(FORTUNE Magazine) – If ever a company needed a New Year's resolution, it is Columbia/HCA. In 1997 the health-care behemoth ousted the CEO who built the company, became the target of the largest federal investigation ever for health-care fraud, and saw its stock sink from $45 to $29.

Now a resolution may be imminent. Sources close to Columbia say that in the first half of 1998, sooner than most people expected, the company could settle with the government and agree to pay more than $1 billion to avoid going to court. Post-settlement, big changes will occur: New CEO Thomas Frist Jr. plans to split Columbia into five public companies. His idea is that Columbia will be worth more in pieces than as a whole. And if the stock market doesn't buy that, somebody else--like a competitor--will. Intrigued by the outlook, value-oriented investors have been swooping in to buy Columbia stock.

The key development is the prospect of a settlement. Columbia will likely begin negotiations with the government by spring. Frist isn't sure about the timing, but says, "We need to put the distraction of this investigation behind us as quickly as possible." Regarding the cost of a settlement, one knowledgeable source says, "The number will definitely have a 'b' in it. Because 'billion' sounds very punitive."

Wall Street analysts agree, noting that the Democrats, heading into a congressional election, hope to use Columbia as the poster company of health-care abuse. Yet if Columbia pays, say, $1.5 billion after tax--the estimate of J.P. Morgan analyst Joe Chiarelli--it won't suffer too much pain. Columbia's stock market capitalization is $19 billion; free cash flow is at least $1 billion a year. "The uncertainty we have now is worse than what the penalty will be," says analyst Scott Mackesy of Morgan Stanley Dean Witter.

Once Frist settles, he'll begin taking Columbia apart. He is scrapping the name "Columbia," and if all goes according to plan, spinning off assets tax-free into four new companies. One will comprise rural hospitals that dominate their markets. Two others will be made up of incomplete networks of facilities (hospitals, rehab centers, outpatient surgery centers). The fourth will be a chain of about 35 ambulatory surgery outlets. What's left? A huge network of mostly urban medical facilities with annual revenues of $14 billion, vs. Columbia's current $20 billion. "These smaller companies can be nurtured by their CEOs," Frist says. "And they don't require so many additions to produce a good growth rate."

A surgeon who hasn't used his scalpel since he left the Air Force 28 years ago, Frist, 59, also is extracting one part of Columbia heavily scrutinized by the Feds: its home health-care division. He will probably sell it and Value Health, which manages pharmaceutical costs for clients, for a combined $1.3 billion or so.

The purpose of the radical treatment is to get Columbia's stock up--though that may not happen very quickly. Analysts say a restructuring won't cure Columbia of its latest growth problems. Increases in hospital admissions have slowed. Frist has retreated on acquisitions. And profit margins, while high, are declining.

Columbia's long-term outlook, however, is luring the bottom fishers. Since Frist became CEO, Columbia's biggest shareholders, Fidelity and Wellington Management, have increased their stakes. Leon Cooperman's Omega Advisors has bought 4.4 million shares. Darla Moore, president of Rainwater Inc., has added three million to her eight million shares. Moore is married to investor Richard Rainwater, who co-founded Columbia with former CEO Rick Scott. She's also the one who prodded the board to push Scott out ("The Toughest Babe in Business," Sept. 8, 1997).

These investors view the new Columbia as a trove of beaten-up, underpriced assets--"bite-sized pieces that can be taken over," as one major shareholder says. What's the chance a buyer will bite? Fairly good. First, because of the industry outlook: "Consolidation is the trend," says Chiarelli, "and pressures from Medicare to find economies of scale will be enormous." Second, while Frist says he'll remain CEO until Columbia is back to full health, those who know him say he's eager to retire and enjoy his wealth. (Frist's family owns 25 million Columbia shares, worth $725 million.) Many investors would love to see Jeff Barbakow, CEO of Tenet Healthcare, the nation's No. 2 hospital operator, buy Columbia. But Tenet, which tried to acquire Columbia last summer, is no longer inclined to take such a big bite. Barbakow prefers to cherry-pick Columbia hospitals and swap some facilities--and Frist says he's up for some swaps as well.

If Columbia's stock continues to languish, a leveraged buyout is a good possibility. Frist did a very successful LBO before: In 1989, after splitting up Hospital Corp. of America (HCA), he took the company private. Three years later he brought HCA public again and then sold it to Columbia. That's how he got so wealthy. And as he says, "History has a strange way of repeating itself." Indeed. If Frist takes Columbia private, public shareholders presumably will make out okay. But only private investors may participate in an LBO, so it's Frist and his already rich followers who could strike it (really) rich again.