Scooter Store's end began with feds' raid

Staff Writer
Columbus CEO

(For use by New York Times News Service clients)

c.2013 San Antonio Express-News

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By Patrick Danner

San Antonio Express-News

SAN ANTONIO -- Feb. 20 was supposed to be a big day for New Braunfels-based The Scooter Store . And it was -- for the wrong reason.

Company executives were confident they had found a lender willing to refinance the financially distressed distributor of power-mobility devices and scooters. The bank's credit committee in Dallas was set to review the loan that day.

Scooter Store CEO Martin "Marty" Landon was just wrapping up a meeting about 9 that morning when he spotted from his third-floor office a solitary black-and-white state trooper sedan patrolling the company parking lot. General Counsel Jason Cone told Landon he would check it out, the CEO recalled.

Before Cone could do so, six federal agents were there to greet Landon and Cone as the latter opened the door.

"And our world turned upside down from that point forward," Landon said in an interview last week.

For The Scooter Store, which had grown into an industry behemoth, the raid touched off a chain of events that culminated Sept. 13 with word that the company was going out of business. After the raid, it was apparent to many observers that it would end badly for the company.

Initially, though, confusion reigned.

"I, honest to God, thought it was a bomb threat," said an employee who didn't want to be identified. "I couldn't imagine what would cause people to storm the building like that."

Employees were ordered out of the building, but it quickly became apparent this was no bomb scare. Executives were sequestered in separate offices -- each guarded by an FBI agent. The executives weren't permitted to talk to each other or use their cellphones for the next couple of hours.

It turned out the raid on The Scooter Store's headquarters was part of a Justice Department investigation, believed to be related to Medicare and Medicaid fraud. Some 150 federal agents descended on the company's headquarters that day. Authorities haven't said much about their investigation, which is ongoing. But Landon said there are both criminal and civil components to the investigation.

The Scooter Store had long been dogged by allegations that some of its customers were prescribed power-mobility devices even though they didn't have a medical need. The store, too, operates in an industry that government officials have said is rampant with fraud and improper payments.

Scooter Store commercials filled midday and late-night TV with pitches to viewers to find out if they qualify for one of the devices "at little to no cost to you." That drew the anger of at least one U.S. senator last year.

The raid sent the company into an even steeper tailspin of which it was never able to pull out. The lender it had lined up to provide financing backed out. Pink slips were issued to most of The Scooter Store's workforce in March. A month later, the company filed for bankruptcy protection.

But the deathblow didn't come until Sept. 11 , when the company was notified it would no longer be permitted to do business with Medicare. The national insurance program has accounted for about 75 percent of The Scooter Store's business.

A spokeswoman for the Centers for Medicare & Medicaid Services (CMS ) wouldn't comment about the decision.

Two days after the letters arrived, The Scooter Store announced it would be shutting down and "furloughing" most of its remaining 370 employees.

Among those to go was Landon, a former chief financial officer for San Antonio wound care company Kinetic Concepts Inc. , who had been hired by The Scooter Store in August 2012 to chart a turnaround.

The company has indicated the investigation is focused on prior management and not Landon's crew. Recently filed bankruptcy court documents seem to indicate former executives Michael Clark and Timothy Zipp are targets.

Hope dies last

Until Scooter Store officials received the letters -- which arrived via email and overnight delivery -- from a CMS contractor, they were furiously trying to save the company. It had been at one time New Braunfels' largest private employer, with 2,400 staffers.

Landon thought the efforts to stay in business were about to pay off. As many as five serious parties -- primarily private-equity firms -- were considering bidding for substantially all the company's assets in a bankruptcy auction, he said. A lead bidder was even lined up, he said. He declined to name the parties.

The plan called for the winning bidder to keep Landon and his management team in place to run the reorganized company, which would operate under a new business model.

"The company had a very high cost structure for what they did because it was focused on consumers," Landon said. "High cost of advertising. High cost of customer acquisition. So there was very little profit falling out the bottom."

Management determined that the business could be made more profitable by "getting closer to physicians" who understand what's required "for them to get product for their patients," Landon said.

The company also planned to expand its business beyond mobility devices, he said. He envisioned serving seniors in their homes with a variety of health care products.

"The people who have mobility issues tend to have co-morbidities," he said.

Landon even secured web domain names using his own credit card -- The Scooter Store couldn't spend money without bankruptcy court approval -- with the intention of changing the company's name after it was bought out of bankruptcy.

The new company name would incorporate the word "Salus ," which he said means "good health and well-being" in Latin. The Scooter Store had been in the process of determining whether there were any trademark hurdles with the name.

Meanwhile, all the prospective buyers wanted to know whether The Scooter Store would continue to have contracts with its biggest customer: Medicare. Any purchase of The Scooter Store was contingent on it keeping those contracts.

Landon was confident it would remain a Medicare supplier despite multiple notices to the contrary.

How it ended

CMS contractor Palmetto GBA first informed Landon in a March 25 letter that it was terminating the company's contract to supply durable medical equipment under a competitive bidding program that was launched in 2011 in nine cities. The program was designed to save the government money.

Palmetto GBA cited The Scooter Store's inability to service new patients as the reason for termination.

The Scooter Store had 30 days to file a "corrective action plan," or the contract would be terminated May 5 .

On April 19 , four days after The Scooter Store's bankruptcy filing, Landon submitted a 12 -page plan that detailed the company's restructuring efforts and the steps it was taking to comply with the terms of the contract.

The communications between Palmetto GBA and The Scooter Store were filed in the latter's bankruptcy case.

More than three months later, on Aug. 1 , Palmetto GBA notified Landon that the company's corrective action plan was "inadequate."

Palmetto GBA detailed numerous calls placed to The Scooter Store by CMS answered by an automated phone system that stated "no new orders are currently being taken" or a similar message. After the company furloughed most of its workforce in March, the San Antonio Express-News received calls from customers who said they couldn't get through to the company.

The Scooter Store had 10 business days to respond to Palmetto GBA's Aug. 1 letter.

On Aug. 14 , Landon wrote back to say the company was meeting its contractual obligations.

"We have been taking new orders and furnishing new product within the Round 1 competitive bidding areas," Landon wrote.

CMS officials were unconvinced. Palmetto GBA's Sept. 11 letter said The Scooter Store's contract was being terminated, effective Oct. 26 , unless the company requested a hearing.

Simultaneously, a second letter said CMS would not sign a contract with The Scooter Store that would allow it to participate in a second round of competitive bidding covering 91 additional cities, including San Antonio. Palmetto GBA cited The Scooter Store's failure to comply with requirements of the first round of competitive bidding as the reason why CMS wouldn't sign the contract.

CMS' decision on the Round 2 contract precluded "administrative or judicial review," Palmetto GBA wrote.

"It's obvious with this competitive bidding process, the government is retaking control of how the devices are sold (and) how much they're going to pay for them," said Jeffrey B. Hammond , an associate professor of law at Faulkner College in Montgomery, Ala.

Ruined reputation

Despite all The Scooter Store's troubles, Landon said he was "surprised" by CMS' decisions.

"Here's why: Because we had made so much progress with so many constituencies along the way," he said, referring to lenders, regulators and investigators.

Also, he said, The Scooter Store was achieving a more than 90 percent approval rate under a three -year demonstration program that CMS launched last year. The program requires providers to get prior authorization from Medicare before patients living in any of seven states receive a power wheelchair or scooter. Texas is among the seven states, which Landon said accounted for 41 percent The Scooter Store's Medicare business. He said he urged CMS officials to expand the program, which he believed would give the company a competitive advantage.

So was there some other reason CMS put the kibosh on dealing with The Scooter Store?

"Perhaps continuing to do business with The Scooter Store would open them up to criticism -- I don't know," Landon said. "I think there was maybe just too much baggage there."

Besides the Justice Department investigation, an independent auditor last year found that The Scooter Store received between $46.8 million and $87.7 million in overpayments.

The company agreed to repay $19.5 million -- the amount it determined it was overpaid -- but only after the inspector general's office of the U.S. Health and Human Services Department threatened to cut the company out of federal health care programs. The OIG found the failure to immediately refund the overpayments breached a five-year "corporate integrity agreement" from 2007 . The company entered into the agreement to settle charges that it made false Medicare claims and defrauded the government.

"The Scooter Store was a toxic brand," said Patrick Burns , a spokesman for Taxpayers Against Fraud in Washington. "When you become a toxic brand in bad odor, not only does every bill that you submit get looked at, but people who pay the bills look for an excuse to no longer do business with you."

Without Medicare reimbursements, Landon said, The Scooter Store's board made the decision Sept. 12 to liquidate rather than reorganize the company and sell it as a going concern. Four of the five board seats were occupied by members of private-equity firm Sun Capital Partners Inc., a major investor and lender in The Scooter Store.

Employees were notified of the board's decision the next day, Sept. 13 .

The auction has been postponed.

"We had an opportunity to carry this thing forward and make it successful," said Landon, who's looking for another job. "But through some very difficult circumstances, we couldn't get over the last hurdle -- which was something that evidently was created in a prior part of the company's history.

"I can assure you there were some high-quality, hardworking people who did some very good work to get this thing saleable," he said.

Express-News Research Julie Domel contributed to this report.