Health South: The Scrushy Way
It is a cliché that “crime does not pay.” Seemingly when one has the charisma to lead a multi-billion dollar corporation, and power to affect the well-being of thousands, perhaps crime does pay – in the short term. It’s easy to rationalize that what one does is not a crime “if it hurts no one,” or if one is doing amazing amounts of charity work. Richard M. Scrushy is a case in point – he seemed to have it all, the all-American success story, yet dishonesty, and unethical practices, when engaged in hurt everyone – for a long time. As this author has explored through this Business Ethics class, unethical behavior looks only at the short-term, what can one get now? The Carpenter taught, regarding those who did not follow wisdom, that they were “like unto a foolish man, which built his house upon the sand: and the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it” (Matthew 7:26-27, King James Version). The character of the individual who cheats, or takes advantage of others, gets bent out of shape and distorted, until it is no longer strong enough to provide a sure foundation, and without that they fall and they hurt themselves and those around them.

Impact on Stakeholders
In the house that Scrushy built, this author identifies several stakeholders impacted by the dishonesty, including: Richard Scrushy, his management team, his board of directors, his employees, the patients of HealthSouth, and the U.S. Government. This author will discuss the contributions and ramifications of the actions, or inactions of each.

Richard Scrushy
Richard Scrushy was a self-made man, a high school drop-out, who completed his GED, and then went on to get his degree in respiratory therapy from the University of Alabama at Birmingham (UAB) (Heylar, Cherry, & Neering, 2003). Between 1984 and 1997, Scrushy built HealthSouth from one facility and a million dollar investment by Citicorp Venture Capital to 2,000 facilities treating more than 120,000 patients each day, with earnings of $106 million (Solieri, Felo, & Hodowanitz, 2008).
During this time there were numerous allegations of ethical and financial deceptions. Solieri, Felo, & Hodowanitz (2008) documented that one internal auditor was fired for drawing attention to HealthSouth’s financial problems in 1989. Solieri et al. also described allegations by Medicare that HealthSouth was padding bills charged against Medicare for both in-patient and out-patient rehabilitation in 1991. In 1998 Medicare changed their payout structure to reduce exploitation and payments which negatively affected HealthSouth. Solieri et al. further identified that a number of lawsuits were filed against HealthSouth, by both Blue Cross Blue Shield of Alabama claiming “improperly billed Medicare for therapy by students, interns, athletic trainers, and other unlicensed aides” (p. 318), and by Medicare alleging fraud by “billing for services it never provided, delivering poor care, treating patients without a formal plan of care, and using unlicensed therapists” (p. 318). Finally, the U.S. Securities and Exchange Commission (SEC) filed suit against Scrushy and HealthSouth alleging the company had falsified at least $2.7 billion worth of profit between 1996 and 2002 (p. 320). The company settled.
Richard Scrushy, CEO and Chairman of the Board for HealthSouth from its creation until these final charges, was definitely the man in charge. He set the “tone at the top” (Beasley, Carcello, & Hermanson, 1999, p. 12) which evinced enough signs of corruption that an deeper investigation into the company should have been made long before the collapse. Several signs of Scrushy’s ethical poverty were his treatment of other people, the lax attitude of management towards internal controls, his lavish lifestyle, and the sense of entitlement he demonstrated.
Treatment of others. By all accounts Richard Scrushy lead through controlling others “by, among other things, threats, intimidation, electronic and telephonic surveillance, and reading their emails” (Mokhiber, 2003, p. 8). He had an autocratic, and coercive leadership style, believing that if you “shine a light on someone – it’s funny how numbers improve” (Jennings, 2003a, p. 50), engaging in weekly “beatings” to discuss “the numbers”, Scrushy generally “ruled by top-down fear, threaten[ing] critics with reprisals, and [paying] his loyal subordinates well” (p. 50).
So what does Scrushy’s treatment of others have to do with his character, and subsequent downfall? Howell and Avolio (1992) described the consequences to organizations and to followers of both ethical and unethical leaders. They demonstrated that unethical leaders tend to “pursu[e] their own personal vision” (p. 44), and “exercise power in dominant and authoritarian ways to serve their [own] self-interests, to manipulate others for their own purposes, and to win at all costs” (p. 45). Even in the imparting of corporate vision, unethical charismatic leaders “communicate goals that promote their own personal agenda often to the disadvantage of others” (p. 46) and are “one-way communicators, close-minded to input and suggestions from others” (p. 46), and finally they follow standards if they satisfy their immediate self-interests. They are adept at managing an impression that what they are doing conforms to what others consider “the right thing to do.” By applying their enormous skills of communication, they can manipulate others to support their personal agenda. (p. 49)
Howell and Avolio (1992) further detail what happens to the followers of such leaders indicating that unethical charismatic’s tend to “attract and gravitate towards loyal and uncritical followers . . . [who] learn to offer the leader information that he or she wants to hear, whether that information is correct or not” (p. 47) and these followers “easily become dependent on the leader who provides a clear action plan to pursue . . . The leaders authority over them seems boundless” (p. 50). Ultimately, unethical charismatic leaders select or produce obedient, dependent, and compliant followers. They undermine followers’ motivation and ability to challenge existing views, to engage in self-development, and to develop independent perspectives. Ultimately, followers’ self-worth becomes inextricably linked to supporting the achievement of the leader’s vision. If the leader deviates into unethical means for achieving his or her vision, followers are unlikely to question the leader’s action. Since the leader is the moral standard bearer, followers can rationalize even the most destructive actions and behaviors. (p. 49-50)
This seems to be what happened in the case of HealthSouth. This author will discuss the employees and their role in the collapse in a following section, but it was Scrushy’s treatment of those employees, that set up the culture that allowed the subsequent fall to be so large.
Lax attitude toward internal controls. This topic will be further developed in the section on HealthSouth’s Board of Directors below. It will be apparent from that discussion that there were no controls placed on executives or directors to prevent conflicts of interest, or to encourage the reporting of unethical and illegal practices. Holmes, Langford, Welch, & Welch (2002) reported that, lax attitudes by management may contribute to a lack of employee conscientiousness and therefore to an environment which allows or perhaps even encourages fraudulent activity, while it discourages the reporting of such activity. (p. 86)
The wholesale fraud engaged in by HealthSouth indicates that this is true, and Scrushy embodied the tone at the top.
Lavish Lifestyle. Richard Scrushy lived a lavish lifestyle with many perks. Jennings (2009) reports that his “personal assets included a mansion in Birmingham, a $3 million 14,000-square-feet lakefront home in Lake Martin, Alabama; a ninety-two-foot yacht; and thirty-four cars, including two Rolls-Royces and one Lamborghini,” while also having access to the 11 corporate jets that he used to “transport his own rock band” (p. 371).
Jennings (2004b) identified common red flags that would indicate to corporate counsel that an investigation into the accounting of the firm might be in order. She indicated that in HealthSouth’s case legal counsel “fits the inaction mold” (p. 45), and “like executives at WorldCom, Enron, and Tyco, executives at HealthSouth, particularly Scrushy, lived lavish lives” (p. 46). She concludes that “the presence of many elaborate perks is a red flag all can see” (p. 46). It is these perks that, according to Neeley & Boyd (2010) “encourage[s] executives to take excessive risk with other people’s money” (p. 548).
Sense of entitlement. Jennings (2004a) identified that many corporate cultures are less concerned about their fraud because of their philanthropic endeavors.These good works seem to blind them to their culpability and cause them to both “overestimate their ability and underestimate the risk of being found out” (p. 17). This sense of entitlement constitutes two of the factors that Jennings identifies as “Wild West behaviors” (p. 13) that are common to organizations that ethically collapse; A “culture of innovation like no other” and a “culture of social responsibility” (p. 17). She notes that “the attitude develops slowly as the other factors of iconic status and high levels of success consume [the] individual right up to a feeling of invincibility” (p. 17). This is amply demonstrated in the behavior of Richard Scrushy, who despite all of the evidence arrayed against him continues to proclaim his innocence of any wrong doing.

HealthSouth’s Management Team
The scope of the fraud at HealthSouth could not have been realized without the assistance and cooperation of many others. “Fifteen of HealthSouth’s executives entered guilty pleas to various federal charges” (Jennings, 2009, p. 374) and agreed to testify against Scrushy in order to mitigate their own sentences. The management team seems to have been characterized by two main similarities; character flaws and lax management practices.
Character flaws. A large contributor to these character flaws was that Scrushy seemed to attract and promote individuals that were highly motivated for upward mobility, and were willing to play the game. Jennings (2009) identified that “HealthSouth had a young officer team. . . . Mr. Scrushy [preferred to] hire what he called ‘advance-them-up-from-nowhere Alabamians’ (Helyar, 2009, p. 76)” (p. 368). This is one of the common traits of ethical organizational collapse identified by Jennings (2003a) in her report regarding Adelphia Communications Corp., Tyco International Ltd., Global Crossing, WorldCom Inc., FINOVA Group Inc., Enron Corp., and HealthSouth Corp.
Jennings (2005) noted that “everyone turns on everyone else in a corporate scandal in order to save themselves,” (p. 44) indicating a global character flaw of frauds. Holmes, Langford, Welch, and Welch (2002) showed that “unethical charismatic leaders have dependent and compliant followers, who learn to rationalize their immoral behavior . . . convinc[ing] followers that immoral behavior is justified” (p. 87). According to developmental psychologists the first level of moral reasoning is called “Pre-conventional” and is characterized by “uncritical obedience to rules set by an external authority who controls rewards and punishment” (Kohlberg, 1994, as cited in Holmes, et al.), which is convincingly illustrated by the management team of Scrushy. Holmes et al. noted that this level of moral reasoning “contains no restraint on unbridled egotism, on the one hand; and, on the other, no basis for independently assessing the morality of authoritative pronouncements” (p. 47). The management team at HealthSouth told Scrushy what he wanted to hear, and did what needed to be done to meet his approval, and get “the numbers,” and Scrushy “obtained large compensation packages for co-conspirators and offered them other incentives to keep them from discussing the fraudulent scheme” (Mokhiber, 2003, p. 8).
Lax management practices. In the Scrushy management team everyone knew on which side their bread was buttered, and knew the consequences of crossing Scrushy. This intimidation fueled what Jennings (2004a) identified in factors of organizational ethical collapse caused management to be lax in their responsibilities for ethical governance. Jennings notes, “So long as human beings run organizations, . . . and those organizations have goals and tasks, there will be pressures and those pressures produce ethical lapses” (p. 12). This seems to be because as people “struggle to meet the goal [it] impair[s] their decision-making abilities” (p. 12). It is this pressure to maintain the stellar numbers regarding performance that is the most critical factor in organizational ethical collapse. This is also borne out in the study by Holmes et al. (2002), that “lax management attitudes, particularly toward internal controls, have frequently been linked to fraud and its detection” (p. 85), and that “when top management displays ‘willful ignorance, [it] sends a powerful message that it will tolerate [wrongdoing]’” (p. 86). This was the case at HealthSouth to the tune of over $2.5 billion.

HealthSouth’s Board of Directors
One of the main purposes of the Sarbanes-Oxley Act, and of the creation of codes of governance overall, is to improve “the quality of companies’ board governance” (Enrione, Mazza, & Zerboni, 2006, p. 963). The board at HealthSouth had abrogated their governance of the company and almost universally were engaged in egregious conflicts of interest. One board member stated outright that they didn’t “know a lot about what [was] occurring at the company” (Lublin, & Carrns, 2003, para. 1).
It is clear that any lack of knowledge among directors about corporate malfeasance [at HealthSouth] may be due, at least in part, to poor governance procedures. That state of affairs was fostered by various independent directors' lucrative links with HealthSouth or company founder Richard M. Scrushy. (para. 2)
An expert in corporate governance said, “There has been so much sleeping on the job at the HealthSouth board that it could rise to gross negligence” (para. 6). The lack of external supervision by the board of HealthSouth, and the large number of conflicts of interest between board members and the company, or Scrushy, are two more factors indicating a company is well on the road to ethical collapse according to Jennings (2003a, 2003b, 2004a, 2004b). She identifies that “such conflicts not only cloud independent judgment, they create an atmosphere in which ethical standards slide because of the failure to draw bright lines that require allegiance to the citizens served” (p. 16-17). The group that could, and should have balanced the larger-than-life CEO and ensured ethical governance at HealthSouth provided no such oversight or restraint.

HealthSouth Employees
Perhaps most unnerving about the HealthSouth ethical collapse is not the greed of the CEO, or of the board, or of the senior management, but of the complicity of large numbers of employees. This led Rossbacher (2006) to conclude,
The business of HealthSouth certainly seems to have been fraud, not health care. . . . Its employees went on for years implementing the company’s criminal scheme. No one blew the whistle. No one quit. Apparently everyone slept at night. Yet the fraud was overt and the criminality obvious (p. 203).
Jennings (2004b) noted that the “atmosphere itself at the company was apparently a horrific one for honest and candor” (p. 45), and under such conditions the research of Holmes et al. (2002) states that if employees feel that they have no ability to exit the situation “these members weigh possible consequences of actions, given their circumstances, and adjust their behavior accordingly” (p. 87).
The leadership atmosphere at HealthSouth was authoritarian and coercive, which creates a culture of fear. Couple this scenario with the fact that according to Milgram, a substantial proportion of people do what they are told to do . . . irrespective of the content of that act and without limitations of conscience so long as they perceive that the command comes from a legitimate authority (as cited in Jennings, 2009, p. 544), it is little wonder, but disturbing, that many employees did what they were told to do, and kept quiet about it.

HealthSouth’s Patients
Unmentioned in all of the articles of the fraud in HealthSouth were the actual patients. The purpose of the corporation is to provide inpatient and outpatient rehabilitative care. It seems that Scrushy during his tenure at the top forgot the purpose of his “numbers” was the actual treatment of individual patients, and several allegations made by Medicare over the years supported that the purpose of the business may not have been to hold the welfare of its patients in the highest regard. In the scandal that broke, the financial chicanery of Scrushy and crew were widely touted, but the focus on patient care seemed lost in the scuffle. HealthSouth did not have to ultimately file Chapter 11, and was relisted on the New York Stock Exchange by mid 2006, marking its recovery from the scandal. This author is reminded that the ethical purpose of business may be to “increase its profits,” but that statement comes with a caveat – that the business engage in “open and free competition without deception or fraud” (Friedman, 1970, para. 33).

United States Government
HealthSouth bought its way out of much of the consequences of its fraud. This hocus pocus came as a result of a principle called deferred prosecution. What is deferred prosecution?
It is a criminal prosecution where a corporation guilty of committing a crime is not convicted of that crime provided it enters into an agreement with the prosecutors to do a variety of things, typically pay a fine, contribute to civil recoveries, cooperate with the prosecutors in further prosecutions, and reform its operations through specific reforms, personnel changes and, upon occasion, appointment of a monitor (Rossbacher, 2006, p. 205).
As shown above, at HealthSouth “not just a few top executives but large numbers of ‘ordinary’ employees” were involved in the fraud, with “teams of employees falsifying records” (p. 203). Yet neither the corporation, nor the employees were punished. The government went after the top leadership, and failed miserably.
In the initial Birmingham trial Scrushy was charged with 36 of an original 85 counts but was acquitted of all charges after a jury trial (Jennings, 2009, p. 375). Following the first trial, Scrushy was indicted on 30 counts of money laundering, extortion, racketeering, bribery and obstruction of justice, and was convicted to serve almost 7 years (Whitmire, 2006). Scrushy faced one more trial, a civil trial brought by the shareholders of HealthSouth, seeking damages. The judge found for the plaintiff, ruling that Scrushy was responsible for HealthSouth’s fraud, and awarded the defendants $2.87 billion (Hubard, 2009; Baurlein, 2009).

Outcome and Fairness of Punishment
In the end crime did not pay for Richard M. Scrushy. For over 20 years, however, his loose ethics cost taxpayers, patients, employees, and management. The cost to taxpayers came in the form of Medicare fraud that was never truly recovered despite the “restitution” made by the company. The cost to patients came in the form of less than stellar care. Many patients were treated by those who may not have had the credentials, or training to perform the services that were performed, and billed for. The cost to patients also came in the form of an emphasis on the financial by HealthSouth and its management, rather than on the welfare of the individual patient – on quantity, rather than quality. The cost to employees came in the form of a harsh working environment, where each individual was placed in a situation to choose losing their job, and earning the ire of management, or of buckling under, and joining with the conspiracy. The cost to the employees became a continuous conflict between earning a living, and loss of integrity and character. Finally, management had their cost as well. Not only did they continuously face the ethical dilemmas of the employees, and the more direct stress of closer contact with Scrushy, but there was “a high level of turnover in the executive team, particularly among those executives age fifty and older” (Jennings, 2009, p. 369).
In the end, Scrushy and many on his team went to jail. Scrushy can never be an officer or director in a public corporation again. Scrushy lost his freedom and his assets because of his actions, and his autocratic leadership style, and his lack of honesty and integrity. Does this constitute fairness of punishment, and a proper outcome? This author believes the outcome would have been better for all involved, if the first attempt to cross the line had been met with resistance, and the second, and the third, until the lesson was learned, that “loose” morals and ethics would not be tolerated. Then, and only then, everyone within the scope of this fiasco would have truly had a good outcome.

Conclusion
Crime does pay in the short term. Unethical decisions may not be discovered for some period of time – but, ultimately they will be discovered, and the individual who made the decisions will be made to pay. Richard Scrushy bilked billions out of unsuspecting government agencies, patients, and insurance companies. He lived large. He created a culture of corruption and lax ethical implementation, and for a time he seemed to have it all. Richard Scrushy is paying for some of his crimes, as he should. But what of the countless hundreds, and perhaps thousands that he negatively impacted, stealing from them some hope, character, money, or other valuables? Dishonesty and unethical practices, when engaged in hurt everyone – for a long time. The character of the individual who cheats, or takes advantage of others, becomes more and more malleable and distorted - and lacking a strong foundation, they fall and hurt themselves and those around them.
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