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.

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This page describes how Smedley's character and policies brought Mayne to its knees and the role which the medical profession played in this. Mayne has now been broken up and seems to be continuing to fragment.

Australian section     

2002 and 2003

Cooke 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

This page describes how Smedley's character and policies brought Mayne to its knees and the role which the medical profession played in this. Mayne has now been broken up and seems to be continuing to fragment.

Mayne which built its wealth through exploitative and illegal market practices in the transport business during the early 20th century switched its primary focus to health in the mid-1990s when its criminal conduct in transport was stopped.

Health disappointed and in 2000 Mayne brought in Peter Smedley, a ruthless Mr Fixit. Smedley's policies flew in the face of long established norms in medicine and gave rise to unacceptable corporate behaviour.

The medical profession responded angrily by taking their patients elsewhere so destroying Mayne's referral base and bringing the company to its knees. Smedley has gone and Mayne is breaking up. It is likely to continue to fragment. The name will stay with the rump. This is likely to be a pure pharmaceutical company.



Smedley Tumbles

By the end of 2001 the writing was on the wall but neither Mayne, Smedley, nor most analysts were aware of the punishment which doctors, angry at Smedley's policies were to meet out and the impact this would have on the company.

Smedley came to Mayne with the intention of duplicating his financial services model in health, then exporting it to Asia. The entrenched players thought he was mad and many disagreed with his plan but the share market loved the idea.

Smedley has formed a new primary care division that will incorporate the group's pharmacy, general practitioner and medical centre interests. Just as Colonial group financial planners were allowed to choose between service providers, those in the Mayne network can also choose.
However, Smedley points out that private capital will not satisfy demand for facilities unless the extensions recoup the cost of capital plus a satisfactory profit margin.
Looking a picture of health : Mayne's chief believes he has a better model The Weekend Australian March 9, 2002

Smedley's success at Colonial had been in centralising operations, the "allfinanz" concept of financial services, where a full range of services from banking to insurance could be sold through a branch network.
Smedley's success at Colonial had been about establishing authority and command, not devolving power. Smedley put Tissot in charge of putting Mayne's red dots all over the hospitals. Smedley had identified the lack of corporate branding and standard staffing and procurement systems as a weakness in Mayne's health care. In fact, the doctors, Mayne's real customers, perceived the individualism of their hospitals as a strength. For one so steeped in team building, Smedley failed to recognise the importance of teams in the hospitals.
COLLAPSE OF CONFIDENCE Australian Financial Review June 1, 2002

A misguided strategy has seen Peter Smedley exit Mayne and its logistics business being carved off
Where Smedley got it wrong was that he thought his customers were the people in the street requiring medical assistance when in fact his customers were doctors.
The Australian Medical Association - - - confirmed that doctors - - - were referring their patients elsewhere. Doctors were said to be upset by Mayne's cost cutting and so called "cherry picking" - -
- - - - doctors were sending their patients to other hospitals because of concerns that quality of care had been eroded by cost-cutting.
Under the knife, The Courier Mail 1 June 2002

Smedley had in essence adopted the Columbia/HCA hard nosed commercial vertical integration model espoused by Dalziel and Catchlove but never implemented. To this he added his aggressive personal approach and the commercial franchising model he had developed at Colonial.

Smedley's centralisation of all decisions and tight control of the business was ill suited to the health care context where complex and often difficult individualised decisions must be made about care.

His policies intruded into care and this infuriated the doctors who were responsible for providing it. To them it was obvious that cost cutting was accomplished by cutting care. Smedley's arrogance, his ruthlessness, and his unwillingness to respond logically to the concerns of others must have fanned the flames. It is typical of this sort of self-made entrepreneur that he had no insight into the impact his policies had on the people on whose cooperation his success ultimately depended.

The dual structure succeeded at Shell and Colonial Bank but went horribly wrong in Mayne's private hospitals. The alleged improved centralised structures created at Mayne failed to service the needs of Mayne's natural franchisees - the doctors, who simply directed the market (patients) away from Mayne.

It should have been predicted that doctors would prove prickly franchisees, being highly educated, comparatively wealthy, business savvy and able to shift the market without damaging their own wallets. Cautionary tale: how franchisees took control Australian Financial Review October 7, 2002

Smedley adopted the US market health model while ignoring the most fundamental lesson form the US system - that market principles can only be applied successfully when doctors are controlled. In the USA this was accomplished by aligning them to commercial objectives, bribing them or by controlling their careers and coercing them.

What probably happened can be surmised from a knowledge of health care and from the material published in the press.

(Note that there is additional information about management style, the practices above and the conflict with nurses, doctors and the community on the page examining the privatisation of Port Macquarie Base Hospital by Mayne. There are illuminating press extracts )

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Cherry Picking

Cherry picking is discrimination in admission policies in favour of patients and diseases which pay well. The outcry about cherry picking in 2001 continued into 2002 and its soon transpired that this was industry wide.Statements by Smedley suggest that he saw nothing wrong in exerting his right to treat whomsoever he chose - in other words only the profitable. Cherry picking may have been the implementation of his views and he is unlikely to have stopped it. To Smedley this was a business like any other.

This was exactly the view taken by the infamous Columbia/HCA who compared the requirement to treat all comers with expecting a restaurant to feed every dropout who walked through the door. The problem for Smedley is that health is a humanitarian community service and you simply cannot apply market principles to it. It is not a commodity which can be traded selectively.

The Smedley model of public patients who do not pay for elective surgery but wait for it while all Australians use the public hospitals for emergencies is clearly controversial.
The private hospital area should focus on areas such as surgical, medical and specialised areas, rehabilitation, psychiatric and other services. People with diagnosed complaints should dominate the private area.

Most private hospitals do not have casualty wards. Casualty is the province of the public sector, which should offer the whole ambit of services. Smedley is not convinced that private operators should run public hospitals. Looking a picture of health : Mayne's chief believes he has a better model The Weekend Australian March 9, 2002

Smedley's view that private hospitals should supply care only to selected patients and should not provide emergency care must be considered against the allegations of cherry picking. These other usually much more costly patients should according to Smedley be treated in public hospitals. At the same time he argues that the private system is taking the pressure off the public system.

Snedley's comments suggest that the impetus for cherry picking may have come from the top. Smedley was all powerful and ruthless. His wish may have been acted on by enthusiastic vassals.

Smedley's views are in sharp contrast to the prevailing views of hospitals and of medical services - the illusive claim that private care is better. People take out private health insurance so that they do get private care when they are seriously ill and when it will be costly.

Many citizens can afford to pay out of pocket for straight forward procedures and so avoid inconvenient waiting lists. This is exactly what many citizens did in the 1980's and early 1990s. It was cheaper for younger citizens to do this and rely on the public hospitals for emergencies and major care. The number of insured citizens fell steadily with an increasing proportion of older and sicker insured citizens - citizens who were less profitable. The prime minister put an end to this when he re-engineered health insurance contributions so that many more citizens were driven to take out insurance and then enter private hospitals.

Press reports based on allegations by doctors indicate that the private corporate system was picking the healthy and those requiring profitable operations rather than the sick and aged.

That report, Access to Private Hospitals, shows a marked shift in the focus of private hospital activity between 1996 and 2000, from medical to surgical patients.
That private corporations might seek to maximise profits by cream-skimming is hardly surprising. But as those same companies are now the beneficiaries of so much public largesse, in such a sensitive sector as health care, the Government will clearly have to come up with more effective regulation.
How Healthy Are Howard's Reforms? (Ray Moynihan) Australian Financial Review February 28, 2002

These frail elderly are the people most in need of good health care, careful nursing, additional comforts and prompt admission. This is what these citizens paid private insurance to attain. A system which received greater funding and was more costly was expected to provide more, not less, and serve their needs better. Numerous advertisements by government, by insurers and by the companies themselves promised this. This was a gross betrayal of trust.

In the USA citizens have taken to the courts when companies have failed to provide the care they promised. Faced by glossy brochures promising much, and gross failures in care due to under-funding juries have responded savagely. In Australia this remedy has not been applied.

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Hospitals and Costs

Another problem for Mayne was that Mayne had concentrated its hospitals in major centres. There was more competition here and doctors had more choice. Like Tenet Healthcare in the USA Mayne had targeted high cost procedures, but without the US Medicare loophole which allowed Tenet to charge more for complex cases. They could not squeeze nursing costs as Tenet did. They were more vulnerable to cost pressures from the health insurers, and more at risk from poorly paying high risk patients. The pressure to cherry pick must have been strong, but it was also more obvious when they did so.

Ramsay and Healthscope had targeted specialty areas and bought in places where competition was less intense.

JP Morgan's chief health-care analyst, Sean Laaman, gives Christian Catalano the prognosis on the ailing hospital operator
A. We still find it difficult to foresee the long-term viability of the private hospital industry until we see structural change from the private health insurance industry. Until we do, Mayne will be riding into a cost-containment headwind. Aside from the patient volume issues created during Peter Smedley's regime, Mayne cannot avoid the rise in costs without sacrificing their top-line. Unless private hospital operators achieve a regular cost-plus outflow from the private health insurers, margins are destined to contract indefinitely.

Q. Its 50-plus hospitals are geared toward the high-cost procedure end of the market and are predominantly metropolitan based. Is this the right strategy?

A. So far this has not been the right strategy. Mayne's hospitals appear to be located in catchment areas where there is a relative oversupply of beds and increased competition for patients. The Mayne Event The Age (Melbourne) May 31, 2003

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Nurses stand firm

Nurses salaries comprise over 50% of hospital costs and these are always the first target of corporate cost cutting. To do this successfully one must have the sort of nursing glut which can results when competitors follow the same strategy and economic strictures, or when financial cut backs by government force downsizing at government and not for profit facilities. Smedley's central administrators alienated the nurses whose humanitarian focus was challenged by the impersonality.

Unsubstantiated stories have been filtering through that more and more nurses are opting to work for other operators such as Ramsay Healthcare and, as a result, Mayne is being forced to turn to more expensive agency nurses to cover the shortfall. Smedley Move Is Mayne Worry Sydney Morning Herald 11 January 2002

Private hospitals claim they provide the best level of care. But as nurses cop the brunt of budget cuts, the quality of that care is being questioned. Susan Brown and Phil Dickie pull off the plasters
The public expectation of better care from private hospitals is under threat as government policy pushes in more patients and health delivery traditions increasingly play second fiddle to profits.

If you believe that quality nursing and better-paid and less-stressed nurses might be key components of health system outcomes, the message seems to be "go public".
Australia's largest private hospital operator is Mayne Health: "They don't call them 'Mean Health' for nothing," one nurse says.

MAYNE Health spokesman Robert Tassie says he has heard the derogatory description before, but stresses the complaints are for "historical reasons" and things have changed. The nurses claim otherwise, and that it applies to other private hospitals.
Mayne made $64 million from health in the first half of last financial year, after significant scissoring of the rosters and centralisation of hospital directors, financial and other staff.
A blow-out in agency or casual staff costs has contributed to Mayne's problems, and the agency budgets have been slashed. But a permanent staffer on night or weekend duty comes in around half the rate of an agency staffer. Guess which nurses cop the most gruelling shifts.
"From private hospitals we have consistent complaints on workloads, rostering practices, excessive hours, double shifts, increased fatigue and practices that can be dangerous," Jensen (nurse) says.

"Hospitals load up time using higher-than-appropriate levels of young graduates who come in more cheaply than experienced staff . . . They can be in charge of a whole ward and easily intimidated if they raise concerns.
DOCUMENTATION from several private hospitals examined by The Courier-Mail backs up the short-staffing of nurses, most particularly in the case of the most closely guarded documents: the rosters.
When staff confronted administrators about the workload and expressed concerns about the consequent higher level of danger to patients, they were told non-negotiable policy changes had led to the new system in one hospital.

Staff in another prominent maternity hospital complained they were required to clean private bathrooms and toilets on top of their already significant workloads, following cuts to auxiliary staff. Medical emergency Courier Mail (Queensland, Australia) February 13, 2003

Smedley's leaked plans to deskill and reduce staffing levels were met aggressively by the nursing profession who forced him to back down. Upset by the high handed approach of the central managers nurses voted with their feet. There was an under supply and no shortage of jobs. Mayne was forced to rely increasingly on more costly agency nurses. These were not familiar with the hospital or as motivated. A high dependency on agency nurses is linked to poorer care. This did not please the doctors.

Worst still for Mayne is that the cost of running its hospitals continued to rise, with labour costs per hour rising 7.6 per cent on the December half as Mayne mishandled the use of expensive agency nurses. Medibank Cloud Over Mayne Australian Financial Review September 2, 2002

Nurses are leaving private hospitals for the higher-paid public system in NSW because employers have been slow to match the 15.75 per cent pay rise granted to the state's public sector nurses.
Association general secretary Brett Holmes said: "We are trying to send a strong message to Mayne Health that the nurses are not happy with the offer made so far."
State Pay Lures NSW Nurses Australian Financial Review March 4, 2003

With a shortage of nurses the nursing profession was able to take industrial action pushing up costs further. Mayne was forced to reverse its policies and woo the nurses.

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The doctors revolt

"Doctors have never liked Mayne,'' another analyst said. "It's regarded as one of the more impersonal healthcare operators and Smedley has done little to improve the situation. The discontent has grown.'' Smedley Move Is Mayne Worry Sydney Morning Herald 01/11/2002

The doctors were used to having a say in the way the hospitals were run and the way care was provided. They were angered by the high handed approach adopted by managers - having lists cancelled if there were too few patients to make them profitable and being forced to use equipment including suture material selected centrally on the basis of cost. Mayne did not see this as compromising care. The doctors did

Not enough attention was given to the needs and views of the doctors who were responsible for deciding which hospital to send their patients. Rightly or wrongly (and the facts don't matter), the doctors believed Mayne hospitals were taking the high margin work and rejecting the low margin work. Time to listen to its main clients The Australian April 24, 2002

And the Mayne problem was caused by a simple mistake: not understanding the power of surgeons who very neatly took them to the cleaners. Group falls headlong into the price-earnings trap The Australian April 25, 2002

One analyst said this meant the problem would be hard to turn around. "Doctors have taken a long time to get this frustrated -- they will be sceptical and it will take a long time to get them back." Mayne freefall yet to hit bottom The Australian April 25, 2002

One Melbourne surgeon told the Weekend AFR that the legacy of Smedley's regime was low morale as staff were moved around the network to plug holes and save money.

"People got frisbee-ed all over the place. You would just get used to a good reliable scrub nurse and she would be moved," he said.

Agency nurses began to replace full-time staff, administrators who had previously concentrated on a single hospital now were put in charge of a region.

Doctors said Tissot had failed to appreciate the dynamics of hospitals, the emotional dimension that is absent in running a bank or a service station, the surgeon said. "In an operating theatre, when the jokes stop and the music gets turned down, you need to know that you can rely on your team," said the surgeon.

Another doctor wrote to the Weekend AFR this week to warn that treating hospitals purely as a business could actually endanger patients' lives. He took his work away from Mayne, despite reducing his income, he said.
COLLAPSE OF CONFIDENCE Australian Financial Review June 1, 2002

Each business was branded with the red dot and power was centralised in a St Kilda Road head office which one angry doctor, Patrick Cregan, describes as a "Supreme Soviet".
"If there's less than a certain number of patients on the endoscopy list, they'll cancel the list," Cregan says.

"You've had patients in bowel preparation for two days and Mayne says 'piss off'. I as a doctor won't put up with that and my patients won't either."
Shattered images of corporate main men The Weekend Australian June 1, 2002

Doctors are selling a professional service - not a product. When The Market Needs A Quick Fix The Age (Melbourne) June 10, 2002

MUKESH HAIKERWAL (Federal Vice-President of the Australian Medical Association) : The problem that Mayne had which was previously highlighted, was the management style, which was very much more centrally driven, was not responsive to local needs and local units, and totally disenfranchised the medical practitioners and professionals that worked in the hospitals, and they felt that they were completely out of the loop.
In those days, Mayne were not listening and they certainly were not acting on the deficiencies that were perceived in their health system.
Mayne Group leaves private hospital sector ABC Online 21 October , 2003 <>

That Smedley cut costs for care and cherry picked in order to make profits and then used some of that to sponsor his favourite football club simply added fuel to the fire.

The relationship (between doctors and Mayne) was not helped by Mayne's decision to sponsor the Carlton AFL club rather than plough its sponsorship money into medicine. Private Grants Plug Doctor Shortage Outside Cities The Sydney Morning Herald 17 May 2004

The response was predictable. Doctors took their work and their patients to other hospitals where their clinical freedom was not compromised. Mayne's hospital occupancy fell and profits from hospitals plummeted. While other companies like Ramsay and Healthscope reaped the benefits of the government's support of private health care policies Mayne's hospitals declined dragging the company down.

"The latest private health insurance data show admissions are up 12 per cent in the last quarter, year on year," one analyst said. "So the industry is OK, it's just the doctors don't want to use Mayne's hospitals." Second Mayne Shock Angers Investors Sydney Morning Herald August 17, 2002

I fairness to Mayne I did not find many reports of failures in care. When staff are disillusioned and angry then morale and service declines. I did find one instance where this might have played a part.

Except Anderson developed a golden staph-infected epidural abscess at the base of her spine. The rare, but life-threatening, condition went undiagnosed and she died less than a month after being discharged from Prince of Wales Private Hospital (POWP) on April 17, 2001.
At POWP, Warren District and Dubbo Base hospitals, blood tests and medical records were lost or ignored. There were several misdiagnoses and she was apparently wrongly discharged after her admitting doctor forgot to see her, the inquest heard last year.
The Danger Within The Sydney Morning Herald 10 March 2004

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Consequences - Smedley goes

When the excitement about Smedley's acquisitions evaporated and his deal to sell Faulding injectable's business fell through the market started to question. It directed its interest to performance.

However, Mayne's interim results underscored the fact that the group has been trailing its competitors which are sprinting ahead on the strength of a boom in private health insurance cover.
"There was no further talk on where all the money is going [when] it's burning a hole in his pocket," the fund manager argued. "Blind faith in Smedley is gone and he will have to work hard to win back support."
Blind Faith In Smedley Is Now Gone Australian Financial Review February 28, 2002

Stock valuations a week ago were based, blindly, on working out how much he would earn by using his $2.5 billion war chest on the next acquisition. Now there are worries about how the existing business is going. There's No Case For Feeling Bullish Australian Financial Review March 1, 2002

Analysts have begun downgrading their profit expectations for health-care and logistics company Mayne Group after deciding that its original forecasts are unlikely to be met.
Analysts Give Mayne Poor Bill Of Health Australian Financial Review April 3, 2002

Private hospital operator Ramsay Health Care has set the bar high for rival Mayne Group with an impressive full-year profit result. Ramsay Displays Best Of Health Australian Financial Review August 28, 2002
There are few more startling contrasts in corporate strategy than that of Mayne Group and Ramsay Health Care, the two largest private hospital operators in Australia.

As Mayne pursued a ruthless, branded corporate model of health care which alienated its doctor base and nursing staff, Ramsay did not stray from a policy of putting its people and patients first.
"They operate the hospitals with an ethos that acknowledges that the health care industry is altruistic and people-driven. Health care people respond to this approach."
People-first Remedy Brings Robust Result Australian Financial Review November 19, 2002

The market realised that Mayne's performance lagged a long way behind its competitors. Ramsay's had been an unlisted company run by an individual for many years and even after going public Paul Ramsay remained the majority controlling shareholder. It has therefore never been subject to the sort of market and investment pressures to which Mayne has had to respond. Its management style is consequently different. It will be interesting to see whether this will continue when the aging Paul Ramsay moves on. The manner in which Ramsay's acquired Alpha Healthcare reveals a ruthless take no prisoners streak in Ramsay's current CEO.

While the AFR analyst's insightful comments in the last quote above go to the heart of the problem of marketplace health it is unlikely that the lessons will be learned by the institutional investors who pull the levers which translate into care.

The reasons for Mayne's poor performance gradually emerged. Smedley was eventually forced to confront the fact that doctors did not and had never liked Mayne. From a high of $7.50 after Smedley took over, share prices fell steadily to reach a low of $2.43, lower than in the bad years before Smedley arrived. Smedley's invincibility was shattered and his credibility destroyed. He was sidelined and then resigned. A new hospital manager reversed Smedley's management changes, fired his managers and brought back people with nursing and hospital management expertise. Doctors were targeted in an effort to undo the damage.

Smedley's successor, Stuart James, attempted to direct attention away from the problems in health care by focussing on pharmaceuticals but the losses continued. Standard and Poor downgraded the company.

In a lunchtime address yesterday, Mayne chief executive Stuart James again devoted the bulk of his time to the pharmaceutical division and its prospects, just as he did at the annual meeting on Tuesday. Oncology Drugs Are Now Mayne's Big Hope The Age (Melbourne) November 14, 2002

Mayne posted a largely anticipated $57.7 million loss for the six months to December 31, marred by $90 million worth of write-downs and compared with a $95.8 million profit in the previous corresponding period.
Hospital Margins Still On The Sickbed Australian Financial Review February 28, 2003

The 160 per cent profit slide compared to the previous corresponding period's $95.8 million profit and was worse than analysts had expected.
Mayne looking sickly Herald Sun (Melbourne, Australia) February 28, 2003

Meanwhile, ratings agency Standard & Poor's lowered its ratings on Mayne from BBB/A2 to BBB-/A3 and stated that the company's rating outlook was negative.

S&P said the change reflected Mayne's continued weak performance in the December half and limited prospects for a significant improvement in the short term. Mayne Out Of Sunscreen Australian Financial Review March 14, 2003

Pressures to dismember the company resurfaced and this is what happened. Smedley had already divested a number of Mayne's businesses because they did not fit with his health model. Mayne now started selling off more sections including bits of his integrated model including the logistics business.

James was very much Smedley's man and it is unlikely that he would see eye to eye with Cooke, who was in all probability a board, rather than a Smedley appointee. Friction between them would have favoured the management buyout of the hospitals. Perhaps Cooke organised this.

Within both Mayne and the broader medical community, James does not appear to have won any fans. A perception of him as the hard man of the company, interested only in the bottom line, persists.

There are also suggestions of a deteriorating relationship with Robert Cooke, head of the hospital division. Cooke, an experienced hospital manager, was appointed in May, a move promoted by Mayne as signalling a new approach, where health-care professionals would have greater input in management. No Miracle Cure Business Review Weekly (Australia) November 21, 2002

Whether Cooke was as kindly disposed to doctors and patients as he is presented is debateable. The decision to stop collecting valuable cord blood in Melbourne raises questions. The blood was not paid for and this would have been seen as a business decision. The humanitarian aspect was ignored.

PREGNANT women are being refused permission to donate their umbilical cord blood because of a management squabble. Up to 100 life-giving cords have been wasted since April when Mayne Health banned collection from Melbourne's Frances Perry House.
"The Cord Blood Bank is responsible for the quality (of the blood)," he said. "I don't think it's a public liability issue. It's more of a business issue."
Cord blood impasse Herald Sun (Melbourne, Australia) December 3, 2002

Citigroup, which has advised many of the successful US corporations that capitalised on doctors vulnerability to corporate largesse, had been champing at the bit about Mayne's management since 1999. Its skills in getting other professionals, such as financial analysts, on side is illustrated by the recent Wall Street scandals in which Citigroup and its captive analysts played a pivotal part. Its ability to make a sick company look profitable is illustrated by the assistance it gave to Worldcom, Enron and others. It has had plenty of experience with successful giants in the USA. That this success was built on unsavoury conduct would not have influenced hard headed business men. They must have been itching to get their hands on Mayne.

Citigroup formed a coalition of venture capitalists which funded the management buyout and bought all of Mayne hospitals in October 2003 renaming them Affinity Health Care.

Mayne now claims to be primarily a pharmaceutical company with a major diagnostic (radiology and pathology) division. In current market thinking "core business" has replaced "diversification" and "vertical integration" as buzz words". It is likely therefore that this division will be spun off or sold and that the unrewarding general practice clinics will go with it. Mayne would essentially remove its dependence on doctors. Its name is so tarnished that a turnaround is unlikely.

The other big rationalisation possibility is if Mayne decides to offload its radiology and pathology businesses and concentrate on its primary strategy of generic and specialty pharmaceuticals. Mayne has always said the businesses are not for sale, although market analysts believe the company would accept offers at the right price. Stitched-up sector Business Review Weekly 24 June 2004

The remainder of this page deals briefly with Mayne's other businesses during this period and with the behaviour of management.

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Purchases and Divestments

The true financial situation at Mayne was obscured by the takeovers and divestments as Smedley redefined Mayne's direction and embarked on a takeover spree. Mayne had a plenty of money to make takeovers even though it was not making much money from its businesses. Speculation about potential takeover targets was rife.

Speculation abounds on all fronts: offshore hospital expansion, buying the Ansell rubber glove and condom business, the pathology operator Gribbles Group, or even private health insurance specifically Axa Health or Medibank Private. STREET TALK --- Midas Mayne has punters foxed Australian Financial Review November 2, 2001

The $1billion-plus war chest of Mayne Nickless chief executive Mr Peter Smedley has more than halved, with confirmation that the $US365 million ($703 million) on-sale of FH Faulding & Co's injectable pharmaceutical business has collapsed.

Mr Smedley's status as a deal maker and the company's share price both took a battering yesterday.
Sale Collapse Halves Mayne's War Chest Australian Financial Review

Smedley's invincibility in the takeover of Fauldings took a small dent when Teva, an Israel company to which Smedley planned to sell on the purchased injectables, backed out after performing due diligence. This caused analysts to stop and think then look a little more closely at the performance of the business and to start expressing some doubts.

Mayne Group Ltd intends to continually look for expansion opportunities in Australia and overseas, particularly for its health-care operations.

Chief executive Peter Smedley said yesterday the company would more likely look at a brownfields approach in expanding its hospital presence in Australia in the medium term.
Asked if Mayne Group was looking for acquisitions in Britain or Canada, Mr Smedley said the company was looking at all opportunities.
"We have progressively been increasing our presence in the logistics area in Malaysia, Thailand, Indonesia and we have a growing interest in Indonesia."
Aussie growth on cards, says Mayne chief Port Macquarie News 12 April 2002

Smedley, who now had no ready targets in pharmacology or hospitals did his best to distract attention by talking up the prospects for further takeovers and by growing the diagnostics business. With little opportunity locally the talk was about Asia and the United Kingdom.

At the same time Smedley attempted to build his integrated health care network including hospitals, diagnostics, pharmaceuticals, logistics and medical computing including ehealth. All of these ultimately hinged around the support of the doctors, both the general practices Mayne had purchased and the specialists who brought patients to its hospitals. It is clear that they did not support Mayne in the way Smedley expected. Only Fauldings met expectations.

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Drug companies

During 2002 Mayne switched the primary thrust of its business into pharmaceuticals but there were no more major purchases. There were also problems in quality control which caused the US Food and Drug Administration to issue a toughly worded warning letter to Mayne in November 2002. Drugs made in a Victorian plant were alleged to be contaminated.

MAYNE'S Victorian drug manufacturing plant allowed "objectionable micro-organisms" to contaminate supposedly sterile medicines 11 times in two years, the US has revealed.

The Food and Drug Administration, the regulator for health and food products, issued a toughly worded warning letter to Mayne in November. But it has now been lodged on the FDA website, and this is the first time details have been publicly revealed.
"In not addressing probable causes and not initiating corrective actions the firm failed to identify the cause of the contamination and neglected to insure (sic) that this type of problem would not recur," the letter concluded.

"The test methods used for sterility testing are inadequate." US warns of tainted drug ban The Australian January 3, 2003

There must have been dissent on the board about the pharmacology business. A small pharmaceutical acquisition in the USA triggered the resignation of a director in protest.

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While not expanding in pharmacology Mayne continued to expand its radiology and pathology division. It bought Endeavour Healthcare's pathology facilities in Victoria with the option of acquiring their general practice network and their occupational health operations as well. They bought Port Macquarie Medical Imaging early in 2002.

Having held out against a tidal wave of corporatisation in the pathology and radiology sectors, the 14 partners in the business, who stand to each reap an average $18million from the sale, have decided to stop fighting the trend. QML Poised For Fall To Corporatisation Australian Financial Review March 18, 2002

Moreover, many of the partners and non-equity pathologists (of QML) have reservations about the Mayne culture and executive chairman Peter Smedley. Corporate governance controversies and rumours of boardroom friction do not help its cause. Mayne looks likely Australian Financial Review April 19, 2002

Wallace Cameron's Gribbles Group should be considered the frontrunner for the $260 million QML pathology business, - - - - - - - Mayne Group disliked by a number of its (QML) partners, not to mention most of the medical profession.
Gribbles in front Australian Financial Review May 2, 2002

When radiologists at Queensland Medical Laboratories decided to bow to corporate pressures and sell their business, Mayne was the obvious strategic fit. Some of the radiologists did not want to sell to unpopular Mayne. Mayne's standing among the medical profession is reflected not only by the "Mean Mayne" tag but in the comments in the press about this sale. The matter dragged on until the radiologists eventually agreed to do so, perhaps because other bidders would not match Mayne's bid.

The purchase of diagnostic businesses continued into late 2002 and 2003 by which time Mayne's entire health strategy was in turmoil. They purchased another 10 radiology practices and then the Obstetric and Gynaecology Ultrasound business at the Sydney's Prince of Wales hospital in December 2002. They bought the MIA Group's NSW pathology business in June 2003. At the same time Mayne took full control of the Gippsland Pathology Service (GPS) in Victoria and also the obstetrics business "Melbourne Ultrasound for Women". They bought diagnostic imaging group Pacific Healthcare during 2003.

The strong focus on building up the diagnostics division even though it was lagging behind competitors suggests that Mayne has been building a viable entity with significant market dominance so that it can spin it off or float it on the stock market.

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Medical Centres

Mayne is quietly building up the number of general practitioners under its wing, located close to its hospitals and diagnostic centres as the looming purchase of GPs in Melbourne from troubled Endeavour Healthcare illustrates. State and Mayne Australian Financial Review January 24, 2002

The loss-making medical centres are also worth watching. At December 31, Mayne owned 44 centres employing 331 general practitioners, and it continued to buy centres in the six months to June 30. It is difficult to make money out of medical centres alone. Their main value is in the lucrative referrals they provide for pathology and radiology services. Mayne has a loss-making business, where the potentially valuable referrals have not been picked up.
Intensive Care Business Review Weekly (Australia) August 22, 2002

Never popular with doctors Mayne had been low key about its general practice purchases but continued to buy into 2002. It bought 20 medical centres in Queensland at this time. The income from these purchases did not justify the investment but the company expected this to pay off in referrals.

The plunge in profits and the lack lustre performance of diagnostics division showed that this strategy was not working. It may well be that independent general practitioners saw Mayne as a competitor that might take their patients. To analysts surprise Mayne elected not to take up the option to acquire Endeavour's Victorian Medical Centres.

Some GP's were unhappy that Mayne was entering their business via medical centres.

For whatever reason, they did not give as much business to Mayne hospitals as was expected. Initially, this was obscured by the rush of November-December business, 12 months after the new health fund entrants.
Time to listen to its main clients The Australian April 24, 2002

- - - - - - the decision not to take up the option to buy the medical centres (from Endeavour) meant the company was having second thoughts about its strategy of setting up a vertically integrated medical service. "That vertically integrated model is one that has yet to be proven,," said one analyst.
(The company's chief executive Peter) Smedley has been very aggressive in picking up new acquisitions, but it seems as though they might be coming to the same conclusion as the market that putting all the pieces together might be a bit more difficult than they first thought and having a bit of a re-think about the whole strategy."
Mayne chance missed as medical centres go begging The Australian April 9, 2002

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Other projects

Mayne bought Health Communication Network Limited towards the end of 2001 and has been active in computerising its hospitals.

An interesting event which illustrates the unreliability of the marketplace occurred when the health care of the defence force in Victoria was out sourced at the end of 2001. Mayne's tender was successful but shortly before it was to sell its hospitals to Affinity in 2003 it withdrew from the contract leaving a major hiatus in services.

The Australian Defence Force has outsourced health-care services for Defence personnel in Victoria, announcing that Mayne Group has won the $140 million deal. Mayne Wins Defence Health Contract Australian Financial Review October 18, 2002

Health services for Defence Force personnel in Victoria are in chaos following the collapse of an attempt to contract the services out to Mayne Health, leaked Federal Government documents reveal.
- - - - -(it) reneged on its bid last week. It also gave 60 days' notice of terminating hospital services at Puckapunyal army base.

The briefing notes say that Mayne's decision meant "Defence will now have major problems providing health care in Victoria". Victorian Troops Left Without Health Care The Age (Melbourne) September 12, 2003

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Smedley had maintained the illusion that the transport and logistics section was in some way integrated into his vision for health care. It delivered the drugs for Faulding. The decision to start breaking up Mayne must have been taken in 2002 because Mayne sold off this division before the end of the year breaking it up among different buyers.

Shares in Mayne Group hit their highest level in six weeks yesterday as investors applauded its plan to get out of transport and focus solely on health care. Shares Lift As Mayne Unloads The Age (Melbourne) June 1, 2002

MAYNE yesterday completed the shift to becoming a focused health company after selling off its transport arm for $456 million. Lindsay Fox's unlisted Linfox group, Paul Little's listed Toll Holdings and Deutsche Post's DHL divided the spoils between them.
Trio shares Mayne transport spoils The Advertiser November 2, 2002

The unwinding of Peter Smedley 's ambitious expansion plan at Mayne Group is set to continue with the $400 million-plus sale of its pharmaceutical distribution business to South African retailer New Clicks Holdings
Tough Medicine : Mayne To Lop Off Another Arm For $400m Australian Financial Review October 29, 2003

The sale included the Express air freight and courier service, the Canadian transport business, and the Australian and Asian Contract Logistics and Cash Logistics (Armaguard) businesses. By the end of 2003 it was also selling its pharmacy distribution business.

At the same time it jettisoned its international sunscreen business and its Victorian personal wash and soap business.

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The Hospital Sell off

When hospital profits collapsed and Smedley's credibility crumbled Robert Cooke, a more experienced hospital administrator was put in charge of hospitals. He fired Smedley's appointees and put administrators with hospital experience back in the hospitals.

Cooke fell over backwards to please the doctors and undo the damage which had been done. At the same time he placed much more emphasis on individual hospitals and their profit performance. Communities and doctors risked losing their local hospitals if they were not profitable. This put the pressure back on doctors.

"It was decided at our annual general meeting last November that we would conduct a review of all hospitals, because there were some which were under-performing financially," Mr Tassie said. Private hospital's; future uncertain Knox Leader (Australia) February 4, 2003

Australia's biggest private health-care group, Mayne Group, has taken expressions of interest on up to seven hospitals along the east coast. Another tranche is expected to be sold next year as returns fail to meet investors' expectations, despite federal government industry stimulus. Mayne Puts Seven Hospitals On The Block Australian Financial Review November 14, 2002

An under-performing hospital was one that did not "meet our financial performance criteria . . . which are internal measures", he said.
Mayne Health would then decide whether an under-performing hospital's performance could be 'turned around. "If not, we would look at selling the hospital," said Mr Tassie.
Hospital's fate undecided Sunbury Macedon Leader (Australia) January 28, 2003

Mayne Group Limited has reached an agreement with Healthscope Limited for the sale of six hospitals. The hospitals are Hobart Private, St Helen's Private, Mersey Community Hospital, National Capital Private, Geelong Private and Mosman Private.
These hospitals have consistently made a negative EBITDA impact.
These costs relate primarily to the Hospitals business and include Hospitals head office redundancy costs, the termination of the national hospitals food services contract and the termination of the centralised procurement process.

These significant items, which total approximately $90 million after tax, result from the strategic changes which Mayne has undertaken in the past six months to sharpen focus on- - - - - with a less centralised management approach. Mayne announces divestment of six hospitals and associated writedown, and other significant items Mayne WEB SITE 3 February 2003

The difficult private hospital market forced Mayne to write more than $76 million off its hospitals division as it agreed to sell six hospitals to Healthscope yesterday.
However, the size of the write-down of the sale surprised some analysts, and sent Mayne shares falling 13cents in early trading before a recovery resulted in them closing 6cents weaker at $3.15.
* They (unprofitable hospitals) were bleeding $10m to $15m annually from Mayne's earnings.
Mayne Cuts Out Rot For $90m Australian Financial Review February 4, 2003

During 2002 the profitability of large numbers of hospitals was evaluated with the threat of divestment or closure. Ultimately 6 were sold to Healthscope and a few others to smaller groups. Some of these were closed, some became specialised hospitals and some became aged care complexes. Services to some communities were disrupted. The market is there for profits not care. Decisions are impersonal. There are winners and losers. Services are consequently inherently unstable. All too often government and the taxpayer is called on to protect the community or preserve services.

Mt Waverley State Labor MP Maxine Morand said the closure of either hospital would have a huge impact on the Monash community.

"I wouldn't like to see the services close," she said. "I guess it's a business, but we need to hope they take into consideration the role of the hospitals in the community when they conduct the review."

Ms Morand said she didn't know whether the State Government would take over either facility. "I guess it's something the Government would have to consider at the time if the hospitals are to close," she said. Cloud over hospitals Waverley Leader (Australia) February 4, 2003

Cooke claimed to have stopped the rot and to be making a small profit. Mayne's claim that they had no need to sell the hospitals is disingenuous. The link to Mayne was a lead sinker.

Broker Credit Suisse First Boston said yesterday: "We continue to believe the best and perhaps boldest move would involve a divestment of the hospital business, which we believe will struggle to meet [weighted average cost of capital]." Mayne Puts Seven Hospitals On The Block Australian Financial Review November 14, 2002

The financiers and their analyst saw financial opportunities in dismembering the company. As the Wall Street scandals revealed this is good business for the financial institutions that manage and arrange the deals.

Citigroup which had been eyeing the hospitals for years made a tentative offer early in 2003 but Mayne elected to go to tender. Citigroup's group of Venture capitalists won the tender in October 2003 over an Australian grouping because, it is claimed, they were prepared to assume Mayne's medico-legal liabilities.

Yet, from Mayne's perspective, selling the hospitals for more than $750 million (a good price) but retaining contingent liabilities is unlikely to meet its criteria of being completely rid of the underperforming division. There's Plenty Under Mayne's Bed Australian Financial Review October 17, 2003

The management buyout deal which was brokered places far greater financial pressures on managers and links their personal fortunes to the financial success of the company.

These international financiers are renowned for their ruthlessness and their emphasis on cost cutting. Mayne may well have jumped from the frying pan into the fire.

Doctors were already negative about multinationals. They stepped in and objected when the UK managed care group BUPA bid for Mayne hospitals. That CVC Asia Pacific was a part of Citigroup was concealed from them and the public. How they will respond when they finally realise that the management buyout ploy put them at the mercy of the US financiers remains to be seen. That some of these are public or colocated hospitals will not help.

In September 2003 UK-owned mega-health insurance fund BUPA was in talks with Mayne Health about a potential acquisition of Mayne's 54 Australian hospitals. The alarm bells went off and the first to react was the Australian Medical Association's Federal Council chair, Dr Dana Wainwright. She was concerned that, despite being UK-based, BUPA wanted to get into "US-style "managed care". She was particularly bothered by something she termed "vertical integration" and said the AMA opposes this in healthcare provision with health funds owning private hospitals, due to the potential for interference in clinical decision-making. MANAGED CARE, ANYONE? BUPA AND MAYNE HOSPITALS AUSTRALASIAN NEWS BITES 1 November 2003

The example (Mayne's collapse) illustrates how temperamental the industry can be and how the normal rules of business may not apply when people's health is involved. The conduct of doctors taking on the federal government over its plan for medical indemnity insurance also shows exactly how much attention the medical fraternity can generate when it stands united on a common cause.
However, this also begs the question of how governments or doctors for that matter would react to having such a large chunk of private hospital infrastructure owned by offshore private-equity funds that have been notorious for cost-cutting and setting high performance hurdles.

Obviously minimum standards would be enshrined as part of the deal, but would government or doctors trust a private equity fund to supply the sort of capital required to run a hospital network of this size? Mayne Not Out Of Hospital Yet Australian Financial Review October 13, 2003

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Smedley and the analysts

WHEN Peter Smedley and Stuart James took control of Mayne and announced their intention to adapt the Colonial model to health, the industry experts said it would never work.

And last night with the former Colonial executive Paul Tissot being replaced by a health professional Robert Cooke as general manager of hospitals, the word around the health industry was: "We told you so". Time to listen to its main clients The Australian April 24, 2002

During most of his rule Smedley kept his plans close to his chest but there was much speculation. It was not until March 2002, 18 months into his term when cracks were appearing that he expressed his opinions publicly. It is clear from the press reports that he was trying to adapt his colonial management model to health care.

From the outset there had been a small number of doubters among analysts but as time progressed more and more analysts became critical. They were talking to doctors and alarm bells sounded. Share prices gradually fell. Smedley and his team seemed to be impervious to this and continued to be positive about the company's prospects and profits. It required some very hard facts to put an end to Smedley and his ideas.

"If you strip out the acquisitions, the organic growth rate of the business was pretty scary," one analyst said.
Oblivious to the investor sell-off, Mayne's chief executive, Mr Peter Smedley, was upbeat about the group's prospects, saying they were leveraged to economic recovery and primed to benefit from patient flows from the Federal Government's lifetime health cover initiative.
Under The Weather At Mayne Australian Financial Review February 28, 2002

MAYNE Group says the recent deep slide in its share price is a result of the downgrading of the health sector and analysts' disappointment over the company's operating margins, but it is sticking by its 2002 earnings forecasts. Mayne stands by its expectations The Australian April 5, 2002

HEALTHCARE conglomerate Mayne has sacked its hospitals general manager and warned of a dramatic profit slump of up to 18 per cent just three weeks after telling the stock exchange its earnings were on track.
The result raises difficult questions about Mayne's strongly centralised management style.
Mayne will now hire a business analyst and business development manager for each major hospital.
Mayne begins the bloodletting The Australian April 24, 2002

Particularly revealing of the mind set, and of the sort of people involved, was the positive assurance given by Mayne to a stock exchange inquiry about falling share prices in 2002. Only 3 weeks later Mayne released figures disclosing a massive loss in its hospitals.

Former sharemarket high-flyer Mayne Group stunned investors last night with a dramatic profit downgrade, raising fresh doubts about the strategy of chief executive Peter Smedley.
The downgrade has also raised concern about Mayne's disclosure policies, coming only weeks after a raft of broker profit downgrades and a query from the Australian Stock Exchange.

Until yesterday, Mayne had reiterated full-year earnings forecasts. The company said last night that fresh information which prompted the downgrade had not been available at the time of the ASX query on April 3.
The downgrade follows a steep slide in Mayne shares, which have fallen as much as 30 per cent over the past six months amid growing investor dissatisfaction with its hospital management and its continued inability to find suitable acquisitions.
Mayne Shocks With Downgrade Australian Financial Review April 24, 2002

The market was incensed because the announcement came less than three weeks after Mayne had issued strong assurances that it would meet its revenue forecasts. Mayne freefall yet to hit bottom The Australian April 25, 2002

An investigation into the previous stock exchange assurance exonerated Mayne. It seems that Smedley and his select team simply did not know or failed to understand what was happening. Smedley's days were now numbered.

An revealing episode was when at the height of Mayne's revival in 2001 Smedley was named to succeed Rayner as chairman of Mayne's board when Rayner retired. Analysts were divided about this. Most were highly critical of a CEO succeeding a chairman, something that was unacceptable in Australia and very poor corporate governance. Others acknowledged that this was usually undesirable but argued that it was justified in Smedley's case.

PETER Smedley has long wanted to introduce an US-style board structure to Australia -- with the CEO as chairman and other chief executives on the board. Smedley sunk by a revolutionary medley The Australian May 31, 2002

The present market demands the most stringent of all governance practices and earnings certainty and Mayne has failed on both counts.
Mayne's Smedley Loses His Gloss Australian Financial Review April 24, 2002

A confidant of Mayne chairman Mark Rayner told The Australian Financial Review that the former National Australia Bank chairman was "barely talking" to Mr Smedley before the chief executive's move to the position of Mayne's executive chairman in September.
The company is, in effect, to reverse that policy, appointing a number of senior managers at individual hospitals.
Mayne Shocks With Downgrade Australian Financial Review April 24, 2002

Now Smedley has been exposed as the emperor without clothes, the board should reconsider making him chairman. Concerns about corporate governance won't help restore Mayne's battered image. The pain for Mayne is mainly down to Smedley's reign The Australian April 25, 2002

Mr Smedley, the announcement said, had made a "personal decision" to leave the healthcare group when his contract as chief executive finishes at the end of this year. Mayne Spin-off, Smedley Out Sydney Morning Herald May 31, 2002

When the business collapsed reports suggest that the relationship between Smedley and the chairman became strained. Smedley withdrew as future chairman and then later moved aside as CEO in favour of his long term deputy Stuart James. In denial to the end he blamed the problem on "implementation" rather than his policies.

OUTGOING Mayne chief executive Peter Smedley yesterday blamed "flawed implementation of strategy" for the group's underperforming hospital division.
"I am obviously disappointed in the hospital result," said Mr Smedley, who stood down yesterday to act as a consultant to Mayne until it demerges its non-core logistics business, Loomis.
While denying that the group had underestimated the role of doctors in the hospital system, Mr Smedley did acknowledge that Mayne "did not manage the relationship with doctors as well as we should have".
'DISAPPOINTED IN HOSPITAL RESULT'; Career ends on low ebb The Advertiser August 29, 2002

Smedley remained as a "consultant" until the sale of the transport division on 11 November 2002. In Smedley we see the same arrogance and total self belief which has been a feature of the disastrous US health corporations. The consequence is an inability to see and grasp the obvious when it is not congruent with those beliefs. I have called this closed minded, sometimes even sociopathic.

Described by admiring colleagues and subordinates as both the toughest and best chief executive with whom they have worked, he has been driven by an often blinding self-belief and a dogged loyalty to key staff. Smedley: Sweet Success Turns Sour Australian Financial Review April 27, 2002

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Mayne and the Health Funds

Mayne also alienated health insurers like Newcastle-based NIB late last year by demanding higher fee payments or risk losing contracts -- daring them to send fund members elsewhere in the process. FALL FROM GRACE Courier Mail April 25, 2002

Analysts saw the market model in terms of corporate power linked to size and market share. It was all about competition. In some strange way individualised service and care was paramount was best served by consolidation into an area where giant organisations bargaining aggressively with each other.

Mayne was the biggest so the most able to bargain. It therefore adopted an aggressive bargaining stance. Among the market converted the distinction between bargaining power and competition in providing services is never made. Some of us see the exercise of power through size, market share and influence as anti-competitive and as undermining the very idea of a market. What happens to consumer choice and their right to examine quality when what they get is determined by power plays in which they play no part.

The perception of market power was another illusion. Hospitals were at the end of the profit line. They got what the funds felt they could pay, and the funds premiums were capped by government controls. If Mayne wanted more it would have to plead its case. They were not in a position to play brinkmanship and their stance would have been counterproductive.

Health-care conglomerate Mayne Group's full-year forecasts have come under increasing pressure due to the dual problem of the Pan Pharmaceuticals recall and stalled negotiations with the private health insurance funds. Pan Is Headache For Mayne Australian Financial Review May 15, 2003

The insurers were initially flush with funds as new members, spooked into private care by government legislation, went through a preliminary period when they could not claim. Once this expired they flocked to have the procedures they had been saving up for. Much of this money went to competitors and not to Mayne's half empty hospitals.

The health funds were soon in trouble again, pressing government to push up contributions and cracking down on the money paid to hospitals.

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Marketing and Branding

Shareholders overwhelmingly backed the rebranding exercise, voting to change the 126-year-old company's name to Mayne Group from Mayne Nickless. Mayne Nickless Sale Plan Flops Sydney Morning Herald 11/16/2001

Marketing and image were key issues in Shell and in Colonial. Like Columbia/HCA Smedley set out to create a brand image and to market the company. He renamed "Mayne Nickless", "Mayne Health" with the red dot as the symbol over hospitals, pharmacies and other businesses. This was the sort of thing which appealed to the business mind and the market welcomed it.

To stop charlatans from making false claims professional ethical values have for centuries forbidden marketing. Professional bodies have restricted advertising to supplying only basic information about a doctor's qualifications and speciality - sufficient to show that they were qualified to provide the services they practiced. Breeches were subjected to disciplinary action. This was seen by market economists as part of a closed shop and as being anti-competitive. Government specifically made it illegal to restrict advertising in Australia.

Smedley's branding and hyped up marketing may have impressed the gullible but it would have gone down like a wet balloon with most of the medical profession.

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Other setbacks

From its high of $7.50 Mayne's shares declined steadily in value with periods when setbacks caused them to plunge more rapidly.

A trifecta of negative news knocked Peter Smedley's Mayne Group on Friday, sending it to its lowest levels since February last year.

First off the rank and credited with most of the clout were offshore investors slamming the stock on the basis of Moody's cutting the group's long-term credit rating to Baa2 from Baa1.

The cut was based on concerns the group could look to fund acquisitions most likely offshore with debt, which Moody's said was a worry because of the lack of vigour in operating margins.
STREET TALK : Mayne nicked Australian Financial Review March 9, 2002

Private health, now there's the go. Or how to run a company into the ground.

Stuart James might be trying his hardest to turn Mayne Group around but at the moment the healthcare company looks pretty sick and the shares trading at their lowest levels since the crash of 1987. Mayne Looks Sick And Getting Sicker Sydney Morning Herald May 29, 2003

Mayne's prospects and share prices took a knock during the medical indemnity crisis when many surgeons at high risk threatened to down tools if they were not protected by insurance. This never eventuated.

Shares in Mayne Group and other listed hospital operators were casualties yesterday of the collapse of insurer United Medical Protection as investors worried about the threat to surgical procedures. Hospital Shares Hit As Insurer Collapses The Age (Melbourne) May 1, 2002

Mayne was also a big player in the lucrative complementary medicine field and most of its products were manufactured by Pan pharmaceuticals. Regulators stepped in and closed Pan ordering the recall of potentially contaminated products. Some estimates put Mayne's losses at $50 million. Mayne is pursuing Pan through the courts.

Citigroup Smith Barney raised its expectation of the Pan crisis costs to $50 million to $70 million. Mayne Gets Some Pain Relief Australian Financial Review June 3, 2003

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The Meat in the Sandwich : Patients

The meat in the sandwich through all of this were the patients. The sick look to the medical profession to protect them and act in their interests. When the doctors interests are aligned with the patients then their humanitarian mission triumphs and it works. This is what happened at Mayne.

Experience in the USA has shown that when financial pressures are put on doctors and their families and when their careers are threatened then this humanitarian mission may bend. Much that happened in the USA could have been stopped by doctors if they had stood firm. Instead whistle blowers have had their careers destroyed. Maynes hospitals, now called Affinity Health are now focussing on pleasing doctors. The combination of strong profit pressures and a policy of rewarding doctors for being on side is worrying for the future.

Mayne's profits were falling, and they were in dispute with insurers who were keeping the lid on funding. Not surprisingly they threatened and then started charging co-payments. People who had reluctantly taken out private insurance when coerced by government now found themselves paying additional large bills. The medical indemnity crisis was used as an excuse.

He said the reintroduction of out-of-pocket expenses for patients was inevitable unless the Federal Government intervened or the health funds discovered some goodwill towards hospital owners. Mind The Gap, Warn Private Hospitals The Age (Melbourne) November 13, 2002

PRIVATE hospital giant Mayne is warning it could need to charge patients directly for their hospital stays -- even if they are covered by health insurance -- to cover soaring indemnity costs.
He would not speculate on how much Mayne might charge, but Australian Private Hospitals Association chief Michael Roff said it could be up to $150 a day.
Patients warned of private hospital charge The Australian November 13, 2002

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Ethical edges

Cherry Picking

In the section on cherry picking above I pointed out how Smedley's views on the role of the market in health care predisposed to the illegal and unethical practice of cherry picking. This flies in the face of community and ethical values. Within the market there is no obligation to provide a service. It is a deal between the seller and the buyer. Either can decline. In health care in contrast there is a duty of care quite independent and above any commercial deal. This is not profitable.

Cherry picking and the denial of care are key problems in the market driven US health system. That the message about Cherry Picking has not penetrated market craniums is well illustrated by a report in the Australian Financial Review in 2003. Mayne is urged to do just this - adjust the services it provides to target profits. It is seen as the only way they can fix the hospital problem.

To fix the hospitals division 28 per cent of capital employed Mayne must increase occupancy levels, shift the case mix towards advanced surgery, with a higher revenue per bed, as well as contain the cost base.

The last point is problematic as there are unavoidable rises in professional indemnity cover, nursing wage expenses and prosthetics. Health Group Still Off Colour Australian Financial Review March 3, 2003

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Medical Centres

As we look at Mayne and at the marketplace we see specialists in the hospitals standing firm when their interests are at stake. There are also several pointers to areas where ethical structures are under pressure and doctors interests are not at stake. While professional leaders may draw lines in the sand and draw up agreements, rank and file doctors are influenced by market thinking and we know that some are likely to cross the lines when their own interests are at stake. The critical question is how many, and whether the justifications that they use are becoming acceptable among their peers.

Says one analyst: "The real motivation (for buying GP practices) is building a captive market for higher margin (medical) services. But corporatisation of the sector and the possibility of over-referrals is going to be a very, very sensitive political issue." Health funds copy Mayne line The Australian March 4, 2002

We have a situation in which corporations own the buildings, the pharmacies, the pathology services, the X-ray services, the therapists and a variety of other health care add ons as well as the practices of the doctors. They are geographically located in the same buildings.There is no sharp ethical dividing line here and it is easy for some to justify practices on the basis that they are in the patient's interests while other disagree. Doctors are expected to put their patients first and to behave ethically but the context in which they practice may make this very difficult.

Clearly there are many advantages to doctors and patients by having all of the services on tap. At the same time all of these businesses are entirely dependent on referrals from the pens of the doctors. The more referrals the greater the success of the business of which they are all a part. While we can debate endlessly the line between legal conduct and kickbacks, this is not the critical issue. It takes a brave person to buck the trends, legal or illegal, when everyone else is following and offering glib justifications.

In this context the doctors are likely to come under strong social pressure to refer to these other services excessively. They are working in a set up dominated by market thinking in which commercial deals and rewards for service are the norm. We should not expect doctors to be immune to the pressures, however carefully the deals are structured to make them legal.

This may be a particular problem in General Practice where doctors are already underpaid, overworked and discontented. If corporate complex primary care becomes the norm then we should anticipate economic and patient care problems. The issue is not about medical centres but about the provision of care in a competitive for profit market environment when a not for profit cooperative system would be appropriate.

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Payment for support

That doctors do enter into financial deals in return for support, that this is common, and that the market (and at least some doctors) see nothing wrong with it is revealed in a startling report in the Weekend Australian

The doctors, accusing Mayne of mindless cost control, abandoned it. Doctors who asked for special bonuses to stay (a regular feature of private health) were told: "Doctor, I will help you pack." Too many obviously did. SHATTERED Image - Shattered images of corporate main men The Weekend Australian June 1, 2002

So the truth is out! If the report is accurate and it could only have come from talking to doctors or Mayne staff then private hospitals do pay doctors for their support - or at least for relocating to their facilities. Doctors have come to accept this as normal and even ask for it.

These are the same doctors who have stood firm against Mayne's cost cutting and patient care. If this report is accurate then seriously unethical conduct that might prejudice care is now seen as acceptable. If payment for support is extended to the logical next step, payment for admissions, then this would encourage unnecessary surgery - a feature of the contracts which Tenet Healthcare (then NME) was alleged to have reached with surgeons.

Whether similar contracts lay behind the profitable but allegedly unnecessary cardiac procedures and bypass surgery by Tenet doctors in California is not known. During 2004 Tenet hospitals in multiple states are being investigated for "physician relocation agreements" - ie. payments for relocating to Tenet facilities. These are considered to be thinly disguised kickbacks in return for support.

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Aligning commercial interests - joint ventures

One of the more worrying features of the corporatisation of general practice in Australia was the purchase of doctors practices using company shares. This ensured that doctors working for the company had a strong financial interest in the success of the business - essentially a form of legal kickback. I do not know if Mayne did this. Affinty Health is employing the same strategy by attempting to enter into joint ventures in which specialist surgeons become co-owners in day surgery centres, so effectively binding them to the company.

This is a strategy employed by the US giant, Columbia/HCA, as part of their US $1.7 billion fraud. These were criticised in the press. US authorities considered these to be kickbacks. Columbia/HCA was fined and forced to undo the deals.

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Hospitals try to Recover

Robert Cooke the new hospital manager's most urgent problem was to get doctors back on side. He spent a year dong so prior to becoming part of the Affinity Health Care management buyout where these policies continued.

This focus on pleasing doctors opens up a new side of corporate medicine, more dangerous because it seeks to align the profession with the market mission. As this is integral to Affinity Health and Cooke's role as CEO of Affinity I will address the issue further there.

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Web Page History
This page created August 2004 by
Michael Wynne
Format changed Nov 2005