The other shoe is about to drop, this time on the head of Richard Scrushy, healthcare's flamboyant poster boy for corporate greed.
As we have warned on this page, the feds have been itching for a high-profile scalp in the healthcare world to prove they are getting tougher on fraud and abuse. It has been surprising that executives of the for-profit chains have so far avoided criminal conviction, but that may be about to change. Scrushy wasn't indicted last week, but anyone who read the Securities and Exchange Commission filing on this case and the U.S. Justice Department complaint against former HealthSouth Corp. Chief Financial Officer Weston Smith can predict what's coming next.
Even by the standards set by Columbia/HCA Healthcare Corp. and Tenet Healthcare Corp., the HealthSouth case is breathtaking. Based in part on the cooperation of Smith, who flipped for the feds earlier this month in a plea agreement, the allegation essentially says that HealthSouth has been an illegal racket since it went public in 1986, replete with mob-style "family meetings" where the books were cooked and illegal stock sales in advance of bad earnings news. Even last fall's report of a $175 million overstatement of earnings based on a "misinterpretation" of a Medicare payment rule was a scam designed to throw everyone off the real wrongdoing, the SEC charged. The actual overstatement in earnings was $1.4 billion for just three and a half years.
The godfather of this family is Scrushy, who earned approximately $77 million on his stock sales, plus an annual base salary of about $4 million and bonus of at least $6.5 million, according to company proxy statements and government estimates, even while his company's earnings and share price tumbled.
The casualties from this spectacular corporate abuse will be shareholders, employees of the 1,229 outpatient rehabilitation clinics, 203 outpatient surgery centers, 117 rehabilitation hospitals and 127 diagnostic-imaging clinics, patients and perhaps the reputation of accounting firm Ernst & Young.
All, apparently, because of the greed of one man, who, when pressed by his advisers to put an end to the scams, said in effect, "Not until I sell my stock," the SEC report said. Not surprising from a man who used charitable contributions to put his name on college campuses, athletic facilities and a conference center that housed a museum devoted to Scrushy and his company.
To conceal the fraud, according to the SEC, HealthSouth accounting personnel designed false journal entries to fool outside auditors Ernst & Young. The Big Five accounting firm's claim that it was duped for all these years will open it up to severe scrutiny as this case progresses. In a single year, 2001, HealthSouth had actual earnings of $9 million but reported $434 million in earnings. By the third quarter of 2002, HealthSouth's assets were overstated by $800 million. Can't accountants use calculators anymore?
This case also marks the first charges filed under the post-Enron Sarbanes-Oxley law, which requires that top corporate executives certify financial statements. Indeed, the SEC said it was that law that may have caused nervous HealthSouth officials to issue the fake Medicare statement, hoping to cover their tracks.
Finally last week Tenet, which is under federal investigation for Medicare fraud and other skulduggery, said it will close or sell 14 hospitals, sell a couple of its corporate jets and adopt two new accounting procedures as it tries to dig out from its own self-inflicted morass. It has already abandoned its outlier payment scheme. But it has a long, long way to go to get past its past billing irregularities and restore investor confidence.
Let's hope healthcare executives who are watching these messes unfold take heed of the message being delivered by federal investigators: Keep your hands clean or put them together, behind your back.