Southampton Society Blames Doc As Hospital Reveals Huge Losses

The wooden sign outside the unremarkable, white Tudor-style house on Lewis Street in Southampton, L.I., depicted two realistically rendered cows under the legend, “Til the Cow Comes Home.” Beneath the cows’ hooves: “The Ferry Family.”

The cow came home on Aug. 15, 1998, when Dr. John J. Ferry Jr. resigned as chief executive of Southampton Hospital amid reports that the 168-bed hospital was mired in red ink. By autumn, the news had turned bleaker than the coming Hamptons winter: An accounting firm brought in by the hospital’s board of directors determined that Southampton Hospital, which has an annual operating budget of approximately $65 million, had lost a staggering $50 million over two years. And most recently, a source close to the situation said that the State Attorney General’s office was investigating the mess at the hospital.

The revelation of the financial morass at the medical center has made the 47-year-old Dr. Ferry the focus of a lot of anger from year-round, working-class South Fork residents, as far east as Montauk, who rely on the hospital for health care and, in many cases, a paycheck. Yet, there is another, white-hot component to this fury. An anger based in the complicated social hierarchy of the Hamptons, where success is the only vaccine against the virulence of public life. And where those who falter, especially those who come in from the outside, suffer a fate similar to the way in which white blood cells deal with an infectious agent in the body.

In the four and a half years that he ran the hospital, the charismatic, bantamlike Dr. Ferry, along with his effervescent 41-year-old wife, Karen Fifer Ferry-both of them Wharton Business School graduates-tattooed themselves onto the Hamptons scene. What they lacked in net worth, they made up in social consciousness: a charming, articulate couple dedicated to the community they had made their home. Their six-day-a-week, half-dozen-events-a-night social schedule regularly landed them in the social pages of the local press. (An amateur cook, Dr. Ferry even submitted his recipe for “Grilled Chicken with Moroccan Spices” to Newsday in 1995.) Dr. Ferry, looking crisp and slightly academic with his neatly parted brown hair and oversize tortoise-shell glasses, could also be seen and heard on local television and radio stations. Tanned, dimpled and brunette Mrs. Ferry, meanwhile, joined a number of local boards, including the Hamptons Film Festival, and ran for a school board seat. (She lost.) With their winning personalities and “big, big smiles,” as one acquaintance put it, the Ferrys made a lot of acquaintances, and their defenders claim that their high profile was instrumental in raising awareness and money for the hospital.

“The hospital finally had a face and a personality,” said one year-round Hamptons resident. “That was immensely comforting.”

Seemingly always in motion, Dr. Ferry in his Ford Expedition, and his wife in her Volvo convertible (one resident remembers Mrs. Ferry having calculated the time it took to drive from village to village, so that she could better schedule her day), the couple moved around town under a benevolent gaze. When the hospital’s financial straits became apparent, however, the Ferrys’ cheery tones were suddenly perceived in a different light.

“John Ferry was without a doubt a charming man. Indeed, he was. But now we feel that we were duped by him,” said Ann LaWall, the president of the Southampton Business Alliance, an organization of local business people whose meetings were attended by Dr. Ferry. “Basically, most people in the town lay the blame for this $50 million deficit at his feet,” said Ms. LaWall. “When you’re C.E.O., there’s usually a sign on your desk that says the buck stops here.”

Dr. Ferry declined several requests to be interviewed, but did respond briefly to some questions. He referred The Observer to the resignation letter he submitted to R. Peter Sullivan III, the chairman of the hospital’s board of directors, on Aug. 15.

“Although throughout my career I have never chosen to step aside in the face of a challenge, I believe that the Hospital’s Board of Directors would be better served at this time by someone else leading the organization,” Dr. Ferry wrote. “I have the utmost respect for and trust in [incoming hospital chief executive] Tom Doolan as an effective agent during the coming transition.”

Dr. Ferry added: “The revelations of the past six months as they have unfolded have provided a clearer picture of problems which far exceed those that the Hospital’s C.F.O., Executive Vice President, I myself, the other members of the Board Executive Committee or the Hospital’s previous external auditors were aware of.”

In the weeks following Dr. Ferry’s resignation (he received a severance payment of $140,000 and $116,667 in deferred compensation), the hospital’s officials tended to avoid placing blame. But as the losses and questions from the hospital’s employees and the public grew-some wondered why the hospital’s board didn’t detect that something was amiss-more angry fingers were pointed at Dr. Ferry.

In a phone interview with The Observer , John J. Mullen, director of community relations and development for Southampton Hospital, said, “John Ferry tried to turn a country hospital into a Fortune 500 company with all the perks and ego that goes with it.”

But there are those, such as one prominent businessman affiliated with hospital, who contend that Dr. Ferry has been made “a scapegoat,” largely for problems caused by dramatic changes in the way hospitals are paid by insurance companies. Those changes took effect at the beginning of 1997, when hospitals were required to negotiate individually with insurance companies as to how much they would be reimbursed for their services, negotiations that usually resulted in the insurance companies paying discounted rates. Prior to that, the state dictated how much the hospitals would be reimbursed. The problem was magnified by Southampton Hospital’s new computer system, which was not accurately accounting for those discounts. “When you start squeezing the revenues of a hospital the way the state and third-party [insurance] payers have done it, these things are inevitable,” said the businessman, who requested anonymity. He added, of Dr. Ferry, “Did he try? Yes. Did he fail? Yes. But I always prefer guys who try and fail than guys who sit and wring their hands.”

Black Satin Boxers

By 1996, after he’d been on the job in Southampton for two years, Dr. Ferry was being touted as the administrator who had come from New York Hospital in Manhattan to turn the sleepy country medical center where Jacqueline Bouvier was born into a modern, modestly profitable facility. “He was trying to lure doctors here, which had been difficult because this is such a small, seasonal place,” said one resident. “Suddenly, it felt like someone had taken over who understood modern medicine.”

Dr. Ferry, a pediatrician by training, had come to Southampton Hospital via New York Downtown Hospital, where he had served as senior vice president for medical affairs and medical education. Prior to that, in the early 1980’s, he was assistant to the chairman of the pediatrics department at Cornell Medical School (now the Weill Cornell Medical School). Dr. Maria New, chairman of that department, said she recruited Dr. Ferry and that she remembers him as a “very smart, very personable guy” with “high ambitions.” “When I hired him,” she said, “I asked him, what do you want to be in 10 years? I remember his answer. He said I want to be Secretary of Health.” (Dr. Ferry told The Observer he does not recall making that statement and that he’s never aspired to that position.)

During his run as chief executive of Southampton Hospital, Dr. Ferry opened a breast health center within the hospital, added valet parking, a concierge and a number of swank satellite centers (part of an expansion plan that had been put into effect before Dr. Ferry came to the hospital) in East Hampton, Hampton Bays and other locales. Those outlets offered everything from AIDS treatment to sports-injury therapy to Reiki therapy. His direct office number was as coveted as the private reservation line to Balthazar. After tripping on a bike rack in Sag Harbor and gashing his head, literary agent Mort Janklow had Dr. Ferry paged and asked him to alert a plastic surgeon. And some of the powerful contacts Dr. Ferry made seemed to pay off for the hospital. In 1997, Howard Gittis, vice chairman of Ronald Perelman’s MacAndrews & Forbes Holdings Inc. and his wife Lynette Gittis hosted the hospital’s annual benefit at their 22-acre estate. Mr. Perelman played the drums and the party raised $1.5 million, about $700,000 more than the previous year.

In May 1997, however, when The New York Times quoted Dr. Ferry saying about the hospital, “We grew out of our deficit,” a source familiar with the hospital said that there were already rumblings of financial trouble.

Dr. Ferry’s public face gave little indication that there was anything to worry about. In 1997, he modeled black satin boxer shorts in a lingerie fashion show that benefited a local charity, the South Fork Breast Health Coalition. (He managed to attach his trademark suspenders to the shorts.) That same year, he cavorted in green tights as Peter Pan on the hospital’s “Never-Never Land” float in a local St. Patrick’s Day parade. (In other years, he portrayed the Wizard of Oz and Snoopy.)

Some Hamptons residents were also talking about Mrs. Ferry, although for a different reason: She was becoming rather close with a local real estate broker, Paul Brennan, who was also married. Mr. Brennan had no comment, except to say that he knew Mr. and Mrs. Ferry “very well” and that it was “too bad” what had happened regarding the hospital. Mr. Brennan’s wife, the television journalist Connie Collins, from whom he is currently separated, would only tell The Observer that Mr. Brennan and Mrs. Ferry “played tennis an awful lot.” Mrs. Ferry did not return calls seeking comment.

As the Hamptons grew accustomed to Dr. Ferry’s face, others began to look more closely at the growth that had occurred on his watch. For instance, while the satellite centers were devoted to worthy causes such as physical rehabilitation, AIDS treatment, and support groups for people with cancer, diabetes and other illnesses, critics contend that some of the elements of their design seemed extravagant for a nonprofit hospital. According to Mr. Mullen, Dr. Ferry hired the design company that outfitted a yet-to-open dialysis center in Hampton Bays with cathedral ceilings with wood beams and a bank of postmodern windows. Mr. Mullen said that the plans also called for each dialysis station to be outfitted with a cable-equipped television, a phone and a computer modem hookup. “The opulence of it was ridiculous for a country hospital,” he said, “but it was in line with [Dr. Ferry's] vision of making the well-to-do feel comfortable with the hospital’s health care facilities.”

Barbara Feldman, whose architectural and interior design firm, Avatar East, designed the dialysis center, said, “My directive was to make this as high-end a facility as possible, to attract the tourist trade. That came right from the top.” Ms. Feldman said that “every single thing” was approved by “either Dr. Ferry or his second-in-command, Richard Fenton.” Ms. Feldman, whose firm specializes in health care facilities, said that Dr. Ferry “was very good at spending money, but I don’t think his vision was inappropriate. His mission statement was not out of sync with most health care facilities today. There isn’t a hospital around that isn’t pumping huge dollars into their facilities to make them look great and function well and be competitive.… If you had a choice of going to dialysis in a two-by-four room with nothing on the walls painted white or going to a beautiful facility, where would you go?”

There was also the case of a community health and wellness center in East Hampton, located in a leased space on tony Main Street, where real estate rates reach Madison Avenue heights. While defenders argue that the site was a temporary one and was designed to attract East Hamptonites’ attention to the hospital, Mr. Mullen said: “It was a symbol of the extravagance and reckless spending. A wellness center hardly needs to occupy the most valuable real estate in the Hamptons.”

Ms. LaWall recalled another minor but telling incident. She said that every year the Southampton Business Alliance holds a golf outing, and the alliance sells advertising space, for $300 a pop, in the form of giant tee signs. One year, Ms. LaWall remembered, Dr. Ferry called her up and ordered two signs, but added he was going to have them printed up himself. “Three weeks later, I get a huge crate,” Ms. LaWall said. “I think someone’s sending me a Picasso. I open it up. There, in three colors, were the signs bearing the Southampton Hospital log. They were the most gorgeous things I’ve ever seen. It made everybody else’s tee sign look like garbage. Now he would say he’s promoting the image of the hospital, and indeed he was. But one would think that with signs like that, the hospital was in the pink, not in the red.” (Dr. Ferry said he did not recall any such incident.)

Next Stop, Rhode Island?

What was behind the image? Shortly before Dr. Ferry left the hospital, the board hired the accounting firm of KPMG Peat Marwick to scrutinize the hospital’s books. In a January 1999 “Report to the Community,” Mr. Sullivan, the board chairman, said the firm had determined that “about $30 million of the total losses resulted from accounting errors.” This problem was exacerbated by the installation of two new computer systems that resulted in “major operation problems,” according to the report. “Accounts receivable, what the Hospital thought it was owed, were significantly overstated,” the report said, “because discounts on rates to HMOs were improperly recorded. Collection and financing fees to outside companies which had been hired to do the hospital’s billing also were underestimated. Reserves for uncollectible old billings were deemed insufficient. Finally, the new audit transferred almost $7 million of what had been recorded as capital assets into operating expenses incurred prior to 1997.”

Mr. Mullen told The Observer that the board has formed a committee to weigh the option of suing Deloitte & Touche, the accounting firm that handled the books when Dr. Ferry held the reins. Ellen Ringle, a spokesman for Deloitte, issued this statement: “Deloitte & Touche’s last audit of Southampton Hospital’s financial statements was for the year ended Dec. 31, 1996. Deloitte & Touche performed its services for Southampton Hospital in accordance with all applicable professional standards.”

Meanwhile, James J. Needham, a year-round Southampton resident who was formerly chairman of the New York Stock Exchange and a commissioner of the Securities and Exchange Commission, has been leading the call for the State Attorney General to investigate. Mr. Needham said he got “all sort of inklings” that something might be amiss back in 1996, when he asked for a copy of the hospital’s 1995 audit and couldn’t get one. The same thing happened, he said, when he asked for a copy of the 1996 audit in 1997. “These are a lot of sophisticated board people,” said Mr. Needham. “I really feel that the board of directors just didn’t do what it was supposed to do.” Mr. Needham said he contacted the office of then-Attorney General Dennis Vacco. (Scott Brown, a spokesman of the Attorney General’s office, would not confirm or deny that an investigation had been opened, but said, “We are well aware of the situation at Southampton Hospital.”)

Mr. Mullen alleged, however, that the hospital board “trusted John Ferry. When he came out here with his winning smile, his articulateness, his vision and his tremendous energy, they trusted him. And he backed it up by providing them with certified audits from Deloitte & Touche. He abused their trust. This is why the board is where it’s at today.”

Mr. Needham, however, said he finds it particularly difficult to exonerate the board given a letter to the editor that appeared in the July 23 Southampton Press . Signed by both Dr. Ferry and Mr. Sullivan, the letter noted, “The hospital’s board has been consistently informed of the hospital’s financial difficulties at its bimonthly meetings and members are provided the hospital’s audited financial statements each year as soon as they are available.” The letter also stated, “The board has been supportive of all the actions taken over the past nine months to re-establish financial equilibrium.”

Since his resignation, Dr. Ferry and his wife have kept a relatively low profile, but for a time their continued presence in the Lewis Street house, which is owned by the hospital and has a view of its emergency room, served as a reminder of what had happened. At a public forum in January, one emergency room nurse got up and asked, “How much longer do we have to watch Dr. Ferry playing with his kids and dogs on the lawn of his house while we’re short-staffed and all working like crazy?”

On Feb. 22, Dr. Ferry was hand-delivered a letter saying that if he did not vacate the premises immediately, the hospital would begin to charge him $150 a day for use of the home. The following weekend, moving trucks were parked out front. Although the town is buzzing that Dr. Ferry has found a job with a health maintenance organization in Rhode Island called Harvard Pilgrim Healthcare, his family has moved to another house in the Hamptons. And some in town are wondering whether he’ll remain until the cow comes home.