LINKS CORPORATE MEDICINE WEB SITE Disclaimer The many extracts on these pages are from copyright material. They are owned by the reference given or its owner. They are reproduced here for educational purposes and to stimulate public debate about the provision of health and aged care. I consider this to be "fair use" in the common interest. They should not be reproduced for commercial purposes. The material is selective and I have not included denials and explanations. I am not claiming that all of the allegations are true. The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made. Links to Site Maps Central Initial USA Australian International Corporate Practices (to print) Path to this page Home Australia Austr Hosp Companies Mayne access page Other pages Entry to Privatisation Privatisation Background Australian states Gen. Pract. Corporatisation General Practice/Pathology:- Sonic&Co . . Foundation Lifecare . . . Endeavour Primary . . Revesco&related Hospital Companies Affinity Health Alpha Healthcare Austr. Hosp. Care Benchmark Healthscope Hosps of Austr (HOA) Insurer hospitals James Hardie & HCC McGoldrick's comps Markalinga & AME Mayne Health & HCoA Moran Healthcare Nova Health Ramsay Hlth Care US grps HCA & AMI Small Hosp groups Mayne Pages Mayne access page 1886-1994 - - - refs Collusion - - - refs 1995-2000 - - - refs Clippings 1998 Conflicts&Scan scam                         refs Privatisations 2000-2001 - - - refs Smedley - - refs Health Story 2002-2003 Purchasers Affinity Hlth & Citigroup 2004-2005 Break up Mayne Diagnostics Restrict Mayne Content An analysis of Smedley, the corporate Mr. Fixit, and his business practices - what he brought to Mayne when he came from Colonial to replace Dalziel in 2000. Australian section      Peter Smedley The new Doctor on the Block

One thing is for sure though: with Dr Pacman wielding the scalpel at Mayne Nickless, the status quo is not an option for the health industry. Smedley Gets Ready To Operate, Australian Financial Review 1 July 2000

Source of information:- The description given of Smedley and of his previous conduct is based on newspaper reports in the Australian press. I have never met Smedley. I am particularly indebted to an article by lvor Ries "Peter Smedley: Health Care's Rude Shock" published in the Australian Financial Review on 22 June 2001. This is based on extensive interviews with Colonial staff after Smedley left. It is congruent with many similar reports over the preceding years. I urge readers to obtain and read Ries full article. Someone who knew Smedley drew it to my attention as capturing the essence of the man. This page and the linked references bring this material together and relate it to what has happened when similar policies and market pressures have been introduced into health care elsewhere and where aggressive market practices have been applied. I am not claiming or alleging that the same things will happen in health or aged care here but the possibilities and risks must be examined.

While I do not admire this sort of person and consider a more civilised and mature approach to business as desirable my criticisms are of the man as a provider of health care. His behaviour selling oil may be acceptable, even desirable in some eyes. His policies and practices in selling banking and insurance products has alienated citizens who would prefer a more personalised service. I do not believe that the sort of person described in the press reports should be given responsibility for humanitarian services to people whose capacity to act as vigilant customers is impaired.

There are so many sources that I have not referenced them directly. Instead I have tried to use sentences and phrases from these original articles and put them in inverted commas. To find the relevant extract, similar extracts and sources open the reference page in another window. Copy and paste the phrase or key words from it into the browser's find box and search for the phrase or uses of the words. Please remember that the extensive extracts I have used are copyright material - from the sources quoted.

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The New MD of Mayne Nickless:- Peter Smedley was appointed as MD of Mayne Nckless in June 2000 following a very successful career in Shell and then staggering success in Colonial. This had endeared him to the share market if not to the customers whose banking practices he changed irrevocably.

A socially responsible advisory service providing individualised help in insurance and banking was repackaged as a series of products and marketed aggressively like any other commodity. The emphasis changed from individualised service to bulk sales. These were marketed to an increasingly distrustful population. Smedley is described as a control freak and is renowned for the ruthlessness, efficiency and speed with which he brings his commercial policies to fruition. He brooks no opposition.

Marketplace Medicine:- In the present context in Australia and in the world the marketplace and its wealthy tsars are dictating the way in which health care is provided. They are imposing their changes without consultation or sensible debate. This is part of a worldwide ideology which seeks to structure all facets of our lives within marketplace contexts and understandings. They are doing so in the face of mounting evidence, which challenges the social benefit of their prescriptions, at least in health and aged care. They are very influential and are fully supported by both major parties in Australia. Alternatives are not considered.

Writing in 1992 Ron Williams considered US megacorps to be the inevitable future for Australia. He painted a bleak and depressing picture. By remarkably good fortune this global onslaught has so far been resisted. The politicians who tried so hard to import these groups now assure us that we will not get the American system. At the same time they attempt to introduce a similar market system here. We now have in our midst a powerful corporation led by an immensely resourceful and intelligent MD. His track record suggests that he is likely to introduce very similar if not identical business practices to those, which have caused so much distress in the USA.

Mayne Nickless is by far the largest corporate health care provider in Australia and is spearheading the change to corporate health care. It has had a close relationship with politicians and has enjoyed unprecedented patronism. Despite this it was in serous financial trouble in 1999 and 2000. Smedley is the recognised wizard in turning situations like this into market success stories.

Available Information:- Given his way Smedley is going to have a profound influence on the way in which health care will be provided in Australia. Doctors and their patients have little idea of what is likely to be in store for them, and yet there is a great deal of information available. If we are to anticipate the future and deal with it then every doctor considering working and every patient being treated in a Mayne owned facility should very carefully examine the information available about Smedley and consider what the consequences are likely to be. There is an abundance of information. To this end I have prepared references and extracts from reports going back nearly 10 years. They make fascinating reading and give a deep insight into the man and what we can expect from him. They are well worth reading

CLICK HERE to scan the headings and read the extracts.

How Predictable is Smedley:- Smedley is a man in his 50's and it is therefore unlikely that he will generate radically new ideas and management practices. He was trained in Shell, one of the five corporate training schools which have placed successful senior managers around Australia. To Sir Leslie Froggatt who trained him in Ford he will always be "one of my boys".

He comes from a school of thought that sees management as largely independent of context. The same general formulas and economic solutions can be applied across the marketplace. He applied what he had learned in Ford to the very different insurance and banking industry about which he knew little. He radically changing the way in which banking and insurance are provided across Australia. He changed a small conservative money losing mutual insurance corporation into a highly successful market listed insurance and banking giant with an appetite for aggressive corporate expansion across the world. He did so with ruthless precision, remarkable efficiency and lightning speed. He is a formidable force. Past Shell employees have indicated that this was the Shell style and he was applying Shell principles. It is likely therefore that he will apply his tested lessons and competitive solutions adapting them to the new context of health care.

White Knight or Demon? To market analysts, economists and even insurers he is exactly what the health care marketplace needs to make it more market-like and so fix the profit problems they see. They expect profits and growth. Smedley has the ruthlessness and the focus needed to make the hard, cost conscious decisions which Dalziel and Catchlove baulked at. Given the opportunity he will undoubtedly do so. He has the nerve and the drive to back his hunches and ignore his critics. An analysis of his past record suggests that he will be very successful in his financial objectives - but his policies may be one of the biggest threats that Australian patients and their doctors have ever faced. Similar cost cutting policies applied by similarly ruthless businessmen in the USA have deskilled and understaffed health and aged care facilities. Investigations across the USA reveal that thousands of older citizens have suffered needless complications and died prematurely.

The Smedley story

After less than two years at Duntroon, the military training college in Canberra, he was, in the words of army archivist Ross Howarth, "terminated ... it means he was sacked, the army asked him to leave". Daring Or Dangerous?, Business Review Weekly 26 Oct 1998

At school Smedley played first team cricket and a schoolmate at the Christian Brothers Aquinas College in Perth describes him as a "go-getter"… He had a shock of red hair, was a left handed batsman and very competitive. He had boundless energy and was reputed to regularly play rugby league, rugby union and AFL football, all in one weekend.

He initially planned a career in the army and attended the military college at Duntroon. Some comment that if he had stayed he may have been a general. He was there for two years and it is suggested that he learnt about military strategy and how to become a more formidable opponent. Quite what the fiery young Smedley did or how he upset the military establishment is not clear but he was terminated ie sacked. He then joined Shell.

Smedley soon made his mark in Shell where he came under the patronage of Sir Leslie Froggatt. Reports suggest that in Ford senior staff surrounded themselves with like minded proteges who supported them and whose careers they advanced. The future career of these appendages was compromised if their mentor departed. Smedley it seems later surrounded himself with his own supporters and fellow thinkers. When he left Ford many of them followed him to Colonial and then to Mayne Nickless.

Smedley's talents were soon recognised and he rapidly secured an MBA. He spent nearly 30 years working for Shell in Australia and around the world gaining a wide experience in coal, gold and oil. He finally became executive director in the distribution of oil products, based in Melbourne and was in line for the top job at Shell. His flaming red hair, his ruthless drive and his controlling nature earned him a reputation as the " Red-Headed Terror". When he left Shell, joined Colonial and went on a takeover spree he became known as the "Pacman". By the time he left Colonial it had taken over 17 other companies.

A former Shell executive considered Smedley to be the most ambitious man he has met. When Smedley with 12 years to go before retirement was passed over for the top job at Shell he accepted the offer to modernise Colonial.

Smedley married at the age of 21, has five children and is a committed family man. He is a great fan of the Carlton Australian rules football club, and he has a property on Port Phillip Bay where he spends time with his family.

The Colonial story 1992 to 2000

CML's choice of the 49-year-old Smedley was even more surprising for the fact that he had no experience in superannuation and insurance. THE REASON INSIDERS ARE OUT . Australian Financial Review 22 Jan 1993

 Smedley's appointment to Colonial in 1992 was a surprise for the market. Colonial was a conservative gentlemanly rather stuffy old fashioned insurance company in deepening financial trouble. It was almost a basket case. Smedley was brash, supremely confident, impatient and strongly sales oriented. He was a workaholic and control freak who took a personal interest in everything and everyone. He built his own network of personal contacts and often knew more about a managers department and sooner than the manager himself. He was ruthless in performance requirements and generous with incentives. He knew very little about insurance or banking but set out to learn. It was a culture shock for both sides.

Smedley immediately set about riding the company of its senior management, bringing in his own staff from Shell. He gave junior staff support and promotion so securing their cooperation. In this sort of situation a counter culture often develops but it did not develop in Colonial. This was probably because of Smedley's information network and his willingness to rid the company of those who challenged his courses of action.

Within months of starting at Colonial Smedley had developed a strategy for combining banking and insurance. Colonial found itself the only bidder for the State Bank of New South Wales and was able to negotiate a purchase in which New South Wales taxpayers picked up the risks associated with poor and unbusinesslike past loans. No one else wanted it. Even the auditor general in NSW considered that Colonial paid far too much and would be hamstrung by restrictions imposed by the government - but Smedley needed a bank.

What possible reason would compel an organisation to fork out close to $600 million to purchase a bank which has notched up combined losses of close to $55 million in the past 18 months? BANK SALE PUTS GOVT ON THE SPOT, Sydney Morning Herald 21 May 1994

Today, half of Colonial's profit comes from a bank that cost it only $576 million. It was simply one of the best takeover deals ever made by an executive in the Australian financial services market. Daring Or Dangerous?, Business Review Weekly 26 Oct 1998

The bank was the key to Smedley's plans. He appointed Gerry Van Der Merwe, the previous manager of the Australian Investment Development Corporation to run the bank but van der Merwe resigned after a year because he fell out with Smedley. He had not yet turned the bank around. He opposed Smedley's plan to fuse the businesses and sell insurance through the bank. Smedley replaced him with a Shell man, who promptly restructured and cut further jobs.

- - - - - the board was becoming increasingly concerned that the "bancassurance" concept was not being implemented successfully by State Bank. - - - - - NSW State Bank MD Resigns, Australian Financial Review 24 June 1996

Smedley structured Colonials insurance business and the banks business into a series of market products and packages in a policy he called "allfinanz" or "bancassurance". These were marketed and sold across the system, often as packages. The employment of salesmen was terminated and instead Smedley established a very successful system of franchises in which the incentives for salesmen were greater. Once the company was performing it was demutualised and listed on the share market. Its shares were snapped up and it was soon oversubscribed.

After an initial negative result Colonial's profits increased rapidly and Smedley embarked on a national and international buying spree. He displayed remarkable skill and speed in successfully integrating these purchases into the Colonial system and squeezing profits from the synergies.

Colonial already had UK, New Zealand and Asian investments. It soon had teams looking for purchases in the UK and Asia. It bought out some of its Asian joint venture partners and started expanding in several Asian countries including Hong Kong, the Philippines, Singapore, Indonesia, Malaysia, Thailand, China and Vietnam. One of its biggest successes, entry into the Chinese market was achieved with the help of Paul Keating. It acquired the UK and Asian operations of fund manager Nicholas Applegate. It bought Scottish fund manager Stewart Ivory.

Smedley paid a massive $892 million for Legal & General but Smedley wanted Legal and General's advanced computing system. He introduced it across the rest of the empire with spectacular results. This was followed soon after by a massive $1.6 billion takeover of the Australian and New Zealand operations of Prudential Corporation. This was a large indigestible chunk but Smedley digested it and made it part of the empire with remarkable speed.

Colonial was now almost large enough to threaten the major banks. It had been seen as a good takeover target for the major banks for some time. Smedley's next target was the Bank of West Australia. Its owner the Bank of Scotland was trying to sell. While a takeover of Colonial after it had purchased the bank of West Australia was still possible it would have raised problems with the ACCC. The Commonwealth Bank decided to move. It made a bid which shareholders could not refuse. Colonial was sold for $8.5 billion, about $9 per share. Colonial had acquired 17 other groups before it was in turn taken over. This was a company crumbling in 1992. When it was flourishing in 1997 after demutualisation its shares were still under $4. During the same period Mayne Nickless shares fell from over $9 to less than $3.

Smedley had the Midas touch. He paid far more than analysts believed he should in his takeovers and then made them work. He achieved goals and objectives, which they doubted were possible. Everything he touched turned to gold. He rewarded himself and his staff lavishly. He walked away from Colonial with almost $19 million in his pocket and a life pension of $837,333 a year.

Smedley the Man

 

A new Australian study shows that a CEO's reputation has an enormous impact on the standing of the entire organisation -------------------- Analysts understand expectations are built into the share price and a brand name will generate that shift. But maintaining the boost requires much more. Reputation, Australian Financial Review 12 Oct 2001 Smedley is one of the last living examples of "management by fear'' chief executives, a boss who invoked an almost evenly balanced mix of fear, loathing and admiration among those who worked for him. Peter Smedley: Health Care's Rude Shock, Australian Financial Review 22 June 2001

Executives and Culture:- One of the most important lessons to be learned from the US system is the major impact that managing executives and the corporate culture they create have on the financial success of the company and on the care which patients ultimately receive. As a general rule financial success and standards of care are inversely proportional. I have linked adverse outcomes for care to two factors. Firstly the pressures for profit and secondly the personality of the senior executives.

On the previous page I described the extreme market pressures placed on Mayne Nickless and its senior staff by the marketplace. Dalziel and Catchlove did not respond to market pressures demanding that they cut costs to increase profits. They were consequently identified by the market as "investment obstacles". I believe that they were aware of the consequences for care of further cost cutting and simply could not bring themselves to do this.

The market demanded someone who was totally ruthless and would respond to those pressures. Smedley was the man who fitted the mould. He was "well known for his ruthless cost-cutting and take-no-prisoners approach - - ".

The market for more than a year has been begging for a leader prepared to take the tough decisions. Hearty welcome endorses Pacman's game, The Australian 27 June 2000

- - he is seen as perfect for the job. Tough, aggressive and intolerant of substandard management, he is viewed as exactly the medicine Mayne needs - - - - Hearty welcome endorses Pacman's game, The Australian 27 June 2000

Health care executives:- I have described a number of personality and cultural traits which are common in the leaders of the most successful health care megacorps. These are also the most dysfunctional corporations and they most readily abuse the trust of patients. I have used terms like closed minded and even successful sociopath to describe some of these personality types. I have suggested that the health care market system specifically selects for such people because financial success and care compete directly for the same dollar. The pressures for profit are far more powerful than the pressures for care.

These traits allow health care executives to look past socially adverse outcomes without experiencing the emotional discomfort that restrains others when care is compromised. These traits seem to have little to do with intelligence. These people are often highly intelligent. This is why they are so successful in the marketplace.

Some of these traits can be identified in most of us. They may manifest in socially dysfunctional conduct if the context is conducive and the processes of person to person social control break down. The marketplace is coercive in its demands and generous in its rewards. It can create a context where dysfunctional behaviour is both demanded and richly rewarded. The corporate market is an elite establishment. It has a strong self righteous culture and an ideology whose marketplace success is its own legitimisation. It shields its members from the social pressures generated in the larger community. It remains to be seen how Smedley will respond.

Mayne's past record:- The conduct of Mayne's executives during the 1980's and early 1990's, as they built their global transport empire was blatantly sociopathic. I have also examined the behaviour of the previous Mayne team led by Dalziel and Catchlove. While some of these characteristics can be identified in these executives, the reports suggest there may have been a real inner conflict between what was demanded of them by the marketplace and what they could bring themselves to do.

I suggest that this accounted for the way in which the forward thrust of their policies collapsed, and their administration became paralysed by inertia when it came to crunch time. I have suggested that in the final analysis Dalziel and Catchlove could not bring themselves to do what they had promised and what the market demanded. They could not look past their responsibility to citizens and society. They lacked sufficient of these traits. The market consequently rejected them - Social Darwinism at work.

Smedley- a quick overview:- In Peter Smedley we have an extremely intelligent and very complex person. Reports indicate that "high energy is a Smedley trademark". Someone who knew him described him to me as management on steroids. Any simple analytical frame will have grey areas and conflicting points. I am looking for patterns.

Put simply we have on the one hand the ruthless cost cutting businessman responsible for the loss of many thousands of jobs. He is intolerant of under-performers, will not tolerate serious dissent and surrounds himself with his own supporters. He places strong emphasis on the economic performance of his staff.

On the other hand we have the family man intensely concerned for the welfare of staff who have illness in the family or who become ill themselves. He is known to have intervened for a staff member discharged unfairly without adequate recompense. He has assumed a position on the board of Care Australia and is clearly highly motivated.

It seems that the ruthless executive has a human side. He responds when he is close enough to feel the pain of others himself, yet he does not show signs of feeling the pain of those who fall foul of his aggression and his policies. Instead he is proud of his achievements. Those behaving the same way in similar situations have responded by compartmentalising - keeping the two sides separate so that the conflict is never confronted.

It is encouraging that Smedley has a soft human side, which does cut in when he comes in close contact with the pain of others. It is clear that this human side has not had much impact when he is making business decisions and implementing them.

He is also described as fair and as someone who is honest in his dealings. He is described as a control freak, who interests himself in every facet of the business and collects information through a personal network of junior staff.

How will Smedley respond when the information, which comes through his network indicates that the nurses on whom care depends are alienated and the patients suffering. Will the driving and ruthless businessman prevail or will the human being in the man baulk at what he is required to do to serve his shareholders.

Most likely this sort of information will not be welcomed and his network will tell him only what they know he wants to hear. This is how personal networks built on fear and personal advancement works.

A comparable situation:- We should not put too much faith in Smedley's nicer side. We should remember Richard Eamer, founder and chairman of National Medical Enterprises (NME). He also had enormous drive and a vision which he aggressively imposed. He established a strong marketplace 'profit before all else' corporate culture. He demanded market performance and closely monitored the performance of all staff. He personally involved himself in business practices, which resulted in vast numbers of normal people particularly children being admitted needlessly to hospital where they were kept against their will and misused for profit. Many suffered permanent damage as a consequence.

Eamer applied what he considered sound business principles. He set up a system, which bought and sold patients and defrauded both the taxpayer and the patients. He offered massive incentives and rewards for economic performance and terminated those who failed to reach the economic targets set for them. He received monthly reports and met regularly with the executive directly responsible for arranging care in the hospitals involved. Standards of care were never measured. There is no reason to doubt that he believed that, because the company was so successful it must be providing superior care. This is what the company claimed when criticised. He simply did not see what was happening in his company because he was blind to anything outside his market mission. Success was validation enough and critics were self interested or biased.

Eamer became enormously wealthy. He became a renowned and admired benefactor. The Richard Eamer Pavilion was built in his honour and with his money at the University of Southern California. He donated vast sums to education and to many good causes. He was a marketplace hero and politically influential. He was on many boards.

So convincing and invincible was Eamer, that what was happening was not exposed until one of his hospitals blatantly kidnapped a teenager and hospitalised him without his parents or his own consent. He was unfortunate enough to hold medical insurance. A policeman chose to believe the mother rather than the hospital and when he investigated it all blew apart. Eamer and his board were probably more surprised than anyone by the revelations and they promptly went into denial. It wasn't possible!

The significance:- I suggest that both the success of Mayne Nickless and the welfare of patients will be determined by the way Smedley responds to the same conflicting pressures. This will have wide ramifications as good care and profit are not comfortable bedfellows. Will he put conflicting information about care and socially unpalatable conduct in a compartment where it does not impact on his business decisions or will he confront it and recognise where the problem really lies? If he does so and is a man of integrity he will renege on his primary fiduciary duty to shareholders.

In October 2001, a year after Smedley's appointment Mayne was confronted on the 7.30 report with allegations and a graphic example of unprofitable patients being denied care and turned away in Victoria and NSW? Will he deny, rationalise and justify or will he accept what is happening? Will he recognise that adverse outcomes in health care are due to the commercial pressures that he is using to drive up Mayne's profits and fuel the company's expansion? If he does what will he do?

The nature of the man:- Those who do business with Smedley describe him as "formidable, aggressive, yet very focused". A Shell colleague describes Smedley is the "most ambitious man he has met". A former Colonial colleague is reported as saying "He's a workaholic" and "he's no tourist or golfer". Understandably "following something through gives the greatest satisfaction". His personality is described as "powerful and aggressive". One article suggests that "Smedley stands out like a rough diamond on a mullock heap". Many found him "pugnacious". His leadership was not based on any personal affection.

Those who did not see eye to eye with Smedley on Colonials business practices described him as an "intellectual bully", who was "not acquainted with details of the businesses, and egocentric". This view is hardly surprising as he is also described positively as "a smasher of established cliques and business models". If economic success is the ultimate justification then he was vindicated. This really depends on whether you as a citizen value individualised advice and service based on your needs over the marketing of multiple packages by franchisees, who have strong financial incentives to sell them to you.

There is only "one person in command" and that is Smedley. He seems to be the ultimate control freak and is described as "an unreconstructed 1950s-style command-control manager".

Self importance:- Smedley has a highly inflated opinion of himself and his own importance, "bred of half a lifetime spent working in an oil company more powerful than most United Nations member countries" . He dismisses criticisms. When the highly respected ratings agency Standard and Poor's put Colonial on a credit-watch negative after its Prudential acquisition he brushed them aside. "If we managed our business on the basis of what ratings agencies say, we would be stopping and starting all the time." He has usually been right.

 Impatience:- His "deep-rooted impatience" is legendary. He hates "being behind schedule". Smedley went for a meeting with a senior official in the Indonesian government. The story claims that when the official was delayed and Smedley was asked to wait for 30 minutes he stormed out.

Appearance:- It was very important that the company, which he controlled was impressive. When Colonial was not performing in the marketplace he responded  "We do not choose to be mediocre, and we will not have mediocrity thrust upon us. "We aim to be a market leader in the segments that are relevant to our strategies." He recognises the importance of appearance and appearance is important to him.

Another aspect of Smedley's control culture is an obsession with meeting or exceeding targets and with projecting an image of a company that was far bigger than it really was, a company that could take on the world. Peter Smedley: Health Care's Rude Shock, Australian Financial Review 22 June 2001

He was described as under-reporting market projections in order to earn accolades when Colonial later "outperformed" those projections.

 Management style fear:- Smedley's management is claimed to be based on fear and intimidation, a management style advocated by some business writers in the USA. Reports allege that the massive organisational change achieved at Colonial was accomplished by "creating a 'climate of fear' that penetrated most of the top levels". Fear was his "chief motivational tool".

Smedley kept all his staff permanently "off balance". He would "find your weak parts and hit you there". One critic claimed Smedley was a "difficult bloke to work for". He "ruled with a grip of iron". One executive claimed that "No matter what you did, Peter always made sure that you always felt slightly off balance".

 Management style information networks:- There were many ways in which Smedley kept staff off balance. He created his own informal information network within each of Colonial's departments so that he knew about a department's figures and performance long before the head reported it to him. He developed an "alternative reporting system" by establishing "numerous teams of mostly junior people. - - to report back to Smedley on the performance of the business unit boss". He also spent time "building low-level contacts inside the organisation to give feedback on the performance of executives". A staff member indicated that "he knows everyone's name and what they do. He never forgets a thing. He has spies at every level of the organisation."

"The teams reported directly to Smedley, and they reported on the management of the business unit. You could not [overestimate] the lack of trust, undermining and suspicion this created. A lot of people couldn't handle it and bodies started flying everywhere.'' Peter Smedley: Health Care's Rude Shock, Australian Financial Review 22 June 2001

One former executive put it this way. "You knew he was getting two inputs. You knew he had the information hours before you did, and you were at a disadvantage.''

He knew in advance when the sectional figures were being fudged to hide failures, what was being said about him and when the head of department was not doing well. Colonial senior executives were consequently constantly fearful. He expected profits from revamped sections "on day one".

Dealing with criticism:- Smedley claimed that he liked senior executives with the courage to say "no" but this openness to challenge was not evident when talking to the media. There are reports which suggest that at best he was capricious in this and that challenging Smedley was a dangerous exercise. Critics claim "He shouts you down in front of other people."

"Very early on, Colonial staff learnt never to question or debate a topic on which Smedley had developed a strong view." This indiscretion would be dealt with by a "public dressing down or, worse the sack".

"He intimidates people. He shouts you down in front of other people. You never take him on in an open forum," says one former Colonial executive. Peter Smedley: Health Care's Rude Shock, Australian Financial Review 22 June 2001

Smedley held what staff called "predetermined meetings". One executive claimed that there "was very little that could be discussed in an open forum. Most of the decisions had been taken beforehand. The point of the meeting was to confirm or approve a decision that Smedley had made beforehand."

Smedley also sought to control the board. He prepared assiduously for meetings and grilled his executives beforehand so that he could immediately answer questions from board members and dispel any doubts. He liked them to discuss broad issues and did not like discussions, which looked at management details.

Thoroughness:- Dalziel had used common sense and not relied on teams of experts. Smedley in contrast used teams of experts and hired advice extensively while also taking a close personal interest. He is described as very thorough. One colleague said "There was no way you would ever say Peter would skate over an issue. He would go straight to the guts of an issue and pull it to pieces before coming up with his plan." Colonial employed "an army of expensive advisers to help it make up its mind about the State Bank". He set up teams of staff to decide and advise him where the opportunities might lie.

Making it happen:- Smedley was a workaholic and he really made things happen. He never rested on his laurels. Colonial, a company in the doldrums reported a loss on its first report only. Thereafter the profits grew rapidly as did the company. The allfinanz synergies from the purchase of the NSW state bank "fuelled a $1 billion profit turnaround in 1995". Colonial "publicly set demanding objectives and consistently, and substantially, outperformed them".

Last year's $2.3 billion acquisition spree is proving more successful than anyone outside Colonial could have anticipated. - - - - - Colonial executed the integration of the two new businesses with its own pre-existing insurance and funds management operations extraordinarily efficiently. Smedley Not The Type To Relax, So Watch This Space, The Age 11 Aug 1999

Loyalty:- Despite his disruptive management style staff stayed and he built up a loyal group of followers. He inspires loyalty in many and "those in whom he has inspired loyalty are lavish in their praise". One of his strongest supporters claimed that "You don't see a visionary come along every day, but I believe you have one in Peter."

Smedlay has many positive attributes. Staff comment that "intellectual credibility and fairness, rather than personal warmth, created loyalty in Smedley's executives". However like so many of his US counterparts he surrounded himself with loyal followers and dissenters were marginalised. While his "chief motivational tool is fear" it is "tempered by an unshakeable loyalty to those who are totally loyal to him and a soft spot for those down on their luck".

Real humanity:- When he was not finding "your weak parts" there was a human side to him. Staff indicated that "When things go wrong in your family he will do everything to help you out.'' There are several stories describing his generosity.

People wanted to work for him:- Most executives, even those who criticised him were able to advance reasons why they continued to work for him and would do so again. He "showed genuine sympathy for the less fortunate of his regime". He was exceptionally sympathetic "towards employees with health or family problems". He "was fastidious about rewarding executives who met performance targets" and paid bonuses rapidly. "He always keeps promises". There was also the great satisfaction of accomplishment - of being on a winning team.

Smedley also has a wider social commitment. When he joined the board of Care Australia he immediately involved himself with his usual intensity. "Why are we here? Why are we there? Why do we do things this way?" That's just typical Peter Smedley.

A pattern in his behaviour:- Smedley is reported in the press and is considered by the market to be unique - some sort of superman. His personality is not unique nor is his management style - in fact it was the management style fostered in Shell. A former Shell colleague writing to the Australian indicated that what they were reporting about Smedley "are very much Shell methods". He said that "The success secret of the Shell information bypass method is that whoever uses this information never compromises their source". He was clearly referring to Smedley's information network.

I can think of several of the great surgical figures of the 1950's and 60's with personalities very like Smedley. They used a culture of fear to build great surgical departments - great training centres, new surgical techniques and great research centres. Some had the ruthlessness to look past their early and sometimes costly (to the patient) experimental failures and continue until they were successful. The energies of these great men were fortunately devoted to training and to advancing the surgical care of patients - rather than to profit. Despite the great stress on staff, doctors and nurses competed to work for them. Surgeons like this were satirised in films like "Doctor in the House". There are better ways of accomplishing the same things and there are few surgeons like this today.

These techniques and this reversion to toddler temper tantrums are not taught. They are absorbed. When years ago I set up a new department in a hospital I was faced with seriously deficient nursing. I found myself using just these techniques and behaving in the same way - something I had promised myself I would never do. I spent a great deal of time and effort teaching - but I flew into a rage whenever there were failings. I prowled the wards at night when no one expected me. I refused to have those whom I caught using sloppy practices on my ward. It worked. Standards improved. There was no shortage of nurses wanting to work there. It was some years before I forced myself to behave in a more civilised manner! There were better ways of achieving the same objectives at far less social cost.

Smedley was just what Mayne wanted:- Mayne Nickless was threatened with a hostile takeover and dismemberment. Its management was in disarray. Analysts saw this as due to a failure to cut costs - a basic management flaw. Smedley must have looked like a gift from heaven.

But this abrasive style and his huge success at Colonial has made Mr Smedley a much sought-after candidate by troubled companies that needed a tough, hands-on chief executive to turn them around.   Smedley Wants To Be Boss, Again, Australian Financial Review 15 June 2000

Some claim that Smedley's huge success was luck. His "success was aided by legislative fiat which directed a torrent of money into superannuation". Everything has certainly fallen his way. That said his ability to grasp the opportunities and turn them to profit is unsurpassed.

He joined Mayne at a time when the health care corporations were beginning to benefit from the enormous injection of funds into the private sector by the government. There may well be some leeway, before he is forced to cut care. The future may be interesting and painful.

Business thinking and practice

 

That has all changed now. In the high-octane environment of competition, the spoils go to the rich. No longer protected by regulation, the banks feel no obligation to the community at large. Banking now is a business, not a social service. --------------------- But community anger at the banks has been fuelled by the enormous profits earned in recent years and the huge salaries drawn by many of the industry's senior executives. Are You Being Served?, Sydney Morning Herald 9 March 2000

This criticism refers to the banks and the insurance industry - the changes in which Smedley played a significant role. They could equally be applied to the US Health and aged care system and to trends in the provision of health care that are now well established in Australia.

The same changes are seen by the market as the reforms needed in health and aged care. In the face of massive community disillusionment and mounting evidence of dysfunction US "consultants" selling corporatised medicine across the world claimed in 1997 that these reforms "will enhance care right off". I have called this closed minded claiming of excellence in the areas of maximum weakness "NMEspeak" because I first encountered it in Tenet/NME. These people really do believe their own marketing and are genuinely indignant when they are challenged with evidence. As Robert Kuttner has indicated, because it fits their theories it must be so. It is self-evident.

 

Some of the hallmarks of the Smedley style are a big focus on branding, obtaining control of ownership of the distribution system, ruthless cost controls and the rigorous application of a set decision-making process. Peter Smedley: Health Care's Rude Shock, Australian Financial Review 22 June 2001

Smedley, unlike Dalziel and Catchlove is very much his own man. He does not telegraph his plans or readily disclose his views. Most of his takeovers are accomplished through private negotiations. His strategy was to go "knocking on doors on the off-chance your rival is thinking about waving the white flag" then making a good offer. The Prudential sale was negotiated in this way. One former staffer claimed that "He keeps everyone guessing what his real opinions are".

"Allfinanz" and bancassurance:- Smedley's recipe for success was expressed in his favourate word "allfinanz", borrowed from the German. He had complete faith in the idea. Colonial was the first Australian group to introduce this controversial approach to selling a full selection of financial services by amalgamating banking and insurance.

This was considered risky as it was contrary to market theory. Few international corporations had adopted the allfinanz concept so completely or so radically as Colonial. Market theory was based on the idea that the customer was king and should shop around for what she wanted selecting the best and the cheapest. Allfinanz saw the salesman as owning the customer. Smedley wanted to hold her and sell her as many of his products as he could before she could slip away. Smedley's goal was to own the soles of the salesmen. Australian reports sometimes used the term "bancassurance" instead of allfinanz.

Smedley's first major commercial step was to buy a bank through which he could sell insurance. He paid too much for it but that was a secondary consideration.

 

- - - the products now sold by the group are so-called box products. A customer who comes to Colonial seeking a low-start home loan is offered a box that gives them the loan plus home insurance, a gold mastercard, a savings account and a disability insurance policy. -------------------------- The aim of the game is to own the customer, rather than be a provider of a commodity-type service where the customer can switch at a whim. Pac-man's Digestion Problem, Australian Financial Review 10 Oct 1998

In the allfinanz concept the customer was captured and cross-sold a multitude of products. Embraced by the term is the integration of different services into marketable packages. This is described as "selling banking, insurance and funds management off the same management and technology platforms, through the same multi-channel distribution network and to the same customer base". There was a "single distribution system". By doing this a host of departments and services could be amalgamated and rationalised. Duplicated cost structures were removed.

Colonial "pioneered the allfinanz approach to financial services in Australia" and by 2000 it had achieved "the highest cross-sell ratios of any Australian financial institution''.

Smedley saw a great similarity between selling oil and selling insurance. He is quite likely to see health products the same way. He wanted customers to "get access to all its services by visiting one shop". The business was described as a "one-stop" financial services program. "One stop" was also Mayne Nickless' model for integrated health care.

Colonial for instance used a "Home Pack Box, a true allfinanz package in which a home loan, general insurance and life insurance are offered" to capture and hold the customer once a single purchase was contemplated. In 1998 Smedley set a target to increase his "cross sell" rate from 20% to 50% using strategies like this.

While there were many doubters the controversial "allfinanz" strategy produced a startling cycle of cost reductions and business growth. Cross-selling and a "continued focus on harvesting cost efficiencies" were the "key drivers". By 2000 when Smedley left Colonial the average customer was buying 2.7 "products from the group. This far exceeded competitors. Colonial was considered the "only true allfinanz group"

 Acquisitions, market share and critical mass:- To achieve allfinanz success, Smedley had to achieve his cross-sell target, get costs down and most importantly improve market share in each sector where they operated. This was described as "achieving critical mass". This necessity dictated their takeovers in Europe and Asia. Without a large enough outlet for their products they could not reap the benefits of their investment. Smedley "needs to sell a lot of financial products to each of his customers". He needed to "dramatically lower the cost of servicing each customer and sell more products to each".

 

"Our Asian strategy is about growing by reinvestment and we will not change this strategy until we meet our critical mass targets in the countries we operate in." Colonial Mutual Plans Asian Foray, Australian Financial Review 17 Feb 199

Smedley regarded insurance as a low margin business which depended on economies of size for its success. Acquisitions "added a vast new customer base to Colonial's existing business and therefore the potential, not just to reduce costs, but to cross-sell products, including Colonial's banking products". The benefits of cross selling were amplified. This explains Smedley's interest in creating a chain of banks across Australia. This threatened the big banks and resulted in the defensive takeover of Colonial by the Commonwealth Bank in 2000.

Smedley saw little prospect in markets, which were too small. A Colonial source indicated that "Put simply, there is no future in the UK business if it doesn't grow. You either get bigger or get out - and getting out is something Peter doesn't like doing." In 1998 they had plans to "double Colonial's UK operations in the next five years".

Mr Smedley said an acquisition strategy was "the fastest and best means of achieving the efficiencies that arise from increased scale and business synergies, resulting in substantial benefits for shareholders and customers". Colonial Prowls For More Deals, Australian Financial Review 18 Aug 1998

It was acknowledged that "Step one is to get the costs down" and that this had to be repeated after each acquisition. After an initial radical cost reduction the cycle of new acquisition followed by cost reduction was repeated by Smedley 17 times. Smedley's voracious appetite for takeovers and his rapid digestion of some very large corporations like Prudential earned him his "Pacman" title. Executives were terminated as Smedley brought in his own team and shrunk the acquisition into the Colonial frame and culture.

Colonial has flagged an almost unlimited appetite for acquisitions, with teams also looking for suitable targets in both South-East Asia and the United Kingdom. Acquisitive Colonial Snaps Up $1.6bn Of Prudential, Australian Financial Review 17 Aug 1998

Analysts realised that "The name of the game for Smedley, and indeed most of his rivals in the financial sector, is size". This is of course exactly the situation which existed in the US health and aged care system, and now in Australian health care. The imperative to grow and achieve critical mass was largely responsible for the pressures that forced competing market listed health and aged care groups in the USA to indulge in fraud and the misuse of patients.

Branding:- Smedley's style included "a big focus on branding". Smedley had early on recognised the importance of branding and how this was created by words and images. Research at Shell "had revealed that appearance was among the top three considerations of customers looking to refuel". Two years and large sums were spent redesigning service stations with an easily recognisable pecten and new logo.

Smedley brought this preoccupation with appearance and image to Colonial. He set out to align the images of all of the group, shortened Colonial's name and merged the image of the others into the Colonial brand which had more goodwill and recognition attached.

The story goes that when Smedley found that a small room had been booked for a meeting in Asia where few were expected he baulked and demanded a larger venue. It was the wrong image. Smedley wanted to "exude an image of power and size".

 Incentivising:- Incentives, ie promising rewards for meeting or exceeding profit targets has become standard corporate practice. This is enormously effective in inducing staff to put profit before all else. In the USA incentivisation has been one of the prime factors in inducing staff in hospitals to put profits before care. It is particularly effective in boosting sales and in inducing those who first make contact and so own the customer to use the company which is offering them incentives. This is a way of buying the advice given by salesmen to customers - another version of money for mouths - the radio scamdal which rocked Australia. Customers of banks and insurers expect the people they consult to advise them impartially. Even if they are told of the commercial relationship they seldom appreciate its significance.

Controlling those who control the customers ensures success. Paying incentives was a very successful way of getting heads on to beds in the USA. Counsellors, court officers, doctors and even priests were given kickbacks when they referred patients. The community was softened up and sensitised to psychiatric illness by aggressive and often deceptive advertising. Tenet/NME and other psychiatric chains then paid up to $2000 for each head on a bed to the equivalent of franchised bounty hunters. They combed the community for people they could persuade into hospital. Almost all of the major US corporations have sought legal or illegal ways to circumvent the US kickback laws so that they could reward doctors for referrals and support. Most of the massive fraud allegations settled include claims of paying kickbacks. This unethical practice encourages the misuse of patients.

One of the major changes made to Colonial by Smedley in 1994 and 1995 was the "introduction of the incentive scheme". Smedley and incentivisation go hand in hand.

Smedley himself was offered a "remuneration of $988,000 per annum" at Colonial in 1997 plus many incentives, and again at Mayne Nickless in 2000. He walked away from Colonial some $19 million richer plus a life pension. He was equally profligate in the giving of incentives to his own senior management, particularly to those from Shell. He promised incentives to senior staff and was scrupulous in paying them when the targets set were met. This largesse was restricted to a handfuul of senior executives.

Another way to bind employees to the corporate system is to link their rewards or bonuses to profits. This is usually done by giving them shares. When Colonial was demutualised shareholders were incensed that staff were to own "3.5 million shares". This was "4.6 per cent of the company following its listing". It was done " under the terms of three separate employee share schemes". Smedley got the largest chunk of "options at 1cents each, convertible into ordinary shares at the listing price", but 45 others got their noses into the trough.

These were shares to which shareholders would normally be entitled. One institutional investor said "Its ultra generous". Others questioned "the moral ethics of the way the whole thing has been run". The float was heavily oversubscribed and "angry shareholders took to the floor" at the AGM. They "complained about their reduced share allocations and accuse directors of looking after their own interests". They were soon mollified by the "windfall profits" they accumulated. The "elite band of executives, led by chief Mr Peter Smedley" shared "an option pool already almost $13 million in profit".

Franchising:- Franchising is a method of exerting strong incentives. Franchising has recently become a new market strategy in health and aged care in the USA. US corporate chains, such as the "evil empire", Beverly Enterprises have appointed new executives who have had experience in franchising in the hotel and other businesses. They believe that this is the future for health care. Like Smedley these new executives have no experience in health care.

"The influence of Peter Smedley's 29 years, basically in marketing posts, with Shell shows in his emphasis on getting much closer to customers and in an emphasis on the bottom-line result." Smedley's working life had been spent in "low-margin, high-volume businesses, with specific problems in distribution". Smedley's Shell staff recognised that "the banking and funds management are also low margin, high volume businesses." Colonial State Bank soon had a Shell hallmark - "a national franchise network". Franchising gets the franchisees out there in the community beating the bushes and rounding up the customers. One Tenet/NME executive offering inducements to a doctor boasted that it had people out there beating the bushes for patients and that those doctors who were team players would be made very wealthy. The doctor taped the conversation and used it in evidence.

"Colonial hired Carlson Marketing Group in early 1994 to help it create an incentive program to motivate and reward franchisees." Colonial sold "most of its branch businesses as seven-day-a-week retail franchises". "More than 700 agents and distributors were dropped and the survivors were turned into franchisees."

In the franchising system the seller only makes money when she sells the product and the more she sells the more she makes. The financial pressures to make a sale are dramatically increased and in the allfinanz approach the incentive to sell boxes of products is even greater.

Smedley refused to finance any of the franchisees. They had to buy the franchise. He said "They will have to either put the capital up, have third party funding or a letter of credit from another institution." They consequently started in debt. They had to sell extra hard to pay the debt and cover their costs. After that the profits increased very rapidly. All this dramatically increased the pressure to sell and the rewards for doing so. There were additional incentives.

It operates like an airline's frequent-flyer program, with points awarded each month for sales, attending seminars and workshops, attending external courses and so on. Franchisees join the scheme as bronze members and progress to silver and gold. Colonial Incentive Scheme Gives A New Zest For Life, Business Review Weekly 15 July 1996

This card system of incentives is not dissimilar to those used by the companies involved in the US psychiatric scandal, particularly that used by Charter Hospital group.

Smedley indicated that "It is radical if you think about banking, but it's not radical if you think about retailing". It was the first time "that an Australian bank has franchised outlets". Like Columbia/HCA Smedley used McDonald's fast food chains as an example. Analysts compared this with the way Harveys had so successfully organised "a large retail furniture and appliance business through a series of franchises". If it was good for the gander then it was good for the goose and if Smedley's thinking is consistent then it should be good for health care as well - the shareholders anyway!

 Restructuring:- Smedley's strategy depended on his ability to pick what he wanted from new acquisitions and strip down those acquisitions so that there was no costly overlap. He was quite open about it. In 1994 he told staff "Take a good look, because in 12 months half of you will not be here." In his first year he "removed or oversaw the departure of all but 10 of the top 200 people in Colonial Mutual".

Starting with Colonial he stripped out senior management in each new acquisition, appointed his own men and promoted junior staff to new positions. In doing so he stripped away old ideas and old practices, and secured the support of new managers eager to please. Staff were extensively culled. This was repeated after each acquisition.

Mr Smedley repeated his longstanding crusade about cost-cutting, claiming success on all fronts, Colonial plans more buys but not in New Zealand, National Business Review 4 March 1999

The consequence was that right across the group, "in Australasia, the UK and Asia, Colonial is generating superior growth rates and profitable growth".

Smedley's Colonial strategy was simple: buy at least one competitor every six months and chop the tripes out of the merged company's costs. As a strategy, it was beautiful in its simplicity. But it could not have worked without the fact that the industry money flow was growing at double-digit rates and the people paying for the services - the pensioners of tomorrow - have not yet objected to fund managers earning 50 per cent profit margins. New Surgeon's Mayne Task, Australian Financial Review 8 July 2000

Political Influence:-- Smedley has had his political supporters. Keating admired his "capacity to develop a clear business model in his mind and pursue it". Keating was "instrumental in assisting Colonial to beat National Mutual to an insurance licence in China". He provided the "high-level contact with Asian leaders".

Through the acquisitions of Trust Bank in Tasmania and State of NSW while at Colonial, Smedley has developed excellent government relationships at both State and federal level,'' the analyst said. Deutsche Upgrades Outlook For Mayne Shares, Sydney Morning Herald 30 Oct 2000

 Smedley's team:- Smedley was an "influential player" at Shell. He had drawn an entourage of "bright and ambitious executives to him". When he left they followed him first to Colonial and then to Mayne. They thought like him and had worked with him for years. They made a formidable team.

 

(Mayne's) new chief executive is expected to reassemble an executive coterie group that stretches back to his formative years at Shell Australia. Already, Mayne Nickless has hired former Colonial financial services chief Mr Stuart James to a senior executive role. Mayne Gives Pacman Something To Chew On, Australian Financial Review 27 June 2000

This team was a "key part of his success". By bringing in his team to Colonial, "ridding the organisation of dissenting executives around whom a clique could develop", and promoting juniors Smedley prevented the growth of an "underground resistance movement". He "surround himself with a group of executives who were fiercely loyal", but the inner circle dubbed the "club within a club" were mostly former employees of Shell Australia.

Applying Smedley's Policies in Health Care

In the Smedley world-view, the GP and, to some extent, the private health funds own the customer and therefore the distribution system. Former Smedley subordinates say that, on past form, his next moves will be to vertically integrate through the purchase of one or two major health funds and large numbers of suburban medical clinics. Peter Smedley: Health Care's Rude Shock, Australian Financial Review 22 June 2001

To understand the possible or likely consequences of Smedley's policies I have assumed that he will follow his established formula for success. There is no guarantee of this. It is possible he will follow a different tack. To make an intelligent guess at the consequences I will look for similar practices in the US system and describe their impact.

A low-margin, high-volume business:- In Australia the bulk of health care funding comes from government or from private insurer. Both are cutting funding to the bone. Smedley will consequently see health care as a "low-margin, high-volume businesses". Given the complexity of the medical referral base it has "specific problems in distribution". These are problems Smedley knows all about.

Costs, profit and care:- Smedley may try to address the health care business, as he has in the past by cutting costs to the bone and by embarking on acquisitions in order to increase the critical mass of the company. Health however differs from banking and insurance.

Once insurance, superannuation, and banking packages have been created they can be sold across a massive distribution system. Once sold there is little extra work other than collecting interest, debts and paying out when necessary. Much can be computerised. Volume sales do not markedly increase production costs.

The problem for health care is that each patient has to be treated and payment is for that treatment. Much is individualised care. This can't be readily packaged. Increasing volume also increases cost. Each health package requires staff, resources and time for each patient. The formula is consequently difficult to implement and inevitably compromises care. The benefits of size are small. When this strategy fails then there is intense pressure to ration to increase the profits for shareholders. This is done by cutting the staff needed to provide care. This is a people intensive business and it cannot be done. Corporate executives believe that they are entitled to make a profit from health care and therefore extract one. This is easy to do if you take from care and turn a blind eye to the consequences

US corporations operating within this framework have often claimed that provided they can secure a large flow of patients then profits could be made by providing services. They successfully secured a large flow of patients and extracted profits by providing services to them. The share markets lionised them. As is well illustrated in psychiatry and in subacute care these profits were obtained by overservicing, by compromising on care (particularly staffing), and by defrauding the funding system.

 Cost cutting:- The same market rhetoric about profit by cutting costs has characterised the US health and aged care systems. The market has demanded this. The dominant cost in health is staff. The way in which staff have been cut has been to rationalise services. This means examining the activities of staff, reorganising them, removing wasted time, and then processing large numbers of people through fewer less skilled staff - in short efficiency. The problem is that many of the most important humanitarian aspects of care cannot be measured or rationalised. Corporations have done this by cutting and deskilling staff as the first step. They have then made extravagant claims about the benefits of efficiency. In practice efficiency and care have been left to look after themselves and patients have been neglected. The examples I give in this section are extreme well documented instances of practices that are widespread in the health and aged care marketplace - the tip of an iceberg.

Critics claim that there are many examples of poor care in publicly funded institutions and this is not disputed. There is however a deep moral chasm separating a system of rationed care where the citizens or the state have not been able or are unprepared to provide enough funds, from a system where subterfuges are used to deny needed care for the financial benefit of shareholders.

Cutting Staff:- Cost cutting is usually introduced by businessmen, who have little understanding of health care. As a consequence they simply reduce staff, expect their managers to rationalise by giving them targets, and claim that their strategies have improved care and reduced costs in an inefficient system.

The most extreme example of cost cutting occurred in aged care in the USA. Here the myth of "fat in the system" was promoted and reaffirmed by people like Sun Healthcare's Andrew Turner and by politicians. Nursing staff, a major cost were reduced to levels where thousands of lives were lost due to neglect. There was no one to look after them. Frail elderly were herded like cattle and processed through baths, toileting and meals. Those who required more care than this to survive died. There was no time to listen to them let alone attend to their needs.

Instead of employing nurses the companies employed a large excess of therapists. Therapies were paid per item of service and by providing extra therapies vast profits could be generated. When the funding system was changed the "demand" for therapies miraculously melted away.

Another horror story comes from the UK where a subsidiary of Generale de Sante Internationale (GSI) adopted a low staff "factory system" for processing the care of severely mentally ill patients. The facility was severely understaffed and patients did not receive the individualised care given in the public system. Instead they were physically restrained and heavily sedated. A number of deaths in young patients were possibly due to this. Instead of responding to criticism of its practices the company threatened defamation actions.

The recent publication of a leaked document in which Mayne Nickless planned to save $30 million by rationalising nursing services brought an angry response from nurses. They planned to reduce the number of trained nurses and replace them with nurse aids. They denied the claims made about this by the nurses and insisted that they were rationalising to improve care - by replacing skilled professionals with untrained low paid staff - a bit much to swallow!

 Rejecting unprofitable patients:- Patients who are unprofitable, don't fit or who cannot be processed in this way can be rejected. Richard Scott asserted that Columbia/HCA was not a charitable institution and that he did not see any obligation to provide care for which he was not paid. He claimed that we did not expect restaurants to feed every beggar on the street. Columbia/HCA was a business no different to food chains like MacDonald's. It was unfair to expect this of them.

Columbia/HCA also abandoned unprofitable but needed services, broke up high quality functioning units and had a lower ratio of staff. Hospitals were organised to serve the corporation rather than the community where they operated - perhaps in much the same way as Colonial packages were sold to serve Colonial and its shareholders rather than cater to individual insurance and banking needs.

Vencor, was once one of the largest and most successful aged care chains. It selected patients who paid well. They instructed staff to reject those, whose insurance system paid poorly. When patients ran out of money or moved to less lucrative insurance they were simply discharged and dumped regardless of their medical condition. Vencor's board and also state regulators saw this as a legitimate business decision which the company was entitled to make. Other corporations behaved similarly. There was a public outcry and Vencor was fined well in excess of US $100 million for this.

It seems likely that Smedley is already on track in employing this strategy. In October 2001 there was an outcry from doctors in Victoria and NSW. The matter was reported on the ABC's 7.30 report. They claimed that Mayne Nickless was "cherry picking "by selecting fit healthy patients who recovered rapidly and so were profitable while rejecting patients who were elderly, had cancer of were otherwise infirm. Complications and longer hospital stay's rendered them unprofitable.

Charging more:- In the USA private patients are usually charged much more than medicare or privately insured patients. Individuals have no market power. Vast numbers of US citizens do not qualify for Medicare but simply cannot afford private insurance. They pay more. The inhumanity of corporate chains in rejecting these citizens or in extracting their fees is legendary. The situation in Australia is different but I am aware of anecdotal accounts that Mayne hospitals are demanding an additional facility fee from patients attending their hospitals.

 Incentives and report cards:- Monetary incentives have been at the root of the problems in the US health care system. Corporate executives have regularly offered large bonuses to managers if they meet financial targets or exceed them. If they fail they are fired. These managers have wives and children whose interests they place first - above those of patients. The majority turn a blind eye and look past the consequences of the practices for their patients. This was well illustrated in Tenet/NME.

As in Colonial under Smedley, incentive schemes in the USA are based on some system of measurement. Tenet/NME used a complex computer based system to track performance. Central administrators set the desired financial targets for each hospital - the number of admissions, the duration of stay, the treatment plan, and the average profit per patient per day. This was called plan and it had nothing to do with the needs of patients. Patients were kept in hospital and given treatment in order to "meet plan". Staff were fired for failing to meet plan and richly rewarded for meeting or exceeding plan. "Meeting plan" became the prime concern in each hospital and far exceeded any concern for patients.

Columbia/HCA used a system of economic score cards. Richard Scott used these as the basis for carpeting, firing and rewarding staff. To meet expectations employees in both companies indulged in fraud. There were also problems in care.

Charter Hospital chain had an incentive system similar to Smedley's. All staff were eligible for the award of points for indulging in a large number of money making practices, most of which had nothing to do with care and were detrimental for patients. Those who performed well were publicly rewarded and held up as examples. Prizes were lavish and included luxury Carribean cruises. Energy was diverted from care to the pursuit of profit. Charter Hospitals was one of the large chains involved in the Psychiatric scandal and it was heavily fined.

Franchising care:- Franchising has enormous business appeal as it exerts far greater financial pressures to generate profits on those selling services - first to break even and then to capitalise on all the effort after having done so. This is far more powerful that offering simple financial incentives.

The adverse consequences for health care are therefore likely to be greater than those generated by more conventional incentivisation. Smedley is very much "with it". Franchising has recently been embraced by several of the large US chains. They have appointed executives from hotel chains, Kentucky Fried Chicken and other business groups to senior management because of their expertise in franchising.

"In the Smedley world-view, the GP and, to some extent, the private health funds own the customer and therefore the distribution system". If past practice is a guide then he is likely to attempt to control both perhaps by franchising.

Perhaps we can expect to see primary care facilities, hospitals and even radiology and pathology facilities sold back to franchisees under the Mayne brand name. The franchisees will be under enormous pressure to get their medical staff to generate more services and sell more health care packages. Preventive medicine in particularly may be packaged and sold. They will want to hold the customer and provide all the services. Doctors will be under considerable pressure to serve the corporation rather than their patients by keeping all services in house.

We may see a repeat of the situation which was particularly evident in Tenet/NME. Company policy discouraged/refused to allow consultations outside their hospital or to transfer patients to competitors when their hospitals did not provide the services they needed.

Possible consequences from franchising:- The US experience tells us that franchisees under pressures like this are likely to coerce and incentivise medical and other staff. The US experience gives some idea of what might happen.

Those who are not what Tenet/NME called "team players" will be carefully marginalised and their views discredited. Corporations will use marketing and other strategies to gain control of the patients and will then steer them away from dissenters to team players. Dissenters will starve. In the USA peer review committees were used to rid corporations of "disruptive doctors" who flouted corporate desires and spoke out about unethical practices or the misuse of patients.

Doctors who are team players are likely to be promoted by businessmen and marketed as authorities. They will be given increased credibility and will be invited to speak at meetings. They will be paid under cover incentives in a variety of subtle ways. They will be given a variety of perks including hospital appointments, research grants and even have their office staff paid for claiming these are research appointments. Team players will prosper under corporate patronage.

Staff meetings will be used to build a corporate culture and establish a world view which sees corporate practices, not only as legitimate but also as desirable. Contexts will be created where staff will be encouraged to publicly express corporate views as legitimate - so externalising them and then internalising them as their own in the group setting. Those with open minds, insight and contrary views will be identified and group pressures used to marginalise them so that they can subsequently be "terminated" without dissent.

All of these things have happened in the corporatised US system.

Smedley copied Columbia/HCA when Colonial Staff were given a large stake in the company when it was floated. They benefited when the company did well. This is a strategy to align the interests of staff with those of the company. Columbia/HCA employed this strategy by giving doctors a profitable stake in the Columbia/HCA facilities to which they wanted them to refer patients. When they did so they benefited financially. The US Department of Justice considered these to be hidden kickbacks. As part of its US $840 million fraud settlement Columbia/HCA was required to unwind all of its arrangements with doctors.

If the US experience warns us of anything it is the dangers to patients and to the health system when the commercial interests of doctors and market listed corporations are aligned. This pressure for alignment between doctors and corporations was expressed by Dr Wooldridge, the federal minister for health in his May 1996 policy speech to the AMA in Canberra. He said "we have gathered here representatives of the medical profession the private hospital sector and the private health insurance industry. I must say that such a convergence bodes well for the future." He was highly critical of labour legislation, which had driven "a wedge between who should be natural allies - private health insurers and private health providers". There can be little doubt that doctors were included.

The poor relations between the medical profession and Dr Wooldridge were in large measure a reflection of Dr Wooldridge's anger at the refusal of the medical profession to enter into any sort of alignment or financial agreement with corporate groups - in particular with Mayne Nickless which Wooldridge patronised and supported.

 Responsibility and criminal liability:- The strategy of obtaining desired objectives by exerting economic pressures has another and very useful advantage for senior corporate staff. It places considerable pressure on those actually selling or providing care to indulge in fraud and to exploit their patients for profit. They are not specifically instructed to do so nor do they report these practices to the executive. The only evidence prosecutors have of involvement by senior management are "legitimate" and perfectly legal business instructions and reports. Senior staff can claim that they were unaware of what was happening or that their more junior staff disregarded the corporate mission. All businesses operated in this way and it was now accepted that health was a business. It is easy for executives to employ closed minded strategies which allow them to look past any information which comes their way.

While senior executives have been forced to resign, and companies have paid what seem to ordinary citizens to be enormous fines these executives still receive massive termination bonuses. Because of their proven skills they are soon employed elsewhere. If we consider that Columbia/HCA's US $840 million settlement could be paid by selling 10-12 of the 400 odd hospitals it owned then the fine becomes no more than the cost of doing business. None of Tenet/NME, nor Columbia/HCA, nor Beverly nor any other groups senior staff went to prison. A number of the junior staff directly involved in the practices were imprisoned. Close links with politicians and large campaign donations certainly help.

The adverse publicity has only a transient impact on profits and the community soon forgets. Name changes are easy. Very few in the USA realise that Tenet Healthcare, the second largest and very credible hospital group in the USA is the infamous NME which imprisoned large numbers of children in psychiatric hospitals and misused them. None would realise that its CEO Michael Focht was president of its international division when his deputy was alleged to be trading in patient admissions with a doctor - allegations which not a single NME international staff member involved in discussions with the doctor was prepared to challenge by giving evidence in court.

The branding strategy used by Columbia/HCA was the word "Columbia". Following the $840 million settlement the "Columbia" was dropped and the company reverted to HCA, the original name of the company which had merged with Columbia in 1994. The company promotes HCA as having a long history of integrity and as always being patient centred - long before it joined Columbia. Citizens do not know that HCA was one of the large companies involved in the psychiatric scandals exposed in 1991. It was accused of needlessly admitting children and misusing them. It paid a large settlement. The fraudulent practices for which Columbia/HCA paid US $840 million originated in HCA. In fact the Qui Tam whistleblower action taken by James Alderston, which finally brought Columbia/HCA down was first commenced against HCA before it merged with Columbia.

How many patients attending Mayne Nickless hospitals today would remember their early misconduct or be aware of the judges scathing condemnation of the arrangements, which disadvantaged their customers and their true competitors.

Franchising provides further protection in evading responsibility. The franchisees are independent self funded operators and are liable for their own misdeeds. The parent company will be in a position to be vocal in its condemnation and vehemently deny that it had any part in what happened. Franchisees can be easily replaced.

Being both payer and provider:- A report in June 2001 states "Former Smedley subordinates say that, on past form, his next moves will be to vertically integrate through the purchase of one or two major health funds and large numbers of suburban medical clinics". The possibility of paying yourself for the services you provide is not only anti-competitive but creates endless opportunities for innovative money making practices and profitable but legal accounting.

Columbia/HCA, the Pacman of the US health system recognised the great financial potential in this. In 1995 it started looking for insurers to buy. Columbia/HCA like Mayne Nickless already had a very poor reputation. Its ruthless business practices and the adverse consequences were the subject of many articles and of a national television expose in October 1996. The enormous dangers of this for Medicare, for the health system and for patients was recognised by already angry citizens. When in 1996 Columbia/HCA tried to buy Blue Cross in Ohio there was such an outcry that the state attorney general stepped in and stopped this. Attorney generals across the USA stepped in to curtail and limit Columbia/HCA's Pacman activities, but particularly the purchase of not for profit community services. In February 1997 the FBI commenced the first of their sweeping raids on Columbia/HCA's hospitals across the country.

Integration:- We can anticipate that Smedley will embrace the corporate model of integrated health care with enthusiasm. It fits neatly into the allfinanz concept. He will extend Dalziel and Catchlove's policy of an integrated health system. This too is a system where the corporation aims to own the customer and ostensibly supply all their health needs - the box of products. There is of course nothing wrong with an integrated system focussed on the needs of the patient. This is highly desirable and is one of the failings in the current system.

The corporate model of integration in contrast focuses on profit, on demand and on sales - the number of services which can be sold. It rapidly becomes a game of pass the parcel as the patient is processed through a multitude of services. This is well illustrated by Tenet/NME, subacute step down care and aged care in the USA.

It would not matter to the average person too much if this merely pushed up the cost of care, which it does. Most medical treatments carry risks of serious complication and even death. The benefits of treatment are always balanced against the risks. Unnecessary treatment carries all of the risks but none of the benefits.

Incentives are very much part of the integrated corporate model of health care. The integrated system lends itself to unethical, immoral and illegal arrangements involving care. There are also opportunities for creative accounting and so fraud. Columbia/HCA is a good example. Powerful corporate groups can and do exert strong pressures on other groups with whom they do business. Their patronage and support can make or break those they work with. Columbia's external accountants, one of the largest groups in the world participated in their fraud. They were also prosecuted.

Growth and consolidation:- Market listed companies face a catch 22 situation. They believe that they must achieve critical mass to make a profit. Because the market is consolidating they must grow by acquisitions or be acquired themselves. Successful corporations are those which grow and this is reflected in their share prices. To grow the company needs capital. To raise capital the company must have a strong guaranteed profit stream to entice shareholders to invest and lenders to lend.

They need to grow to make a profit but cannot grow unless they are already making a profit. The easiest way to make sufficient profits is to over-service, overcharge, under-resource and defraud. We need only look at Tenet/NME, the Pacmen of health (Columbia/HCA) and aged care (eg. Sun Healthcare) to see what happens.

Immediate Implications of Smedley's arrival for Mayne Nickless

That Mayne was in for some radical surgery was clear as soon as Smedley was appointed in June 2000. This is reflected in the headlines. "Pac-man' Called To Firm's Rescue", "Smedley Gets Ready To Operate", "Health Care's Rude Shock" and many more. He was expected to put "the broom through the company which last month downgraded full-year profit forecasts". Mayne also hired " Mr Stuart James" the other half of the "dynamic duo". They were described as "the Intellect and the Implementer".

Many other past Shell staff were expected to follow Smedley to Mayne and did so. A year later "Team Smedley" was well established. Opposition was less muted than at Colonial and the Financial Review reported that by June 2001 "Team Smedley" provided continuity - but there was a "them-and-us split". At least one staff member left because he "was never going to be part of the inner circle".

Press reports in 2000 suggested that Smedley faced a particularly difficult task. There was little optimism about continuing the takeover strategy because of the "low returns from the millions ploughed into private hospital ownership". When Smedley took control in June 2000 "capital expenditure in the whole sector" was grinding to a halt "precisely because of the low capital returns and poor cash flow". Some Colonial executives cautioned that "the Smedley management style won't work in all situations".

There was considerable doubt that Mayne could ever "achieve a return above your cost of capital in the health business?" Some doubted that the increases in private insurance rates would be sufficient to save the company. They claimed that it had been "a badly run industry for a long time overcapitalised, oversupplied, inefficient and lacking in market power against the health funds".

Others claimed that Smedley would act within 6 months. "Costs will be a major focus". They suggested that "rationalisation beckons" and "time is of the essence". The "whole sector is ripe for rationalisation". The hope was that "this is a card Smedley knows how to play". What was needed was some of "Smedley's tough guy approach to management". The health care sector was "ripe for some Smedley-style takeover action".

 Predictions:- To those familiar with developments in the USA it is not difficult to predict a replay of the health care failures in that country. Ron Williams depressing predictions for our health system in his book "Remission Impossible" will come true, but not because of the exploitation of our citizens by foreign multinationals for the benefit of their shareholders. Instead wealthy Australian shareholders will feed off the vulnerability of their less fortunate fellows.

It will be interesting to see what the future holds. It is clear that the future will not look anything like the present. The question is how long we will plough down the corporate for profit path before the worm turns? How many citizens will be ploughed under on the way? Ultimately we must come to terms with the reality that health care is a humanitarian and Samaritan service, which we as a society owe to each other. Big changes are desperately needed. How much pain must we endure and how difficult will it be to unscramble the corporate mess so that we can move down another path?

An analysis from the UK:- Colin Leys, Emeritus Professor at Queen's University Canada and a world authority on British politics and globalisation has written an excellent analysis of the corporate processes which underpin the adverse consequences of current market and global trends. He is highly critical of Blair's policies in the UK. He builds his criticism around health care. Although he does not mention the allfinanz concept, his analysis and criticisms are directly applicable and very revealing.

The National Health model he advocates is one alternative but not the one I would personally favour. His analysis of the deficiencies in the 1945 National Health blueprint is well worth studying. His call for a greater community involvement in the day to day running of the health system is I believe the key to a future health system. I would carry his description of 21^st century democracy and direct community involvement in health care even further. Because a system built by and around the community is congruent with the essential intent of the health and aged care system it would have a far greater chance of working.

Go to http://www.catalyst-trust.co.uk/resource.html to download a pdf version of Professor Leys' analysis

Update August 2004

Cooke (CEO Affinity Health) recalls: "For the first six months, we all sat in awe of Peter Smedley. We knew his reputation and you see how he was approaching business, so you question your own judgment and strategies. The centralisation strategy had intuitive appeal but the implementation of it, the lack of experience and arrogant communication style were fundamental flaws." Repair Man Business Review Weekly 18 December 2003

As predicted Smedley imposed his Colonial-like model of health care on Mayne. This was characterised by moving control and decision making from hospitals to central management. He fired most experienced senior staff with hospital skills, replacing them with his own team. He commenced cost cutting and attempted to reduce and deskilll staff. There were allegations of cherry picking profitable patients and turning away those who paid less well. Smedley lived up to his Pacman reputation buying hospitals, radiology practices, pathology groups and launching a large pharmaceutical takeover. All this frenzied activity served to hide the collapse of the hospital business.

Catchlove had earlier attempted to induce doctors to enter contracts but had failed. Smedley made a fundamental error. He failed to get control of doctors incomes and so their loyalty. Doctors, particularly surgeons, found that they no longer had any input into what was happening in their hospitals. They realised that Smedley's changes were compromising the care given to patients. They took their loyalty and their patients elsewhere. Huge losses were made, share prices dropped to pre-Smedley levels, and Smedley was forced to resign. (see the Smedley era page)

The breakup of Mayne advocated by Citigroup in 2000 started. In October 2003 Mayne sold the hospitals to a Citigroup consortium of venture capital turn around specialists. It was renamed Affinity Health. Citigroup is linked to multiple scandals and frauds. It has vast experience in the US health care marketplace. The new management is trying to induce doctors to enter into financial deals which will bind them to the company, rather than their patients. This has been the key to financial success at the expense of care in the USA. These matters are all dealt with on other pages.

CLICK HERE to scan the references and read the extracts on which much of this page is based.   

Web Page History This page created November 2001 by Michael Wynne Modified March 2002, Updated Aug 2004 Format changed Nov 2005