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SPECIAL REPORT-U.S. company makes a fortune selling bodies donated to science

(This is the third in a series, "The Body Trade," about America's virtually unregulated market for human remains)

PHOENIX, Arizona, Oct 26 (Reuters) - In 2008, a thriving company named Science Care Inc developed a 55-page national expansion plan. The internal document projected the yield on raw material to the decimal point and earnings to the dollar.

The goal: to maximize profits from the sale of human bodies donated to science. The companys model for ensuring quality: McDonalds Corp.

Science Care founder Jim Rogers aimed to provide customers with the same cuts from cadavers no matter which Science Care branch handled the order. Thats why he cited production methods perfected by Ray Kroc, the visionary who turned a hamburger stand into a fast-food empire, said an executive who worked closely with Rogers.

He used the McDonalds analogy that no matter where you go, you get the same exact thing, the executive, former quality assurance director John Cover, said in a 2009 sworn statement.

It was all about quality, Cover said in a recent interview. When you get a Big Mac, its going to taste like a Big Mac, whether youre in Louisiana or San Francisco.

McDonalds and Kroc got rich selling hamburgers. Science Care and Rogers have made millions from human body parts.

From 2012 through 2014, Rogers and his co-owner, wife Josie, parlayed the donated dead into at least $12.5 million in earnings, according to Internal Revenue Service audits and court documents reviewed by Reuters.

The two likely earned millions more from Science Care in the dozen years before and after that period. And in 2016, they sold Science Care to a billion-dollar private equity firm. Terms were not disclosed, but the sale included this unusual asset: written pledges from more than 100,000 people to donate their bodies to Science Care when they die.

Last year, Jim and Josie Rogers bought a custom-built airplane and two luxury homes near Phoenix. They also own property in Hawaii and near a ski resort outside Telluride, Colorado.

Jim Rogers, 49, declined interview requests. In a statement to Reuters, he said he sold Science Care to spend more time with his family. The company bills itself as the worlds leading whole-body donation program, and Rogers credits Science Care with bringing reliability to the industry.

Through efficiencies, Science Care has managed to lower costs for researchers, thus better fulfilling the wishes of donors to contribute significantly to research, he said.

Body donation is distinct from organ donation, the lifesaving process that enables surgeons to transplant hearts and kidneys from the recently deceased. Its also separate from the harvesting of tendons or bones from cadavers to repair joints in the injured or ailing. Those practices are strictly regulated by the U.S. government. Selling organs and other body parts for transplant is against the law.

In contrast, with few exceptions, it is legal for companies such as Science Care to dissect donated bodies and sell or lease the parts, whether torsos, heads or limbs.

People have these romantic notions that the world is going to be a better place by donating their body, said Ray Madoff, a Boston College Law School professor who studies how U.S. laws treat the dead. We dont think of businesses using bodies to increase their profits.

Last year, Science Care received about 5,000 bodies from donors, the company said. From 2011 through 2015, the last five years for which public records are available, Science Care received at least 17,000 bodies and sold or leased more than 51,500 body parts.

The payoff has proved substantial. Science Care has turned donated bodies into about $27 million in annual sales, according to a 2017 government filing. That figure includes revenue Science Care generates by hosting medical training seminars, which enable doctors to train on donated bodies. The privately held company doesnt disclose its profits.

Medical school officials in Pennsylvania and Florida report that competition from Science Care and other brokers has reduced the number of bodies donated to schools to train students. Science Care markets itself more aggressively than medical schools, they say, and offers donors more favorable terms, such as picking up the body for free.

We have lost many donations because of them, and weve not been able to meet the needs of our schools, said Clariza Murray of Humanity Gifts Registry, a state agency in Pennsylvania that coordinates the donation process. Were seeing six students per donor in a first-year anatomy lab, when it should be three or four students per donor.

Current Science Care CEO Brad O'Connell said he has received no complaints from medical schools. Science Care's marketing in Florida and Pennsylvania should help, rather than hurt, schools there, he said, because it raises awareness about body donation.

Although the companys donor consent forms state that Science Care is a for-profit company, they do not explicitly disclose that bodies or parts will be sold.

Gail Williams-Sears, a nurse in Newport News, Virginia, said neither she nor her father realized Science Care might profit when he donated his body before his death in 2013. John M. Williams Jr, who lived 88 years, served in World War II and the Korean War, earned a masters degree in social work and spent decades in Maryland state government advocating for children.

Dad was very frugal, his daughter said. He thought it was ridiculous to pay a large amount of money to be put in the ground. His decision to donate his body was also motivated by a lifelong interest in good health, his Christian faith and science fiction books and movies, she said. Whenever he was admitted to the hospital, he made sure to bring the donor documents with him, in case he died, his daughter said.

I dont remember anything in the literature that said anything about them selling his body, she said. I thought it was just his body going for research and it wasnt to get gains off of someones charity. Well, I guess weve gotten to a world where everybody just makes money off of everything.

PIPELINE TO THE DEAD

Neither Science Care, Rogers nor the companys new owners have been accused of mishandling body parts. Rivals in the industry praise the companys professionalism. It has demonstrated how a large, well-run operation can generate rich returns on the people whose remains are its product.

This account of Science Cares rise is based on state records, tax audits, internal company documents and interviews with current and former employees. It also includes sworn testimony from a previously unreported trade-secrets case that Science Care brought against a competitor. In 2010 testimony from that case, executives discuss confidential strategies for soliciting bodies and selling them.

Rogers, for example, testified that Science Cares model for acquiring donated bodies is the engine that drives the whole company. Rather than waiting for people to donate their bodies, the company has sought out the dead or terminally ill by building relationships with funeral homes, hospices and hospitals.

Nobody had really done it before, Rogers testified.

Rob Montemorra, the former chief of the FBIs national health care fraud unit, says the practice of selling donated bodies is legal. But if anyone is going to profit, Montemorra said, it should be the relatives of the deceased.

The families dont realize that a body has tremendous value, the former FBI official said. Everybody makes money but the people who provide the raw material.

Science Cares new owner, Northlane Capital Partners, is led by veteran private equity investors based near Washington, D.C. Northlane Capitals other holdings include Potpourri Group, which operates the linen company Cuddledown. Potpourri also runs Whatever Works, an online catalog that markets products ranging from garden tools and kitchen wares to sex toys and pest repellent.

Northlane Capitals interest in the body broker business didnt end with Science Care. In February, the partners acquired another major body broker that it merged with Science Care. Last year, the same private equity partners expressed interest in buying two other cadaver firms, according to interviews and a letter reviewed by Reuters.

While we are excited about the organic growth prospects for Science Care, we also view the company as a unique platform for possible acquisitions in the body parts market, wrote Northlane Capital partner Sean Eagle. The deals never materialized.

Eagle referred requests for comment to Science Cares current CEO OConnell, who said the company has no plans to expand.

We dont focus on how big we can get, OConnell said. We focus on doing things right. He added, Being for-profit has allowed us to better line up our objectives, strategies and processes.

HOSPICE A CASH COW

Rogers founded Science Care in 2000. At the time, he had been selling funeral insurance plans and had recently earned an MBA.

Rogers conceived of his business plan, he said, after identifying a need to connect donors with medical researchers who were struggling to find reliable human specimens.

I couldnt come up with a reason why there wasnt an organization like Science Care already supplying the market, he testified during the trade secrets case.

It was during that testimony that Rogers described how donor solicitation is the front end of the business, the engine that drives the whole company. To develop a donor base, Science Care sought to enlist companies serving the dead and the dying.

Its very much built on relationships, Rogers testified. When I started Science Care in 2000, was figuring out which funeral homes and which hospices and which social workers and which clergy member in an office down a hallway in some big hospital would be receptive to our message.

According to testimony and interviews, during its first decade Science Care spent more than $1 million on marketing and branding to attract donors.

With what we do, you dont sell it, Rogers said of body donation in his testimony. Its educating people and allowing them to make an informed decision. And then we combine that with all the branding and the touch points and the look and feel.

The typical pitch to the dying and their families is two-pronged. The first is altruism: The gift of a body will benefit medical science and, by extension, others in need.

The second is financial: Body donation saves a family money. The average funeral, including coffin, memorial service and burial, costs about $7,000, according to the National Funeral Directors Association. Simple cremation, an increasingly popular option, costs $400 to $1,000 or more.

Body brokers like Science Care offer the cheapest option: free cremation in exchange for the body. The deal: Science Care pays for the cremation of a donors unused remains and for returning the ashes to the bereaved family, usually after a few weeks.

Kevin Lowbrera, a Science Care employee from 2003 to 2008, said he traveled widely to promote the idea at conventions for retirees, doctors and morticians. He said the husband-and-wife Rogers team also sent him to pitch body donation to nurses and chaplains at hospice centers.

Jim and Josie identified that hospice was a cash cow for them, Lowbrera said. These were people that are on the edge of death and needed an alternative to the financial burden of traditional end-of-life care.

A large supply of free bodies, some of them from financially strapped donors, is central to the business model. Science Cares website emphasizes that by donating a body to the company, cremation is offered at no cost. Thats one reason the working poor are drawn to the option.

Among them is LouJean McLendon, a 64-year-old retired bus driver in Anniston, Alabama. When a friend donated her body to Science Care, McLendon decided to pledge her own remains as well.

A diabetic who is raising her deceased friends young grandsons, McLendon earned $38,000 a year and recently had her car repossessed. She said she had been making burial insurance payments to provide for a formal ceremony and gravesite when she dies. But to save her family funeral expenses, she abandoned the plan and decided to donate her body.

For McLendon, body donation makes sense. Its the fact that it doesnt cost me anything, McLendon said. How can you beat that?

In addition to focusing on hospices and nursing homes, Science Care has negotiated collaborative referral deals with funeral homes. That means the company gets to choose ahead of other brokers which bodies it wants first right of refusal in exchange for cross-marketing and sales opportunities for the morticians, according to 2012 company contracts and a marketing document marked confidential.

Among the benefits to morticians: associating themselves with the Science Care brand and promoting free cremation on websites.

It helps with marketing, said Jeff Wolowiec, owner of Avalon Cremation Care in Chicago.

The funeral homes get a fee for each donor. According to 2013 accounting records for one Florida funeral home, Science Care reimbursed $180 to $525 per body. Records from the trade-secrets case cite reimbursement rates as high as $1,430 for other funeral homes.

In his statement to Reuters, Rogers said that most Science Care donors today are referred by friends and family. He said two-thirds of them cite altruism as their top motivation. OConnell, the current Science Care CEO, said about 100 funeral homes partner with Science Care to offer free cremation, but that 4 out of 5 people donate for a reason other than cost.

I dont think free cremation is going to be a driver, he said.

MARKETING TOOL

As Science Care sought more bodies, Rogers developed a strategy to successfully process and sell them. To attract customers, he aimed to make Science Care the most reliable and consistent supplier of human body parts.

Rogers built a corporate culture that stressed the importance of the finer details, former employees said. Nothing not even putting together packing materials was left to chance. Science Care had 10 different policies, procedures for building a box to ensure that shipped body parts arrived safely, securely and without damage, Rogers testified.

In 2003, Science Care became the first body broker to earn accreditation by the American Association of Tissue Banks, which primarily consists of transplant organizations. In his statement to Reuters, Rogers said his pursuit and promotion of a clear, and robust accreditation system ... helped bring transparency and accountability to the industry.

Gaining early accreditation was among Rogers savviest moves, say former employees and competitors. Accreditation required precision adherence to strict donation, dissection and shipping procedures in a largely unregulated market. It also enabled the company to showcase itself as trustworthy. Science Care displays the tissue bank associations seal of approval on marketing and sales documents.

It certainly opens up a lot more opportunities, opens up doors, gets you recognized, Cover, the former quality assurance executive, testified in the trade secrets lawsuit. Its something you can use as a marketing tool for donors.

In 2004, Rogers opened a second office near Denver and converted the business to for-profit status. In 2006, Science Care added programs that provide body parts and lab facilities so doctors, paramedics and other health professionals can train on cadavers. Science Cares 2007 strategic plan called for an aggressive marketing campaign to increase donor rate and actively target new clients who will snap up low demand inventory body parts that dont sell well, such as hands and feet.

In 2008, the company produced the 55-page national expansion plan with projections for the years 2009 to 2011. The document calculated raw material parts harvested per body to the decimal point: 4.9. It also projected revenue and certain expenses among them marketing, insurance and entertainment on a per-body basis. For 2009, costs included $46 per body for advertising expenses, $104 for insurance and $5 for meals and entertainment. On the revenue side, each body was projected to bring in $6,392, yielding a profit of $677.55 per cadaver.

The three-year strategic plan proposed nearly doubling donation levels to 3,886 bodies by 2011. According to a filing with New York health officials, Science Care almost achieved that goal.

SON OF SCIENCE CARE

By September 2009, Science Care was enjoying its best month to date, according to former employees. Business was so good that three senior Science Care executives abruptly left to create their own company, GenLife Institute.

Their departures triggered the trade-secrets lawsuit. Science Care accused the former executives of using proprietary customer, marketing and pricing information, as well as contacts at funeral homes, hospices, medical schools and device-makers to develop GenLife.

Science Care has invested millions of dollars in donor marketing and they want to compete for the exact same donors, Science Care said in a court filing.

The defendants countered that such information was already well-known or publicly available. Their lawyers argued that employee agreements signed by the former Science Care executives were not binding because the documents were overly broad and unfairly designed to prevent competition.

And theres a reason for doing that, a lawyer for GenLife argued in court. The tissue banking business is very lucrative.

Court records detail intense competition to supply bodies to a customer operating a medical school in the Caribbean. Science Care had been selling the school cadavers for $12,000 each. GenLife secured an order for 15 bodies by charging $11,000 apiece. Although Science Care countered by offering a 33 percent discount, it failed to win back the business.

The trade-secrets lawsuit was settled confidentially in 2012. GenLife, which changed its name to United Tissue Network, has since grown into one of the nations larger body brokers. A spokesman for United Tissue declined to comment on the case.

PROFITING FROM DONATIONS

As Science Cares volume grew, executives met regularly to discuss what they ought to charge for body parts, according to documents and testimony from the trade-secrets case.

The sworn statements about Science Cares pricing methods stand at odds with the companys public assertions that it sells only its services, not the body parts themselves.

Like many brokers, Science Care often tells donors and customers that it is paid merely to acquire, store, dissect, prepare and transport body parts. In a 2015 boilerplate contract, Science Care wrote, Human tissue is intrinsically priceless and cannot be owned, bought or sold. In recent price quotes to customers, Science Care offered a similar explanation.

In Indiana and Illinois last year, Science Care won exemption from state sales taxes with its argument that it provides a service, not a product. Science Care officials told Indiana and Illinois it sets prices by using cost-plus pricing, rather than supply-demand metrics. In other words, the company said, prices are tied to the costs of preparing a body for customers, rather than to market conditions.

But under oath in the trade-secrets case, Science Care executives said otherwise. They testified that body parts were priced as high as the market would allow.

They were determined by supply and demand, former Science Care President Greg Martenson testified. We would use that information to set the prices.

Former executive Cover testified that net revenue per donor cash earned per donated body after expenses was a key metric. Rogers likened Science Cares method for pricing the bodies it sells to playing poker.

They were fees all across the board that were really there was no rhyme, reason or consistency, Rogers testified. In his statement to Reuters, Rogers said: Science Care has always been chiefly motivated by compliance and quality service, not by price.

Current CEO OConnell said sales today are different, involving a complex mix of cost-plus pricing and supply-demand metrics. Prices can vary, he said, depending upon a customers needs and a bodys condition. Some customers, he said by way of example, may accept overweight or underweight bodies for research and training; others may not. Some can use bodies that underwent certain surgeries during their lives; others cannot. Every donation every body arrives with a different value, he said.

It is not a widget, he said.

Some Science Care documents presented to potential customers, such as certain price-quote sheets, state that it is illegal to buy or sell body parts, and cite the National Organ Transplant Act. In fact, there are few state laws prohibiting the trade in whole cadavers or in non-transplant parts. And federal officials told Reuters that the organ transplant law does not apply to the kind of body parts Science Care sells.

Asked to comment on this discrepancy, OConnell said Science Care operates in a relatively young and developing industry that lacks a consistent and well-defined legal and regulatory framework.

TWO HOMES AND A PLANE

Despite the defection of key executives in 2009, Science Care kept growing.

In 2011, the company opened an East Coast training center in New Jersey that was later moved to Philadelphia. In 2012, it added facilities in Florida and California.

Science Cares success during this time is reflected in Jim and Josie Rogers federal tax records for the years 2012, 2013 and 2014. Reuters reviewed audit reports for those years after they became exhibits in a lawsuit the couple filed against the Internal Revenue Service.

For those years, the IRS says, the couples taxable income was $15.1 million; Rogers and his wife say the correct figure is $11.6 million. The IRS says the total includes the $12.5 million earned through a holding company that owned Science Care. The couple says the correct total is about $9 million.

An IRS spokeswoman declined to comment on the tax dispute. The couple declined to discuss its personal finances, except to say that Jim Rogers retained a small equity ownership stake in Science Care following the companys sale to Northlane Capital last year.

After the Science Care sale, property records show, Rogers and his wife bought two homes inside gated communities in Scottsdale, Arizona, northeast of Phoenix one for $2 million and another for $2.5 million.

Jim Rogers also bought an airplane last year a single-engine, custom-built 2016 Cirrus SR22T whose base price was $619,000, according to federal aviation records and the manufacturer. He purchased a hangar worth $212,800, property records show, at a small airport north of Phoenix, in a town called Carefree.

Although Rogers declined to be interviewed about his business, he has posted musings about money and life in online forums.

One post came last year, when Rogers responded to a question in a pilots forum from someone who sought detailed financial guidance about plane ownership.

The plane will be expensive, Rogers advised, but it will make you happy.

You dont want to be the richest man in the cemetery, he wrote.

(Reported by Brian Grow and John Shiffman; edited by Blake Morrison)