Intolerable abuse: The unlikely persecution of Dennis McClatchey


Intellectual Fraud

Intelligent Design

Mega Fix

Ron Brown

Popes & Bankers

TWA Flight 800







by Jack Cashill

Courtesy of - September 2000


Indeed, to trace their progress in the local newspaper archives is to watch the American experience at its quiet best. Here is Dennis, now 56, working his way up the ladder at Baptist Medical Center. Here is Margaret teaching Drama at Shawnee Mission North High School. Here is Dennis catching on as an executive at Health Midwest when Baptist becomes part of its system - arranging mergers, opening surgery suites, expanding health care into the inner city. Here is Margaret shining in her own world - volunteering with the school band, winning national honors for her theater program, helping Dennis launch their two sons into adulthood. Here are the McClatcheys, married 33 years and proud new grandparents, cresting into a safe, secure, highly respected middle-age.

From all that one hears about the McClatcheys, and all one reads, it becomes that much harder to imagine Dennis in his new public role: as indicted criminal, as convicted felon, as culprit in what Kansas City Star editorialist Stephen Winn will call a "sordid tale" of "intolerable abuses."

How Dennis McClatchey fell from grace is, alas, the story of our times, a story more about America than about McClatchey, and one that needs to be told from the beginning.

The Great Society

A good place to start would be 1965. After an overwhelming victory in the 1964 election, Lyndon Johnson and his Democratic Congress narrowly passed into law the Social Security Amendments of 1965 and in so doing gave birth to the Medicare program. Unbeknownst to these lawmakers, they were about to strip the commercial logic from a huge slice of the health care industry, a slice that that would grow into the $200 billion a year Medicare enterprise.

Some background here is useful. Fifty years ago, American health care worked much the way dentistry and vision care still do today. Doctors and hospitals charged only what most of their customers could afford to pay. Customers scrutinized those prices and monitored the service. If dissatisfied with either price or service, the customer could go elsewhere. The unpaid costs of those who could not afford health care were absorbed by the city, the state, or the hospital, with most hospitals being charitable enterprises in fact and in spirit. The people who received that charity understood it to be charity and tended to appreciate it. This was a less prosperous time to be sure, and a less healthy people, but the progress in the past fifty years had been stunning.

For all its virtues - and its billions have surely produced much good - Medicare effectively removed the responsibility from the provider in setting costs and the consumer in approving them. (Imagine, for instance, what would happen to both buyers and sellers were government to pick up 80-90% of new car costs.) Medicare also began the transition of health care from commodity to "right." It was not the only culprit in the demise of free market health care - private third-party arrangements also disengage the consumer - but it was the dominant one.

After the launch of Medicare, health care bills for seniors were passed along to Washington. In the beginning at least, the only one who cared about the bills was Uncle Sam, and he didn't care much since it wasn't really his money and there was a whole lot of it. Worse, the program pumped so much unaccountable spending into the system that it distorted all other pricing.

As should have been expected, costs ballooned absurdly beyond projections. From 1965 to 1990 hospital costs increased 350% beyond the general rate of inflation; physician costs increased 250%. The Feds reacted by progressively tightening the screws. But they squeezed not so much the patients - too many votes at risk here, 39 million at last count - as the doctors and especially the hospitals.

By century's end, Medicare fees would only cover about 70% of the cost of providing care and services to the elderly. Ironically, one reason for the increasing costs was the pressure placed on physicians and hospitals to comply with the ever more onerous and threatening Medicare-driven cost controls.

Caught in the Rise

Faced with restricted payments and spiraling costs, the hospitals had to reorient themselves to a tough, competitive environment or perish. Dennis McClatchey witnessed this transition from his postings at Baptist Medical Center. In 1985, he was named its vice president of operations and COO, a great boost for a guy who started his health career in the hospital's video center. In that same year, Baptist Medical Center contracted with Doctors Robert and Ronald LaHue to help Baptist set up a clinic and treatment program for nursing home patients.

The LaHues were recognized authorities in this area of medicine - to say the least, not among the most glamorous in the profession. Physicians, in fact, have historically shied away from nursing home patients who, at this stage, are often difficult, disoriented, and quite likely to die.

The Baptist program provided a continuity of care for these patients that they had never known before. As part of the program, Baptist also opened a treatment center at the hospital called "The Adult Health Care Clinic," which provided the patients with both clinical services and transportation as well. Thanks to the clinic, nursing home patients no longer needed to be rushed to the more expensive ER for routine care. "It was a challenging program," says McClatchey wistfully, "a model we were proud of." Although the LaHues had entered into comparable arrangements with several other hospitals, no hospital brought the program to life the way Baptist did. Even the prosecutors agreed that the Baptist program was a "good idea," much needed and well executed. Indeed, it may have been the program's visibility that caused the prosecutors to single it out for legal action.

Still, the arrangement with the LaHues was not unusual. Hospitals have long depended on their doctors for referrals. In the 80's, with increasingly restricted Medicare payments, that dependency grew. To secure these referrals, execs stepped up the effort to create as attractive a hospital environment as they could, both for the patients and for the physicians. Did the Baptist execs hope that the LaHues would refer their patients to Baptist when they needed inpatient care? It would make no sense to hope otherwise.

"What should Baptist have told the LaHues?" asks McClatchey's attorney, Charlie German. "Thanks for helping us, but we don't want your patients."

What Baptist did not do, however, was reward the LaHues per referral or overbill Medicare for services rendered. If anything, the Clinic saved the Medicare program money.

All of this transpired before 1992, however, and so it doesn't much matter in the specific case of Dennis McClatchey. As a three-judge panel of the 10th Circuit agreed, it wasn't until 1993 that this otherwise solid citizen decided to turn criminal.

In Search of a Scapegoat

Here's how it happened. In November of 1992, the FBI showed up at Baptist. They expressed concern about the contract with the LaHues, specifically whether it violated what is known as Medicare's Anti-Kickback Act, a bill which prohibits the rewarding of doctors for Medicare referrals.

In a country of increasingly vague laws, the Anti-Kickback Act is among the vaguest. In a stroke it outlawed much of the traditional commerce of American health care. Every contractual arrangement with referring physicians was now potentially criminal. Scarier still, the Medicare program offered no review process to assess in advance the legitimacy of a given contract. Guess right: the exec gets promoted. Guess wrong: the exec goes to jail.

To be sure, Baptist execs were taken back by the FBI visit. A self-described "worrier," McClatchey had always been quick to avoid any proposal that smelled of impropriety. He and his fellow administrators cooperated fully with the FBI.

Still, to make sure all was legitimate, Baptist invited in their attorneys, both local and national, the best in this specialized field, to redraft the consulting arrangement with the LaHues. The attorneys did their work, and Dennis McClatchey signed off on the revised contract with an attorney by his side.

Here's what also happened in November of 1992. The Democrats took over the White House and held the Congress. From their perspective, Medicare was - and remains - the unsullied embodiment of liberal largesse and a still viable political wedge.

As the Republicans learned the hard way, It did not pay to even think of serious reform. In 1995, a $45 million ad campaign, financed at and beyond the borders of legality, hammered Newt Gingrich for his apocryphal threat to let Medicare "wither on the vine." That Gingrich was speaking not about Medicare at all but about the mechanics of its funding authority didn't matter. The ads worked.

At a press conference celebrating Medicare's 34th birthday last year Senate minority leader Tom Daschle repeated the Gingrich canard within 30 seconds of opening the ceremony. He lauded Medicare as being "one of the most efficient" programs government has ever created and ripped into the Republicans for not funding it at even higher levels. Indeed, so perilous is the political environment that now even conservative Republicans like John Ashcroft run ads to "keep the promise" of protecting Medicare.

Given its sacred place in Beltway hagiography, Medicare itself has virtually passed beyond criticism. From Washington's perspective, the fact that Medicare was bankrupting American health care and running an annual 13-15% rate of "erroneous" payment - as it still does, according to the Inspector General's office - was surely not the fault of the system, nor certainly of the voters/patients. By default, the blame had to fall on providers like Dennis McClatchey who, the prosecution alleged, was "derailed by greed." With greed undermining this otherwise model program, the ever-selective Janet Reno made the prosecution ofMedicare fraud and abuse cases her number two priority after drug interdiction.

Ambitious local prosecutors picked up on Reno's enthusiasm and went after the Baptist gang. Not content with a $17.2 million civil settlement, they sought criminal convictions against McClatchey, the LaHues, former Baptist CEO Dan Anderson, and the two local attorneys, Mark Thompson and Ruth Lehr, who had drafted the LaHue contracts. Curiously, the two attorneys were acquitted. Everyone else is staring at hard time.

What makes McClatchey's case particularly troubling is that in 1999 U.S. District Judge John Lungstrum had acquitted McClatchey. He stepped in after the jury had convicted McClatchey of one count of conspiracy and one count of violating the Anti-Kickback Act. In June of this year the 10th U.S. Circuit Court of Appeals reversed Lungstrum's decision, ruling that Lungstrum erred when he found no evidence of criminal intent.

One can understand the judges' ambivalence. The question of intent hangs on a single inferred phrase in the Anti-Kickback Act. One interpretation suggests that McClatchey should go to prison if any "one purpose" of the payment to the LaHues, even if not the defining one, was to induce referrals. The other argues that McClatchey is guilty only if the seeking of patient referrals was the "primary purpose" for the contract with the LaHues.

The question is so critical for the future of health care that five major organizations have filed a friend-of-the-court brief on behalf of the LaHues and Dan Anderson whose appeals are still pending. Among the "friends" are the influential American Hospital Association and the Missouri Hospital Association. The language of the brief is unusually blunt in its criticism of the "one purpose" interpretation. "To infer such congressional intent," states the brief, "would lead to the absurd result of criminalizing many legitimate hospital-physician relationships."

Not stated in the brief is the larger absurdity: namely that the federal courts are forced to evaluate referrals on either standard when in the real world, of course, businesses routinely set up and pay for referral mechanisms.

The Triumph of the Unreal

But the world of health care is no longer real. From Dennis McClatchey's perspective, it's not even close. Although he wakes up every morning and falls asleep every night thinking of nothing else, he still can scarcely believe what has happened to him. Were it not for the emotional support of his family and friends, and the financial and legal support of Health Midwest, he would have been utterly destroyed, not merely devastated as he is now. And he is still not sure why any of this happened.

His own descent into criminality is as confusing to him as it to the casual observer. Let's see, he helped set up a model program for the sickest of the sick; one that was carefully drafted by the best attorneys in the field to comply with an absurdly vague law; one that cost Medicare no more than it ought to have; one that profited McClatchey not a dime; one that did little in the way of revenue or glory for his highly respected, not-for-profit employer; one that is being defended vigorously by just about every thinking person in the health care field.

Still, this was all "bad," claimed the prosecutor, Tanya Treadway ("not available for comment"), because "the defendants got together and treated the patients like commodities." But if the truth be told, it was the Medicare program that insisted on the notion of paying "per head," of "capitizing" in healthcare-speak, of treating patients like mindless commodities and not like the independent, thinking customers they once used to be.

What is bad, intolerable really, is that Dennis McClatchey may well go to prison. At this point only the Supreme Court can save him. And if a person like Dennis McClatchey goes, anyone can




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