Struggling under the double weight of a federal whistleblower lawsuit and a dramatic quarterly earnings slump, Quorum Health Group executives have tried to shoulder the load by underscoring the company's values and ethics.
But Wall Street seems far more interested in hearing words like "profit" and "settlement" than a lesson in morals, as the company's low stock price has shown in recent months.
Investors and analysts are eager to see if the company's quarterly earnings report, due out this week, will show that Quorum management can not only rise above the company's legal travails but also reverse some significant operational troubles.
"I think the stock is going to do what it is going to do until the next piece of major news," says Jeffrey Villwock, a healthcare analyst at Atlanta-based Robinson-Humphrey Co.
Nashville-based Quorum reported a net loss of $18.7 million for the quarter ended Dec. 31, 1998, compared with a profit of $24.4 million for the year-ago quarter.
Quorum Vice President and Chief Financial Officer Steve Hewett referred to the period as "the most disappointing financial quarter in our company's history."
Troubles abound. It certainly did not help that during the quarter, the federal government joined a whistleblower lawsuit alleging widespread Medicare fraud at hospitals owned and managed by Quorum. The U.S. Justice Department and the whistleblower, James Alderson, a former CFO at a Quorum-managed hospital in Montana, allege the company prepared reserve cost reports and kept internal documents that identified padded Medicare claims.
But the bad news on the earnings front did not stem directly from litigation costs, which amounted to only about $1.1 million, Quorum officials say.
In addition to the reduced Medicare revenues resulting from the federal Balanced Budget Act of 1997 and unfavorable third-party-payer settlements during the quarter, Quorum suffered some operational setbacks, according to the company's filings with the Securities and Exchange Commission.
One of these was a joint venture between Quorum and Columbia/HCA Healthcare Corp. to build a medical center in Vicksburg, Miss. The companies formed River Region Health System with Columbia's 154-bed Vicksburg (Miss.) Medical Center and Quorum's 183-bed Parkview Regional Medical Center in Vicksburg.
After the joint venture had been created, however, 62 hospital employees were laid off, causing the city of Vicksburg to back out of $4.5 million in pledged loans to the system.
The two companies plan to proceed with the $100 million to $120 million project despite the financial setback.
"The bringing together of those two hospitals was a bit more traumatic than we had anticipated it would be, particularly from a financial perspective," says Gene Fleming, Quorum executive vice president and chief operating officer.
Fleming also cited the company's Mary Black Health System in Spartanburg, S.C., as a "traumatic market" because of a lawsuit filed by physicians at a competing hospital and ensuing difficulty in recruiting and retaining physicians at Mary Black.
Quorum has tried to recruit physicians aggressively into the market and help them get their practices up and running, Fleming says. "Some of the costs of getting them established were greater than we'd predicted."
The operational factor. Some analysts say Quorum's operational issues have affected company finances more than legal issues did.
"There are certain hospitals where they're having a lot of problems; investors would certainly like to see those problems fixed," says Peter Emch, a healthcare services analyst at BT Alex. Brown in Baltimore. "At this point their operational issues are much bigger than the lawsuit."
Quorum's strategy has been to buy hospitals in mid-sized markets with two to four hospitals so the company can gain significant market share. The company tries to buy an average of two to four hospitals per year. Since July 1998, however, Quorum has bought five hospitals, making the past year one of its more acquisitive.
In retrospect, the company might have bitten off more than it could chew, says Leslie Henshaw, managing director at ING Baring Furman Selz.
Dealing with the problems that cropped up in the last quarter are a top priority for Quorum management, Hewett says.
That's why the company has backed away from a stock repurchase plan that began in August 1998 with the repurchase of 3 million shares. A second repurchase of 5 million shares was authorized, but only 585,000 shares were bought before the company decided to retrench.
Quorum was downgraded by Standard & Poor's in late January when it released the troubling earnings report following the announcement of the repurchases.
"After talking with rating agencies and bankers, our decision is to not repurchase at this time," Hewett says. Instead of buying back its own stock, the company will focus on maintaining its capital structure, he says.
The pace of Quorum's acquisitions is likely to slow, too, as the company becomes more selective, Fleming says.
He also hints that some of the specific problems that led to the last quarter's financial shortfall may not affect the rest of the year as much.
"To the extent that there can be good news in a difficult situation, most of the impact of (the Balanced Budget Act) has happened in the last two years," he says. "I think that we have established a new base, and I think we'll be growing off that base."
Quorum was born when HCA Management Co. was spun off from Hospital Corporation of American to a group of investors and employees in 1989. At the beginning of this year, Quorum owned and operated 23 acute-care hospitals. Quorum's management arm, the business that launched the company, accounts for only a small percentage of its revenues. Today, Quorum has 231 management contracts covering 238 not-for-profit hospitals. In 1998, the management fees totaled $79.5 million, about 5.6% of the company's total revenues.
But the management business not only gives Quorum an in with the not-for-profit world but also provides a base for future acquisitions.
The management company provides national presence through the managed hospitals, so "it's a great conduit to grow our total company," Fleming says.
But in at least one corner of Tennessee, Quorum-employed managers have been getting an earful of discontent.
In Kingsport, Tenn., a group of physicians at Wellmont Holston Valley Medical Center called for a no-confidence vote in the system's Quorum management last month. The physicians complained to the board that staff cuts were jeopardizing the quality of care.
The system's board ultimately voted to continue a relationship with Quorum, but as a consultant, not a manager.
Legal fallout. The unresolved federal lawsuit has affected employees at all levels of the organization.
"Everybody in the company-no matter whether they worked in the corporate office or at a hospital in the most remote corner of the most remote state-if you worked for Quorum, somebody's out there asking you questions about this lawsuit right now," says Meg Mazzone, vice president of ethics and business conduct at Quorum. "But the good thing about working for Quorum is that we had something to say, which is that we've had the code of ethics in place for years and years and years, and that we have a compliance program now that I think is one of the best going in the country."
The lawsuit was originally filed under seal in 1993 against HCA descendants Columbia and Quorum.
The fraud allegations became public in October 1998 when the U.S. Justice Department joined the case as a plaintiff. Since then, Quorum lawyers have succeeding in getting the case separated from Columbia's. Last month, a federal district court judge in Tampa, Fla., appointed a mediator to try to bring the government and the company to the negotiating table. Until that meeting, however, which lawyers suggest is likely to be set for June, Quorum is still on a litigation course and has an April 26 deadline for filing motions in response to the government's complaint.
At the end of March, federal prosecutors served subpoenas to 200 hospitals that Quorum managed or formerly managed, seeking any documents related to the hospital's cost reporting between 1985 and 1995. The hospitals have 30 days to respond unless they negotiate an exception.
From the way both camps are talking, a settlement does not seem imminent.
"If we did get overpaid, we want to pay the money back," says Terry Allison Rappuhn, Quorum vice president, controller and assistant treasurer. "But we. . . know we haven't done anything intentionally at the company that would be wrong."
"We've publicly stated that we have full confidence in our people," says James Dalton Jr., Quorum president and chief executive officer.
But Stephen Meagher, the attorney representing the whistleblower in the Quorum case, says Quorum is sending mixed signals about its desire to conclude the case quickly. On one hand it proclaims the need for quick resolution but on the other, it keeps the government at arm's length about settling, he says. "It's going to be two tracks for a while," he adds.
"The sooner we get into a room talking about bottom-line numbers, the better off we are," Meagher notes.
Legal experts and healthcare analysts say that a quick settlement might offer the best outcome for Quorum.
"I have advised clients for years that it is a dangerous and naive conception to assume the issue is whether you'll go to jail or successfully make credible arguments at trial," says Neil Caesar, president of the Health Law Center, a Greenville, S.C.-based national firm that advises healthcare providers, many of which are for-profit companies.
"By the time things have developed to a full-fledged investigation, you have lost," Caesar says.
If Quorum's case goes to trial, the company faces fines of three times the amount of damages, which totals $210 million, plus $5,000 to $10,000 per individual false claim. If the company loses in court, the government can exclude it from the Medicare program.
"No one wants to roll the dice on that risk," says E. Michael Flanagan, a partner in health practice at Gardner, Carton & Douglas' Washington office.
Tarnished image. Whatever the verdict, a lingering lawsuit tends to hurt a company's reputation, Flanagan says.
"Quorum had a very good reputation for a long time, and once again, the company is claiming it's done nothing wrong," he says. "You wind up having to settle (lawsuits) to make them go away, because you can't afford the expense of letting them go to trial."
Quorum's vice president, general counsel and corporate secretary, Ashby Burks, defends the company's strategy.
"We've made a judgment that we are going the right way, for our company and our shareholders, to get this resolved within a reasonable period of time, and that's about all you can say," he says.
Meanwhile, Quorum's stock price hovers around $10 per share, close to its 52-week low of $7.50, and less than one-third of its value a little more than a year ago, when it sold for nearly $34 per share.
"Obviously, the dark cloud is there. Obviously, you don't like people out there criticizing your company, saying it is something other than what you know it is," Dalton says.
He says he does not believe the company has lost any legitimacy or credibility because of the lawsuit. But he takes seriously the fact that his reputation is on the line.
At the top. Dalton, 56, is a veteran of the hospital world. He came to Quorum in 1990 as president, CEO and a director of the company. At the time, Quorum was still private and owned no hospitals. Before heading up Quorum, Dalton had served as regional vice president of the southwest region of Healthtrust in Nashville. Before that he was with both Hospital Corporation of America and HCA Management Co.
Dalton serves on numerous boards and is in his second term as chairman of the Federation of American Health Systems, an association that represents for-profit hospital companies.
Thomas Scully, federation president and CEO, says the worst aspect of Quorum's lawsuit is that it is happening to Dalton.
"If you could find any piece, any part, of Jim Dalton's life that's not admirable, I'd be pretty surprised," Scully says. "I think Jim has always run his entire business on the fact that Quorum should be a company of unquestioned integrity. Besides the fact that it's been horrible for the company financially as well as image-wise, I think it's been horrible for him personally."
Dalton concedes that the whistleblower lawsuit has been a "tremendous burden," but he also says it has allowed the company to showcase its commitment to business ethics.
"We don't sit around here trying to decide what to do about something we don't think we've lost," he says. "We try to live and walk our values system."
Resolutions. Only time will tell what will win out-the government's portrait of Quorum as a company that systematically defrauded Medicare or the company's self-portrait of law-abiding hospitals trying to do their best with exceedingly complex and ever-changing regulations.
Meanwhile, the government's much more complicated case against Columbia is heading toward settlement, although it could be a long road. In February, the government asked that its civil case against Columbia be put on hold because that case could jeopardize the settlement talks and interfere with the separate federal criminal probe of the company. In its annual earnings report for 1998, Columbia also disclosed that it had offered $1 billion in letters of credit to the Justice Department as assurance that it could complete its planned stock repurchases and still have enough money to settle the litigation.
Healthcare fraud lawyers and healthcare analysts predict that a Quorum settlement would not be nearly as high as one by Columbia, but would be in the multimillion-dollar range.
"It's just too early to talk about settlement as something that's imminent," Burks says. "We're not in settlement discussions with the government. Frankly, one reason for that is we don't think we did anything wrong. So I think there's a lot of ground to cover."
Flanagan says that actual guilt or innocence is a side issue compared with a company's ability to conduct daily business during a major investigation.
"There is quite often a concern, quite often subconsciously, that anything that suggests a lack of ethical standards may be a lack of concern for the patient's best care," he says.
Also, deals with a company under investigation require more due diligence than usual, he says.
For Quorum, the litigation and allegations of Medicare fraud have been bubbling for six years. "Our whole theory has been, now look, this started in 1993, let's go ahead and get it over. Let's wrap it up," Burks says. "We're probably not going to know a whole lot more than we know now."
Quorum's ability to acquire hospitals while dealing with the lawsuit shows that at the very least other hospital companies are not scared of the extra due diligence necessary to complete transactions with Quorum.
Still, the true test for Quorum will be putting the lawsuit behind the company within the next six months and delivering on earnings promises, ING Baring's Henshaw says.
"If they can deliver on that expectation, I think that's a big positive, because I think a lot of people listened to them and said, 'You've had to revise guidance downward twice in the last six months, and your credibility is somewhat suspect,' " Henshaw says. "Show me."