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April 26, 2003

Profits and hospitals don't mix
The Toronto Star
Sat 26 Apr 2003
Page: D7
Section: Business
Byline: David Olive
Source: Toronto Star

"We know this business better than anyone in the world."

It seems weirdly appropriate that as the phenomenon of for-profit hospitals in the United States marks its 35th anniversary, Richard M. Scrushy is fighting to lift a court-imposed freeze on his personal assets.

Scrushy, 50, one of the most dynamic promoters of private hospitals, claims he needs $60 million (U.S.) for annual living expenses, and another $60 million to cover legal expenses.

You can see his point. Scrushy is piling up a mountain of legal bills. He is accused of masterminding the biggest corporate accounting fraud to come to light so far this year - on par, prosecutors say, with last year's epic scandals at Enron Corp. and WorldCom Inc.

It's a story that should invite closer attention by U.S. policymakers to the periodic malfeasance that characterizes the entire for-profit hospital sector, a major contributor to spiralling health-care costs south of the border.

Scrushy is the co-founder and recently fired chairman of HealthSouth Corp. of Birmingham, Ala., the largest U.S. operator of rehabilitation hospitals and clinics, with about 1,700 health centres in the United States and abroad, some 51,000 employees and 2002 revenues of $4.3 billion.

Last month, Scrushy and HealthSouth were accused by the U.S. Securities and Exchange Commission of overstating company profits by at least $1.4 billion over the past four years.

A former executive has testified HealthSouth inflated profits a further $1.1 billion in 1997 and 1998. Federal investigators say the pattern of investor deception at HealthSouth stretches back almost to its inception about two decades ago.

And in a separate action, the company faces U.S. justice department allegations of defrauding Medicare, a federal health program. Scrushy was recently deposed by his hand-picked board of directors, and HealthSouth has laid off hundreds of employees as it scrambles to avoid a bankruptcy protection filing.

The Scrushy scandal does have all the elements of an Enron saga. They include accusations of repeated balance-sheet manipulation to inflate the value of company shares held by top executives, and alleged stock sales by those same executives ahead of bad news that caused the stock to plummet.

Plus a cult-like fear of the CEO by employees who say they routinely jiggered the books on command from higher-ups. And who, in fear of a verbal beating from Scrushy, also pinched the company's pennies - often at the expense of patient care - while the CEO accumulated a trove of creature comforts.

Scrushy acquired four mansions, at least seven corporate jets, nearly three dozen cars, including the inevitable pair of Rolls-Royces and a Lamborghini, and a 92-foot yacht, the "Chez Soiree," for entertaining the CEO's celebrity friends, like basketball superstar Michael Jordan and company mascot Jason Hervey, former teen star on TV's Wonder Years. There is, as you imagine, a ton of overhead in the above - spending that didn't go into patient care, that diminished returns to ordinary shareholders, and was in part financed by taxpayers as deductible business expenses.

HealthSouth had a ferocious need for profits, real and faked, to sustain the lifestyle of a CEO, locally known as the Donald Trump of Birmingham, whose ego-driven, shareholder-financed philanthropy accounts for the many roads, colleges, libraries and sports fields in the city named for Richard M. Scrushy.

Cupidity in private-sector hospital administration is a leading culprit in driving up the cost of health care in the United States, which accounted for 12.9 per cent of GNP in 1998, compared with 9.3 per cent in Canada and 9.4 per cent in France.

Higher cost does not mean higher quality. The World Health Organization says France has the world's best health-care system, rated on quality, accessibility and universality.

Hospital spending is the leading cost in the U.S. system, accounting for 32 cents of every dollar spent on health care. Last year, U.S. hospital spending rose a whopping 30 per cent, due in part to the success of merger-happy hospital firms in creating local oligopolies that reduce consumer choice in many cities and regions.

The for-profit trend in the U.S. hospital sector began soon after the 1965 creation of Medicare and Medicaid, two of U.S. president Lyndon Johnson's "Great Society" programs for helping the poor and elderly cope with unaffordable health costs. Entrepreneurs soon seized on these programs as a bonanza.

In the go-go stock market of the late-1960s, several new hospital chains issued stock to the public and went on expansion binges, buying municipal- and doctor-owned hospitals, and going heavily into debt to build new hospitals from scratch and to merge with each other.

Then and now, debt-strapped, over-extended hospital chains struggled to keep their beds filled in order to generate enough cash to cover their soaring debt costs.

Not coincidentally, the history of the sector is marked by repeated government prosecutions and class-action lawsuits over bilking of Medicare and Medicaid, allegations of shoddy treatment of patients in understaffed facilities, and dubious third-party sales of equipment and services to hospital chains by companies associated with the chains' top executives.

The example of HealthSouth, the Number 3 publicly traded hospital operator in the United States, is the rule, not the exception.

Last December, HCA Inc. of Nashville, Tenn., the Number 1 publicly traded operator with 181 hospitals, agreed to pay a staggering $1.7 billion in civil fines and criminal penalties after pleading guilty to defrauding government health-care programs - the culmination of a nine-year investigation.

Tenet Healthcare Corp. of Santa Barbara, Calif., the Number 2 publicly traded hospital company, nearly self-destructed a decade ago when predecessor company National Medical Enterprises Inc. was hit with criminal fraud charges against its psychiatric clinics.

More recently, the renamed and "cleaned-up" Tenet, has come under investigation for improper Medicare and Medicaid billing practices.

It also has settled a class-action lawsuit brought by Latino patients who accused the chain of price gouging, and has agreed to stop placing liens on the homes of impoverished patients unable to pay their bills promptly.

And the U.S. Number 4 player, Beverly Enterprises Inc. of Fort Smith, Ark., operator of America's largest nursing home chain, pleaded guilty in 2000 to charges of defrauding Medicare and reached an unusual settlement to pay a fine of $175 million over eight years.

The settlement is only a fraction of the $460 million that the U.S. government said Beverly stole from Medicare using phon

y nurse sign-in sheets, inflated patient-cost statements and other fake documents.

You might wonder about this leniency for a chain routinely accused in the 1990s by regulators from Maine to Texas of everything from maintaining filthy premises to complicity in patient deaths due to neglect or improper care by poorly trained, overworked staff.

At one Beverly home in California, inspectors discovered ants covering the body of a female patient, entering her respiratory system through a gaping wound in her throat.

But having attained dominance in the provision of an essential service, the huge for-profit chains cannot be severely punished. Doing so might put them out of business, resulting in the closing of facilities that are the principal health-care providers in their communities.

"The reason why the government agreed to the lesser amount was essentially Beverly's ability to pay," explained Alwyn Cassil of the U.S. department of health and human services.

"We agree to do this when an entity is able to document to our satisfaction that imposing a higher settlement amount would threaten their ability to operate."

Never mind that Beverly long ago perfected the art of showing a loss at many of its nursing homes. At one Beverly facility in Jacksonville, Ark., a 1999 investigation by The Nation magazine found that "loss" reports filed with the state by the nursing home included $309,000 in "management fees and home office costs" passed along to the parent company's headquarters.

What sorts of people have displaced the municipalities and doctors who used to own and operate most U.S. hospitals, and still do run most hospitals in Canada?

The HCA predecessor company Hospital Corp. of America was co-founded in 1968 by Jack C. Massey, the promoter who turned Harlan Sanders' recipe for Kentucky Fried Chicken into a fast-food empire, along with a father-son team of surgeons whose names we'll get to later.

Columbia Healthcare Corp., the firm with which HCA merged in 1994 to create the industry's juggernaut, was launched by the billionaire Texas investment banker Richard Rainwater and an aggressive mergers-and-acquisitions lawyer, Rick Scott, who took over the merged enterprise.

Humana Inc. of Louisville, Ky., the firm that became an early lightening rod for critics of for-profit hospitals during its hectic growth phase of the 1970s and 1980s before bailing out of hospital ownership in the midst of a cash crunch, was co-founded by two Louisville lawyers. And Beverly is headed by a former typewriter salesman with ties to the investment bank that grubstaked the company.

Richard Scrushy got his start in health care as a janitor at an Alabama hospital after his application for enrolment at a community college was rejected. One of his future co-founders of HealthSouth, Aaron Beam Jr., recalled in a 1996 interview with the Birmingham News his first 1980s meeting with the hyper-ambitious Scrushy, then an executive at a Texas hospital chain.

"I went home and told my wife that I just interviewed with the biggest con man I ever met, or the most brilliant young man I ever met," Beam told the newspaper. "Either way, I was taking the job because he was really, really good at what he did." (Beam, who left the company in 1997, is one of the former CFOs who agreed to plead guilty to one count of bank fraud this week.)

Scrushy was really good at extracting money from HealthSouth. This week, the SEC accused Scrushy of illegally selling $175 million (U.S.) in company stock in insider-trading transactions. Many of these sales occurred at a time when, according to the SEC, HealthSouth's reported profits were overstated by a factor of 100. Scrushy was also paid handsomely, collecting more than $10 million in salary and bonuses in 2001 from an audit committee of the HealthSouth board of directors, which included folks whose own companies did business with HealthSouth and Scrushy's many private ventures.

Like the other for-profit hospital operators, HealthSouth has performed well as a device for transferring the taxpayer dollars that fund Medicare and Medicaid into the pockets of a very few executives.

For-profit hospital chains do not enrich ordinary shareholders, to judge from the mediocre 10-year average return to shareholders at HealthSouth (-4 per cent), HCA (12 per cent), Tenet (8 per cent) and Beverly (-11 per cent).

And they represent an enormous regulatory burden for the state and local governments that are obliged to respond to complaints about them by patient advocates and whistle-blowers. And there is the massive legal expense accumulated by the chains and their class-action litigants in three decades' worth of lawsuits over claims of corporate abuse of patients, government programs and minority shareholders.

Case in point Scrushy's lawyer is demanding the release of his client's funds, now frozen for possible use in settling government fraud charges, so that he can fight the government.

Ten former HealthSouth executives, including no fewer than five of its chief financial officers, have agreed to plead guilty to fraud charges in the accounting scheme. Scrushy, holding himself blameless to the end, sees this as a conspiracy in which prosecutors have fostered "an atmosphere of government-created hysteria" that "puts the body count ahead of truth and adjudicative fairness."

Skyrocketing U.S. health-care costs have triggered some movement toward reform. To curb annual double-digit increases in prescription drug costs, many U.S. states have taken the extraordinary step of setting up non-profit drug purchasing operations in hopes of extracting volume discounts from Big Pharma.

And Canada's single-payer health insurance system is winning over some unusual converts, such as the conservative U.S. senator John Breaux (D.-La.). The influential Breaux, who chaired the National Bipartisan Committee on the future of Medicare, said recently the U.S. health-care system, with its more than 40 million uninsured Americans, "is collapsing around us."

But the last redoubt for the privateers might be for-profit hospitals, whose lavish funding of political campaigns is inversely related to its reluctance to pay more than the $5 or $6 per hour minimum wage to its short-staffed nurses. Big Pharma's legendary bankrolling of political campaigns in Congress is easily matched by the hospital chains' attention to politicians at the municipal and state level.

Even on Capitol Hill, the for-profit hospitals can count on a sympathetic hearing from Bill Frist (R.-Tenn.), the Senate majority leader. One of the most conservative U.S. senators, Frist has tried to block campaign-finance reforms and increases in the minimum wage, and voted against restoring $18 billion in Medicaid cuts.

Frist is a renowned heart-transplant surgeon who enjoys adoring press coverage of his AIDS missions in Africa. But he is also resolutely opposed to easier access to health care for financially disadvantaged people back home. In this, he is influenced by a letter his late father once wrote to family members.

"I am a conservative," wrote an 87-year-old Thomas Frist Sr., co-founder with his eldest son, Thomas Frist Jr., and Jack Massey of Hospital Corp. of America, and a fierce proponent of the profit motive in health care.

"I believe the free-enterprise system can do a better job at most things than the government can," Frist Sr. wrote. "People should learn to be self-reliant; when they are self-reliant, they will have self-respect."

That stirring passage is almost comically ironic. For-profit hospital chains are themselves hugely dependent on the public purse in seeking outsized rewards for the CEOs who run them.