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RELEASED TO SECURITY HOLDERS AS OF SEPTEMBER 25, 2000
[The following article is taken from the May/June 2000 issue of "House
Counsel." The author's consent was not obtained for use as proxy soliciting
material.]
INTENSIVE CARE
GC CHRISTI SULZBACH HELPS TO RESUSCITATE A STRICKEN HOSPITAL CHAIN
BY MICHAEL JONATHAN GRINFELD*
When Tenet Healthcare Corporation, the nation's second-largest operator
of acute care hospitals, announced early last year that Christi R. Sulzbach was
going to be its next general counsel, her life's journey to that point completed
a full circle. She was born in 1954 at Hollywood's Queen of Angels Hospital, a
facility that Tenet acquired in 1998.
That Tenet was able to make that deal was in large part due to
Sulzbach's being in the right place at the right time. In the mid-1990s she
helped the company, then known as National Medical Enterprises (NME), to survive
major criminal and civil penalties following investigations at its psychiatric
hospital unit. Taking center stage during the worst of the crisis, Sulzbach
managed the press while she planned litigation defense strategy. Tempered by the
experience, she emerged as a confident, optimistic leader able to handle some of
the thorniest legal and regulatory challenges encountered by any company lawyer.
In recent years the combination of managed care and government price
controls has caused a decline in both patient lengths of stay and federal
reimbursements under Medicare and Medicaid. Most hospital chains have few
options to increase revenue. Almost every business strategy a company develops
involves regulated activity, and the price for any misstep is potentially huge
civil and criminal penalties. Add to those concerns the ever-present threat of
medical malpractice and False Claims Act suits, as well as ongoing government
and private accreditation and licensing inspections, and it's a wonder that any
health care company stays afloat.
Somehow Santa Barbara-based Tenet Healthcare has thrived. In the past
three years it has experienced a 17 percent average annual growth in earnings
per share, though the company faltered in fiscal 1999 as reimbursement cuts
mandated by the Balanced Budget Act of 1997 depleted revenues by $100 million.
Even so, Tenet still managed to post $249 million in income from continuing
operations from almost $10.9 billion in net operating revenues. Though Tenet's
first quarter fiscal 2000 net income declined to $109 million from $137 million
last year, Wall Street still favors the company's stock and its potential for
growth.
"It's a fascinating time to be a lawyer in a health care environment, in
large part because of very complicated issues that have to be balanced," says
Sulzbach, who is genuinely unfazed by the task. "Lawyers need to understand not
only the laws and regulations that apply to business relationships, but they
must also understand them in the context of the business goals that hospitals,
physicians, or networks are trying to accomplish. It's really a great
opportunity for lawyers who have some business sense, who are smart, and who
want to be aggressive."
----------------------
* Michael Jonathan Grinfeld is a contributing writer for HOUSE COUNSEL based in
Fullerton, California.
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Although Sulzbach has developed all of those attributes, her 20-year
legal career is not what her family had anticipated. The daughter of a prominent
Los Angeles neurosurgeon, she had been groomed to follow in her father's
footsteps. "I was his only son," jokes Sulzbach, who has two younger sisters and
who is raising a twelve-year-old daughter on her own. By age nine, Sulzbach's
father would take her on Saturday hospital rounds, walking her through the halls
where she visited with patients and nurses. "That was back in the days when
intensive care unit nurses had time to talk to a doctor's kid," she says.
Influenced by family friends who were lawyers, and a one-month
internship at the offices of legendary Los Angeles plaintiffs attorney David
Harney, Sulzbach turned to law. "Ultimately," she says, "I became a lawyer
because I didn't have the math skills to become a doctor."
After graduating from a small, private Catholic girls high school in
Pasadena, she received her undergraduate degree from the University of Southern
California and graduated from Loyola University School of Law in 1979. Despite
her career choice, Sulzbach's father remained her staunchest supporter. After
she served a short stint at Haight, Brown & Bonesteel, then in Los Angeles, he
convinced her to take a leave of absence to work for the first Reagan
presidential campaing in 1980. She quickly became the state treasurer for the
California Republican campaign committee.
"Those were back in the days when political campaigns had field offices
throughout the state," Sulzbach recalls. "It was great schooling in juggling
crises and interacting with people. It was really just a lot of fun."
After the successful campaign, however, Sulzbach turned her back on an
opportunity to become, in her words, "one of those young, aggressive lawyers in
Washington, D.C." Instead, she accepted a position in 1981 as general counsel of
Crown Coach Corporation, a manufacturer of school buses and fire engines in East
Los Angeles that was run by another family friend. Acting as the entire legal
department, she handled a potpourri of manufacturing and international trade
issues, sometimes going back to Washington, D.C., to deal with regulators and to
visit old friends.
That job lasted until 1983, when her boss sold the company to become
Nancy Reagan's chief of staff. Sulzbach then accepted the position of associate
counsel at Santa Monica, California-based National Medical Enterprises, never
anticipating the roller-coaster ride that lay ahead of her.
For the first several years, Sulzbach handled routine M&A and securities
matters, later taking over supervision of labor litigation as she rose through
the ranks. In 1991 , however, a series of devastating newspaper exposes
uncovered appalling treatment abuses and murky financial dealings in NME'S
psychiatric hospital operations. The reports and investigations that followed
nearly brought the company to its knees, and altered the course of Sulzbach's
career. For the next three years she was thrust into a legal maelstrom that
consumed nearly all of her attention.
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Brought over to help manage the scandal, Sulzbach had to learn
everything about NME's Psychiatric Institutes of America from scratch. The
Washington, D.C.-based unit had been run largely as an autonomous division since
NME acquired it in 1981. "Psychiatric Institutes was the Cadillac of the
business," says Sulzbach. "It was started by some very prestigious
psychiatrists, and what they really needed was a banking partner to help them
grow."
After three years of putting out fires, however, Sulzbach concedes she
learned "more than I ever wanted to know" about psychiatric hospitals. First,
the Texas attorney general charged NME with paying kickbacks for patient
referrals and overbilling the state's crime victims' compensation fund. Then
plaintiffs attorneys began filing hundreds of malpractice claims that alleged
NME had grossly mistreated patients, many of them children and adolescents. In a
scheme to increase earnings, the plaintiffs alleged, hospital admissions were
based on phony diagnoses and treatment plans that drained every insurance dollar
available to patients. Meanwhile, accusations that NME commandeered patients by
illegally applying involuntary commitment laws and then subjected patients to
inappropriate seclusion and restraints generated a feeding frenzy in the press.
Following a huge drop in stock price, shareholders began filing class
action lawsuits, charging that company officers knew, but failed to disclose,
that NME had engaged in wrongful conduct. Private insurers also jumped on the
bandwagon, claiming in several federal RICO suits that NME had created a
conspiracy to overbill the companies by more than $750 million.
Despite the travail, Sulzbach acquitted herself well. Even some of NME's
opponents grew to respect her conduct. One of them is plaintiffs attorney
Gregory Love, a name partner with Love and Norris of Fort Worth, Texas, who
represented both former NME patients and insurers. "I have dealt with Ms.
Sulzbach on a number of different matters, including trials, resolutions, and
every other aspect of these cases," Love says. "She's an extremely capable
lawyer who handled hundreds of cases at a time, all of them with potentially
conflicting issues. She managed the resource needs of the various lawsuits, the
attitudes of the lawyers, and the questions from her own management and board.
To juggle all of that was a difficult undertaking."
The worst blow to NME, however, came in August 1993. After investigating
for more than two years, the FBI and other federal health care regulatory
agencies raided twelve NME facilities nationwide, including the corporate
headquarters. Some 600 agents served search warrants on company officials and
carried off boxes of records. Jeffrey C. Barbakow, then newly appointed CEO and
chairman of the board, says that day marked the lowest and darkest point for the
company. "There were a lot of FBI agents coming in trying to get information,
and everyone was very tense, to say the least," Barbakow recalls. For Sulzbach,
the day was a turning point in her career.
With "something akin to the White House press corps out in front of our
business," Sulzbach says, "Jeffrey called me into his office and said, 'We
decided we'd like you to give our statement.' I said, 'No, no, I'm the lawyer.
I'll go write the statement, and one of the PR guys can read it.' Jeff said,
'No, I'm the CEO, and you'll give it.'"
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Barbakow adds, "I knew that she would answer the questions in an
appropriate way and that she would not play any games. But I also knew that she
would understand the complexities of a very unusual situation that specific
day."
With the benefit of hindsight, Sulzbach can now be reflective. "In most
legal careers you have moments that are challenging and high-risk you either do
very well or very badly But I like those moments. Clearly the company's survival
was at stake. It felt great to have senior management trust me to take on a role
like that."
From then on Sulzbach delivered the company's public statements. Already
a vice president and assistant general counsel, she was given the additional
title of senior vice president of public affairs. She not only managed the
combat on legal fronts but also directed NME's public response to the state and
federal regulatory proceedings against it.
Sulzbach says she grew to enjoy the dual roles. The experience, she
recalls, required a lawyer's precision to "avoid saying something that
jeopardized privilege or confidential investigations," combined with a
publicist's perspective that there was a "need to get certain information out to
reporters."
PR, however, wasn't the heart of the problem. "After the FBI raid,
company officials realized they had a serious problem, and this was not a joke
any more, says Richard P. Kusserow, a former inspector general of the Department
of' Health and Human Services who was hired as a consultant by NME in 1992.
Spurred on by Barbakow, Kusserow says that within three months the company had
put all 70,000 employees nationwide through an intensive regulatory compliance
training program.
Ultimately, it was money-lots of it-that resolved the majority of NME's
problems. The company paid close to $1 billion in damages, civil penalties, and
criminal fines. Of that, $379 million went to the federal government after NME
pleaded guilty to unlawful kickback and conspiracy charges in June 1994. U S. v
NME Psychiatric Hospitals (D DC) Civ No. 94-0268. As part of the deal, the
company offered to divest itself of all of its psychiatric hospitals and agreed
to comply with a corporate integrity plan approved by government regulators. It
was Sulzbach who again made the public appearance, entering the guilty pleas in
a Washington, D.C., federal courtroom.
"Ultimately, we did have to sell major assets to completely resolve the
psychiatric hospital-related issues." she says. "If the company was going to
continue, it couldn't be at war with all of its major customers-the U.S.
government included. The question simply became: How do you demonstrate the
company's defenses and strengths and then negotiate an appropriate level of
settlement?"
The outcome could have been much worse. Kusserow, now president of
Strategic Management Systems of Alexandria, Virginia, says that federal
officials had the option of terminating NME from participating in federal
reimbursement programs, which would have forced the company into bankruptcy.
Given a second chance, the company immediately began to reinvent itself. Within
four months NME acquired American Medical Holding for $3.3 billion,
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nearly doubling the number of acute care hospitals it owned. It also used the
merger as an opportunity to shed its corporate identity, emerging as Tenet
Healthcare.
Though the intensity has diminished, Sulzbach says some of NME's ghosts
continue to haunt her department. Until last June, for instance, the company was
bound by a government-mandated integrity assurance program that scrutinized
every aspect of the company's operations. But Sulzbach says Tenet's response to
federal oversight informed her work in positive ways. She administers one of the
industry's most successful compliance operations, which includes in-house audit,
ethics, and education programs. Occasionally asked to justify the expense of
such programs to her board, Sulzbach says she replies, "I can give you 379
million reasons why they make sense"-- a pointed reference to NME's criminal
fine.
Sulzbach can also cite the ongoing legal problems of Tenet's corporate
rival, Columbia/HCA Healthcare Corp. of Nashville, Tennessee. Confronted with
allegations of billing fraud, Columbia hired former Howrey & Simon partner Alan
R. Yuspeh. in 1997 as senior vice president of ethics, compliance, and corporate
responsibility. Although Yuspeh knows Sulzbach only by reputation, he says she
was instrumental in establishing early corporate integrity agreements. "She was
highly regarded by government officials," Yuspeh says.
Thomas E. Holliday, a partner at Gibson, Dunn & Crutcher in Los Angeles
and outside counsel for Tenet, credits Sulzbach with enforcing a program that is
in more than just words on paper. "As general counsel, she brings great judgment
to both the legal and operational side," Holliday says. "She looks at a problem,
knows how to address it, knows the consequences, and does a first-class job of
handling the legal, business, ethical, and personal ramifications. Whether it's
a boardroom issue or a courtroom issue, you want Christi on your side."
Sulzbach now is gearing up for increased scrutiny following a boost in
congressional appropriations for health care oversight. It's a tricky job,
because the company's bottom fine depends on regulatory compliance. In fiscal
1999, for instance, Tenet received 43.3 percent of its revenues from the
Medicare and Medicaid programs, making the federal government its most important
customer. Even with the best of intentions, Sulzbach says, meeting regulatory
standards can be maddeningly difficult.
"People in the Office of the Inspector General and the Department of
Justice say they want to have a mutually cooperative relationship with the
providers," Sulzbach explains. 'They say they understand that the regulations
are quite complex, and that no one is going to bill correctly 100 percent of the
time. But then they can't tell you what they think is an acceptable error rate.
Its like obscenity-they know it when they see it."
With government wielding the ultimate termination from participation in
federal health care programs, providers live in constant fear that a single
mistake repeated on a large number of billings will be deemed intent to defraud.
"We're never on a level playing field in terms of being able to discuss the
merits of the cases that develop," Sulzbach says. "I do think that there are
certain districts where assistant U.S. attorneys tend to approach enforcement on
a guilty-until-proven-innocent basis."
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Sulzbach must also comply with the so-called Stark regulations, a
complex and still evolving set of rules that govern relationships between
hospitals and referring providers. The Emergency Medical Treatment and Active
Labor Act (EMTALA) is yet another potential pitfall, one that can invoke severe
penalties for turning away seriously ill, injured, or pregnant patients from an
emergency room because they can't afford to pay for services.
Finally, litigation remains an ongoing concern. According to Sulzbach,
about 300 complaints involving allegations of patient abuse and dishonest
business practices have been filed since 1994. " Unfortunately, because of the
advertising ability of plaintiffs lawyers, we still have patient cases coming
out of the psychiatric sector," she says. "Several large firms have been running
ads that basically say, 'If you were ever a patient in a psychiatric hospital
owned by National Medical Enterprises, call this 1-800 number.' A large
percentage of the cases, we think, are barred by the statute of limitations."
Charleston, South Carolina-based Ness Motley Loadholt Richardson &
Poole, a key player in the tobacco industry class action settlement, has become
a regular adversary.
"One of our advantages is that we're a firm of considerable resources,"
says litigation supervisor A. Hoyt Rowell III "Basically, we don't quit." Rowell
says the firm manages about 100 cases against Tenet and may file hundreds more.
As for the hard line Sulzbach established, he says, "Sooner or later, she might
get dinged."
Sulzbach confirms that the days of routinely settling claims against NME
are over. "Early in the game, when the company was trying to resolve issues with
the insurance companies, the federal government, and the patient cases, we
needed to reach some global resolution," she says. "After a while, however,
settling cases only meant that additional ones would be filed. Our strategy now
is to litigate these cases."
Plaintiff's lawyer Stacy L. Brainin, a partner with Haynes and Boone in
Dallas, worked with Sulzbach from the outset of NME's troubles and helped try
some of the cases against her client. During the trials, Brainin recalls, it was
Sulzbach who testified about the company's guilty pleas and asked jurors to
distinguish the convictions from a patient's specific claims. Calling Sulzbach a
"courageous general counsel" for deciding to "put an end to this," Brainin
credits her with forging a winning strategy by making plaintiffs prove their
cases.
"Christi is clearly the leader of this trial team," says Brainin. "She
is a hands-on manager of legal services, both inside her department and with
outside counsel. She came to believe in the quality of the patient care being
provided in each hospital. So she didn't need outside lawyers to come up with
this strategy."
Not all plaintiffs attorneys applaud Sulzbach's tactics. Robert F
Andrews, a Fort Worth, Texas, attorney who settled 66 fraud and patient abuse
cases in 1993 with NME for $20 million and who still brings cases on behalf of
former psychiatric patients, calls Sulzbach's intransigence shortsighted. "Tenet
generally wins because it relies on the social prejudice against mentally
challenged individuals," Andrews says. "The strategy fails to take into account
that real people who were really hurt are bringing these claims. It tells me
that the company is still looking at its
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patients as marketable, fungible human commodities. Either they fill hospital
beds or they are simply plaintiffs and lawsuits."
Not everything Sulzbach does however, is about dispute resolution Tenet
trades actively in hospital properties, buying and selling them as it implements
a business strategy that focuses on its core strengths. In addition, the company
is forging new alliances to enhance its market position. Early last year, for
instance, it stepped in to rescue eight hospital, from bankruptcy, acquiring
them after the financial collapse of Allegheny Health System. In October it shed
ten of its own hospitals, selling them to IASIS Healthcare Corporation because
they were "not essential to a network." And in December it formed a new
e-commerce company with Ventro Corporation called Broadlane, Inc. that will
offer business-to-business online solutions in the $143 billion medical supplies
industry.
"We have business competency," say Sulzbach of her legal department.
When Tenet moves in to take over a troubled network," we know what systems to
put in place, and we know the operational staffing, quality, and technology
issues. We bring our legal and compliance competencies to address them."
Despite all the legal entanglements Sulzbach's company faces, one of her
first assignments as general Counsel was to trim its $60 million a year legal
budget. Sulzbach intends to increase her in-house group of 28 lawyers, promising
to adopt a matrix model that will give each lawyer responsibility for both a
geographic region and a practice area. For instance, one of tier staff counsel -
referred to as the "EMTALA Queen" now handles most inquiries nationwide
regarding emergency room admissions.
"We're trying to assure that each of our lawyers has a particular area
of expertise that will rival what we can purchase on the outside," says
Sulzbach. At the same time, she is centralizing the legal work done by outside
law firms, reducing what had been more than 700 firms that provided services.
"We don't operate in an environment where you can sit in your office and
wait for someone to call and ask you a question," she says. "The lawyers in this
company are an integral part of the overall operations, and they need to be
there side-by-side with the business people."
Sulzbach has also created a management committee in her department for
the first time. "Women managers are supposed to be much more consensus-oriented
than men," she says. "I don't know that I'm interested in consensus as, much as
I'm interested in input. We have some very strong, able senior lawyers in this
department who should have the ability to voice an opinion on running and
staffing the department and what our budget should be."
Although Sulzbach concedes that serendipity and the confluence of events
have influenced her journey to the general counsel's office, she has no regrets
about the path she has followed. "I would be foolish to complain about where
life has carried me," she says. " Sooner or later everybody encounters
opportunities to move into new areas, to take on new challenges, find different
ways to grow. If you become dogmatic about it, you'll miss out on a lot."
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