It was only a few years ago that self-described "managed-care iconoclast" Barry Scheur was making headlines--and millions of dollars--by adopting and breathing new life into struggling provider-owned HMOs.
In January 2000, the high-flying insurance entrepreneur acquired a faltering HMO and began to rebuild it into what he envisioned would become a national gold standard for managed care. He pledged to put patients before profits, slash industry red tape, avoid delays in paying providers and infuse the insurance business with compassion and integrity. To reflect this promise, he dubbed his new venture the Oath for Louisiana.
But little more than two years later, the Oath had collapsed into insolvency, a casualty of mismanagement and overspending. And now Scheur, 54, faces a further fall from grace amid new allegations of criminal fraud.
A federal grand jury in New Orleans last month indicted Scheur and two former colleagues for allegedly trying to conceal the crippled financial condition of the now-defunct Oath from state insurance regulators. The Oath was Louisiana's third-largest health plan until it was seized by the state in April 2002, leaving 82,600 members scrambling for new coverage and local providers holding the bag for $40 million in unpaid claims.
U.S. Attorney Jim Letten said the two-count indictment sends a "strong, clear and unambiguous message" that the federal government will not tolerate any corporate abuse.
The indictment also highlights how difficult it is for even seasoned insurance executives to run an HMO profitably. Many healthcare providers learned that lesson the hard way after jumping into HMO ownership during the 1980s and 1990s, only to later exit (See chart, p. 16).
"Hospitals have decided they can't run HMOs," said Peter Kongstvedt, a partner in the health and life sciences practice of consulting firm Accenture. "Most have lost a lot of money and they want to get back to their bread and butter," which is providing medical care.
For Scheur, Robert McMillan and Rodney Moyer, the indictment could lead to prison terms. Each was charged with conspiracy and mail fraud for allegedly doctoring financial statements filed with the state Department of Insurance in late 2000. During that time, the executives devised a scheme to mislead regulators into believing the by-then foundering HMO was still meeting the state's minimum net-worth requirements, "thereby unlawfully enriching themselves" while plunging creditors ever deeper in the hole, according to the indictment announced by the U.S. Justice Department on Nov. 18.
Scheur, of Newton, Mass., was president, chief executive officer and a director of the Oath. McMillan, 56, of Garland, Texas, held various positions at the HMO, including vice president, chief operating officer and chief financial officer. Moyer, 59, of Doyleston, Pa., served as executive vice president.
The defendants have been ordered to return to Louisiana for a bond hearing on Jan. 19, 2006, where they are expected to plead not guilty. If ultimately convicted, each of the men could face up to 15 years in prison.
Jan Mann, first assistant U.S. attorney for the Eastern District of Louisiana, did not rule out the possibility of further indictments. "All we can say right now is that the investigation is continuing," she said. "The federal government is going to remain aggressive in rooting out healthcare fraud where people don't get the benefits they've been promised."
Too little too late
Scheur joins a now-lengthy list of healthcare executives to face criminal prosecution over the past few years amid redoubled fraud-fighting efforts by federal authorities (March 18, 2002, p. 6). This year alone, industry executives have been charged with a variety of white-collar crimes, including kickbacks, conspiracy and securities fraud, while many others are under investigation.
But indictments don't always lead to convictions, and at least one of the attorneys representing the former Oath executives contends federal officials were overzealous in their attempts to ferret out impropriety. "From our perspective, the government has taken what was simply the failure of a business-a health (plan) that failed for a variety of reasons, none of which had to do with criminal wrongdoing-and turned it into a crime," said Herbert Larson, McMillan's attorney. "We absolutely intend to contest these allegations at trial."
Shaun Clarke, who represents Scheur, declined to comment other than to call his client's indictment "a tragic injustice."
"Barry Scheur fully intends to defend himself against these charges," Clarke said.
Either way, the indictments do little to heal the financial scars suffered by many local doctors and hospitals following the Oath's untimely demise. Most providers have given up hope of ever recouping the money they were owed, despite state regulators' continuing efforts to recover some of it through the courts.
"We're not holding our breath," said Sam Caruso, spokesman for 144-bed Slidell (La.) Memorial Hospital and Medical Center, which was left with millions of dollars in unpaid claims. "While it would be nice to get paid, the damage has already been done."
`A Stephen King nightmare'
Slidell Memorial was part of a five-hospital consortium called Southeast Medical Alliance, which had owned the Oath's predecessor HMO. The other hospitals included East Jefferson General Hospital, Metairie, La.; Terrebonne General Medical Center, Houma, La.; Tulane University Hospital and Clinic, New Orleans; and West Jefferson Medical Center, Marrero, La.
Caruso said the Oath's meteoric crash was "a major contributor" to Slidell Memorial's financial slump in 2002, which forced it to seek a sale to Tenet Healthcare Corp. Local voters rejected the deal in April 2003 amid antitrust concerns, but later approved a 20-year property tax to save the capital-starved hospital (Oct. 13, 2003, p. 20).
The Oath debacle also was partly to blame for a financial slide at 448-bed East Jefferson General, which resulted in 300 layoffs and the ouster of its former president and CEO, Peter Betts, in 2002. The HMO's insolvency not only left the hospital with about $5 million in unpaid claims and no other HMO contract to bring in patients, but it also placed tremendous strain on its largely independent medical staff, said Mark Peters, who succeeded Betts at the helm.
"When you're operating as a private practice, you don't tend to have the cash reserves in place to get you through something like that," said Peters, a family physician who was East Jefferson's medical director during the Oath's rise and fall. "It left a lot of people out of a lot of money."
Jeff Prescott, spokesman for hospital chain HCA, described the Oath's tumultuous 18-month existence as "a Stephen King nightmare" for local providers and consumers. HCA is the majority owner of 341-bed Tulane University Hospital, which recovered only "pennies on the dollar" after being stiffed for $4 million in unpaid claims, Prescott said. "The rest of it is pretty much gone for good."
Scheur has been described as an ambitious and savvy businessman. In 1976, the Buffalo, N.Y., native became the first blind graduate of Yale Law School and went on to earn a living practicing healthcare law. In 1988, he founded his own consulting company, Newton, Mass.-based Scheur Management Group, which over the next decade grossed more than $40 million by turning around struggling healthcare companies.
Scheur arrived in Louisiana in 1999 when the Southeast Medical Alliance hired him to resuscitate its ailing HMO, SMA Health Plan. The 5-year-old HMO was on track to lose $27 million that year, and its owners--like several other providers since then--were eager to leave the insurance business behind.
Sensing an opportunity, Scheur formed Venture Health Partnership Group to take the troubled HMO off his clients' hands. Under the deal, the hospitals pitched in $22 million to cover SMA's losses and ensure it had adequate reserves. Venture Health put up no capital, but agreed to shoulder all liability if the HMO failed.
At the time, Scheur extolled the renamed Oath as the crown jewel in what he hoped would ultimately become a national network of eight to 10 HMOs. "We are becoming a new family, and with the acquisition of our first HMO finalized, we have our first child," he wrote in the February-March 2000 issue of his online newsletter, Insider Vision. "We will lavish love, affection and guidance on it, and plan to watch it grow and prosper."
Scheur hired 16 consultants from his management company-including McMillan and Moyer-and paid the team $250,000 to $350,000 per month to turn the HMO around. According to the indictment, Scheur Management Group collected a total of $5.7 million in consulting fees from the Oath through September 2001.
In 2000, the HMO also invested heavily in revamping its image, spending $4.5 million on marketing and advertising in its first year. The company purchased a three-year lease on a luxury suite at the Louisiana Superdome, where in January 2002, it hosted a promotional event as the official health-plan sponsor of Super Bowl XXXVI.
The HMO also ran print and TV ads slamming traditional managed care's cost-containment tactics. In one local newspaper ad, Scheur claimed the industry had "lost its soul" and added, "So for the bean counters and MBAs, here's something to tattoo on your forehead: The health of the patient comes first." The ads apparently hit home; the Oath's enrollment quickly climbed to a peak of 122,000 members.
Five months later, Venture Health expanded into Alabama, buying a money-losing HMO from Birmingham-based Baptist Health System. Like SMA's former owners, eight-hospital Baptist put up money to aid the transition. Scheur renamed the 100,000-member HMO the Oath for Alabama.
By then, however, Scheur's venture was beginning to show signs of strain. Unpaid claims left by SMA had begun to pop up, saddling the Oath with $7 million in unexpected debt. Soon, providers began to complain to the state insurance department that the HMO wasn't paying its bills on time.
The Oath added to its financial burden in April 2001 when, in an ill-advised bid to gain market share, it took over Gulf South Health Plans, the insolvent HMO arm of 436-bed General Health System, Baton Rouge, La. Despite warnings from state insurance officials, Scheur said he believed he could make money on Gulf South's 45,000 members by lowering overhead, boosting premiums and implementing capitated medical management. But the changes weren't made in time, and the company racked up millions more in losses, according to state officials.
The Oath's financial woes weren't limited to Louisiana. By September 2001, its Alabama operation had lost more than half of its net worth, and regulators there were threatening to pull the plug. To save the operation, Scheur loaned it $2.6 million, of which $1.1 million was borrowed from the Louisiana Oath. (The Alabama Oath eventually recovered after shedding two-thirds of its members and was later sold to HealthSpring, Nashville.)
That month, the Louisiana Department of Insurance placed the Oath under administrative supervision and required company officials to submit monthly, instead of quarterly, financial reports. Regulators also began taking steps to get the HMO's financial house back in order, including directing Scheur to recover the $1.1 million loan to the Alabama Oath and cutting Scheur Management Group's monthly consulting fees by half.
It was during this period that the Oath was hit with a lawsuit--possibly triggering the criminal investigation that led to last month's indictments.
In October 2001, the HMO's former vice president of sales and marketing, Jamus Jacobs, filed a wrongful-termination lawsuit against the Oath seeking severance pay and damages after being fired that February.
Among other things, the lawsuit alleged that in September 2000, Scheur told senior managers that the HMO was in "a severe financial crisis" and ordered the reclassification of up to $4 million in claims "such that rather than showing a third-quarter loss of several million dollars, the Oath was reporting a profit of approximately $500,000."
Scheur vehemently denied the claims, and the lawsuit was settled for an undisclosed sum. But the allegations caught the attention of the U.S. Postal Inspection Service, which eventually began searching for evidence of mail fraud. Mann declined to comment on the lawsuit or estimate when the Justice Department became formally involved.
The Oath continued to hobble along until March 2002, when Louisiana insurance officials visiting the HMO's offices discovered a stack of 30,000 overlooked medical claims--totaling $10 million--that had never been logged into the company's computer system. The HMO was declared insolvent and seized by the state a month later. By then, its liabilities topped its assets by $45 million, according to the indictment.
Since then, the Louisiana insurance department has been working to verify each of the roughly 237,000 medical claims left unpaid in the wake of the Oath's collapse. "We hope to have that completed within the next three months," said Barry Karns, the receiver who oversaw the Oath's liquidation.
If nothing else, the Oath's implosion spurred Louisiana to tighten regulation of health plans. Previously, the state required all HMOs to keep just $3 million in cash reserves to cover claims in the event of a financial collapse. But after passage of a law in 2003, regulators are now using a more stringent risk-based capital formula to determine minimum reserve requirements for each insurer, based on its annual premium revenue, membership, investment portfolio, provider contracts and other variables.
But how much--if anything--healthcare providers in Louisiana and Alabama will ever recoup depends on the outcome of three lawsuits filed by the department last year.
Two of the civil lawsuits, now pending in East Baton Rouge Parish Civil District Court, seek to collect on the personal assets of the Oath's former managers and directors as well as on their professional-liability insurance policies. The department also is in the preliminary stages of suing the Oath's former auditor, KPMG, for allegedly failing to adhere to proper accounting standards. Depositions are scheduled to begin in January 2006, after being delayed a number of months because of Hurricane Katrina, Karns said.
"We would have to make a pretty substantial recovery, either through settlements or damages, in order to fully compensate everyone," Karns said.