The Mystery of the Fugitive Founder (and Longterm President of an Offshore Medical School for US Students)

We recently wrote about for-profit medical schools located offshore from the US, but catering to American students, not students from the countries in which they operate.  Now some new media reports raise further questions, if not mysteries about another set of such schools.  

Two Bloomberg articles on a trial underway focused on the alleged use of offshore accounts to avoid US taxes.  These accounts were connected to the former long-term President and founder of two offshore medical schools, and his spouse, a dean at one of the schools.  


The first Bloomberg article opened thus:

Patricia Hough, according to her lawyers, is an altruistic psychiatrist who helped her husband build two Caribbean medical schools. To prosecutors, she is a tax cheat who used offshore accounts to avoid paying taxes on millions of dollars from the schools’ sale.

Jury selection began today in federal court in Fort Myers, Florida, where Hough, 67, is accused of using accounts at UBS AG, the largest Swiss bank, and elsewhere to hide assets and income from the Internal Revenue Service, including almost $34 million she and her husband made when the schools were sold in 2007. 

The Bloomberg article asserted,

 At the heart of the case is whether she misused accounts associated with the Saba University School of Medicine Foundation.

The main question to me is not whether Dr Hough is guilty or innocent, which I cannot tell.  There are more intriguing  mysteries raised by this case.

How Did Non-Profit Medical Schools Become For-Profit?
 
According to Bloomberg,

  Hough’s lawyers say she helped [her husband, David] Fredrick build Saba University School of Medicine, on the island of Saba in the  Netherland Antilles, and the Medical University of the Americas, or MUA, on Nevis in the West Indies.

To do so,

 Through the Saba foundation, which they first funded in 1988, according to a government trial brief filed Oct. 3, the couple opened the Saba University School of Medicine in 1993. Fredrick served as president and a foundation director. Hough was associate dean for clinical medicine. 

Also,

In 1999, Fredrick and Hough began the Medical University of the Americas, a for-profit school on Nevis in the West Indies, according to the government filing.

There seems to be no question that the schools were started by a foundation based in the Netherland Antilles.  A report of a site visit of the Saba University School of Medicine by the Division of Licensing of the Medical Board of California in 2004 summarized this history,

In 1986, the government of the Netherlands Antilles proposed to a group of American educators that a medical school be established on the small island of Saba, N.A.  It was to be relatively small, of high quality and established for the dual ppurpose of benefiting the economy of the island (of only 1500 population) and attracting N.A. citizens to medical careers in the N.A.

A committee of Dutch citizens from Curacao, the seat of the N.A. government, approved the preliminary plans and the school was founded as a non-profit foundation under Dutch law....

The Saba University website still states that the school is accredited in the Netherlands,

Saba University School of Medicine’s Doctor of Medicine (M.D.) program is accredited by the NVAO (in Dutch: Nederlands-Vlaamse Accreditatieorganisatie). The NVAO is the Accreditation Organization of the Netherlands and Flanders. This organization was established by international treaty and ensures the quality of higher education in the Netherlands and Flanders.

So apparently Saba University was started as a non-profit organization meant to focus on medical education for the Netherlands Antilles, and thus accredited there.  But then, somehow,  according to Bloomberg.

Equinox Capital, a private-equity firm based in Greenwich, Connecticut, bought the Saba school and MUA for $36 million in 2007. The transaction included $34 million for land held in the name of Fredrick’s daughter from an earlier marriage, according to prosecutors.

Hough and Fredrick didn’t tell the IRS about most of the proceeds of the sale and transferred money among various undeclared accounts to buy the plane and real estate, make gifts to family members and pay personal expenses, prosecutors said.

There also seems to be no question that Equinox Capital did buy the schools.  The summary of a 2007 press release from the company stated,

 Equinox Capital III, L.P. announced that it has completed the recapitalization of Saba University School of Medicine B.V. ('Saba'). Founded in 1986, Saba is a leading for-profit university that awards four-year graduate degrees in Doctors of Medicine (M.D.). 

A statement from Prairie Capital, which is now an investor in the schools, noted that now

 R3 Education is a Massachusetts-based holding company that controls The Saba University School of Medicine ('Saba'), The Medical University of the Americas ('MUA') and St. Matthew University ("SMU").

After,

 Prairie Capital partnered with Equinox Capital to acquire the three universities.

It is enough to cause some dizziness.  Let me recap.  Mr Fredrick and Dr Hough somehow founded two medical schools apparently under the auspices of a foundation, the Saba University School of Medicine Foundation, which the couple ran.  The goal of the foundation was to attract Netherland Antilles citizens to medical careers in the NA.   However, the Saba University school became an off-shore facility for US medical students.  The two schools were later acquired by Prairie Capital and Equinox Capital, and they are now run as for-profit operations by R3 Education.

So somehow Saba University transitioned from being a non-profit meant to serve the medical education needs of the Netherlands Antilles to a for-profit owned by US private equity firms (and apparently now focused on serving Americans.)

How did that happen?  What was the rationale for the change?  Did any Dutch authorities consider the implications for their country?  Did any American organizations concerned with the quality of education and credentials of US physicians consider the implications?

Where Did the Money Go?

According to Bloomberg, US prosecutors made some striking allegations,

Both the foundation and MUA failed to tell the IRS about accounts held at UBS, Liechtenstein Landesbank and other banks, the U.S. charges.

Singenberger and Luetolf helped the foundation and MUA move money through British Virgin Islands or Hong Kong entities they controlled called Top Fast Finance Ltd., Ample Dynamic Trading Ltd., New Vanguard Holdings Ltd. and Apex Consultants Ltd., according to prosecutors.

'Hough and Fredrick were the beneficial owners of and had signatory authority over all over these accounts and owned and controlled each of them,' prosecutors said in their brief. 

The prosecution also alleged that Mr Fredrick and Dr Hough spent the money they allegedly got from selling the two medical schools rather lavishly.  Per the second Bloomberg article,

[Prosceutor] Kessler said Hough and her husband used the proceeds of the school sales to buy a $1.6 million airplane, a $1.1 million house in Asheville, North Carolina, a $590,000 house in Greenville, North Carolina, and an $800,000 condominium in Sarasota, Florida. She said they also gave money to relatives.

The prosecutors charged that the money the private equity firms paid went to Mr Fredrick and Dr Hough.  But while Mr Fredrick was President of Saba University, and apparently ran the foundation that was supposed to support it, he did not own either.  So why would the money go to him, and his wife?  If the money did not go to them, where did it go?

As the trial continued, as documented in a second Bloomberg article, Dr Hough's lawyer denied that she got the money,

Dan Saunders, an attorney for Hough, said his client never believed the money held at UBS AG (UBSN), the largest Swiss bank, and in other offshore banks belonged to her. Rather, he said, she thought it belonged to the foundation that ran the schools.

'It wasn’t her money, and she never believed it was,' Saunders said in his opening statement. 

If that is true, however, why is money that supposedly belongs to a foundation sitting quietly in a Swiss bank?

Dr Hough's lawyer said,

 Saunders said the accounts did serve a business purpose: to protect the assets of their nonprofit foundation from people attempting a hostile takeover.

Hostile takeovers of publicly held corporations do occur, of course.  However, how could a hostile takeover of a foundation occur, and who would possibly want or be able to do so?

So thus far, no one has offered a rationale explanation for how the schools were sold, why they were sold, and where the money resulting from the sale went.

Where in the World is Mr Fredrick?

So far, while the defendant is Dr Hough, the role of her husband, Mr Fredrick, apparently the President of Saba University from its founding at least until 2007, seems key.  Yet little of the coverage focused on Mr Fredrick.  The reason for that suggests the next mystery, per  the first Bloomberg article,

Fredrick vanished after the indictment, leaving Hough to face trial alone. U.S. District Judge John Steele, who is overseeing the trial, has declared Fredrick a fugitive.

So why did Mr Fredrick flea, and of course, where did he go?

Obviously, the fact that Mr Fredrick, who was the President of Saba University for many years, chose not to defend himself against charges that he hid the money he somehow obtained from the sale of that and another medical school, but rather fled, suggests that he may not have had a very good defense against those charges.  What does that say about the leadership of these medical schools?

 Summary

So the coverage of this intriguing trial, when added to some other publicly available information, suggests a wealth of mysteries about the founding, current nature, and leadership of two Caribbean medical schools which currently are run as for-profit firms and owned by US private equity firms, and whose student bodies come almost exclusively from the US.

So the really big mysteries are those about the implications for the medical education these schools provide, the students they attract, the physicians who graduate from their programs, the US patients of such physicians, and the US government which largely provides the loans which paid for these students' education (look here).

Despite the extraordinary nature of this case (again, involving the longterm president of an offshore medical school that sought to educate a substantial number of US physicians, and who is now a fugitive from justice), the only interest in it so far seems to be its implications for US prosecutions of hidden offshore accounts.

This case illustrates why we must reexamine our fascination for "market based" approaches to health care, when almost nothing about any part of health care resembles, or could resemble a free market (see this post).  We need to make health care more transparent, and shine more sunshine on the nooks and crannies, like off-shore but US corporate owned medical schools.  We need to facilitate health care leadership and governance that puts patients' and the public's health first, way ahead of the personal enrichment of the participants.  




ADDENDUM (29 October, 2013) - Dr Hough was convicted of defrauding the IRS and income tax evasion, see the Bloomberg article.  So far I see no response, certainly no apology or disavowal, by the current managers and owners of the medical school. 

To Whom Does a Leading "Off-Shore" Medical School Owe its Allegiance?

We have noted how existing US medical schools seem unwilling to invest or reward teaching (see post here.)   It is no secret in academic medicine that for years, US medical schools have been unable to train enough students to meet the country's current demand for doctors.

Brain Drain
Hence, a significant proportion of physicians practicing in the US were trained by medical schools in other countries.  One well-known adverse consequence of our disinclination to put sufficient resources into medical education is "brain drain," the migration of physicians from countries with severe physician shortages and major unmet health care needs to the US.  (For more discussion of this issue, see our 2005 post here, and also Mullan F. The metrics of the physician brain drain. N Engl J Med 2005; 353: 1810-1818. Link here.)

At the end of 2009, the St Petersburg (Florida) Times published an investigative report which showed some further adverse effects of the US disinclination to support medical education sufficient to meet the country's needs. 

Ross University and Its Problems

The report profiled the problems at one important "off-shore" medical school.

Ross University School of Medicine may be the biggest medical school you've never heard of.

For decades, the school on the Caribbean island of Dominica has been accepting U.S. students whose poor test scores make it impossible for them to get into medical schools in the States.

And though Ross is 1,500 miles from the mainland, U.S. residents who attend the school, and about two dozen other offshore medical schools, qualify for federal student loans.

That has meant more than $150 million a year in government-guaranteed aid for Ross, which has about 3,500 students, double the biggest U.S. medical school.

Ross and other foreign medical schools say they're responding to U.S. demand for new doctors as the population ages.

And there's no question that these schools have produced thousands of practicing physicians. There are more than 80 Ross graduates in the Tampa Bay area alone.

But federal regulators are taking a closer look at evidence suggesting taxpayers and students may be getting shortchanged by foreign medical schools.

• At Ross, fewer than one-third of the students finish in four years, compared to nearly 100 percent at U.S. medical schools. [And as reported later in the article, the six-year graduation rate is only 66% - editor]

• Since Ross, like other Caribbean medical schools, doesn't have a teaching hospital, it pays hospitals stateside for students' clinical training, with wide variations in quality.

• Students of foreign medical schools like Ross graduate with higher average debt, $235,000 compared to the average $158,000 owed by graduates of U.S. medical schools, according to an August report to Congress by regulators.

• About 20 percent of Ross graduates fail to land a residency, the key to a license to practice in the United States. If they cannot pay their student debts, taxpayers are left holding the bag.

The article concludes with:

In a report to Congress in August, the group that accredits offshore medical colleges recommended that the schools raise standards and improve reporting on everything from test scores to graduation rates to total cost.

[Michael] Rendon, the former Ross registrar, said he agrees with the need to stiffen entrance requirements.

'We want doctors but we can't give that kind of money to everyone who's chasing a dream of being an M.D.,' he said. 'We need to be a little bit more discriminating about who those tax dollars go to.'

Based on what I wrote above, these criticisms do seem very "US centric." It seems obvious that a school based in the tiny Commonwealth of Dominica, with a population of little more than 72,000, and an estimated gross domestic product of $726 million in 2008, (according to the CIA factbook), might have trouble meeting US standards.  But instead of trying to do so, wouldn't it be better if the school could concentrate on training physicians to practice in the Caribbean region?

But wait, it is not so simple... 

Who  Really Owns Ross University?

It is true that the missions of most of the medical schools outside of the US which make substantial contributions to the US physician workforce are mainly to train physicians to practice within their countries.  But that description hardly applies to Ross University.  Per the St Petersburg Times,

Robert Ross, a commodities trader in New York, opened his medical school in 1978 in a motel in Dominica's capital at the suggestion of an employee whose son couldn't get into medical training in the States. By 2000, Ross had sold majority interest in both the medical school and an affiliated veterinary school in St. Kitts to a group of New York investors. Three years later, both schools were acquired by DeVry, [Inc] for $310 million.

Ross is the only offshore medical school owned by a publicly traded corporation, which must disclose more financial data than privately owned schools.

Last year, DeVry, better known for its tech training schools, reported $165.7 million in net income after taxes. But the company also reported an additional $140 million in tax-free income from the Ross operations.

"Ross University" describes itself as:

Ross University is one of the largest and most successful medical educators in the world – and remains one of the great secrets in medical education.

Since opening in 1978, Ross has been committed to our students with a rigorous curricula that mirrors the education of its U.S. peers.

I see nothing obvious on the "Ross University" web-site that mentions DeVry Inc. 
But "Ross University" and "Ross University School of Medicine" are really just operating subsidiaries of DeVry Inc, which does describe itself as:

one of the largest publicly held, international, higher educational organizations in North America, is the parent organization for DeVry University, Ross University,....

This raises questions whether the US students who apply to the medical school know they will be taught by a for-profit US corporation?


Who Leads Ross University?
 
Note that the CEO of DeVry Inc, and his lieutenants most responsible for medical education at Ross University do not seem to have the sort of qualifications you would expect from those in charge of a "unviversity" and a medical school.  Per the DeVry Inc., web-site:

Daniel Hamburger:

Daniel Hamburger is President and Chief Executive Officer of DeVry Inc.

Hamburger joined DeVry in 2002 as Executive Vice President, responsible for DeVry’s online operations and Becker Professional Review. He was named President and Chief Operating Officer in 2004, and Chief Executive Officer in 2006.

Prior to DeVry, Hamburger served as Chairman and Chief Executive Officer of Indeliq (pronounced 'in-DELL-ik'), now owned by Accenture Learning. In addition, his previous experience includes serving as Division President of WW Grainger's Internet Commerce group, growing revenues from $10 million to over $100 million in one year. Previously, Hamburger started the Internet Services Group for RR Donnelley’s Metromail division, and was responsible for its venture capital investments. He also served as a consultant with Bain & Company in London, Warsaw and Boston.

Hamburger graduated in 1986 from the University of Michigan with bachelor's and master's degrees in Industrial Engineering. In 1990, he earned an MBA from Harvard Business School.

Dr Thomas C Shepherd:

Dr. Thomas C. Shepherd has been the president of Ross University since 2004. In this position, Dr. Shepherd is responsible for the operations of the School of Medicine, located in Dominica,....

Prior to joining Ross University, Dr. Shepherd was the president of Bastyr University, a Washington-based university with multiple offerings in healthcare education. Prior to Bastyr he co-founded Royale Healthcare, Inc., a hospital management company in North Carolina, to provide hospitals and health systems throughout the United States with management and consulting services. He has served in senior management roles for a variety of [for-profit] hospitals and healthcare systems, including Hallmark Healthcare (now Community Health Systems), American Healthcorp, Inc., and HCA.

Dr. Shepherd received a bachelor of science degree in business administration cum laude from Fairleigh Dickinson University in 1972, a master’s degree in hospital administration from George Washington University in 1975, and a doctor of health administration from the Medical University of South Carolina in 1999.

William Hughson:

William Hughson is President of the Medical and Healthcare group at DeVry Inc.

Hughson joined DeVry from DaVita Inc., a leading provider of dialysis services in the United States. At DaVita, he managed a wide number of business units including co-founding DaVita at Home, and founding DaVita Rx. Prior to that, he headed Ultra Lucca from 1997-1999, which under his guidance, rebranded itself A.G. Ferrari Foods and more than doubled in size. Previously, Hughson was president and chief financial officer of Noah’s New York Bagels, which he helped to grow from one to 39 stores. Hughson began his career in the Capital Markets Division of Morgan Stanley in 1986 and subsequently worked at Bain & Company in 1990.

He received his bachelor’s degree in English from Williams College and graduated from the Stanford Graduate School of Business with a master’s in business administration.

For their pains, Mr Hamburger had amassed 548,666 shares of DeVry stock, worth $30,966,709, at today's price of $56.44/share, and received $3,454,711 in total compensation in fiscal 2009, while Mr Shepherd had amassed 74,950 shares, worth $4,230,179,  and received $714,688, according to the 2009 DeVry Inc proxy statement.

Yet none of the three top leaders of DeVry Inc with responsibilities for the Ross University medical school subsidiary are physicians, have any obvious direct clinical or biomedical scientific experience, or have any educational expertise or experience.

Conclusions

So here we have a new kind of example of what laissez faire unregulated capitalism has wrought for US health care.  The medical school in tiny, impoverished Dominica exists only to train physicians for the US not for Dominica, or the Caribbean area.  Nonetheless, the school does not do a great job: one-third of its students do not graduate even in six years, and one-fifth of those graduates never even start a residency.  Yet the students pay more than $30,000 a year in tuition, and graduate with an average debt much higher than US trained medical students.   In fact, the school is actually a subsidiary of a large, US for-profit corporation, although it is not clear if this is made obvious, or even revealed to prospective students.  The leaders to whom the school report to seem to have no expertise or background in clinical medicine, biomedical science.   Yet they are handsomely rewarded for their lack of relevant expertise and experience, and apparently for the poor performance of their graduates.

There is something really perverse about a nation that spends $2.3 trillion a year on health care, yet does not spend enough on medical education to educate the physicians it needs, while drawing physicians from unregulated, for-profit schools located in less developed countries, but owned by US corporations.