Community Psychiatric Suffers an Ailing Image : Health: The firm’s reputation has been tarnished by allegations of under-staffing and falling profit. Its president says company hospitals offer quality treatment and that competitors give industry a bad name.

Amid the scandal-plagued and financially strapped private psychiatric hospital industry, Community Psychiatric Centers until recently had a reputation both as Mr. Lean and Mr. Clean. Its unbureaucratic management kept costs low, and its marketing staff stayed away from the sensational advertising that tarnished the image of some competitors.

But now, allegations of under-staffing at some of its 50 hospitals are hurting the Laguna Hills-based company’s relations with patients and doctors. And declining profits, caused in part by the failure of its business of importing patients from Canada, are tarnishing its stellar image among investors as one of the nation’s biggest and most profitable psychiatric hospital chains.

The mother of a 12-year-old girl who was allegedly raped while a patient in one of the chain’s hospitals is suing the company. She charges that the child was assaulted by another patient as a result of poor staffing in the facility. Other patients and at least one staff members have also filed suit, charging that under-staffing put them in danger.

The Texas attorney general is investigating some CPC hospitals in his state for possible consumer and insurance fraud and for paying illegal kickbacks for patient referrals. The Canadian government is refusing payment for patients treated at CPC’s U.S. hospitals. Doctors have defected. And irate shareholders have sued, charging that managers were slow to reveal negative news while they were selling $14 million of their own shares.

In a recent interview in his office, filled with Civil War paintings and sculptures, CPC President Richard Conte vigorously defended the ethics of CPC hospitals. Company hospitals offer quality treatment, he said, angrily blaming competitors for giving the industry a bad name. “I think without a doubt there have been abuses going on. I’m not going to mention any names . . . but there have been some bad actors.” Richard Conte and his father, James Conte, CPC founder and chairman, also deny the shareholders’ charges.

The company’s problems are symptomatic of a troubled $8-billion industry that grew on swelling insurance payments and is now feeling the backlash from employers and insurers trying to rein in health care costs. Mental health treatment has been the fastest growing category of costs for employers providing health care benefits in recent years, and insurers are trying to apply the brakes by limiting what treatments they will pay for and for how long. Insurers and employers have also become more vigilant about rooting out fraudulent and inept providers.

For much of CPC’s 20-year history, the environment was strikingly different. Investors, dazzled by the company’s impressive two-decade history of uninterrupted 15% to 20% annual profit growth, loved the chain that they affectionately referred to as “Crazy Mary” (its stock symbol is CMY). Investors drove the stock up to $40 in 1991, from $2.50 in 1980.

Forbes magazine included the company in its list of America’s Hottest Small Companies. Barrons praised its “absolutely stunning record” of profitability. James Conte, who was making up to $8.6 million a year in the late 1980s, was named a CEO of the Decade by Financial World Magazine for his tight-fisted management.

The company bought and built hospitals aggressively, doubling its number of beds from 1985 to 1989 and making $3 to $4 profit for every $10 in revenue it took in. Last year, the company was continuing its gung-ho acquisition strategy with a bold $1-billion bid in March to swallow up one of its biggest competitors, Macon, Ga.-based Charter Medical Corp., and in the fall it was announcing plans to buy two Texas hospital chains.

Many investors were shocked when the company announced in September that third-quarter per-share profits dropped 98% and that it had millions in bad debts. They dumped the stocks in droves, driving it down to a 52-week low of $10.625. On Friday, the stock closed at 13 7/8. The company dropped its aggressive acquisition plans.

James Conte boasted to The Times in 1989 that “we are the leanest hospital company in regard to staffing, and I think our profit margins show it.”

But physicians, nurses, and other staff formerly associated with CPC said that focus on leanness has gone too far.

The state Department of Health Services cited CPC’s Santa Ana hospital from at least 1988 through April, 1991, (earlier records are not available) for under-staffing, inadequate treatment plans and record-keeping and other violations of federal regulations.

“These deficiencies pose an immediate serious threat to the patient health and safety,” said a letter from investigators to CPC Santa Ana in November, 1990, adding that the hospital could be denied Medicare and Medi-Cal payments if conditions were not improved. Since CPC Santa Ana was last cited in April, 1991, it pledged corrective measures, and there have not been complaints since, according the state agency.

The question of whether the Santa Ana hospital has been adequately staffed may be answered in lawsuits pending against CPC. According to Thomas Hahn, who represents the mother of the 12-year-old girl who allegedly was raped by a 17-year-old boy, the assault occurred because the young man was inadequately supervised. Suits filed by Hahn say that the young man molested at least one other girl and a boy. A Santa Ana police report says other teen-age patients also said he repeatedly abused them physically and had sex in the bathrooms of the hospital with them.

According to the police report, the stocky, muscular young man had a history of violent and abusive behavior, a long arrest record for charges including attempted rape, was an intravenous drug user and sported swastikas and other tattoos.

Josephine Rietkirk, Santa Ana’s former director of nursing, has also sued the company, alleging that she was fired for complaining about under-staffing to state regulators.

A CPC lawyer said the company still doesn’t know exactly what happened in the alleged rape case, given the unstable nature of the only witnesses. As for Rietkirk’s suit, he said she was not terminated, but resigned.

CPC’s Laguna Hills hospital is also troubled. The facility is an attractive edifice, built in beige stone with deep brown marble trim and an interior decorated in pink and maroon. Like the Santa Ana hospital, with its clean, carpeted lobby nicely decorated in soothing colors and expensive-looking colonial furniture, Laguna Hills is designed to appeal to middle-class patients. But Laguna Hills is almost empty. Of its 78 beds, only about 15 were filled in December.

A number of doctors who have regularly admitted patients at the hospital, including some who were former chiefs of staff, said the hospital had problems with under-staffing and excessive staff turnover. Of the three psychiatrists elected chief of staff by their peers from 1988 to 1991, all have since severed their relationship with the hospital.

Said Dr. Stephen Petty, a former chief of staff: “Nurses on the floor and mental health workers were turning over like mad. Medical records people too. . . . You could go in and not recognize anyone if you’d hadn’t been in for a few weeks.”

Petty said he doesn’t believe that patients were endangered by the staff turnover, although several other doctors said they were concerned about under-staffing.

Richard Conte denied that the hospitals are understaffed: “If we had improper or dangerously low staffing, we wouldn’t have the licensing and accreditation we do,” he said.

CPC Laguna Hills and CPC Santa Ana remain fully licensed by the state of California and by the private, nonprofit Joint Commission on Accreditation of Healthcare Organizations.

Conte admitted that turnover has been “too high” among staff at Laguna Hills and said stabilizing management there is a “top priority.”

CPC began to lose revenue last May when the Ontario government in Canada cracked down on the export of thousands of Canadian patients and refused to pay millions of dollars in claims by U.S. hospitals, including CPC’s.

Faced with a declining local supply of patients, CPC, like many psychiatric hospitals, began in 1989 to recruit patients in Canada where government insurance provides generous payments for mental health treatment.

Calvin Dufore, a former CPC vice president who was steadily promoted during his five years working for CPC, handled the company’s early marketing efforts in Canada. Richard Conte said he fired Dufore for making unethical payments for patient referrals and said it’s unfair to blame top management for Dufore’s activities.

According to Dufore, CPC was getting such a high number of Canadian patients that the company negotiated volume discounts with American and Northwest airlines.

He said the company’s hospitals paid between $1,500 and $5,000 per head for patient referrals to its drug and alcohol abuse programs. The medical community considers such “bounties” to be unethical. In Texas, where such payments are illegal, the attorney general is investigating CPC, among other hospital chains, for possible “bounty hunting.”

Dufore said recruiters hired by CPC got patients at a Toronto Salvation Army shelter for the homeless, where they visited a foul-smelling room in winter and showed a video of the sunny Laguna Hills hospital, complete with shots of the nearby beach and the pool and promised them a holiday in California.

After patients were recruited--also with the aid of outdoor advertising in downtown Toronto--they would be divvied up among American CPC hospitals, depending on which had the most empty beds, Dufore said. “Laguna Hills was doing terrible so they stuffed a bunch of Canadians in there,” he said.

Conte said that in order to avoid unscrupulous “flesh peddlers,” CPC set up its own referral and counseling office in Toronto in 1990. But hospital bills for patients recruited by that office have been refused by the Canadian government.

Community Psychiatric Centers at a Glance

Community Psychiatric Centers has reaped phenomenal profit growth from its leanly run hospitals. But business is slowing as employers trim mental health benefits and some doctors and patients charge that some of its hospitals are unsafe.