The events have all the elements of a best-selling novel or movie screenplay: gambling, alcoholism, cocaine abuse, sex, uncontrollable egos, money laundering and embezzlement.
But experts cite one overriding motivation for executives to risk their careers, reputations, families, pride and self-esteem to violate community trust and steal what amounts to a couple of years' pay.
"Simple greed," said Christopher Rolle, a lawyer hired by Cape Coral (Fla.) Hospital from 1993 to 1995 to investigate misfeasance and malfeasance.
"When some executives are in power for a long time they tend to think they own the place and can take whatever they want from it," said Rolle, who's with the law firm Foley, Lardner, Weissburg & Aronson in Orlando, Fla.
Cape Coral experienced some of the most horrendous examples of internal corruption, a lax board, poor management oversight, and absence of financial and ethical codes of behavior at a community hospital.
From 1989 to 1994, three top executives at Cape Coral are alleged to have stolen more than $2 million. A developer connected with the executives also has been indicted on 46 felony counts.
Like many conspiracies, the Cape Coral caper included dummy corporations controlled by insiders to which millions of hospital dollars were funneled.
In one alleged scheme, the executives conspired for 15 years to melt silver residue from used radiology film into bars. They smuggled the silver bars out of the hospital and pocketed the profits, indictments charge.
The damage to Cape Coral went beyond the amount of money the executives allegedly stole. Over the past three years, Cape Coral lost more than $35 million and nearly defaulted on its bonds.
The lives of more than 332 employees and their families were disrupted through layoffs to stem the red ink. In addition, the community suffered embarrassment as the story was reported locally and in national publications.
In order to recover financially and emotionally, Cape Coral earlier this month agreed to sell its assets to Lee Memorial Health System, Fort Myers, Fla., for $140 million. The amount will cover accumulated debt and fines.
But as egregious an example as Cape Coral was, it is far from an isolated or rare incident.
In a MODERN HEALTHCARE*review of published stories from 1985 to March 1996, a total of 100 executives ripped off more than 40 hospitals to the tune of $38 million (See chart, p. 124).
The rip-offs, which averaged nearly five hospitals a year, typically involved two executives at each facility. The average amount of money stolen per hospital was $791,000; the average per executive was $380,000.
Ironically, the amount of the rip-offs generally totaled about two years' worth of estimated salaries for each executive.
The average salary in 1994 for chief executive officers was $165,500 and $105,300 for chief financial officers, according to Hewitt Associates, a Lincolnshire, Ill.-based employee benefits consulting firm (June 26, 1995, p. 47). Put bluntly, many hospital executives ruined their careers for a fraction of what they would have received if they had stayed honest, experts said.
"Everyone thinks they can get away with it," Rolle said. "It becomes an ego thing: I'm smarter than everyone else."
Security experts said it's impossible to estimate how many crimes in healthcare go undetected for every case that becomes public. But one estimate indicates one out of every five dollars spent on healthcare services is fraudulent or questionable (See chart, p. 134).
The FBI currently doesn't track the number of crimes against hospitals committed by executives. However, FBI officials said later this year they will begin to compile crime data in a new healthcare section of the agency's Uniform Crime Report (See related story below).
"The ones detected are a mere fraction of the total number," said Jonny Frank, a former U.S. attorney and government investigator who is now managing director of Decision Strategies International's New York office. The firm helps companies root out fraud and develop monitoring and compliance programs.
"Crimes occur so frequently and are so infrequently investigated," he said. "The government is becoming more aggressive in investigating fraud, especially in healthcare. Hospitals are very lax in self-policing. There are lots of opportunities for fraud."
Frank said his firm performs executive background checks for companies to eliminate or catch possible suspects in a known crime or to clear potential employees
for sensitive jobs. Most businesspeople come up clean,
"The one exception is the healthcare arena," Frank said. "I can't tell you how often it comes up that people in healthcare have major skeletons in their closets they don't want people to know about."
Besides the executive's high salaries and proportionately low amounts of the thefts, several other common threads run through the stories of embezzlers brought to justice:
Hospital executives generally were on the job for years at their institutions.
Audits of the hospitals by accounting firms failed to uncover the fraud.
The parent organization of the hospital failed to detect problems through financial or internal audit controls.
The boards of the hospitals inordinately trusted the executives.
The hospital boards and the community were shocked and embarrassed when the scams were exposed.
"All these schemes involve submission of fraudulent invoices and front companies," said Lynne Hunt, chief of the FBI's healthcare fraud unit in Washington. "It usually involves a circumvention of the normal submission (accounting and purchasing) process. They are able to do it because of the involvement of employees."
Hunt said healthcare organizations can try to prevent abuses by instituting greater checks and balances for bidding processes or by emphasizing ethical standards (See related story, p. 132).
"There is no fail-safe system for a for-profit or not-for-profit hospital," Hunt said. "If you have insiders committing the fraud, they know the system and how to cover it up. It is very difficult to prevent."
Case studies. Another insider rip-off occurred last year at 512-bed Manatee Memorial Hospital in Bradenton, Fla.
Karl Tague, who served for seven years as president and CEO, participated in an illegal kickback scheme in which he persuaded the board to approve inflated construction contracts.
Over a two-year period, Tague, another hospital executive and four outsiders bilked Manatee Memorial out of $1.5 million.
In one scam, Tague stacked the deck to fool the board, arranging three bids that were essentially controlled by him and his cohorts. The scheme was exposed when one of the conspirators feared he was being cut out of the scam and became a stool pigeon for local police and FBI agents, who then cracked the case.
Tague pleaded guilty in U.S. District Court in Fort Myers to accepting more than $344,818 in bribes. He was sentenced to three years and four months at a federal work camp on the Seymour Johnson Air Force base in Georgia. He also was required to pay $352,355 in restitution and agree to submit to periodic drug testing.
His reported salary as CEO was $175,000. Because he was fired, Tague lost a $200,000 severance package and a $50,000 bonus. He also lost an undetermined pension.
In testimony, Tague admitted that greed drove him to take the money. At his sentencing hearing in March, Tague requested leniency from U.S. District Judge Lee Gagliardi of Fort Myers.
"I'm truly sorry, your honor. I've privately apologized to my wife several times and she's forgiven me. Perhaps the hardest thing about this for me was telling my son that his father was a thief, that the guy he looked up to and respected was not deserving of that. I've paid a price," Tague said.
But Gagliardi wasn't inclined to be lenient. "This would send the wrong message to the community," he said.
At the time, Manatee Memorial was owned by Baptist Hospitals and Health Systems, Phoenix. During this period a sale was being negotiated with Universal Health Services, King of Prussia, Pa., which now owns the hospital.
Tague's indictment charged that he stole most of the money in the three months before the sale closed, when he knew confusion was at its highest because of the ownership transition.
Cape Coral. In 1994, the unusual management activities of three top executives of Cape Coral Hospital were exposed.
In indictments, the three executives were accused of using hospital credit cards to buy jewelry and other personal items valued at more than $30,000 total. They also were charged with diverting hospital money to buy a warehouse that was leased back to the hospital at an inflated price and then sold to it at an even more inflated price.
Tales of lavish spending include a fifth-floor penthouse suite in the hospital that was used to hold extravagant parties where cocaine and alcohol flowed freely. After the executives were fired, cases of expensive foreign wines continued to be delivered to the executive offices, Cape Coral officials said.
One of the executives, Jay Murphy, the hospital's former CFO, pleaded guilty last year to one count of theft and agreed to testify against the other two executives. Murphy is serving an 18-month term in federal prison. He also agreed to enter a substance-abuse treatment program.
Murphy testified that he stole $290,500. He was required to pay $290,000 in restitution, to forfeit a $90,000 interest in his house, and to pay unspecified back taxes, penalties and interest.
Last month, the other two Cape Coral executives, J. Michael Ward, former CEO, and Daniel Edgar, former chief operating officer, were indicted on 46 counts of embezzlement, bank fraud, money laundering and tax evasion.
The indictment also charged that Ward and Edgar stole $2 million from the hospital, including $60,000 to purchase cocaine and share with at least five other former employees. Ward faces 30 years in prison and a $1 million fine; Edgar faces a maximum of 20 years and a $500,000 fine.
Ward and Edgar have pleaded innocent. Their attorney says the charges are untrue.
"The hospital is fabricating this to avoid paying their salaries by charging that felonies have been committed," said attorney Alan Woodruff of Fort Myers. "The board knew what was going on and approved it. They are a bunch of bozos who have ignored this hospital for 15 years."
Professional ethics. The Healthcare Financial Management Association and the American College of Healthcare Executives both have ethical guidelines that govern their members.
The ACHE's four-page Code of Ethics states the following: "Disclose to the appropriate authority any direct or indirect financial or personal interests that pose potential or actual conflicts of interest."
The 30,000-member HFMA has a similar code of ethics.
From 1981 to 1995, the HFMA expelled just two members, said Richard Clarke, the association's president.
From 1986 to 1993, the 28,000-member ACHE expelled one member, suspended three and placed one on probation, according to Karen Hackett, the college's executive vice president.
"We allow the legal process to take its course," Clarke said. "If a person is found guilty, that is proof in our mind. They are no longer members."
While the number of expulsions may be small, most ACHE and HFMA members convicted of crimes resign before they face disciplinary action, executives said.
Clarke said he believes insider crime, such as embezzlement and taking illegal kickbacks, is increasing.
"Given all the turmoil involved in healthcare today, it might be getting worse," he said. "Maybe we are just hearing about it more. There will always be opportunists who try to get away with it."