It took the wave of corporate scandals led by Enron and WorldCom for investor-owned hospital chains to finally see the silver lining to all the government healthcare fraud investigations of the last decade.
Thanks either directly to one of those probes or to the fear of becoming a target of one, publicly traded hospital companies already practice many of the compliance and ethics measures being suggested for companies whose stock is traded on public markets.
The current climate "might be a shock for companies outside the healthcare sector," said John Merriwether, director of financial relations at Health Management Associates, Naples, Fla., but "healthcare has been under a magnifying glass since 1996."
Bob Farnham, HMA's senior vice president of finance and chief financial officer, also pointed to the compliance program guidance that HHS' office of the inspector general published for hospitals in February 1998. For instance, having a corporate compliance officer-HMA hired a former FBI agent to fill that role two years ago-is a key part of the program that the inspector general looks for, Farnham said.
Denny Shelton, chairman and chief executive officer of Triad Hospitals, Dallas, said most of the compliance effort has been aimed at policing reimbursement practices, not financial statements. Triad already requires its hospital executives to attest to their quarterly financial statements, Shelton said.
Some for-profit hospital companies, including Nashville-based HCA, HMA, Triad and Universal Health Services, King of Prussia, Pa., employ a compliance officer at each hospital, often making the job the responsibility of the hospital CFO. HCA; Tenet Healthcare Corp, Santa Barbara, Calif.; and Triad also have board committees devoted to ethics and corporate compliance, and HCA and Tenet require annual ethics and compliance training for all employees. Starting in 1998, HCA also required hospital CEOs and CFOs to complete a two-day "balance sheet training seminar."
One of the more pressing questions is whether publicly traded companies will expense employee stock options or, in other words, treat as a cost an estimated present value of stock options that haven't been exercised. Such a policy would reduce profits, which are reported as net income and earnings per share.
Since 1996, the Financial Accounting Standards Board has required companies following its standards to disclose this information as a footnote to the financial statements in their annual reports to shareholders and their annual filings with the Securities and Exchange Commission.
Some companies, including Coca-Cola Co. and the Washington Post Co., have chosen to adopt this practice as a regular part of their financial reports. Jack Bovender Jr., HCA's chairman and CEO, told stock analysts on a conference call last month that the company has asked a committee to study the issue and make a recommendation to HCA's board by year-end.
None of the eight publicly traded acute-care hospital companies had committed to expensing employee stock options as of last week.
Tenet said it would adopt the policy only if it became required or standard in the hospital sector. "It would put us in a comparative disadvantage to subtract that unless everyone did," said Tenet spokesman Harry Anderson.
In the most recent fiscal year, Triad reported the greatest hit to earnings per share from expensing stock options (See chart, p. 8). Triad CFO Burke Whitman said the earnings expense was exceptionally high because of the $2.4 billion acquisition of Quorum Health Group, Brentwood, Tenn. Triad gave former Quorum employees new Triad options to replace their Quorum options, which accounted for about two-thirds of the options expense for 2001, Whitman said.
"At the end of the day, regardless of what laws are passed or regulations, integrity is a personal moral issue," said Kirk Gorman, Universal's CFO. "It really does come down to the people in the company, what they do and the frank conversations that they have with each other."