READERS PLEASE NOTE:
Shortly after publication of this article, Netcare's attorneys, Webber Wentzel, wrote to demand that we remove it from our website. They claimed it is defamatory of their client and that it contains falsehoods which Netcare had not been given the opportunity to repudiate. We immediately offered to publish any corrections of fact or alternative views they wished to submit, on our website and in print, as soon as we received them. Weeks later, we have still heard nothing further from them.
Our offer stands. How long will they take to respond? How long is a piece of string? Perhaps it is worth noting that they were offered the opportunity to respond by their accuser in November last year, and again in March this year when he finally forwarded his documents to the US authorities. Netcare and/or their attorneys have still not responded to those offers either. - Ed
Listed healthcare group Netcare is not known for its philanthropy; rather more for its obsession with the bottom line. So it was a surprise to many when South Africa’s largest hospital group (54 private hospitals, 73 acute-care private hospitals and 91 medical centres) seemingly discovered a conscience and started a free HIV-treatment programme for the indigent.
|Netcare's Richard Friedland|
US government funding for the Netcare programme – a total of $18.7 million (R128m) in annual grants over five years – was provided by the President’s Emergency Plan for Aids Relief (Pepfar), launched by President George Bush in 2003 in response to the HIV and Aids pandemic. (Altogether, by 2010 South Africa - government agencies and NGOs - had received approximately $6.2bn (R42bn) through Pepfar.) But five years on, and amidst extreme acrimony, Netcare’s programme ground to an abrupt (unreported) halt.
Today a legal battle is raging between the group and the senior manager it appointed to manage the US donor money. After nearly 12 years with Netcare, 44-year-old James Gregory is out of a job as he prepares his charge that Netcare misappropriated more than R27m of Pepfar’s grant.
This latest anything-for-profit claim comes just eight months after Netcare admitted to participating in an illegal organ-trafficking scheme, in which poor Brazilians and Romanians were paid $6,000 (R41,000) or less each for a kidney to be transplanted to wealthy Israelis. Approximately 250 of these illegal operations were performed in Netcare hospitals between 2001 and 2003, generating an estimated R50 million in fees for the group. A much-criticised plea bargain concluded earlier this year allowed criminal charges against the parent company and group chief executive Richard Friedland to be unconditionally withdrawn.
The latest scandal was born back in 2004, when accountant James Gregory was special projects manager for Medicross Healthcare, Netcare’s primary care division. He reported to Medicross CEO Dr Elbert Steyn, and one of the projects Steyn gave him was to assist in preparing a proposal to Pepfar to supply a confidential HIV-screening and treatment facility for government employees who didn’t want to declare their HIV status to their employer.
The proposal was duly submitted through a moribund wholly-owned Netcare subsidiary, HIVCare Inter-national (Pty) Ltd, for a scheme that was to operate only in the Free State. Why only the Free State? The superintendent-general of the Free State’s department of health, Dr Victor Lithakanyane, had given the project his enthusiastic support. (Just before the US funding came through, Lithakanyane was rewarded with an executive directorship at Netcare, where he is now responsible for group operations.)
HIVCare was pitched as a public- private partnership between Netcare, the Free State health department and Pepfar, with the US’s Centre for Disease Control office in Pretoria acting as managing agent. The first year’s Pepfar grant of $1.3m (R8.9m) ran from 1 June 2005, and the medical staff at Medicross’s newly-refurbished medical centre in Bloemfontein stood by to receive the province’s reclusive HIV-struck government employees.
But the take-up was disappointingly low. So James Gregory had the idea of switching the patient base to poverty-stricken indigent HIV victims. This was before the national strategic treatment plan came into operation and the Free State Department of Health had long waiting lists of people wanting treatment.
The 30-plus health department clinics around Bloemfontein began to refer patients on their waiting lists to the Medicross medical centre in Bloemfontein’s College Square. As word spread, a trickle became a flood. But after several months, Medicross’s mainly Afrikaans, conservative white patient base complained about the “scruffy and smelly” indigent hordes packing their marble-clad waiting room. So HIVCare was evicted, to take more down-market rented quarters next to the town’s taxi rank. Medicross doctors attended on a rota system, although there was a further hiccup when patients complained that the (white) doctors literally refused to touch them – so the programme hired a black doctor.
When Netcare’s grand philanthropic gesture began, the group was headed by its co-founder Dr Jack Shevel, whose view – shared by Elbert Steyn – was that although it might not make any money, the HIVCare project would do some good for the community and would be good publicity for Netcare. However, in September 2005 Richard Friedland, who had been opening up Netcare’s presence in the UK, took over as group chief executive.
“All of a sudden the focus was changed,” recalls James Gregory, who was on a salary of R700,000 a year. “There was a whole pile of changes. Steyn and Friedland didn’t see eye to eye. Friedland was only interested in money: in making the Netcare group more profitable.
“Once they decided on a profit margin, I was instructed to start marking things up. The instruction was that we, HIVCare, had to show a profit.
“Initially the services we were providing to the donor programme had been budgeted at cost. Now we had to mark up those services. The order came from Jacques du Plessis, CEO of the Medicross primary care division. Du Plessis reported directly to Friedland.”
This presented a major problem for Gregory, who was well aware of the US government’s Title 45 Code of Federal Regulation, part 74.81. Headed “Prohibition against profit”, it says: “No funds may be paid as profit to any recipient even if the recipient is a commercial organisation.”
In fact Pepfar requires a minimum of 5% spend by successful grant applicants. In other words, if they give R1m, the recipient must put in R50,000. One of the factors that led Pepfar to approve HIVCare’s application was Netcare’s pledge to put in not 5% but 30%. “Good cost-sharing,” commented the Centre for Disease Control, recommending approval of the application.
“In fact Netcare put in nothing,” says Gregory. “They said its Netcare 911 would be providing millions of rands’ worth of free patient transfers in support of the programme, and that Netcare hospitals would assist with other services, including hospitalisations. However, Netcare 911 did nothing in support of the programme and the local Netcare hospital refused to accept patients because they were asked to provide free care initially. It accepted zero patients during the entire five years of the programme. All patients were sent to state facilities.”
Anti-retroviral drugs that were handed out free by HIVCare to its indigent patients were supplied by Medicross’s Pharmacross, who from the beginning had been notching up a profit for Netcare by billing HIVCare at a 20% premium.
“That profit-gain to the pharmacy, for the five years that the programme ran, pretty well kept Medicross in Bloemfontein alive,” says Gregory.
Quite early on Medicross acquired Prime Cure, a group that operated clinics in townships across the country. The Pepfar funds continued flowing to HIVCare, but the programme, which had already shifted from Netcare to Medicross, now fell under Prime Cure. Because all the financials were consolidated, however, the profits continued to end up with Netcare. And the programme was going well. By February 2009, 4,526 people had been provided with HIV-related palliative care; 7,535 had been tested; 3,888 were receiving ARVs.
However, Pepfar’s auditors, Price-WaterhouseCoopers, picked up that HIVCare was showing a profit, when it shouldn’t; so a new accounting system was proposed: the number of patients every month would be multiplied by a theoretical cost of treatment, including drugs, nursing time, cost of case management – plus an amount for indirect costs such as head office overheads. James Gregory says that Prime Cure boss Dr Johan Pretorius then ordered the theoretical cost total to be marked up by 40%. This was billed to HIVCare and paid from Pepfar funds each month.
Says Gregory: “Because the provision was well in excess of patient requirements, the sum accumulated in the books.”
There was no separate set of accounts for the donor programme, whose business was consolidated with the loss-making Netcare travel clinics and Prime Cure’s occupational health business. “It became evident why,” says Gregory. “The excess profits, the provision that they were writing back from HIVCare, covered the losses of the other two business units.
“Because they’d included the indirect costs and then marked it up, it was in essence a double-dipping exercise. This is outside of the money they were making on the drugs. Of the money supposed to be going towards treatment of indigent HIV patients, 40% was ending up in the pockets of Netcare.”
Pretorius was replaced as MD of the primary care division by Dr Charmaine Pailman and an order went out that Gregory was to make a quarterly presentation to the Netcare main board on the profitability of the donor programme and its value to the group. There were only two of these reviews, but Gregory says that Netcare CEO Friedland was present at both. Gregory recalls: “One of the directors made a rough count and said: “Ah, 80% of our profit from HIVCare is coming from the donor fund!”
However, the auditors remained concerned and Gregory says that by 2010 it became apparent the group would have to repay misappropriated money to the donor fund.
“Pailman got quite frantic and wanted to allocate part of the expenses of the rest of Prime Cure against the donor fund. If they put more expenses against the provision, there would be less they would have to repay. The amount repayable at that stage for the 2008 year was R9m.
“I was called to two meetings with Pailman. I told her: ‘This is unethical and it’s probably going to be fraudulent’. She said: ‘No, we must continue. We’ll find a way’.
“At a third meeting with Pailman, her financial director David de Villiers and the financial manager of Prime Cure [Renee van Vuuren] I was instructed to prepare a schedule of all the expenses for the Prime Cure group that could possibly be allocated against the donor fund. I said to Pailman that I was not prepared to lie to the auditors.”
On 9 February last year De Villiers emailed Gregory: “James – can we wind down this project in three months if we have to without affecting patients’ lives? Where can they be transferred to and can we facilitate the transfer of the Pepfar funding to another entity if we decide we have no appetite for a no-profit organisation?”
In April last year Gregory was called to Netcare head office, ostensibly to discuss a new service contract between HIVCare and Netcare. He was ushered into the boardroom by HR general manager Anita Tyldesley. Pailman joined them and Gregory was given a notice of suspension for alleged gross negligence in managing the donor programme. He was relieved of his laptop and access card and escorted from the building.
The chairman of the internal investigation was Netcare group HR director Peter Warrener. Before his 22 June 2010 disciplinary hearing, Gregory wrote to Warrener: “The allegations are part of a programme of obstruction and victimisation against me and have been made in an attempt to intimidate me to leave the company prior to the finalisation of a certain audit.”
Warrener refused permission for Gregory to be legally represented at the hearing, so Gregory declined to attend and was unable to testify in his defence. The verdict was guilty of negligence in his running of the Pepfar programme which “specifically made no provision for any profit to be made by the company”. The lack of a proper system “led to the inaccurate accounting of revenue and subsequent identification of ‘profit’ which should not have existed and which was not able to be realised.”
Gregory was found guilty of four other offences, including negligence by not making regular drawing of donor funds and gross negligence in failing to submit a fresh $15.3m (R105m) tender proposal to Pepfar before the due date of 15 March last year.
He tells Noseweek: “As a result of the trumped-up nature of the charges I am presently engaged in litigation with Netcare, after making a protected disclosure under the whistleblowers provision of the Labour Relations Act.”
At the end of May this year Netcare offered Gregory four months’ salary and his already vested share options in settlement. Gregory refused the offer; he wants two years’ salary (R1.4m) plus his share options (valued at R800,000).
Last month Gregory wrote to Pepfar’s managing agent, the Centre for Disease Control. His letter, headed: “Re fraudulent activity on Cooperative Agreement 024562/05 – Prime Cure” says: “The net result of these activities has been the deliberate and intentional misappropriation of funds from the USG [US Government] to Netcare by senior staff even after they have been informed that the nature of the transactions was fraudulent. My own role in this has been to identify the proposed allocations as fraudulent, to advise the primary care MD [Charmaine Pailman] of that fact and further to refuse to cooperate with the senior managers of the company in the misleading of the auditors.”
The CCMA has been unable to resolve the Netcare/James Gregory wrangle, so the matter will now be aired in the Labour Court.
■ In Netcare’s interim financial results for the six months to March 31 this year, group revenue from local operations grew 7.6% to R6.5bn. Chief executive Friedland reported that following a strategic review the controversial primary care division had returned to profitability, from a R5m loss to an operating profit of R8m.
■ Last year Friedland, 50, drew a salary of R5.5m – plus a bonus of R3.8m. He holds 8.4m shares in the group and options over another 3.4m at prices ranging from 436c to 838c.
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