employee revealed, Smith's car is usually the first one in the parking lot each morning—although true to his self-deprecating CEO persona, Smith dismisses that statement with another familiar Smith trait, humor—"I leave it parked there overnight," he says.

In 16 months to two years, Triad and CHS should be fully integrated, and if CHS has returned to a pattern of consistent, stellar performance, Smith and CHS can claim victory and a well-deserved "I told you so."