ABQjournal: Sun Investor Faces Texas-Size Troubles

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Sunday, September 5, 1999

Sun Investor Faces Texas-Size Troubles
His Nursing-Home Chain Has a History of Problems

  • Nursing Homes, Troubled Times

    By Thomas J. Cole
    Journal Investigative Reporter
    DENTON, Texas -- Peter "Woody" Kern is one of the biggest nursing-home operators in Texas, where he and his companies have a history of criminal, civil and regulatory troubles.
    He's also the No. 2 individual stockholder in Albuquerque-based Sun Healthcare Group, one of the nation's largest nursing-home chains.
    Documents filed with the U.S. Securities and Exchange Commission show Kern's 3.5 million shares is second only to the 7 million owned by Sun founder, chairman and chief executive Andrew Turner.
    "I threw a lot of eggs in that basket," Kern said in a lengthy interview in his office in Denton.
    And those eggs are in a precarious position. Sun has said it is considering bankruptcy reorganization -- a move Kern said could wipe out his $7 million investment in the company.
    He's counting on Congress and the Clinton administration to bail out Sun and other financially ailing nursing-home companies by pumping more money into Medicare.

    EXPENSIVE INCIDENTS

    Some judgments, settlements paid by Peter "Woody" Kern's Texas Health Enterprises:

    * A jury in 1998 ordered Texas Health to pay $28.3 million in damages to the daughter of a 78-year-old man. The man allegedly died from complications that resulted from malnutrition and improper feeding with a tube. He had been a resident of a home in Conroe. Texas Health said the man died because of a surgeon's mistake. The company decided not to appeal and settled the case. Kern said the settlement was $3 million.

    * A jury in 1997 assessed $10.7 million in damages against Texas Health in the death of an 80-year-old woman. The woman died after developing a gangrenous leg at a home in Pilot Point and having the leg amputated. Her family sued. Courts have since reduced the award to about $6.5 million, plus interest. The case remains on appeal.

    * Texas Health in 1998 agreed to pay $4.65 million to the family of a 64-year-old paralyzed woman. The woman was raped by an employee at a Midland home. The employee had a criminal record and had been fired for patient abuse 13 months earlier from an Odessa home also operated by Texas Health.

    * Texas Health was ordered to pay a $3.3 million judgment in 1998 to the parents of a mentally ill resident at a Texas City home. The resident wandered away from the home and died in the heat.

    * A court in Midland in 1998 ordered Texas Health to pay $2.75 million in damages. The case resulted from a sexual assault of a female resident.

    * Texas Health in 1996 paid $1.25 million to the widow of a 79-year-old man who was in a home in Grand Prairie. He was given barium for a test and the barium hardened in his colon. He died after a 36-hour bout of uncontrollable vomiting.

    * Texas Health conceded no wrongdoing but agreed to pay $850,000 in 1995 to the family of a 71-year-old woman. The woman suffered from dementia and wandered away from a home in Fort Worth. She was killed by a car.


    "To the extent that the feds have screwed up Medicare, they will in fact fix Medicare," Kern said. "They can't let everybody go out of business."
    Kern also has had some Texas-size problems elsewhere:
    * His nursing-home companies in Texas in early August filed for protection from creditors while they reorganize under U.S. bankruptcy laws. He said the companies' financial problems are due to inadequate Medicaid payments from the state of Texas, low occupancy levels and, to a lesser extent, Medicare reforms.
    * He is awaiting trial on a 1992 charge of misapplication of fiduciary property. He allegedly didn't refund money to nursing-home residents and their families. Kern has denied wrongdoing.
    * His nursing-home operations company, Texas Health Enterprises, has been indicted in the deaths of two residents. The company has repeatedly been accused of poor patient care and has paid millions of dollars in fines, settlements and judgments.
    * Kern agreed never to return to Massachusetts as a nursing-home operator after his homes there had difficulty meeting care rules.
    * In Ohio, he once testified against his father and a state auditor in a Medicaid-fraud scheme. His father went to prison, and Kern eventually bought the family nursing-home business.
    Kern has been the subject of unflattering news stories, including a page-one report in The Wall Street Journal. NBC's Dateline recently visited.
    "I really have not tried to screw anybody in my life," Kern said in the recent interview in his office. "I don't make any conscious effort to do that, whether it's patients, business relationships, whatever.
    "And to be characterized the way I constantly am troubles me because I don't think that's an accurate portrait."
    Regardless of how he is portrayed, Kern is a wealthy man thanks to the nursing-home industry.
    He is the majority owner of the Tampa Bay (Fla.) Storm, an Arena Football team, and the Asheville (N.C.) Tourists, a Class-A affiliate of baseball's Colorado Rockies.
    Kern also owns one of the largest residences in Texas, a ranch in north Texas and a million-dollar-plus vacation home in Gulf Shores, Ala. He drives a Mercedes-Benz but gave up a company airplane.
    "People say I live too ostentatious," Kern said. "You either have it or you don't."

    Taking a chance
    Sun Healthcare Group has reported nearly $1.5 billion in losses and eliminated more than 10,000 jobs in recent months. Its stock once traded for $20 per share.
    Sun's stock closed Friday at 38 cents a share in over-the-counter trading. That means Kern already has lost millions of dollars on paper.
    Kern decided to take a chance on Sun when stock in the company hit bargain-basement levels. He now owns about 6 percent of Sun's common stock.
    Kern has about 30 years of experience in the nursing-home business but doesn't expect Sun to ask him to join the board of directors.
    "Here in the state of Texas, I'm indicted," Kern said. "It doesn't look good" to be placed on the board.
    Sun and other large nursing-home companies with financial problems blame a cut in Medicare payments.
    Congress is expected this fall to consider legislation to boost the payments. Backers of the legislation include New Mexico's senators, Republican Pete Domenici and Democrat Jeff Bingaman.
    Kern argued against bankruptcy for Sun in a recent letter to Turner.
    "Sun could continue to manage and control costs and become in the very near future marginally profitable," Kern wrote. The company would become more profitable after the Medicare bailout, he said.
    Kern also noted in the interview that much of Sun's reported losses have been only paper losses.
    He said Turner told him in a meeting in June that if Sun filed for bankruptcy, Turner would receive an interest in the reorganized company.
    "Here's one guy that will probably do whatever it takes to survive and come out at the other end of the tunnel, even if there were a bankruptcy," Kern said.
    Kern said he hadn't received a response to his letter to Turner.
    A Sun spokeswoman said the company had no comment on Kern's investment in the company and his remarks on a possible bankruptcy.
    Kern notified the Securities and Exchange Commission in April that he had obtained the large stake in Sun.
    Sun officials said at that time that Kern would have no role in the company's operation.
    "We just believe that he's confident in our company," a Sun spokeswoman told The Dallas Morning News. "I'm not going to speculate on why."

    Spread too far
    The headquarters for Kern's nursing-home business is a converted supermarket in gritty downtown Denton.
    "I like the temples out there in Albuquerque," Kern said with a laugh.
    The remark is a reference to the corporate headquarters built by Sun and another nursing-home company, Horizon/CMS Healthcare. Horizon was acquired in 1997 by another company.
    Kern, 52, is dressed for the interview in chinos and a denim shirt. He is a bear of a man with blue eyes, ruddy cheeks and graying hair and beard.
    He wears an ArenaBowl ring and a gold necklace with a diamond-studded emblem of his football team.
    Kern is an affable man. He laughs a lot.
    He grew up in northeast Ohio. His father, a dentist, ran a few nursing homes.
    Kern said he graduated from Case Western Reserve University with a degree in biochemistry.
    He said he planned to attend medical school but joined the family nursing-home business full time when his father suffered a heart attack.
    He took over in 1978, about the time of his father's conviction and retirement.
    Kern expanded the business and said that by 1986 he had homes in Ohio, Connecticut, Florida, Oklahoma and Texas.
    He said he sold some of his homes in 1987 to Horizon, the former Albuquerque company, for $70 million. That same year, he moved to Texas. And he again expanded, buying homes in Michigan, Wisconsin, Massachusetts, California and New Mexico.
    There were troubles with care standards in Massachusetts and elsewhere.
    "We were spreading too far from the base," Kern said. "We didn't do a good job of it."
    He got rid of many of the homes.
    As of Jan. 1, according to Kern, his companies operated about 92 homes in Texas and eight homes in Michigan.
    Kern said his Texas Health Enterprises will still run about 60 nursing homes in Texas when it emerges from bankruptcy.
    His companies' revenues were in excess of $200 million annually, he has said.

    Pending lawsuits
    Quality of care has been an issue at several of Kern's homes in Texas.
    The state Department of Human Services and the U.S. Health Care Financing Administration, which set care standards, have assessed more than $381,000 in penalties against Kern's Texas Health Enterprises since Jan. 1, 1996, a government document shows.
    Another $3.1 million in possible penalties are pending.
    The Texas Attorney General's Office has filed about 20 lawsuits against Texas Health for allegedly violating care standards, according to the office.
    Texas Health agreed to pay $300,000 to settle one case, the office said. Arbitration in two other cases resulted in the company being assessed about $400,000.
    A couple of the lawsuits were withdrawn or dismissed, and one case resulted in Texas Health being ordered to pay only a small amount. Eleven lawsuits are pending.
    Kern's nursing homes have been sued dozens of times by residents or their families, and he estimated he and his insurers have paid about $10 million in settlements and judgments.
    Texas Health is under criminal indictment in the deaths of two nursing-home residents in Amarillo.
    Kern said his homes have been wrongly accused of some things and rightly accused of others. He said lawyers who sue nursing homes are out of control and that other nursing-home companies have also been hit with large jury awards.
    He said his homes provide care that is above average in the industry, and produced some data from state inspections that supported that argument.
    "This is humans dealing with humans. There are going to be mistakes made," he said. "There have been patients that have been injured."
    He added, "Those are unfortunate situations, but as a pattern I'll categorically deny that. It just isn't there."
    Kern said he expects the health-care professionals he hires to do their jobs and said he doesn't feel personally responsible when they err.
    "If it were a matter of intentionally understaffing, intentionally cutting food budgets and not paying for medical supplies ... then I would feel some personal responsibility.
    "Then I did something overt to make sure it (providing quality care) couldn't get done. ... That's where I think you could put a noose around my neck and say you son-of-a-bitch, you did that to enrich yourself. Never has happened in 30 years."

    Good and bad
    Jim Lehrman, associate commissioner in the Texas Department of Human Services, said Kern has some good homes, some average homes and some poor homes in terms of quality of care.
    Three of Kern's homes have been cited by the department as being among the state's best, Lehrman said.
    But, he said, studies of the state's inspection data show Kern's homes, when analyzed as a group, are mediocre to poor when compared with others in Texas.
    "Historically, it's been below normal," Lehrman said of Kern's chain.
    Paul Carmona, head of the attorney general's Elder Law and Public Health Division, said Texas Health Enterprises is "way out in front" in terms of being sued by the attorney general and of paying penalties and other money to the state.
    "It's impossible to ignore the history of what's gone on with this company," Carmona said. "They're definitely out of the ordinary."
    He objects to Kern's denying personal responsibility for what has occurred in his homes. "To me, it's personally unseemly," Carmona said.
    Brandon Boehme, a Fort Worth lawyer who said he has sued Kern's nursing-home business about 20 times on behalf of residents and their families, said Kern was correct when he said other nursing-home companies have been hit with bigger jury awards.
    But, Boehme added, "Nobody has been hit more often with large judgments."