Westworld’s Chief, Others Investigated : Lake Forest, Defunct Firms Under Scrutiny
Though Michael Dunn is generally credited with building Westworld Community Healthcare Inc.’s highly successful chain of rural hospitals, he is now a target of a civil racketeering complaint and federal investigations into his management of rural health-care companies.
Dunn, chairman and chief executive of the Lake Forest-based Westworld, is one of eight individuals and five companies named as defendants in a $28.6-million lawsuit filed recently by Nye County, Nev., alleging fraud, conspiracy and overbilling.
Federal authorities have recently opened inquiries into Dunn’s management of the now-defunct Advanced Health Systems Inc., which is also named in the lawsuit, as well as Westworld. Dunn served as president of Advanced Health for 10 years before founding Westworld.
Federal Investigations
According to federal government sources, Advanced Health is under review by the U.S. Office of the Inspector General and other federal agencies. The agencies are looking into allegations of overbilling, fraudulent management contracts and filing of fraudulent financial statements.
In addition, the Inspector General and other federal agencies are looking into Westworld’s current operations for possible billing irregularities, according to federal law enforcement officials.
Robert Evans, regional inspector general for investigations in San Francisco, said his staff is familiar with the Nye County allegations, but declined to comment on any government inquiry into Dunn or companies that Dunn is or has been associated with. However, Evans said: “Mr. Dunn is of interest to us, of course, because of the (1982) Advanced Health investigation.”
In a series of interviews Dunn called the lawsuit “ludicrous” and vehemently denied all the allegations. He said he was no longer employed by Advanced Health when the dispute with Nye County arose. “I never had any business with that hospital,” Dunn said.
He said he did not think the Nye County lawsuit is relevant to Westworld’s current operations.
Dunn said Wyoming state officials recently conducted an audit of Westworld’s Sundance, Wyo. facilities, but he was not aware of any other pending government inquiries. “They are welcome to do it,” said Dunn. “There is certainly nothing we want to hide from them.”
Westworld, a leading provider of rural health-care services, operates 33 health-care systems and two alcoholism-treatment programs. The company, which employs about 3,000 people, has experienced phenomenal growth in recent years by targeting medically underserved, rural communities.
In recent months, Westworld has been on an acquisition binge, adding seven new health-care facilities during the second quarter ended June 30. It signed agreements to acquire two others in recent weeks. Second-quarter revenues more than tripled to $29.8 million from $9.1 million and net income more than doubled to $782,000 from $275,000 a year ago.
Suit’s Allegations
Nye County’s lawsuit against Dunn, Advanced Health and others, stems from a dispute over the rural county’s refusal to pay a $1.24-million management fee to Advanced Health after the company terminated its management contract with the county. The county’s suit, filed in response to a lawsuit filed by Advanced Health in August, 1983, alleges that Dunn and the other defendants defrauded the county by inflating the price of hospital supplies and equipment that Advanced Health sold to the hospital. It also alleges that Advanced Health filed fraudulent Medicare claims and commingled county and company funds, among other things. The amended 49-page suit was filed June 24 in a Nevada federal court.
This is not the first time that Advanced Health’s hospital operations have been publicly criticized. In 1982, after a lengthy investigation by the FBI and the Department of Health and Human Services, federal Medicare officials accused Advanced Health’s 24 Raleigh Hills alcoholism-treatment centers of admitting patients solely as a means of obtaining Medicare reimbursements. Dunn who was president of Advanced Health from October 1972 to May 1982, said he had left the company before the investigation began, but was interviewed by government investigators after he resigned. No criminal charges were filed, but about $2 million in costs billed to the government were disallowed and Advanced Health later agreed to repay $236,000 to the government, according to Evans of the Inspector General’s office in San Francisco. Advanced Health was a subsidiary of Long Beach-based Petrolane Inc. Petrolane was acquired by Texas Eastern Corp. of Houston last Fall.
Hospital Focus of Suit
The legal dispute centers on Nye County Hospital, a 23-bed facility serving the desert community of Tonopah. Nye County officials said the hospital was losing about $25,000 a month in 1980 when Advanced Health took over and promised to make it profitable.
“One of the reasons Advanced Health came here is because this county was going to be the MX (missile) capital of the world,” said Roy Neighbors, county manager, in an interview. But Neighbors said Nevada was eventually dropped as a missile site. Neighbors and others familiar with Nye County Hospital said one of the first things Advanced Health officials did was raise the hospital rates and boost operating expenses. A source familiar with Nye County’s case said the in-house cost of treating one patient for one day was about $400 before Advanced Health signed the management contract in May, 1980. Soon after Advanced Health took over, the per-patient cost rose to $700 a day.
“In the first year, accounts receivable increased from $350,000 to $1.2 million,” said Neighbors, adding that the higher rates were necessary because Advanced Health promised to operate the hospital at no cost to the county.
“After they left, the county had to get a state grant of $210,000 to keep the doors open,” Neighbors said. He pointed out that the county also re-established a tax assessment district to support the hospital. And, Neighbors said the county had to pay thousands of dollars to Medicare after the federal government refused to pay for some of Advanced Health’s billings because they were too high.
The “rate increases caused the patient base to shrink and their (Advanced Health’s) outrageous management caused adverse publicity in the newspaper,” according to a report prepared by legal researchers hired by Nye County.
Other Hospitals’ Problems
Marcy Byrnes, a Los Angeles attorney representing Nye County, said the report shows at least 13 Advanced Health-managed hospitals had management problems similar to those experienced by Nye County Hospital. Specifically, Nye County’s complaint alleges that Advanced Health:
- Marked up goods 33% to 50% and “billed Nye Hospital for the marked-up price.”
- Used “the mails to submit fraudulent inflated claims for reimbursement for administrative costs and hospital costs to . . . government agencies” such as Medicare.
- Tried to acquire or maintain control of the hospital through “racketeering activities.”
- “Commingled Nye County’s funds with other funds of Advanced Health and Petrolane.”
Dunn denied every allegation. He said supplies from Advanced Health’s central distribution center were marked up because “every facility paid overhead for the distribution center, plus the cost of the item.”
(Two Orange County hospital management company executives said a 33% to 50% markup on goods is extremely high. One executive said hospitals that sell products or services to each other usually charge a 5% to 10% markup.)
Dunn acknowledged that Medicare denied some Nye County Hospital claims but said it was not uncommon because Medicare claims are denied “every day.” He also said the hospital continued to lose money under Advanced Health’s management because “the place always lost money.”
‘Didn’t Even Know Me’
Although he was president when the management contract was signed, Dunn said that Nye County Hospital “was not a facility I had any personal contact with. “Those people didn’t even know me. I’ve only been there once in my life.”
County officials disagree.
“We knew him,” said Nye County Manager Neighbors. According to Nye County records, Dunn visited with hospital officials in Tonopah on Aug. 5, 1980. Neighbors said soon after that visit, Advanced Health convinced the hospital to build a medical building adjacent to the hospital. The county borrowed $1 million to complete the building and make certain improvements to the hospital itself. Nye County is still paying off the loan, Neighbors said.
David Schinderle, an Orange County executive also named as a defendant, signed the for Nye County Hospital in May, 1980. Schinderle, is currently director of management services for St. Joseph Health System in Orange.
“The whole thing amazes me. I did nothing wrong,” said Schinderle, who said he was not employed by Advanced Health when the dispute that prompted the lawsuit arose.
Mark Waxman, a Los Angeles attorney representing Petrolane, said: “We have not been able to sit down with the (Nye County) commissioners and work it through.” He said Petrolane “would like to get the parties together before a lot of money is spent.”
Others Named in Suit
Neighbors said he has never heard from Waxman but would be willing to discuss a settlement.
Also named in Nye County’s suit are: Horizon Health Corp. of Dallas, Affiliated Health Corp. of Dallas, Republic Health Corp. of Dallas, Jack R. Anderson, founder of Horizon and Republic; William Morton and David Schinderle, former vice presidents of Advanced Health; J. Kent Howard, a former Advanced Health division manager; James Ken Newman, a former Advanced Health executive; James Wayne McAtee, former executive vice president of Advanced Health, and Clovis Wood, president of Affiliated.
Federal law enforcement officials said Wood is being sought by Michigan state officials in connection with financial problems experienced by a hospital there.
