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American Academy of Emergency Medicine

Ailing Helper to Paterson's Ailing Healer

by Mary Jo Layton

Reproduced with permission of The Record of Hackensack, New Jersey, January 20, 2002

AAEM Comment
by Robert McNamara, MD, FAAEM

This article is essential reading for all emergency physicians and current residents. Fortunately for you, you belong to the only EM organization who would bring this to your attention. As a service to your nonmember colleagues share your copy of this with them. What is depicted here is the cold, hard reality of corporate EM. This piece documents nothing that is new to me or the rest of the AAEM leadership. In fact, AAEM's first President Jim Keaney appeared on and was the force behind the referenced "60 Minutes" piece. In between the lines of the business issues you see threads of the impact on the practicing emergency physician. Clearly, as a business entity, PhyAmerica must pursue profit and that intersects with issues related to patient care. Note what the article mentions about this: "The philosophy of linking pay incentives to productivity in a hospital concerns patient advocates." The noted public advocate Sidney Wolfe opines that "The whole assembly-line view of medicine is a dangerous one."

The article states 26 emergency physicians are now employees of this company with a "controversial" past. What is the specialty's role in this matter? Did the specialty let these physicians know that they should be concerned? PhyAmerica ads are everywhere and, outside of AAEM and academics, in much of the field corporate EM is accepted as part of the fabric of EM. None of the involved physicians contacted AAEM for assistance. If they did we would have raised the issue about the corporate practice of EM in New Jersey. Specifically, in 1984 in the case of Dentec Inc. v. New Jersey Board of Dentistry (No. A-3408-84T7) the court stated that when "a physician or lawyer must answer to a corporate board of directors staffed by nonprofessionals, whose concerns may center more on profits than people, the professional relationship is undermined." This and other rulings in the state need to be brought up in such matters. However, this did not occur and the involved physicians have an uncertain destiny and questions have been posed related to patient care that will need to be answered.

The financially ailing St. Joseph's Regional Medical Center has turned over its emergency department - a vital source of medical care for thousands of poor patients in Passaic County - to a company that has bled more than $350 million in red ink over the last six years.

In the last year alone, the company settled a lawsuit that alleged widespread fraud and mismanagement, and it lost at least 10 contracts with other hospitals, according to the company's latest filings with the Securities and Exchange Commission.

PhyAmerica Physician Group, whose stock has plummeted from $40 to 12 cents a share since 1994, is also heavily in debt to a financial company that is blamed in part for the financial collapse of a major Boston hospital.

PhyAmerica officials acknowledged the massive financial losses and said their history has made it difficult to attract new business. The North Carolina-based company plans to go private and restructure its debt load, but recovery is a long way off, said Eugene F. Dauchert Jr., its executive vice president and general counsel.

"There's no major cataclysmic change that will suddenly turn this company around," he said. "It's going to be a multi-year process."

Officials at St. Joseph's said they were aware of PhyAmerica's financial losses and legal problems. "It's a fair question," said Gary Walker, a vice president at the Paterson hospital.

The hospital chose PhyAmerica from among several management companies after PhyAmerica assured St. Joseph's it was addressing its difficulties, Walker said.

"We felt comfortable that the genesis of their financial problems really in no way encumbered their ability to do the job," he said. "The overall thing that convinced us was how they behaved in similar hospitals."

But others wonder whether St. Joseph's should gamble on PhyAmerica.

"PhyAmerica is asking this hospital to be a guinea pig for an experiment of whether they turn around or not," said Dr. Sidney Wolfe, executive director of the Public Citizen Health Research Group, a patient advocacy group in Washington, D.C.

Wolfe and some physicians at the hospital say St. Joseph's faces only more turbulence if PhyAmerica can't deliver: Patient care could suffer, and the hospital's finances could grow more grim.

"Given all the problems they've had in the past, it sounds like a risky experiment," Wolfe said.

Asked if he would have hired PhyAmerica, Dr. James Pruden, a staff physician who was chief of the emergency department for 19 years, said, "Probably not."

Another emergency room doctor, who spoke on condition of anonymity, said doctors are nervous about the contract. "Doctors are afraid this group isn't going to last," he said. "Then what happens?"

Devoted to the poor since its founding

St. Joseph's is relying on PhyAmerica, as well as other for-profit companies that have signed contracts to run other departments, to put the hospital on better financial ground.

The hospital, known for its unwavering commitment to the poor since its founding in 1867 by the Sisters of Charity of St. Elizabeth, is struggling to cut $30 million from its budget without compromising its reputation for quality medical care. The hospital has earned a reputation for excellence on many fronts, including its cardiology program and neonatal intensive care unit. It is one of the few hospitals in the state whose pediatricians are board-certified in Emergency Medicine.

In October, St. Joseph's laid off 120 employees and eliminated 60 unfilled positions, moves officials said were necessary to offset operating losses of up to $19 million.

St. Joseph's receives nothing or minimal payments from a third of the 67,000 patients treated annually in its emergency department, further squeezing its resources.

The three-year contract puts PhyAmerica in charge of billing for physician services, patient flow, and scheduling of staff. Walker declined to detail the department's finances or say how much PhyAmerica would earn.

The hospital does not expect to turn a profit with PhyAmerica, but it does intend to increase reimbursements through better billing and greater patient flow, Walker said.

The contract calls for the hospital's 26 emergency room physicians to become employees of PhyAmerica. Although the doctors have been working with PhyAmerica since Jan. 1, they have not yet officially signed their portion of the contract because they are still negotiating with the company over malpractice issues.

"Most are expected to sign up," Pruden said.

When it took over, the company promised to give doctors pay incentives for productivity.

"If you work hard, you will have the opportunity to make more money," said Dr. Mark Rosenberg, a regional president of PhyAmerica. "In private practice and in real life, whether it's a Wal-Mart or anything else, the more people you see, the more sales you make, the more money you have," he said.

The philosophy of linking pay incentives to productivity in a hospital concerns patient advocates. "The whole assembly-line view of medicine is a dangerous one," Wolfe said.

Since PhyAmerica took over, some doctors in the emergency department said they felt pressured to move patients through more quickly. "You are now burdened to see patients faster to get more incentives," said one doctor. "It feels like you're being watched."

Another physician described the move to contract with PhyAmerica as "very self-serving on the part of the hospital administration. They just dumped the problems onto a commercial enterprise."

Such contracts are now common in hospitals across the nation, because many hospitals believe that private companies are better at monitoring finances. Walker promised that PhyAmerica will be closely watched because of its past problems. If the hospital is dissatisfied, it can terminate the contract.

In the five years ending in 2000, PhyAmerica lost $328 million, according to the company's annual report. The company had a net decrease of 10 contracts for most of 2001, and it acknowledged that its financial plight made some hospital executives wary.

"Hospital administrators have expressed concerns about awarding and renewing contracts both as to operational ability and financial viability" of the company, PhyAmerica concluded in the Nov. 14 filing, just weeks before signing a contract with St. Joseph's.

While St. Joseph's was negotiating its contract last fall, a Florida hospital was replacing the company.

"We're switching. We're thrilled," said Dr. Joel Friedman, director of the JFK Medical Center in Atlantis, Fla.

The hospital's CEO, Phillip D. Robinson, said in a memo to his staff that PhyAmerica's contract would not be renewed because emergency room physicians had complained about "their dissatisfaction with their employer."

But PhyAmerica continues to have contracts with more than 200 hospitals throughout the country. It has received favorable reviews of its work at two other emergency departments in New Jersey, at St. Mary Hospital in Hoboken and St. Francis Hospital in Jersey City.

"We haven't had any problems," said Joan Quigley, spokeswoman for the hospitals.

St. Clare's Medical Center in Denville recently parted with PhyAmerica, but not because of any performance issue, said Lynn McFarlane, a hospital spokeswoman. Rather, PhyAmerica lived up to a promise to help St. Clare's doctors form their own physician group.

"We've been satisfied with their performance to date," McFarlane said.

Walker said St. Joseph's selected PhyAmerica in part based upon the company's work at St. Clare's. The hospital also was impressed with PhyAmerica's billing company, which he said has "an excellent reputation."

The emergency department's finances will be closely monitored, Walker said. "We have contractual guarantees about an open-book policy," he said. "We're very much involved in monitoring their performance here."

Walker said St. Joseph's executives were impressed that PhyAmerica had been "quite direct and open regarding the problems they had in the past" and how the company was attacking those problems.

According to Walker, there was reason to hope for a turnaround: Company officials told him of the plan to go private. They also informed him that PhyAmerica expected "a profitable fourth quarter."

But, after posting an $8 million loss in the third quarter, the fourth quarter likely will turn out not to have been profitable, company officials said Friday.

When asked why the company had led the hospital to believe that it would be profitable, Dauchert said: "I can't answer that. There's not a magic bullet out there that we can say next quarter or next month we'll be instantly profitable."

A very rosy future in the early 1990s

PhyAmerica's headaches are a long way from what seemed like a healthy future in the early 1990s.

Shortly after the company, then known as Coastal Physician Group, went public in 1991, it became a darling of Wall Street. By 1994, the stock had soared to more than $40 per share and the company had contracts with 550 hospitals and healthcare providers.

Flush with money, the physician management group bought several HMOs and healthcare clinics, a disastrous move that eventually forced the company to sell many of its assets.

And it was dogged by controversy. There was a report on "60 Minutes" accusing the company founder and president, Dr. Steven Scott, of hiring doctors who had been disciplined or sued for malpractice. One physician who was sued in the death of a 9-year-old Florida boy had never practiced medicine in the United States and was thrown out of a residency program for being "incompetent, sloppy, uninterested, and dishonest," the news program reported in 1993.

At the time, Scott said his physicians were sued no more or no less than other doctors.

But Scott battled other litigation. Hospitals and companies sued, complaining of abusive bill collection practices - allegations the company denied.

The troubles mounted. In 1996, the company lost $145.5 million and endured a proxy fight for control of the company. By 1998, its stock had sunk so low that it was delisted by the New York Stock Exchange.

In 1999, the company borrowed $69 million to purchase Sterling Healthcare Group and changed its name to PhyAmerica to distance itself from its turbulent past. "We're still digging out," Dauchert said Friday.

The next year, the shareholders filed suit, alleging that Scott and National Century Financial Enterprises - the company that has been providing millions to keep PhyAmerica afloat - were actually draining it. They alleged that Scott and Lance K. Poulsen, National Century's president, had an agreement: Poulsen would fund Scott's spending while Scott "looks the other way while Poulsen improperly diverts the company's cash into NCFE's coffers."

Even as the company's finances deteriorated, PhyAmerica bought one corporate jet for $6.6 million and leased another for $848,000 - expenses that benefited Scott because he owned the aviation company that provided the jets, shareholders said. They also alleged that Scott required his executives to use his wife's travel agency.

To raise cash, PhyAmerica sold its pending insurance reimbursements, known as accounts receivable, to National Century. The Ohio-based financier, which works with more than 2,000 companies, keeps a few cents from each dollar it collects, charges a "program fee," and requires its clients to post a reserve in the event that payments are not received.

The shareholders alleged that National Century charged PhyAmerica double what it said it would, costing millions more. The suit said National Century manipulated the company's financial records and failed to report all of the insurance collections.

At one point, worried PhyAmerica executives hired a team of financial consultants who discovered that they "could not account for over $30 million in receivables collected by NCFE," the suit alleged.

"Plaintiffs can say just about anything they want in a lawsuit," Dauchert said, adding that the company "vigorously" defended the suit for 18 months, finally settling in September.

It wasn't the first time National Century has been accused in lawsuits of improperly diverting funds.

Creditors of the bankrupt Boston Regional Medical Center allege in their suit that National Century took control of the hospital's finances, setting exorbitant interest rates on loans - 48 percent in 1997 - and overcharged the hospital by $12 million.

To save the 100-year-old medical center, hospital executives decided to sell it to a company partially owned by National Century. When that deal fell through, the hospital was left on the hook for millions, forcing it to close and putting 1,000 people out of work.

A spokesman for National Century said the company is settling the Boston case and admitting no wrongdoing. "If we continue to fight it, the costs will just escalate," said Jim Nickell, vice president in charge of marketing and communication.

National Century and PhyAmerica also have agreed to settle the shareholder case for $4.65 million, the company announced in September. Neither Scott nor National Century admitted any wrongdoing.

PhyAmerica owes National Century at least $167 million, according to its 2000 annual report. The company is so deeply in debt that interest payments alone were $18.8 million in 2000.

PhyAmerica hopes to save millions by restructuring its debt and buying back its stock to become a private company, a move that also would shield its finances from public scrutiny, Dauchert said.

"We're the only ones who get these kinds of questions from the newspapers and the hospitals, because we're a public company. We're the only ones who have competitors go on the Internet and e-mail our financial statements to hospital administrators," he said.

"It certainly puts the hospital in a situation," Dauchert said. "They've got to have a great deal of faith in our ability and the quality of what we do to overcome this."

The Record of Hackensack staff writers Robert Ratish and Ben Lesser contributed to this article.