Criminalizing the Act Of Doing Business

Story Stream
recent articles

Successfully demonizing business, making it ripe for manipulation and plunder, takes a well planned effort sustained across multiple fronts.

Start with a broad cultural assault equating profits with theft. Follow up using the highest corporate tax rates in the developed world to confiscate and redistribute profits to favored constituents. Force companies to divert precious resources into satisfying complex and ever-changing regulations. Then inflict a cost that can't be passed along to customers or shareholders by criminalizing a broadening catalog of business practices. Make a big show of selective enforcement so that every senior executive goes to bed wondering, am I next?

And we have to ask why our economy has stopped growing while China's soars?

The curious case of stock option back dating is a perfect case study. Once a widespread compensation practice the media sensationalized this relatively benign accounting artifice into a scandal aggressive prosecutors elevated into a crime. It took several years of Sturm and Drang and a string of ruined lives but this witch hunt finally burned itself out. The verdict? In a rare act of judicial rebellion judges are refusing to sentence back-dating "criminals" to jail because no one can identify any victims.

Criminalization has become such popular sport that the Supreme Court had to rule that the vague and expansive "honest services" law can only be applied to bribery and kickbacks. This means it can't be creatively wielded to collect CEO scalps every time a state's Attorney General decides to run for governor.
Yet new threats keep coming. Dig into the 848 pages of the Dodd-Frank Act, now spawning thousands of pages of enabling regulations, and you'll find a roadmap for manufacturing white collar crimes.

Targeted financial services firms are now required to retain all emails and text messages. These should come in handy should future prosecutors or class action lawyers decide to fish for business practices that might not have been crimes when the emails were written. Make a rule that all phone calls be recorded, forbidding employees from transacting business on telephones that haven't been tapped by compliance officers. Who will be the first executive to go to jail for engaging in unmonitored conversations?

As unsettling as this is, the mother lode of criminalization awaits in the healthcare industry.

An old Wall Street adage has it that cash is a reality while profits are an opinion. Nowhere is this more true than in any business that accepts payments from Medicare. Because of the byzantine way these payments are administered the only thing standing between most healthcare executives and prison is an overzealous prosecutor waiting to pounce.

How so? Most normal businesses expect the bulk of their invoices to be paid within 60 days, and at face value. Revenue recognition practices vary and different businesses keep different bad debt reserves, but by and large bookkeeping is an orderly process amenable to generally accepted accounting principles.

Not in healthcare.

How long does it take Medicare to pay its bills? Sometimes six months, sometimes a year, sometimes after an appeal to an administrative law judge, and sometimes never. How should this be reflected in the books?

How much of the invoiced amount does Medicare pay? Rarely face value, sometimes 60%, but sometimes more and sometimes less. Businesses manage cash by developing statistical estimates of average payment percentages, but how should this be reflected in the books?

When healthcare companies introduce new products and services they often pile up unpaid invoices for years as they wait for Medicare approval. Sometimes some of these bills get paid and sometimes most of them don't. Investors bear the financing burden but how should this be reflected in the books?

So tell us, Mr. Executive, were the quarterly profits you reported two years ago accurate or did you criminally defraud your shareholders? Only your prosecutor knows for sure.

Underneath this chaos swirls a mélange of cost shifting and reimbursement code finagling driven by desperate attempts to compensate for unpaid Medicaid bills. This generates bizarre pricing anomalies like whacking private patients $400 for latex gloves. Who could justify this hauled in front of a jury? Yet healthcare executives have to swear to the truth of their company's financial statements on pain of imprisonment.

When the whole chicken wire and bubblegum system crashes on the rocks of fiscal reality the final push for single payer healthcare will begin. Perhaps this was the plan all along. The last private healthcare providers will be run out of town through mass prosecution of their executives for alleged accounting fraud. Parading handcuffed "profiteers" in front of the baying media will provide visual "proof" for most attention-deficit voters that capitalism has failed.

Capitalism hasn't so much as failed as it is fleeing the country to escape the madness. What replaces it isn't going to be pretty.

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

Show commentsHide Comments

Related Articles