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made to provide accurate and well written material.
Your contributions, suggestions, additional
information and advice sent to the web address at
the foot of the page are welcome. Where possible
they will be included in revised pages. The intention is
to show the general thrust of corporate practices
as well as the nature and extent of any allegations
made. Material contained here represents my views
based on my study of the operation of the health
care marketplace and the material available to me.
It should not be assumed to represent the views of
any other individual or organization. USA
LINKS CORPORATE MEDICINE WEB SITE
Every attempt is made to provide accurate and well written material. Your contributions, suggestions, additional information and advice sent to the web address at the foot of the page are welcome. Where possible they will be included in revised pages.
The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made. Material contained here represents my views based on my study of the operation of the health care marketplace and the material available to me. It should not be assumed to represent the views of any other individual or organization.
Content of this
"HealthSouth is really a good corporate citizen," Alexander (HealthSouth spokesperson) said. "HealthSouth has never been involved in any of the national health-care scandals.
MONEY & MEDICINE State probes purchase of hospital share; The Providence Journal-Bulletin March 6, 1999
"We want to turn the lights on and get the facts out," said Richard M. Scrushy, HealthSouth's chairman.
HealthSouth Tries To Allay Uneasiness Of Investors The New York Times - Sept 20, 2002
While WorldCom was heaving entries from its expense column onto its balance sheet in billion-dollar chunks, while Enron sprouted fraud at multiple, apparently unorchestrated levels, HealthSouth employees carefully altered invoices, painstakingly covered their tracks on the asset ledger and made sure to keep the fiddles too small to attract auditors' scrutiny, the government alleges.
HealthSouth talent is said to be in its sleight of hand The Baltimore Sun April 13, 2003
"The whole market is surprised," says Premila Peters, an analyst at KDP Investment Advisors. - - - "It really is horrific. I think people feel really violated when something like this happens in health care.
HealthSouth, CEO Face Charges On Earnings USA TODAY - MARCH 19, 2003
Brad Gray, director of the division of health and science policy at the New York Academy of Medicine, said health care fraud is unusual compared with other types of fraud.
The patient rarely knows whether the service received is appropriate and the purchase is most often made by a payer -- a health insurer or government plan -- that is not present, Gray said.
"You really do have a situation in which there is a need for a lot of trust and honesty," Gray said. "If you put organizations in place with strong incentive structures, big profit expectations and ambitious revenue goals, you are asking for trouble."
HealthSouth Scandal the Latest in Health Care Ills by William Borden Reuters Nov 5, 2003
THE HEALTHSOUTH WEB PAGES
(Outline and Links)
INVESTIGATION AND PROSECUTION
THE BUSINESS STORY
Richard Scrushy found laible for US$2.88 billion fraud June 2009 (Go direct to details on another web page)
I have tried to write these web pages to accommodate a variety of potential readers. There are those who want only an overview of what happened. For them I have provided the material on this page. For those who want more information I have written a series of linked pages. In these I have summarised the content of literally hundreds of reports and commented on them. For those particularly interested and for the researcher I have included large numbers of sometimes lengthy extracts from the press. Those less interested can simply ignore or skim read them. These give more detail and also the actual words of those involved. They give the flavour of what happened. They also draw together a distilled reference resource.
Additionally of course HealthSouth may be a litigious company with its back to the wall and might initiate SLAPPs (Strategic Lawsuits Against Public Participation) even when there are no grounds for them. It is more difficult to do this when the material contains the words of others who actually made the allegations and criticisms. The material reproduced on these pages is all copyright of the newspapers listed and is reproduced here in the public interest to stimulate discussion and debate about the future of health care. I consider this fair use.
In reading these web pages you should
understand that HealthSouth's founder and chairman,
Scrushy was acquitted by the jury
of the charge that he was the force behind the fraud. He claimed that
he did not know it was happening. He was set up by the many
HealthSouth staff who pleaded guilty and then blamed him in order to
secure lenient sentences. This was a criminal trial and the jury
clearly felt that the prosecution did not prove their case beyond
reasonable doubt. Much of the material on these web pages was written
prior to the acquittal. It is based on the assumption that there is
some credibility to at least some of the information available, even
if it is disputed. That the fraud occurred is not disputed
Each sector of the corporate health care
marketplace has come to be dominated by a small number of "growth"
companies. In this marketplace companies compete to take over
competitors or else are taken over themselves. The most successful
have expanded dramatically by taking over or merging with
competitors. Vast empires and wealth go to those who compete most
successfully in this. Those unable to do so go under. Investors and
market analysts have lauded this consolidation of the
This is a market where the source of legitimate income needed to fund this growth and dominance is limited by government funding and by insurers determination to contain costs.
The successful companies have included
By the beginning of 1998, available information showed that these US companies had built their dominant corporate empires in this strongly competitive marketplace by
This web site documents the extensive
defrauding of Medicare and citizens by improper billing, by
overservicing and by misleading advertising. In addition to this
there has been deceptive marketing promising excellent care while at
the same time reducing the quality of services - particularly the
quality and quantity of nursing care.
Resources, both human and financial have been diverted from care to marketing, to funding the administrative structure needed to compete, and to political donations in order to influence political decisions, which impact on corporate success.
In 1998 there was one glaring exception to this, HealthSouth. When HealthSouth entered Australia in early 1998 I searched for information of similar practices so that I could object. I found nothing.
HealthSouth's Rise and Rise
- - - Mr. Scrushy's quixotic vision to build what he would call the Wal-Mart of outpatient rehabilitation clinics. Questions About Investor on Board of HealthSouth The New York Times April 17, 2003 (NOTE: Walmart is a massive US discount chain operating stores across the nation.)
Richard Scrushy and a few close associates
founded HealthSouth in 1984. When I looked at it in 1998 it had been
far more successful than any of the other successful corporations. It
had come to dominate the for-profit rehabilitation and out patient
surgery marketplaces by acquiring competitors. There were only a very
few small for profit rehabilitation providers still competing with
it. It was busy buying up outpatient surgery from its competitors
including Surgical Health, Columbia/HCA,
and National Surgery Centers.
HealthSouth and HealthSouth directors had formed MedPartners. This was the largest, and most successful in the health care corporate craze of Physician Management. Only one other company Phycor could compete. Medpartners had also entered the pharmacology business buying up the company Caremark. HealthSouth directors were involved in nursing home and post acute care holding positions on Integrated Health Services board. They had entered Home Care when they joined with Integrated Health Services and bought Horizon/CMS. They had moved into Managed Care buying MedSolutions. With Columbia/HCA in the midst of a massive fraud investigation it looked as if Scrushy and HealthSouth were poised to take over the entire US Health System.
HealthSouth and its directors had indicated much wider multinational ambitions. HealthSouth were already purchasing in Australia, the UK and Europe. Caremark had purchased into Europe and Canada providing home care and home infusion services. Scrushy and his close associates could not put a foot wrong. They seemed set to dominate the world.
I found plenty of reports indicating that the companies acquired by HealthSouth had a very poor track record and had indulged in many of the criminal and unethical money making strategies so typical of the marketplace. There was almost no information linking HealthSouth to any of these practices. It boasted openly that it was not tarnished by the dubious and often fraudulent conduct that characterised the health care marketplace.
HealthSouth was the exception that seemed to disprove all my claims about the marketplace. Its success story showed that ethical companies could succeed spectacularly and take over their errant competitors, all without adopting their disturbing money making strategies. HealthSouth had been more successful in totally dominating its market sector than any of the others.
This did not make any sort of economic sense to me. This sort of expansion would require much more money and a far higher income stream than could possibly be provided by the funding system.
The company was being supported by the banks. The market analysts who were supposed to monitor these things and report on them were raving about the company and its prospects. I had no grounds for objecting to its entry into Australia and as it did not try to expand I did not revisit it. All I could do was email politicians and medical groups expressing my reservations.
I turned my attention to the expansion of Sun Healthcare, Mayne Nickless and the corporatisation of Medical Practice in Australia. It was not until I was sent startling information in March 2003 that I took another closer look at HealthSouth.
The HealthSouth Fraud Unravels
The whole sad saga blew up in March 2003. HealthSouth imploded. Not only had HealthSouth indulged in fraud but its growth and dominance was because its fraud was far larger, had gone on for much longer, and was far more ingenious than any of its peers. In the 5 years between 1997 and 2003 the sum involved was US $2.7 billion. The company itself subsequently estimated that the total fraud over the years was in the region of US $4 billion. The amount of the fraud increased over the years peaking after 1997.
HealthSouth had found a far cleverer way of defrauding the system and lining the pockets of its founder and his close associates. It was just so simple. It knew the marketplace, the culture and the interdependency of the whole system. It banked on the fact that its auditors and its bankers who made a lot of money doing business with the company would not want to know, would not look and if they looked would not want to see. At most they would see only small individual discrepancies which they could ignore.
It methodically added the extra non- existent money that it needed to boost its share price to its income statements in multiple small amounts. It knew that none of those it did business with would want to see fraud. They would not look too closely. It apparently started this soon after the company listed on the stock exchange in 1986. It built its empire on this artificially inflated income and the overvalued share prices that resulted.
Many alleged that HealthSouth accountants would present Scrushy with the accounts which fell far short of analysts inflated predictions. This was unacceptable to Scrushy who handed them back and told them to "fix it" which they systematically and carefully did until the accounts matched or exceeded predictions. This was not done in writing.
HealthSouth could not have predicted that 15 years later Worldcom and Enron would create a crisis that would focus a microscope on its accounting practices, and expose the way in which many on Wall Street connived to milk investors.
This exaggerated income stream allowed HealthSouth to borrow money from bankers and raise money from the market by floats. It could use its inflated script in mergers and takeovers instead of cash.
This fall from grace in 2003 did not happen as suddenly as it seems. It should have been clear to me in 1998 that HealthSouth was over the top and had exceeded itself - that the bubble must burst. Had I continued to watch the company I would have seen things start to break down during 1998. It is simply not possible to keep creating money that isn't there. Ultimately something must happen to it.
There was a downturn in the market in 1998, largely fuelled by a Medicare crackdown on fraud. HealthSouth initially claimed this would not impact on them. After selling large numbers of their own shares senior staff announced that profits would not be met. HealthSouth's share price tumbled. It was later alleged that the losses were deliberately overstated in order to get some of the artificial money off the books.
At the same time MedPartners Physician Management business failed and was abandoned. Investors in MedPartners lost most of their investment. Integrated Health Services was in trouble and headed for bankruptcy. Investors were left with virtually nothing.
HealthSouth copped a lot of anger from investors and a series of insider trading lawsuits were initiated in 1998, but it survived. Scrushy's charisma and persuasiveness was an invaluable asset. It was at this time that the idea of splitting the company was first raised but it languished. A similar proposal in 2002, when HealthSouth was similarly threatened is claimed to have been an attempt to bury the fraud, and leave it behind.
HealthSouth maintained its image if invincibility and recovered during 2000 and 2001 but its rate of expansion was slowed. It is clear that this recovery was largely due to the continuance of the fraud. Between 1997 and 2003 HealthSouth is alleged to have added $2.7 billion of profit that was not there to its books.
Available reports suggest that by now it was also boosting its income stream by the same strategies used by its peers - defrauding Medicare and cheating on patient care. A few whistle blowers spoke out in 1998. A Qui Tam court action alleging Medicare fraud was commenced by whistle blowers.
In 2002 the government joined the whistleblowers and this became public. Share prices wobbled. At the same time the Worldcom and Enron scandals had alerted authorities to accountancy fraud. There was a desperate need for HealthSouth to find some way out.
Richard Scrushy again sold a large number of shares. He then announced that profits were expected to fall. He claimed deceptively that this was due to a change in Medicare funding. This was not credible and a skeptical market did not believe it. Share value plummeted. Scrushy was attacked, class actions by shareholders followed and the US Securities and Exchange Commission (SEC) started investigating insider trading.
Scrushy now made a desperate attempt to extricate himself and the company from the mess by splitting HealthSouth into two. One half would continue as a public company and the other would become a private company where the fraud could be hidden. The company's lenders and financiers saw no merit in this and Scrushy was forced to abandon it.
Following the Enron scandal criminal investigators started looking at accounting practices in other companies. HealthSouth became a target towards the end of 2002. In February 2003 the SEC subpoenaed documents which HealthSouth was forced to give them. The recent Sarbanes-Oxley corporate reform law had increased penalties for the executives who participated in fraud or who signed fraudulent documents. Senior HealthSouth accountants confessed to their involvement in the fraud. They agreed to cooperate in return for more lenient sentences. Two wore hidden tape recorders and recorded their meetings with colleagues and with Scrushy.
In the middle of March 2003 the FBI and the SEC raided HealthSouth's headquarters. The next day civil actions were commenced against Scrushy and HealthSouth. The company was delisted from the stock exchange. Shares, which had exceeded US $30 early in 1998 now, sold over the counter for 14 cents. Bankers froze lines of credit ahead of loan repayments. The company faced bankruptcy if lenders pressed for their money.
Resolution and Recovery
After the fraud was exposed in March 2003 events moved very rapidly. Fifteen past and present senior staff including all of the company's five Chief Financial Officers, and a 1984 co-founder pleaded guilty to criminal conduct. They implicated Scrushy in their testimony. Two more were charged but were acquitted at trial.
Scrushy vehemently denied any knowledge of
the fraud claiming he was set up. The SEC tried to freeze Scrushy's
vast assets so that there would be something left for shareholders
but the court refused their request.
The exposure of the fraud has triggered a much closer look at the intertwined mesh of companies built around HealthSouth, at the lack of corporate governance, at the interrelationships between directors, at the relationships with, and the rolls played by bankers and auditors in this - and at Scrushy's remarkable wealth and life style.
The revelations were so disturbing that a congressional committee in Washington carried out an investigation. It subpoenaed documents and interviewed HealthSouth officials as well as representatives from the banks and auditors. Scrushy took the 5th Amendment and refused to answer questions.
A multitude of complex intertwined lawsuits engulfed the company, Scrushy, its past employees, its auditors, and its bankers. Civil and/or civil law suits were lodged against these entities by, the Securities and Exchange Commission (SEC), The Department of Justice, Medicare and Medicaid authorities, shareholders, debt holders, insurers, and other interested parties. In addition these groups sued each other in various complicated ways.
Ultimately Scrushy was acquitted of involvement in the fraud by a jury in his home town. He was convicted soon after of bribing the governor of Alabama by a jury in another town and has been sent to prison. Multiple employees pleaded guilty to the fraud but most were given lenient sentences because of their confessions and in return for giving evidence against Scrushy. One judge gave particularly lenient sentences because she believed that Scrushy had escaped conviction and that it was unfair for his subordinates to have to bear the consequences of his actions.
HealthSouth negotiated a Medicare fraud settlement with government and another with shareholders. It negotiated smaller settlements with the SEC and a number of other litigants. It did not admit guilt but gave undertakings and entered into integrity and compliance agreements. Some of these matters are still ongoing in 2007. Ultimately vast sums were spent on lawyers and money was shifted around, but the company itself received no more than a slap on the wrist. No one received a sentence or a penalty commensurate with the seriousness and extent of the fraud.
In 2003 HealthSouth faced almost certain bankruptcy and few expected it to survive. It was soon in default on payments to its lenders and there were many who could have forced it into bankruptcy. The company immediately brought in a series of independent corporate recovery experts from outside to manage the crisis. The banks and other lenders were persuaded to be tolerant. They allowed the company to reorganise its finances and restructure its loans. Shareholders insisted that all of the directors on the board during the time of the fraud resign and be replaced. HealthSouth was fortunate in finding others prepared to take up the directorships.
Unlike other fraud prone companies HealthSouth's basic business was sound and profitable. It managed to retain the support of its doctors so there was a steady profit stream to work with. It was a long and complex process involving cost cutting and the sale of facilities. By 2007 the threat of bankruptcy was over, share prices were running at $2-3 and the company was planning to resume its listing on the Stock Exchange.
Chronology of HealthSouth
A separate page has been devoted to a more detailed year by year overview chronology of HealthSouth's rise and fall. It tells the story as it happened.
The Accountancy Fraud
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.
Profits and hospitals don't mix Toronto Star Apr. 26, 2003
He (Scrushy) also paid for his chain of 1,800 clinics and hospitals in every state the nation's largest with loans and investor money secured with what the government says were phony financial projections.
Rocket-like Ascent Tumbles Back With Crushed Investors The Birmingham News April 13, 2003
Reports indicate that starting in the 1980's
soon after it was formed HealthSouth established a fraudulent
strategy that allowed it to dominate and take control of the entire
rehabilitation and surgical outpatient for profit marketplace. The
fraud involved making multiple entrees in its accounts to inflate its
perceived earnings and so create an image of enormous success that
pushed its shares to ridiculous heights. It used these inflated
figures to secure bank loans and raise money from the market. It used
its inflated script to buy all its competitors which further boosted
The missing money could be hidden in these transactions. The fraud went undetected for 15 years and in the last 5 years was US $2.7 billion. It was only when the Enron and Worldcom scandals focused attention on deviant accounting practices that the fraud was exposed.
It is significant that no one has claimed that the fraud did not occur or challenged its extent. They simply fought about who did it and who should go to prison.
It was alleged that whistle blowing was constrained by a head office culture of compliance, combined with an ethos of admiration for and fear of the driving CEO, Richard Scrushy. This was coupled with an almost paranoid attention to security and stringent employee oversight, even monitoring emails.
The American dream, rags to riches success story, and the charismatic persuasive character of the CEO who took tight control of all press interviews blunted criticism. Delighted shareholders, auditors, banks, and analysts all profited from the spiraling share price and the business generated.
A separate page has been devoted to a detailed description and comment on the Accountancy Fraud
Director and Company Relationships
HealthSouth is now confronting a loss of faith on many fronts. - - - - the company is facing questions not just about the quality of its services, but about its financial practices, insider stock sales, business dealings among company officials and the independence of the board.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002
Part of the HealthSouth phenomenon was an
interlinked group of public and private companies, founded by
HealthSouth capital and whose boards were largely controlled by
Scrushy associated directors from HealthSouth - usually including
Scrushy himself. Scrushy and close associates were also on the boards
of other health care corporations with whom they sometimes had
extensive business dealings.
The question asked in the press reports is whether these linked companies were in the interest of shareholders, or were primarily to enrich Scrushy and his friends. Two companies seem to be representative of what happened. MedPartners enjoyed spectacular success before collapsing leaving shareholders with very little. Reports suggest that Capstone, a REIT was simply a strategy to move money from the market into Scrushy and his associate's bank accounts.
Also of concern was the dominance of the HealthSouth board by Scrushy's cronies and the lack of independent directors. Because of the complex dealings there were conflicts of interest which were ignored as well as other deficiencies in corporate governance. There were also allegations and court actions alleging insider trading.
These problems did not attract much attention until the company's profits fell in 1998. Scrushy's persuasive handling of his critics and the renewed success, probably due to the fraud carried them through. Concerns about Scrushy and his fiefdom resurfaced more strongly in 2002 when the company again disclosed falling profits. This led to the investigation and exposure of the fraud.
Of interest is the denial of any knowledge of the fraud by members of the board. Particularly prominent is the new chairman of the board, Joel C. Gordon who has abandoned his old friend Scrushy and shifted the blame to him claiming a clean track record himself. Gordon in 1999 did paid consultancy work for the company while serving on its board, usually considered unwise. He became a director of HealthSouth when it bought his company Surgical Care Affiliates in 1996, so was on the board during all of the US $2.7 billion fraud.
A separate page has been devoted to a more detailed description of the board and the interrelationships of companies and directors.
HealthSouth was a generous donor to politicians and in 2006 it has once again resumed its donations to members of the very elected body that so recently investigated it.
MedPartners and Caremark
The article, "Vulgarians at the Gate," (Fortune magazine June 1999) described MedPartners as "a onetime Wall Street darling that has cost investors billions." The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003
Medpartners was another HealthSouth offshoot,
this time into the Physician Management business. It was funded by
HealthSouth and like other linked companies its directors and
chairmen were from HealthSouth. The Physician Management model was
fatally flawed. It required busy physicians to make much more money
than they already were in order to support the company's
infrastructure and the profits it promised. This was not
Caremark was a home infusion company spun off from Baxter Pharmaceutical company in 1992 in the midst of a criminal fraud investigation which resulted in US $200 million fraud payments by Caremark in 1995 and 1996. It had diversified rapidly into Physician Management and Rehabilitation. During 1995 and 1996 Coram Healthcare, HealthSouth and MedPartners dismembered Caremark each taking a piece.
Analysts beat up the unsustainable physician management business. MedPartners became a bubble that swelled rapidly even exceeding HealthSouth. The bubble burst in 1998 leaving shareholders with almost nothing and the MedPartners name discredited. MedPartners somehow survived abandoning physician management. It evolved into a pharmaceutical services company. It changed its name to Caremark. The press is still critical of its accounting practices.
Caremark gradually distanced itself from HealthSouth and became a very successful Pharmacy Benefits Manager. Its CEO was praised, awarded and rewarded. At the same time the pharmacy business was under intense criticism. Caremark and other similar managers were investigated and charged by multiple whistle blowers and US states with fraud and other unsavoury practices which do not seem to have been adequately resolved
In 2007 Caremark was taken over and merged into the much larger CVS drugstore chain.
A separate page has been devoted to a more detailed description of MedPartners, Caremark, the rise and fall of the physician management market, and the more recent allegations about its conduct.
HealthSouth's Auditors and Bankers
- - - - critics have questioned why Ernst & Young wasn't able to detect massive fraud that reportedly went on for at least three years and possibly from the time HealthSouth went public in 1986.
Scrushy gets the boot from HealthSouth Modern Healthcare's March 31, 2003
Eight weeks ago UBS received a subpoena from the agency; reportedly, other financial advisors did too. The question is whether Lorello & Co., who were said to be deeply involved in HealthSouth's operations, knew about the hanky-panky.
HealthSouth's Go-to Guy :: The collapse of HealthSouth is putting pressure on UBS Warburg. FORTUNE April 15, 2003
"Were investors defrauded by analysts who were more concerned about getting rich quick than getting the facts right? Based on our interviews with a key whistle-blower, there was an incestuous relationship between top HealthSouth officials and a small group of investment bankers and analysts," said Ken Johnson, spokesman for Energy and Commer
Panel Asks UBS Warburg For HealthSouth Papers Washington Post - May 9, 2003ce Committee Chairman W.J. "Billy" Tauzin (R-La.).
HealthSouth's profits and accounts should have been closely scrutinised
Many of these groups had close relationships
with HealthSouth and with Scrushy. HealthSouth had poached employees
from these groups and they would have had friends and contacts in
The critical question is whether a 15-year fraud of the extent alleged could have escaped attention without deliberate connivance or at the very least a self-interested blind eye? Those who conducted the fraud would have known where the unwilling eye need not look, or could justify not looking.
The problem was that all of these groups and their employees who received incentive payments based on performance made large amounts of money from their dealings with HealthSouth - sometimes billions of dollars. They would have lost this if they had started being picky about the large discrepancies created by the US $2.5 billion empty hole in the accounts. They had no incentive to look, and plenty to look the other way.
Very worrying was the failure of Ernst and Young to respond when they were advised of fraud in 1998 and again in 2002.
Even more worrying was the relationship with the Smith Barney (and later USB Warburg) banker Ben Lorello, and the analysts he employed including Geoffrey Harris. Harris gave glowing reports of HealthSouth's prospects and Lorello capitalised on these reports to do over US $8 billion worth of business with HealthSouth. They even attended HealthSouth board meetings on multiple occasions to advise the company. They are credited with proposing and designing the plan to split the company into two in 2002. Press reports indicate that witnesses and the US Securities and Exchange Commission believe that this scheme was an attempt to bury the fraud so that it would not be detected.
While none of these entities have been charged with criminal conduct in the HealthSouth fraud, the accountants and the bankers are, still in 2007, the subject of multiple law suits by shareholders and by HealthSouth itself.
A separate page has been devoted to a more detailed description of what went on between HealthSouth and its auditors, tax advisers, banks and analysts.
It's a story (ie HealthSouth) 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 spiraling health-care costs south of the border.
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.
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
Profits and hospitals don't mix Toronto Star Apr. 26, 2003
Until 1998 there was little evidence of
Medicare fraud in HealthSouth. In 1998 the company was fined after a
Blue Cross investigation in Alabama. An ex-employee opened a web site
accusing HealthSouth of Medicare fraud and was sued by Scrushy for
defamation. The next event was a settlement involving allegations of
fraudulent billing. This related to fraudulent claims made after
HealthSouth purchased equipment from one of the Scrushy family's
private companies. This was followed by a US $1 million fraud
settlement by a subsidiary in Alaska.
The next information was that a whistleblower Qui Tam action had been started in Texas as early as 1996. It seems that there have been several more actions like this because authorities now indicate that they have been investigating Medicare fraud and patient care issues for some time.
What usually happens is that the courts consolidate multiple similar court actions but we do not know how many there were or if this happened. That these cases are not frivolous and have merit was revealed when the government joined the whistle blower actions in May 2002. This means that the department of justice has taken over investigation and prosecution and can use its powers to demand documents and raid facilities. The congressional House Energy and Commerce Committee has indicated that Medicare fraud is a major focus of their investigation of HealthSouth.
All of the allegations follow a similar pattern accusing HealthSouth of treating patients in groups then charging for individual services, of providing expert care using unqualified staff, and of failing to have and follow physician plans of care. It is very probable therefore that these allegations are well founded. HealthSouth reached a Medicare fraud settlement for US $325 million in 2005 but as always without admissions of wrongdoing.
It is difficult to know how long this has been going on. HealthSouth had a very strong culture of compliance and a rigid disciplinary system. Employees were closely watched and there was tight security. Scrushy himself tightly controlled interviews by the press.
A separate page has been devoted to a more detailed description of the Medicare fraud allegations and investigations.
Failures in Medical Care
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. Profits and hospitals don't mix Toronto Star Apr. 26, 2003
Day care centres and rehabilitation services
deal with comparatively healthy patients and the treatments have low
complication rates. You would not expect there to be reports of
deaths or serious complications. Instead we need to ask whether the
treatment was appropriate and adequate and whether it was required.
How did others handle similar opportunities for profit and would
HealthSouth have done the same?
Companies which take over from doctors and provide care using a factory like system have tried to process as many people through as they possibly can at minimal cost - whether this care is indicated or not. People with individual requirements will not be catered for. After all, like Walmart on which HealthSouth is modeled they are selling mass market commercial products - not catering for individual idiosyncrasies. "Demand" is easily created.
Generale De Sante Internationale (GSI), and National Medical Enterprises built their empires by doing just this. Individuals are unique as are their health problems. They cannot be well treated on an assembly line.
It is clear when one examines the Medicare fraud allegations that many of the practices claimed to have occurred would have compromised care. Statements by authorities and by individuals also suggest that all was not as it should have been.
To form an opinion about what happened to patents we need to look at the honesty of marketing, the business practices, the emphasis on profit rather than care, the structure of medical services, the pressures placed on staff to generate profits, and the relationship with physicians. While at this stage information about the actual care provided is lacking it can be inferred that care was very probably compromised.
A separate page explores these issues and examines the information available about care in HealthSouth facilities.
HealthSouth in Australia
HealthSouth entered Australia in 1997/8 by buying a single rehabilitation hospital owned by Krinsky Pty Ltd. Although its profitability and rapid growth were not compatible with the exemplary conduct that it claimed, there was no adverse information to draw to the attention of authorities at the time. Why HealthSouth failed to expand in Australia is far from clear.
In 2004 it was revealed that the Australian arm of the company had participated in the fraud by paying kickbacks (bribes) to an individual in Saudi Arabia on behalf of HealthSouth in order to secure and keep a hospital contract.
As soon as the scandal broke in March 2003, and continuously since then, Australian state regulators and politicians were kept fully briefed on developments in the scandal and urged to force the company out of Australia. There is no information to indicate that they took any action to do this.
HealthSouth finally sold its Australian hospital in 2006.
Context, personality and culture
"Their life was about as unhindered by reality as one could imagine, and with freedom like that, comes the temptation to do anything you want," Ms. Launies said in an interview. The Rise and Fall of Richard Scrushy, Entrepreneur New York Times March 21, 2003
But people close to the company insist the fraud was maintained for so long because of his influence. As chief executive, they say, he held sway over a circle of young, ambitious locals glad to accept an opportunity that was rare in Birmingham: a chance to be a leader in a Fortune 500 company and amass wealth. The parties and glamorous lifestyle were even more of a draw. Diagnosis of fraud. Financial Times April 15, 2003
It is one thing to describe what happened,
but quite another to understand it. It is clear that the everyday
ideas about good, evil, crooks, policing and punishment do not come
to grips with what is happening in health care, and perhaps wide of
it. It is simply not possible for there to be so many evil people and
evil empires. It is clear they don't see themselves this way.
I have tried to promote some more sensible frames of understanding which allow us to grasp some at least of what is happening, and perhaps look at alternative ways of thinking which might have better outcomes. To do so I have assumed that there is substance to most off the allegations made about HealthSouth, but realise that some may be assumptions that may not be substantiated and that a jury found there was reasonable doubt regarding those about Scrushy and acquitted him of fraud. The reports are at least pointers.
The suggested understanding of the extent of aberrant practices is built around the idea of context as a critical factor in facilitating the sort of ideas which people develop - how they understand their situation. These are the understandings which people living in that context use to act out their lives. The context exerts a strong influence in determining the sort of leaders who appear, the sort of social structures which develop, the justifications people use for their actions, and the way they ultimately behave.
Problems arise when the context is discordant, in that desired social outcomes and the actions that must be taken to build successful lives are in conflict. The corporate health care marketplace is a good example. Strong pressures favour
These are all likely to facilitate success
for participants at the expense of the intended social objectives. A
variety of well recognised social and psychological processes are
used to deal with the ethical and moral conflicts that result.
HealthSouth is almost a caricature of what has happened in other health care corporations. We find a context whose pressures are augmented by the leader's policies, a total preoccupation with marketplace beliefs and outcomes, an eccentric driving leader with a massive ego to fill, a corporate culture of complicity, compliance and deliberate blindness. This extends more widely than any other, and results in a far bigger and all embracing fraud than ever before in health care.
Added to this is a wider marketplace awash with corporate misconduct, inappropriate relationships, and connivance in fraudulent enrichment at the expense of ordinary shareholders. HealthSouth has relationships with these groups and its culture is part of this wider culture, which its story illuminates.
I have devoted a whole web page to an analysis of the interplay of all these factors in the HealthSouth scandal using extracts from reports to illustrate what is happening. There is much to learn from HealthSouth's story
The Congressional Investigation
The House Energy and Commerce panel on oversight and investigations mounted an investigation into the HealthSouth scandal. They subpoenaed documents and interviewed staff from HealthSouth, Ernst & Young, and UBS as well as others with knowledge or expertise. Some HealthSouth executives including Scrushy took the 5h amendment but others described the way the company operated and what had happened there. Staff from Ernst & Young as well as UBS denied knowledge and tried to distance themselves explaining why they could not detect the fraud.
The Scrushy Fraud Trial
This was a very high profile trial and seen as a test case for the recently enacted Sarbanes-Oxley act. This was a response to the Enron, Worldcom and other frauds. It held executives directly personally responsible for what happened at the companies and the accuracy of the documents they signed.
The prosecution were outclassed by a very skilled team of lawyers. They had very little documentary evidence and although the evidence by witnesses seemed overwhelming many of the key witnesses were felons giving evidence in return for reduced sentences. There was plenty of room for the defence to mount an effective defence particularly to a jury. The prosecution made made several tactical errors including.
Scrushy became a religious fundamentalist, a lay preacher, a tele-evangelist centred on the fundamentalist black churches he had joined. Many Bishops and priests became strong and convinced supporters attending the trial. Many jurors were from the community hey ministered to.
The defence mounted a sustained and very public legal challenge to the legal processes, the law, the evidence and the Sarbanes-Oxley act. Shortly before the trial Scrushy changed his legal team employing skilled local lawyers used to dealing with local juries to plead his case. Some consider this an inspired decision.
Although the evidence given for the prosecution seemed overwhelming and the evidence of some defence witnesses seemed to favour the prosecution the jury, after wavering reached a unanimous verdict on NOT GUILTY. The prosecution relying on witnesses rather than documentation was unable to prove its case beyond reasonable doubt. There was widespread amazement and even other judges involved in trying and sentencing the other felons were widely divided about this verdict.
Was the jury inspired and insightful in a case which depended in some measure on the evidence of people who admitted to being deceitful and who were being rewarded with leniency for the evidence they gave against Scrushy? Alternately were they naive hick fundamentalists, lacking in the business and legal knowledge required, persuaded by Scrushy's god fearing image, and the support of their clergy? Did they have preconceptions that prevented them from making a rational decision? These questions are all open and I do not try to answer them.
Whatever is said about the verdict this is an important and fascinating saga to examine. It provides a wonderful low level insight into the southern USA, fundamentalist religion, the US legal system, trial by jury, and of course that fascinating character Richard Scrushy.
UPDATE JUNE 2009. Scrushy was found guilty of fraud by a judge in a civil case and laible for 2.88 billion.
<CLICK HERE> (Here to go direct to details of 2009 court action)
The Richard Scrushy Bribery Trial
Investigators examining bribery allegations against the governor of Alabama were soon cooperating with the HealthSouth investigators in regard to the role of Scrushy in US $500,000 paid by HealthSouth and IHS to Don Siegelman, then the governor of Alabama.
Both Scrushy and the governor were charged, found guilty and sentenced to prison terms by a jury in Montgomery. Scrushy's attempt to replicate the strategies he used in Birmingham failed.
Particularly interesting are the strong arm tactics that witnesses indicated were used by Scrushy when dealing with HealthSouth staff, its bankers and the almost bankrupt IHS, of which Scrushy was a director. This was in order to get the sum paid in a hurry without arousing suspicion. The story illustrates the way Scrushy and HealthSouth operated. It goes to the heart of Scrushy's credibility and speaks for the probable accuracy of the many allegations made about him by HealthSouth staff.
In 2007 there was a move afoot to secure a congressional investigation of allegations that the entire Siegelman bribery trial was a republican initiated strategy to neutralise Siegalman, a Democrat seen as a major threat to the republican cause. The justice department issued a strong rebuttal. This sounds far fetched but time will tell if it goes anywhere.
HealthSouth Staff and the Fraud
Fifteen HealthSouth staff pleaded guilty to participating in the fraud and agreed to give evidence for the prosecution. They were sentenced by different judges who held very different views about the roles they had played, the weight to be given to their cooperation, and the importance that should be given to the fact that the real culprit, one at least considered primarily responsible, had gone scot free. The sentences were very variable and most very lenient with few jail sentences. The prosecution appealed many of the sentences and some were increased. The only staff member who pleaded not guilty and attempted a defence received 8 years the harshest sentence of all. Ultimately no one paid a price remotely commensurate with the crime committed.
HealthSouth's Court actions
HealthSouth was involved in a myriad court actions related to the accounting fraud. Most were initiated by others but some were taken by the company itself. These involved the US Security and Exchange Commission (SEC), shareholders class actions, Richard Scrushy, other past employees, Ernst & Young, UBS, employees in regard to stock options, insurers, real estate companies from whom HealthSouth leased facilities, physiotherapists etc. These are in addition to those described on the other pages.
The largest were a US $445 million settlement with shareholders and a US $100 million settlement with the SEC. Many legal actions are still ongoing.
HealthSouth's Collapse and Recovery
When the scandal broke in March 2003 the world fell apart for HealthSouth. It was overwhelmed by lawsuits. Its finances were a mess and no one knew what its position was. Its chairman and CEO, its senior staff and its auditors were gone. Its bankers were discredited. Its disoriented directors were left holding the baby. Few had any doubts that it was heading for bankruptcy.
Hopefully most sensible people think that bankruptcy is what should have happened, but it did not happen. It was a monumental achievement that the company survived. While there was some initial dispute the board accepted what had happened and their own untenable position. They employed a large number of credible and very talented outside groups and handed the company over to them. They made their directors positions vacant for others. HealthSouth not only survived but by 2007 had regained the confidence of the market and was prospering.
Whatever we may feel about the probity of these people, and consequently their suitability to operate in the health care sector, we cannot but admire the effort. This web page tells the story.
Scrushy World at http://www.scrushy-report.com/ gives a great deal of information and comment
For HealthSouth reports to the US Securities and Exchange Commission (SEC) see http://finance.yahoo.com/q/sec?s=hls or http://google.brand.edgar-online.com/?sym=HLS
"The Financial Collapse of HealthSouth" congressional inquiry has prepared statements, transcripts and webcasts.
HealthSouth Web page http://www.healthsouth.com/
Wikepedia Encyclopedia on
Richard Scrushy http://en.wikipedia.org/wiki/Richard_M._Scrushy
More on Caremark http://en.wikipedia.org/wiki/Caremark_Rx
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