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Read Making a Killing

home / healthcare / in the media

TheStreet.com
Mar 12, 2003

by Melissa Davis, Staff Reporter

For Shareholders, More Pain to Come

For the health care industry, the last decade has played out like a brutal game of musical chairs.

First, HCA -- the nation's largest hospital chain -- winds up in the Medicare hot seat. It spends years, and billions of dollars, to clear its new Columbia-free name. Then Tenet (THC:NYSE), which has undergone a similar conversion already, takes HCA's place. In between, smaller players come and go, keeping the hot seat warm.

And shareholders, those loyal spectators on the sidelines, continue to get burned.

Michael Ruggio, a former attorney for the Justice Department -- the agency that investigates Medicare fraud -- believes that shareholder anguish may soon grow even worse.

"Everybody thought HCA was going to be the ultimate Medicare case," says Ruggio, who now represents health care giants for the Washington office of Duane Morris & Heckscher. "But this investigation of Tenet is very serious -- and it's only just beginning.

"I think you're going to see even bigger cases going forward."

Even some well-intentioned companies may wind up causing deep shareholder pain. Michael George, a health care consultant for Professional Providers Services, says many companies run afoul of Medicare laws without even knowing it. George recommends that investors verify the presence of a strong Medicare compliance program, led by a full-time compliance officer, before sinking investment funds into any health care company.

Otherwise, George says, investors could invite unpleasant surprises -- like the federal raids that often signal big Medicare probes.

"That's like opening the door and seeing 60 Minutes standing there," George says. "You know it's not going to be good. And ignorance is not an excuse as far as the government is concerned."

The Art of Failure

Back when Integrated Health Services began throwing money at fancy art -- including a painting by the son of Michelangelo's teacher -- investment banks were still throwing money at IHS.

Company founder Robert Elkins, who had developed a passion for art while studying medicine in Rome, was hailed as a visionary who had figured out a way to profit handsomely from the unglamorous nursing home business. IHS would accept much sicker nursing home patients and, by claiming Medicare exceptions, collect much bigger checks for stepping up its care.

By the time Medicare clamped down, IHS had exploded into an overgrown nursing home giant with more than $4 billion in debt and an insatiable appetite for the finer things in life. Even as it slid toward bankruptcy, IHS relocated to a lush campus in the Maryland countryside. And IHS executives -- who jetted around the country in three corporate airplanes -- found enough money for one last painting when the company was technically broke.

IHS coughed up $1 million for an Italian baroque, which the bankrupt company would later auction off for pennies on the dollar. Elkins, who wound up as the high bidder on another IHS painting, has since been accused of reckless spending that cost the company its health.

"They weren't so brilliant," Fulcrum analyst Sheryl Skolnick recalls of the entire nursing home group. "They stretched their balance sheets to the limit and made a lot of wrong decisions."

Tumbles

When Medicare jerked the cushion from beneath them, some of the industry's largest players fell.

More recently, HealthSouth weathered a similar blow when Medicare issued an unfavorable "clarification" about its physical therapy reimbursements. But the deep cut to earnings hurt the company less than a big insider sale by former CEO Richard Scrushy. Today, HealthSouth is seeking to restore lost profits at the same time it struggles with multiple investigations by federal authorities.

Meanwhile, PolyMedica continues to fight its own Medicare battle. Since mid-2001, the medical aids supplier has been fielding questions from the FBI about allegedly charging Medicare for supplies that were returned or never ordered at all. Company employees told the media they had to "make up numbers" to meet mandatory sales goals each month.

PolyMedica -- now under the temporary guidance of its lead director -- announced in late January that it had thrown open its doors to federal investigators, offering unfettered access to company employees in an effort to put the billing controversy behind it. The company's stock, up 18 cents to $29.38 on Monday, fetches half the price it commanded before the Medicare scandal first broke.

But some companies, like Hospital Staffing Services, never recover from Medicare setbacks. Since tumbling into bankruptcy five years ago, the company has been declared a "complete, utter disaster" by trustees appointed to clean up the mess it left behind.

Although federal authorities considered Medicare fraud charges against the company, Hospital Staffing was apparently guiltier of lousy bookkeeping and reckless spending than of any outright government theft.

"If you don't follow the rules, it doesn't make any difference," says trustee Kenneth Welt. "The [company] may say the reporting requirements were too strenuous -- and that may have been the case. But they were still required."

Wonderment

Many big-time health care players -- including Apria, Cigna, DaVita, Merck and WellPoint -- have
also raised regulatory eyebrows. But some experts believe the current, eye-popping scandals at Tenet may finally trigger real reform.

The nonprofit Foundation for Taxpayer and Consumer Rights remains skeptical.

"We heard the same thing in the wake of the HCA scandal," says Jamie Court, executive director of the nonprofit agency. "It was a lot of sound and fury. If a few HCA executives had gone to jail, we would have a far different situation today. But this is not the climate where individual executives are going to pay the price."

In recent weeks, Medicare reform has re-emerged as a hot topic of national debate. Experts agree that coming changes will present fresh challenges for health care companies. But they remain divided on whether reform will ultimately hurt -- or help -- health care players in the end.

President Bush is viewed by many as a business-friendly leader who will push Medicare changes that bring a flood of new business to health care corporations. But so far, Bush's vague proposals have fallen short of pleasing either political party because of shortfalls for consumers.

Sen. Majority Leader Bill Frist (R-Tenn.) is considered another powerful friend of the industry. Frist is a former heart transplant surgeon whose family founded industry giant HCA, a company Frist owns stock in.

Court's group is among those who look at Frist and see a conflict of interest.

"Unfortunately for the public, the doctor running the house -- Sen. Bill Frist -- typifies the GOP government's new health care strategy: care most about the health of corporations that elect you," he says.

Health care companies themselves juggle their own conflicts. No matter how the Medicare debate winds up, publicly traded health care providers will remain pressured to deliver quality service and solid profits -- a combination that doesn't necessarily mix.

"There's such an emphasis on making money that some people take shortcuts and lose sight of what they set out to do -- take care of people," says Thomas Atchison, an organizational psychologist who promotes the "human condition" of health care. "But I get saddened when I only read about Medicare fraud. 

"I think the future of health care is robust. We have the greatest health care system in the world."


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