When the rape of an incapacitated patient at an Arizona intermediate care facility (ICF) came to light, it exposed other systemic problems, including allegations of Medicaid fraud, and in the process raised doubts about the effectiveness of the board’s oversight, an expert said. Hacienda HealthCare’s then CEO eventually was convicted on fraud charges, its board stepped down and the ICF repaid the state $11 million.
“There were a multitude of failures here,” said Martin Biegelman, managing director and investigations practice leader at SunHawk Consulting LLC in Phoenix.
The case is one of a series of headline-grabbing corporate scandals, including the Theranos case,[1] that happened in part because boards apparently were missing in action, he said Oct. 18 at the Compliance & Ethics Institute sponsored by the Society of Corporate Compliance and Ethics. “A board that abdicates its oversight will miss misconduct, especially fraud, and fail to protect the organization’s shareholders, investors, employees and others from financial, reputational and litigation risk,” Biegelman noted. “Boards need to do a much better job of enhancing the corporate culture of the organization.”
The revelations of wrongdoing at Hacienda HealthCare in Phoenix came in the wake of the patient’s rape by an employed licensed practical nurse (LPN). The rape went undetected until the patient gave birth to a baby in December 2018, which led to DNA testing and the LPN’s conviction for sexual abuse, Biegelman said. “This horrific act exposed wrongdoing at the company and ... the board in being blind,” he contended. “What came out of this was the CEO of Hacienda had been at the facility for 28 years and for much of the time was the subject of complaint after complaint” of a hostile work environment, Biegelman said. “Rather than taking other strong action against the CEO, the board ordered counseling and training for the CEO and docked a small amount of pay,” he said, referring to newspaper reports.[2]
Biegelman noted that the president of the board said it didn’t fire the CEO earlier because board members had to weigh the fact that he did some good for families against employee complaints.[3] “My argument is, you had people coming forward about sexual harassment and bullying and that was a hard call for you? If after people come forward and nothing happens and there’s a fear of retaliation, people will stay silent,” Biegelman said. “What I like to call compliance nirvana is employees feeling safe and empowered,” not only about reporting alleged misconduct but when they raise questions before the company gets involved in a deal that may be problematic.
Board members allegedly had their own issues, Biegelman said. “They benefited financially from dealings they had with Hacienda.” For example, the board chairman “brokered health insurance for roughly 800 Hacienda employees through his private company for decades, reaping lucrative commissions on the contracts.”[4] Biegelman said there were also reports of children of board members hired at Hacienda.
“If board members benefit by having relationships with the organization that financially benefit them, it colors their decision-making,” Biegelman said. “That’s the definition of a conflict of interest.”
Alleged Misallocation of Funds Led to Settlement
But it was the Medicaid fraud investigation in connection with Hacienda HealthCare’s ICF that broke the fever. Ultimately, Hacienda HealthCare settled a civil case, paying $11 million over financial shenanigans with the state’s Medicaid agency, which is called the Arizona Health Care Cost Containment System, according to the Arizona Attorney General (AG).[5] From 2013 to 2018, the state contracted with Hacienda’s ICF for medical and behavioral health services provided to Medicaid members, although the state had other contracts with Hacienda. The state alleged Hacienda billed improperly, inflated reported expenses and misallocated direct and indirect costs in connection with the contract with its ICF. “Administrative salaries resulted in the largest misallocation of funds pursuant to the contract,” the AG said. Hacienda used money from the contract with its ICF to pay for a big chunk of costs at its other facilities.
During the term of the contract, Hacienda CEO William Timmons and CFO Joseph O’Malley gave financial data to the board of directors “about the entity’s performance but not about how costs were allocated between affiliated programs and entities,” the AG alleged. In January 2019, O’Malley allegedly admitted to the board that costs hadn’t been accurately allocated and that he and Timmons knew it. Timmons resigned that month for reasons unrelated to the AG’s probe and O’Malley quit two months later. The AG said that “a new administrative team took over Hacienda in March 2019.”
In connection with “an elaborate white-collar fraud scheme,” as the AG called it, Timmons and O’Malley were indicted and Timmons pled guilty in June 2021.[6] Almost exactly a year ago, Timmons was sentenced to three years of probation and ordered to pay $774,000 in restitution. There’s no word yet on O’Malley.
“There was no evidence the board members were involved other than in conflicts of interest, but it was a failure of oversight,” Biegelman said. He said board members should be asked certain questions to ensure they fulfill their duty of care and loyalty (see box).
It’s unclear whether there was a compliance program in place at the time problems were unfolding at Hacienda HealthCare, but it posted a compliance plan that was updated in 2020.[7] The person listed as the compliance officer no longer works there, RMC was told, and the person who replaced him did not return a phone call.
It’s challenging for compliance officers to work in an environment with pervasive problems. “Usually, compliance officers quit when the board and management aren’t listening,” but sometimes organizations turn things around, Biegelman said. He worked on one case where the compliance officer for a large global company had never left the country and had no staff. Biegelman recommended to the board that to protect the company, it had to go “from a paper compliance program to a real effective program per the Federal Sentencing Guidelines.” The board agreed and over time, it funded a compliance program that “became truly global in nature and was able to implement policies and procedures that made a significant difference in the organization.”
Contact Biegelman at martin.biegelman@sunhawkconsulting.com.