Q:
National Medical Enterprises, Inc. (NME) is a multinational health care enterprise with 143 hospitals on four continents. NME was started by Richard K. Eamer, a tax attorney, in the 1960s. Eamer's development of NME was possible because of the implementation of the Medicare and Medicaid programs. He saw the programs as opportunities for a virtual guarantee of profits.
He began by acquiring six hospitals. He paid for these hospitals with promises to the physicians on staff of stock in his company. After the six hospitals were acquired, Eamer did a $25 million national stock offering and gave the physicians shares of stock in NME.
Eamer adopted a decentralized structure for the company. Hospital managers were simply given a financial goal and complete autonomy in their operations. Eamer traveled a great deal and used a company plane to get to NME-owned condominiums in London and Aspen. While Eamer was not a hands-on manager, he set very clear goals for NME managers. Achievement of established goals was rewarded. Under NME's pay structure, it was possible for managers to double their pay by meeting goals. Eamer was harsh when goals were not met. In meetings he would refer to those executives who had failed to meet established goals as "morons."
Eamer's managerial style paid off in the form of earnings growth of 15% per year through 1985. But, in 1986, earnings growth was off, down to 3%.
When informed by his managers of the decline in earnings growth, Eamer announced that NME would now focus on operating and acquiring psychiatric, substance-abuse and rehabilitation hospitals. NME had 62 psychiatric hospitals in 1986, but by 1991, that number had grown to 86. Further, NME occupancy rates for its psychiatric hospitals were 25% higher than any of its competitors. NME maintained an occupancy rate of 84%.
The director of NME's Fair Oaks Hospital in New Jersey, testified at a Congressional hearing that NME executives circulated information on how to maximize insurance payments. Strategies included longer stays and additional tests.
NME's intake manual specified as a goal that one of every two people who came to the hospital for a psychological assessment would be hospitalized.
Some adolescent patients were billed for as many as 10 therapy sessions per day. A memo from one senior officer to the various NME hospitals stated that the length of a patient's stay would be determined "not by the patient's individual medical needs, but on the insurance or payor mix." A controller for an NME hospital in Texas testified that probation officers, clergymen and officers in corporation employee-assistance offices were offered up to $2,000 in referral or "bounty hunter fees" for referring patients to NME. The controller also testified that he was required to make "cold calls" on facilities for purposes of soliciting referrals. He indicated that one of his cold calls was to a nursery school.
Former executives of NME have provided information showing that physicians were given 50-year leases for $1 per year by NME and then referred their patients exclusively to NME hospitals. Many of these physician-occupied buildings operated at a loss. Both Medicare and Medicaid regulations prohibit payment of referrals fees to physicians.
By 1991, occupancy rates at NME psychiatric hospitals were down to 52%. Eamer began selling of the psychiatric hospitals and announced to shareholders than NME would return its focus to its core 35 general hospitals. In announcing the refocus to shareholder, Eamer noted, "Our focus is on the patient. We know everything else will follow."
a. What type of ethical culture existed at NME? Why?
b. What does NME need to change?
c. Do you think NME's strategies with respect to the psychiatric hospitals were ethical?
d. Evaluate the ethics of clergymen, counselors, and probation officers accepting referral fees.
