McKesson on HBOC, PAML, Medicare Coding, Abbott Laboratories

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FIVE EXECUTIVES WERE SACKED by McKesson HBOC Inc.’s Board of Directors last month in response to allegations of financial improprieties.

All five were employed by HBOC prior to its acquisition by McKesson last year. The terminations were accompanied by the resignation of McKesson’s CEO, Mark Pulido, and CFO, Richard Hawkins. Both men had supervised McKesson’s
acquisition of HBOC.

Auditors and investigators, working since last April, found evidence of such financial shenanigans as backdating signed contracts into the previous quarter. This would allow HBOC to manage its financial statements in such a way as to meet investor targets, even though these sales were not final.

McKesson HBOC announced that earnings for three prior years will be restated as a result of its internal investigation. Revenue will be reduced by $327.4 million and net income from continuing operations will be reduced by $791.5 million.

HBOC is familiar to many laboratory executives for its purchase of Advanced Laboratory Group (ALG) in the mid-1990s. ALG had developed a successful laboratory information system (LIS) software package before it was gobbled up by HBOC.

HBOC fueled its rapid growth by a series of acquisitions, complemented by an aggressive sales and marketing effort. It was a high-flying stock and many analysts praised McKesson for acquiring HBOC.

Fired executives were Albert Bergonzi, who had been the pre-merger President and CEO of HBO; David Held, who was HBO’s pre-merger CFO and Controller; Jay Lapine, HBO’s pre-merger General Counsel; and Michael Smeraski, who led HBO’s sales of systems that automated functions across various healthcare organizations. Former HBO CEO Charles McCall was ousted as McKesson HBOC’s Chairman and dismissed as an employee.

Expect more repercussions as the full scope of the alleged financial mis- management is made public. These events will certainly distract HBOC from its core software business.


INDEPENDENT commercial laboratories continue to thrive by concentrating on their immediate service regions.

One example is Pathology Associates Medical Laboratories, Inc. (PAML) of Spokane, Washington. It is a major participant in PacLab Network Laboratories in Washington, a flourishing statewide regional laboratory network.

Now PAML is building a service base in Boise, Idaho by acquiring Treasure Valley Medical Laboratories, Inc. (TVL), located in Boise. Partner in the acquisition is Saint Alphonsus Regional Medical Center, also located in Boise.

The goal is to combine testing from St. Alphonsus and TVL in Boise to increase the test menu performed locally while gaining economies of scale. This should give PAML a service boost in Western Idaho. With the Boise acquisition, PAML now has a string of satellite laboratories in Eastern Washington and Western Idaho which make it the regional laboratory of choice in what is primarily a rural area.

TVL has been the acquisition target of many would-be buyers. Its President, Skip Pierce, built TVL into the dominant commercial laboratory player in Western Idaho.


THINK THE FEDERAL GOVERNMENT’S Medicare fraud and abuse crackdown is having little impact? Think again.

Recent convictions in federal court of two mid-level executives of Columbia/HCA Healthcare Corp. for defrauding government insurance programs is just one more important milestone in the Fed’s anti-fraud campaign.

Laboratory executives already know the full force and power of government fraud investigators. Commercial and hospital laboratories forked over close to $1 billion in settlements with the OIG during the 1990s. The entire lab industry is vigorously implementing compliance programs.

Now hospitals have got the message about fraud and abuse. Medicare spending rose at a record low of 1.5% last year, and spending actually dropped during the first six months of 1999! While this was occurring, the OIG reports that Medicare “only” lost $12.6 billion through improper billing in 1998, compared to $23 billion in 1997.

Here’s the remarkable fact about a major change to hospital billing practices. For the first time since Medicare was launched in 1966, hospitals’ billings for the year were, overall, for less serious illnesses than the previous year.

Medicare officials point out that this does not mean the over-65 population is getting healthier. Rather, they interpret this to mean that more hospitals are becoming “scrupulously accurate” in the diagnoses cited for medical claims.

In effect, hospital billing departments are coding conservatively. “People are definitely erring on the side of ‘when in doubt, underbill it’,” observed attorney Michael Jones of Boston-based Choate, Hall & Stewart. “That indicates almost a level of paranoia that some people have.”

The Tampa convictions of mid-level hospital executives follow those of a recent Kansas City criminal case. In April, federal prosecutors won jury verdicts of guilty against two physicians and two hospital executives on criminal charges involving kickbacks for patient referrals. It shows that federal prosecutors are getting juries to understand complex healthcare laws and deliver guilty verdicts.


SEEKING TO STRENGTHEN ITS PRODUCT LINES, Abbott Laboratories Inc. purchased two companies in recent months. Already the second largest diagnostics company in the world, Abbott needs size to remain competitive in the pharmaceuticals industry.

In June it purchased ALZA Corp., a manufacturer of urology drugs and drug delivery systems. It followed that in July with the announcement that it would acquire Perclose Inc., which manufactures medical devices.

Meanwhile, Abbott disclosed second quarter revenues and earnings, which increased 5.8% and 9.8%, respectively. The diagnostics division made a strong showing, increasing revenues by 8.22% over the same quarter last year.


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