Essay

COLUMBIA/HCA CASE ASSIGNMENT

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Summary

The U.S. Health care system is one riddled with complicated tangles of entities and

billing processes. In 2006, health care in the United States rose to 16 percent of the Gross

Domestic Product (GDP). Costs in the health care industry were high and rising due to

inefficiencies and costs for new machines, drugs, and treatments. In the 1960’s, the federal

government set up Medicare and Medicaid to help the elderly and poor finance for their health

care. In order for hospitals to be reimbursed by Medicare, it would classify a patient’s illness

into one of the 470 Diagnosis Related Groups (DRGs) which were ambiguously defined and

were subject to abuse such as upcoding. Upcoding is when a hospital would interpret the illness

of a patient in such a way that they fall into a higher-paying DRG code. Since the hospital bills

were being paid by the federal government, there was no incentive for hospitals to lower their

operating costs. The use of consultants and specialized software helped hospitals use the DRG

rules to ensure that Medicare was billed the maximum rates even through the use of unethical

upcoding. The introduction of Health Management Organizations (HMOs) included a network

of physicians, hospitals, and labs to manage and reduce nonessential and marginally beneficial

medical treatment. The reimbursement for these treatments by HMOs were limited and rationed

which lead to mergers and competition for controlling costs. This competitiveness in the health

care industry provided the environment for an aggressive entrepreneur to rise as a powerhouse

and change the industry itself. Richard L. Scott’s company started with only two El Paso

hospitals in 1987 and rose to 590 facilities in 30 states in 1996 by using a free-market

competition based strategy when making their decisions. The organization’s strategy was one

that cut costs and raised revenue at all levels even though the decisions for profit neared the

boundaries of ethics in order to utilize all advantages they could. Reducing the number of

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employed nurses, reducing the number of available hospital, switching to cheaper inadequate

medical supplies, and displaying signs to defer illegal immigrants from entering the hospitals

were some of the ruthless ways the company sought out savings and efficiencies. Scoring

hospital manger’s on short-term financial goals, giving doctors equity in hospitals, and

aggressive Medicare billing were part of the strategy for Columbia/HCA to raise revenue. The

strategy was a success which brought annual revenues from $4.9 billion in 1990 to $20 billion in

1996. The cost of this success was placed on patients with the deterioration of health care, the

increase of medication errors, and the increase patient deaths. Social values viewed that

slighting treatment to save money was wrong and competitors, labor unions, and religious

leaders began to speak out and lobby against Columbia/HCA. In March 1997, federal authorities

conducted an investigation into Medicare billing fraud at Columbia/HCA which resulted in

Scott’s resignation, the indictment of five midlevel managers, the selling of hospitals, share

prices plummeting, and forfeiting over 1.7 Billion in lawsuits, back taxes, fines, and penalties.

This case discusses whither Scott’s inherent strategies were unethical or were they appropriate

but unethically executed by the managers.

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This report will examine the Columbia/HCA case and discuss questions in the business

ethics of their decisions that brought about the rise and profitability of the company. This report

will answer five key questions which are: What ethical issues are arisen in the case, Who are all

the stakeholders involved, Which stakeholder should be involved in solving the ethical issues

identified, What are the ethical theories/principles applicable, and What plan of action is there

for the company to remain competitive and avoid the same problems in the future.

Ethical Issued Arisen From the Case

Business ethics is defined as the study of good and evil, right and wrong, and just and

unjust actions in business. Quite a few ethical issues can be identified from Columbia/HCA’s

practices under Mr. Scott’s administration. One ethical issue is upcoding, which is implementing

the illness of a patient into a higher-paying Diagnosis Related Group (DRG) in order to get more

profit from Medicare. Though this practice is common in the industry, it is illegal as well as

unethical, although because the coding procedures are so complex it is difficult to get a

conviction. The practice of upcoding affects the government (due to the legality of the practice),

the tax-payers (who fund Medicare), and the employees (the physicians and managers who are

guilty of illegal upcoding). Upcoding takes away available funds provided by tax payers that

could have been applied to better uses instead of increasing the hospital’s revenue. This also

makes the government and Medicare seem even more inefficient to the public even though it is

the hospitals who are unethically taking advantage of the system. The repercussions of the

employees who know and participate in the act could be charged for criminal fraud.

Another ethical issue was giving the physicians partial ownership of the hospitals because

this brings up a conflict of interest due to the physician’s vital role of admitting patients into

hospitals. This issue affects physicians, patients, and insurance companies due to the physicians

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having a financial incentive to admit patients to their hospitals, patients could be charged for a

hospital stay/service that was unnecessary or excessive just to increase revenue. All these

frivolous charges to the insurance companies reduce their profits which lead to cost cutting

(denials of payment for certain treatments) and raising prices for the patient.

The third ethical issue in the case was the rigorous cost cutting practices. These practices

included staff reductions, hospital closings, and lower quality medical equipment. This is an

issue due to the affects it had on the end user which are the patients, nurses, or physicians.

Nurses were supplied with weaker gloves, inadequate chest tubes, and were overworked due to

staff cuts. Physicians were not able to make timely decisions if a blood test that should only

have taken minutes to complete now took more than six hours to get the results. Ultimately, the

individual who carried the biggest burden at the end of the cost cutting domino effect were the

patients. The burdened stemmed from the inadequate medical supplies, lack of hospital beds,

understaffing, long waiting periods, medication errors, to an increase in patient deaths.

Another ethical issue was the possible monopoly. One of the practices used to drive up

demand for their hospitals was to buy out the other hospitals just to shut them down. This limits

the choices the patients and community has and raise the probability of them falling into one of

the many Columbia/HCA own hospitals. This also affected the employees of the hospitals

because they are out of a job and face tough competition getting hired again.

Managers of hospitals kept their positions by meeting short-term financial goals. These

quarterly earnings goals were extremely high or unrealistic and did not mention qualitative data.

This environment encourages unethical decision making by these mangers in order keep their

jobs. These ethical issues have a number of individuals who are involved and affected which

brings us to the second topic.

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Stakeholder Analysis

A stakeholder is defined as an entity that is benefitted or burdened by the actions of a

corporation or whose action may benefit or burden the corporation. The corporation has an

ethical duty toward these entities. With an industry such as healthcare a wide range of

stakeholders are effected which include: patients, stockholders, employees/labor unions,

government, doctors in and out of the hospital chains, competitors, tax payers, insurance

companies, suppliers, religious leaders, public, and public media.

Each stakeholder has a unique relationship, concern, and interest to Columbia/HCA. The

patients are interested in receiving quality healthcare, without being taken advantage of, for a fair

market price. The stockholders/investors have an ownership interest in the firm and expect to

receive dividends and rising stock prices. The Employees/Labor unions of Columbia/HCA want

fair wages for their time and effort and expect adequate compensation if they are overworked or

have more responsibility. The government’s interest is the fair billing through Medicaid so that

taxes are properly used in order to cover the individuals on Medicaid. Doctors in the hospital

chain are interested in providing the proper healthcare to their patients so they will get well but,

with physicians in the chain also being stockholders they have the additional interest of receiving

dividends and seeing their stock price rise. The competitors and doctors outside the hospital

chain want a non-monopolized capitalistic market in which they could sustain their existents and

provide patients more choices for the same healthcare services. Tax payers want their tax dollars

to be legitimately used on government programs and not be used for increasing revenue.

Insurance companies want to provide coverage for necessary treatments to their customers and

want to avoid/deny payment any unnecessary treatments. Suppliers are interested in receiving

fair compensation for their products and delivery services. Religious leaders, the public and

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public media have the same interest of seeing that people are not being taken advantage of and to

reinforce/advance broad social interest.

Stockholder power is the ability to use resources to make an event happen or to secure a

desired outcome. There are four recognized types of power: voting power, economic power,

political power, and legal power. Voting power means that the stakeholder has a legitimate right

to cast a vote and for Columbia/HCA this will include the investors and doctors within the

hospital chain. The great success of Columbia/HCA insured that the financial needs and interest

of the investors and doctors in the hospital chain were meet which also inferred that the strategy

used by the managers were parallel to their financial goals. They had financial interest in

maintaining the status quo.

The stakeholders that have economic power are the patients, employees/labor unions,

insurance companies, and suppliers. Patients theoretically can refuse to buy a company’s service

or boycott the hospital chain if they view that they are being treated unfairly. Their boycotting

ability is reduced because the option of going to another hospital in another city or refusing their

service is diminished when it could lead to their death in a medical emergency. Employees and

labor unions have the economic power to go on strike and refuse to work under certain

conditions until they are changed. The more organized the workers or labor unions are the more

power it has over the company. Insurance companies can refuse payment of frivolous medical

treatments which puts the financial burden on the patient but also tells the hospitals that should

only prescribe necessary treatments and/or lower their costs for them. Suppliers’ power is

heavily dependent on the balance of bargaining power between the supplier and hospital, which

in this case, Columbia/HCA was such a large customer that the bargaining power was to their

advantage to get the prices and services they demanded.

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The government, tax payer, and public/community have political power. This is power

through legislation, regulation, or lawsuits. The government can directly pass new laws, enhance

regulation, and has the capabilities for enforcing. The tax payer and public/community can vote

for politicians of the government who support their particular views with respects to the laws and

regulations affecting the healthcare industry.

Legal power is the power to bring suit against a company for damages, based on harm

caused by the firm. Patients, labor unions, and the public/community have legal power. If a

patient dies or is injured do to malpractices by the hospital, the patient or the deceased patient’s

family can file a lawsuit to receive compensation. Workers/labor unions can sue for damages

caused by workplace injury or even possible contraction of a disease because of weaker

protective gloves due to cut backs. Certain stakeholders are in good positions to bring about

change for the better which brings up the next topic.

Stakeholders Involved with Solving the Ethical Issues

The stakeholders who should be involved in the ethical issue of giving physicians partial

ownership of hospitals are the mangers of Columbia/HCA, the physicians, insurance companies,

patients, public media, and religious leaders. The managers and the physicians should recognize

that by giving stock into the hospitals develops a conflict of interest for the doctor and could lead

to unethical behavior. The insurance companies can flex their economic power and refuse to

provide payment to the Columbia/HCA system. Patients can also boycott Columbia/HCA and

choose to go to non-Columbia/HCA physicians for health care treatment. Public media and

religious leaders can expose and speak out against these practices and demand a change. The

treatment of humans as revenue sources in the healthcare industry is ethically and morally

wrong.

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For the possibility of a monopoly forming through Columbia/HCA, the government,

patients, and local community should be involved. The government can investigate to see if

Columbia/HCA is in violation of anti-trust laws and use the proper procedures to fine and break

up the monopoly. The patients and local community can use their economic power to express

their anti-monopolistic sentiment and avoid using facilities owned by the company. They could

also gain momentum for their movement through the use of public media.

The ruthless cost cutting by Columbia/HCA that consisted of lower quality items and

staff cuts should involve patients, and employee/labor unions in order to resolve the issue.

Lower quality products can have a higher chance of failure which could endanger patient’s lives.

Weaker gloves also have a higher chance of being torn and also endangering the employee

wearing them to blood borne pathogens or other contagious diseases. Staff cuts of nurses and

administrators could be directly correlated to the deterioration of patient care and reduction

service quality. Hospitals cannot function without nurses and labor unions can organize and go

on strike or slow-downs until they number of nurses needed to meet the demand of the work are

hired.

The evaluation of hospital mangers through the use of short-term financial goals involved

investors and employees (specifically the mangers). When performance goals are extremely

high and/or unrealistic this has the possibility to encourage unethical decision making in order

for the managers to keep their jobs. Managers should express their concerns if their goals are set

to high and try to get stockholders on their side. In a combined effort with stockholders the

board of directors could be pressured into changing their evaluation process so that the

environment for unethical decision making is reduced or eliminated.

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Upcoding of Medicare billing throughout the hospitals were common place and can be

resolved by the government, employees, tax payers, and public media. The government can use

their political power in order to make the DRGs groups less ambiguous, close any loop holes in

the billing process, and increase enforcement to catch violations. The public media can serve as

a catalyst in order to rally tax payers against this practice because it is their tax dollars that are

being unethically used in order to raise revenue for a company’s gain. Employees can make

ethical decisions and not follow the common practice of upcoding because they are also tax

payers whose dollars are being misused.

Ethical Theories and Principles

Ethical principles are fundamental guides or rules for behavior; they are useful living

guides to analysis and resolve ethical dilemmas. Mr. Scott seemed to use only the principle of

might-equals-right (justice is in the interest of the stronger), the organizational (be loyal to the

organization), and the end-means (the end justifies the means) ethics when he was making his

decisions for pure profit which directly led to each of the ethical issues identified. Here are some

of the principles that can be used to solve the ethical issues caused by his decisions.

The categorical imperative means to act only according to that maxim by which you can

at the same time will that it should become a universal law. The managers of Columbia/HCA

would simply ask themselves “Could this act be turned into a universal code of behavior?” This

would have eliminated ethical a lot of the ethical issues discussed. The only caveat to this

principle is that it is to the discretion of the individual moral compass. If the decision maker

justifies the act to himself then the effectiveness of the principle to prevent or correct ethical

issues is reduced.

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The disclosure rule tests an ethical decision by asking how you would feel explaining it

to a wider audience such as newspaper readers, television viewers, or your family. This is much

like the categorical imperative except that it is in the hands of the public to decide if something is

ethically acceptable or wrong though it is still just a mental exercise. This does not always give

full guidance for ethical dilemmas in situations where there are multiple alternative actions

which could pass the disclosure rule test.

The golden rule is defined as, do unto others what you would have them do unto you. A

person would just solve an ethical problem by placing themselves in the position of the other

party affected by the decision and try to decide on what action is fairer from that perspective.

Another question to ask is, “Would the mangers at Columbia/HCA be willing to change places

with a patient whose treatment is dependent on an understaffed hospital operating with

inadequate, lower quality instruments that are now being purchased due to their cost cutting

decision?” This principle would have eliminated the decision of giving ownership to the

physicians if they would have asked themselves would they rather be seen as a revenue source or

a patient in need.

The principle of equal freedom is a view that a person has the right to freedom of action

unless such action deprives another person of a proper freedom. In a capitalist market system

customers are have the freedom of choice and monopolies remove this freedom. The actions of

Columbia/HCA to buy out hospitals just to close them down and to expand into all aspects of the

healthcare industry so that patients will fall into their chain of facilities deprived people of their

proper freedom of choice. The use of this principle would have help the company and industry

by allowing healthy competition forces to stay in the market system which would have drove

hospitals into rising quality and reducing costs.

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The rights ethic defines that each person has protections and entitlements that others have

a duty to respect. Rights protect people against abuses and entitle them to important liberties.

Consumer rights were not taken into consideration in the case of Columbia/HCA because the

burdens which sprung up from the ethical issues were ultimately placed the patients to bear.

President John F. Kennedy said that consumers had basic rights and some of those rights were to

be offered fair prices and acceptable quality, to have safe and healthful products, and to receive

adequate service. Columbia/HCA reduced their operating costs but not their prices to

consumers; they also reduced their equipment quality which also reduced the adequacy of their

services.

The theory of justice says that each person should act fairly towards others in order to

maintain the bonds of community. If Columbia/HCA were to implement this principle then the

greatest change would be in the distribution of benefits and burdens, and compensation for

victims of injury. Great benefits of profitable decisions are given to the managers but the

burdened of the same decisions are given to the patient. During their reign, little compensation

was given to any medical mishap victim to help pay for damages incurred while being in their

care.

Plan of Action

I recommend that Columbia/HCA remove the ownership of hospitals by physicians due

to the conflict of interest it creates. This violates the theory of justice, the principle of equal

freedom, and the disclosure rule. The company should put in place the principle of the golden

role, the theory of justice, the rights ethic, and the categorical imperative. If the managers

needed medical attention they wouldn’t want to be treated as a source of revenue, go to a hospital

when there is no fair play, or be improperly admitted based on financial goals. The downfalls of

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this action are: less investors, less equity, and lower hospital admissions which correlates to

lower income.

Columbia/HCA should also detach from participating in so many different aspects of the

healthcare industry in order to reduce their monopoly power. This is in violation of the theory of

justice, the golden rule, and the principle of equal freedom. The principle of equal freedom, the

doctrine of the mean, along with the disclosure rule can be used to reduce the chances of it

materializing into a full monopoly. Competition is good for the consumer and industry because

it drives competitors to provide better services for lower prices. If they were to disclose their

market share to the public, the general public would not accept the formation of a monopoly.

The negatives of this action are that it allows for more competition, reduces their market power,

and sets up the potential for their revenue to go to their competitors.

The company should also purchase higher quality items and hire more staff. The

additional staff will reduce the workload for personnel who are overworked and reduce the

chances of employees making mistakes. The cost cutting violated the golden rule, the rights

ethic, and the disclosure rule. To prevent these types of decisions from happening again the

disclosure principle, the rights ethic, and the doctrine of the mean should be used. The general

public looks down upon getting the cheapest equipment at the expense of quality healthcare for

the end user and disclosing this information will help prevent it in the future. The correct

number of staff to high can be determined by preforming a marginal analysis of the extra

employee for the particular position which coincides with the doctrine of the mean. The higher

quality items will reduce the chances of equipment failure and will simultaneously raise the

quality of healthcare provided for the patient in which everyone has the right to quality

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healthcare. The negative of this action is that operating costs will rise which reduces the profit

margin for the hospitals unless they rise prices in order to recoup the additional costs.

The practice of upcoding should be expressively prohibited and condoned by all levels of

management throughout the firm. Not only is it illegal and unethical but it also violates the

disclosure rule, and the categorical imperative. Three key principles that can used to correct this

are the categorical imperative, the theory of justice, and the disclosure rule. Under the

categorical imperative actions like lying, stealing, and breaking promises are not acceptable by

society. Upcoding is inherently lying and stealing. If they were to disclosure this practice to the

newspapers, television, or their family it will be condoned as well. Under the theory of justice,

the practice of being fair to other hospitals and taxpayers are reinforced into the company. All

these principles may entice the company to team up with the Medicaid and suggest

improvements to the system. There is no negative when one follows the law and does the right

thing but financially, by not cheating, there will be a drop in their income.

The company should also stop basing the hospital manager’s performance on short-term

financial goals. This violates the rights ethic and the principle of equal freedom. In order to

avoid this in the future the use of the doctrine of the mean and the theory of justice should set in

place. The theory of justice de-emphasizes financial goals and adds qualitative data such as

service quality, customer satisfaction, and contribution to society. The doctrine of the mean

helps balance long-term and short-term financial growth of the firm and could prevent extremes

by numbing the impact it has on performance evaluations on the managers. The negative of this

action is that managers may be more interested in the qualitative aspects of their evaluation than

the financials which could have a negative impact on the profit margin due to an increase in cost.

Conclusion

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After discussing the key topics of the case which were to identify the ethical issues arisen

in the case, identify all the stakeholders in the case, explain which stakeholder should be

involved in solving the ethical issues, list the ethical theories and principles, and recommend a

plan of action, I believe that Mr. Scott’s market based strategies were not unethical but that they

were just unethically executed. In the end he was left relatively untouched by the ordeal but the

company he worked so hard to create was greatly punished. As a manager, Mr. Scott failed to

realize that his high/unrealistic short-term financial goals, aggressive cost cutting, high manager

turnover rate, and aggressive market based strategy created an environment that lead to all these

unethical issues.

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