In an interview with India-West at Prime Healthcare Management headquarters here, a short drive from Ontario airport, Prime Healthcare vice president and general counsel Michael J. Sarrao, corporate director of reimbursement Ajith Kumar and communications director Edward Barrera defended the company from its critics.

 

 

Reddy is a classic Indian American example of a “rags-to-riches” story. He grew up relatively poor in rural Andhra Pradesh and immigrated to the U.S. with his medical degree. 

 

After completing his residency in internal medicine and cardiovascular disease at Down State Medical Center, SUNY-New York, he set up a cardiology practice in the Southern California’s High Desert area. Reddy founded Desert Valley Medical Group in 1985. It later became PrimeCare International, Inc., a physician practice management company with operations in California, New York, Florida and Oklahoma.

 

In 1994, the Indian American cardiologist built, “from the ground up,” according to a bio provided by Prime, Desert Valley Hospital, in Victorville, Calif., an 83-bed, acute-care facility. PrimeCare grew to over 250,000 managed care patients, but was then sold to PhyCor, a Tennessee-based publicly traded company that eventually encountered financial problems under new management.

 

Reddy founded a new company, Prime Healthcare Services, and in 2001 purchased the failing operations of Desert Valley Hospital and Desert Valley Medical Group from PhyCor. The Indian American cardiologist managed to turn Desert Valley’s operations profitable, the first step in his new career path — buying small and medium-sized hospitals in, or on the brink of, bankruptcy, and improving their bottom lines.

 

Reddy in 1989 established the Dr. Prem Reddy Family Foundation with an initial gift of $1 million. Since then, he has contributed over $100 million dollars to the foundation, which funds a free public health library, a scholarship program for students in healthcare fields and healthcare related charities, mainly in the High Desert area.

 

Prime now owns and operates 10 hospitals in California and one in Texas. Its nonprofit subsidiary, Prime Healthcare Services Foundation, owns another three hospitals in Southern California donated by the parent firm (see box).

According to a Los Angeles Times article, Prime earned nearly $248 million in 2010 on revenue of $1.6 billion, according to a Prime statement filed with the SEC.

 

The company’s chief executive officer and president is Prem Reddy’s brother, Lex Reddy, who has a bachelor’s in business administration from California Baptist University, a master’s degree in business administration and a master’s in health administration from Cal State-San Bernardino.

 

Industry awards have piled up for the company. In the latest honor, Thompson Reuters Jan. 16 named Prime one of the top 15 health systems in the country based on “quality of care, efficiency and patient satisfaction.” The only healthcare firm ever to receive the honor on the West Coast, Prime won the same award in 2009. Prime also has national aspirations, having acquired the Texas hospital and made recent bids to buy troubled hospitals in New Jersey and Hawaii.

 

Late last year, Prime made a $25 million offer in bankruptcy court to acquire the Hawaii Medical Center in Honolulu from St. Francis Healthcare System, which sought a price of $40 million for the hospital, in operation for 85 years. The deal fell through and the hospital shut down Dec. 29, resulting in layoffs of nearly 1,000 employees.

 

“It’s difficult to revive a closed hospital,” Kumar told India-West, indicating that Prime tries to acquire hospitals before they totally shut down. Prime also has pending offer of $15.8 million to purchase debt-ridden Christ Hospital in Jersey City, New Jersey. Christ Hospital initially accepted the offer, but it is now under review by the New Jersey Department of Health and Senior Services.

 

Hudson Hospital Holdco LLC, the parent company of Bayonne and Hoboken medical centers, made an offer of $91.6 million for the hospital, including $35 million in working capital and capital improvements and $56 million to pay off debts, bills and employee pension obligations.

 

“Having received several offers over the past year, Christ Hospital is moving forward with the asset purchase agreement by Prime Healthcare Services, which we believe is in the best interests of the hospital and the community we serve,” Paul Hebert, a spokesman for Christ Hospital, said recently.

 

Sarrao pointed out in the interview with India-West that the bids are not as far apart as they seem, because Prime’s offer doesn’t include its costs for working capital and hospital upgrades.

 

Finally, Prime in December acquired MedCath Corp.’s 34.83 percent interest in the Harlingen Medical Center, a 112-bed acute care hospital in Harlingen, Texas. Sarrao pointed out that, subsequent to buying a minority stake, Prime has acquired majority ownership of the hospital.

 

 

Asked to summarize the business strategy that makes Prime so cost-effective in this dog-eat-dog healthcare environment, Reddy told India-West in an e-mail, “At Prime Healthcare, we strive for the highest quality standards, improve operational efficiencies and invest millions to upgrade our hospitals.”

 

“But it’s not just throwing money at the problems,” he added. “We assess each facility and spend time understanding their unique challenges so that we can find the best solution for that particular community. Ultimately, our goal is to provide comprehensive quality care in a compassionate, convenient and cost-effective manner.”

 

Prime Healthcare focuses on efficiency, especially in the emergency room, Reddy said, adding that increasing patience safety, while at the same time shortening the average length of stay, is crucial.Kumar told India-West that Prime has identified a series of “operational efficiencies” that it applies at each hospital, including cutting times spent by patients in emergency rooms and equipment upgrading.

 

 

But Prime Healthcare’s business strategies have led to lawsuits and investigations.

In one lawsuit, Prime sued Kaiser Permanente and Southern California-based Heritage Provider Network for failing to adequately reimburse eight hospitals in Prime’s network for billing reimbursements related to emergency room admissions of Kaiser and Heritage members.

 

Kaiser fought back in a counter lawsuit charging Prime with using improper medical criteria to “capture" its patients, treating them without authorization and performing unneeded tests to create hefty bills. California Watch, an investigative arm of the Berkeley, Calif.-based Center for Investigative Reporting, also chimed in on this issue, pointing out in its one-year investigation of Prime last year, that another large healthcare chain in California, Tenet Healthcare Corp., “admitted about 39 percent of its ER patients at its hospitals, compared with 63 percent at Prime hospitals.”

 

Sarrao categorically denied to India-West that Prime admits patients unnecessarily or runs unneeded tests.

“Patients need to (acquire) emergency stability” before they can be released, the attorney said. “We have to rely on what the physicians say.”

 

Kumar pointed out that Prime “wins consistently” when Medicare billings are disputed, and that the adjudication process on billing disputes is a frequent process under Medicare. Five separate lawsuits in the case have been consolidated in Los Angeles Superior Court. Sarrao expects the trial to begin in “12 to 18 months.” 

 

Damages sought have gone up significantly since the lawsuits were filed in 2009 from about $35 million to $40 million to $100 million, he added. In another lawsuit, Prime in November sued Kaiser and the SEIU, the union that covers most hospital workers in California. SEIU-United Healthcare Workers West is the largest hospital and healthcare union in the western U.S. with more than 150,000 members.

 

Prime claims in the lawsuit that it is the victim of an “unlawful conspiracy” between the union and Kaiser. “SEIU is not concerned about those patients who rely on Prime Healthcare’s hospitals for much needed healthcare, but instead is focused on driving out hospital operators like Prime Healthcare that pose a threat to SEIU’s and Kaiser’s anti-competitive partnership,” Sarrao said in a statement in November.

 

Prime’s general counsel confirmed that, while there are some union members working at Prime under contracts signed before Prime’s takeovers, even those workers get less in total pay than the union workers at Kaiser. SEIU obviously sees Prime as a threat, he said.

 

Sarrao pointed out that running hospitals is “labor-intensive,” accounting for between 45 percent and 60 percent of total costs. The lawsuit also alleges “unlawful payments from Kaiser to the SEIU.”

 

Kaiser spokeswoman Sandra Hernandez-Millett told one reporter that Prime’s allegations are totally false and Kaiser is a leading provider in high quality and affordable care.

 

California Watch’s yearlong investigation of Prime Healthcare leveled a battery of charges against the hospital management company. The articles were run under the CW banner or reported on by newspapers throughout the state.

One complaint involved illegal “upcoding,” a practice of exaggerating or improperly diagnosing an illness or medical condition to get greater reimbursements.

 

Several former coders at Prime interviewed by California Watch alleged Reddy encouraged upcoding at company meetings. The California Watch articles cited higher-than-average diagnoses of septicemia, or blood poisoning, among older patients; kwashiorkor, a form of malnutrition commonly found among Third World children; and acute heart failure in Medicare patients.

 

California Watch said Prime “has been the subject of state and federal investigations for the way it handles its billings.”

The journalism group said it “analyzed millions of patient admission records contained in state data to identify a pattern at Prime hospitals of billing for rare and serious medical conditions that typically generate bonus payments to hospitals.”

 

After SEIU complaints against Prime and publication of the critical California Watch articles, several lawmakers asked for probes of Prime. Congressman Henry Waxman, D-Los Angeles, and Pete Stark, D-Fremont, asked Medicare officials to investigate the surge in cases of blood infections at Prime.

 

The California Department of Public Health looked at Prime’s septicemia cases and found the high rates of the bloodstream infection. But regulators said last year that they did not find evidence to cite Prime for any abuses. Prime Healthcare officials vehemently deny complaints of upcoding. “Our model is physician-driven,” Sarrao rebutted. “We do what is good for the patient.”

 

Kumar said Prime is not aware of any FBI probe, adding that federal healthcare agencies frequently audit hospitals on their billing practices. Regarding the malnutrition cases, Kumar pointed out that people are in economic difficulties and there were “50,000 (diagnosed) cases (of malnutrition) across the nation in 2009. Medicare has approved it. They know what we are doing.”

 

“No one at Prime…has told anyone to code something that was not documented,” Sarrao told India-West.

According to a California Watch analysis of Medicare billing data, from 2008-10, Chino Valley Medical Center, a Prime hospital in San Bernardino County, claimed 35.2 percent of its Medicare patients were suffering from acute heart failure, six times the state average.

 

In 2006, before Medicare began making bonus payments for the condition, the hospital reported no acute heart failure cases, records showed, California Watch reported. Prime attorney Anthony Glassman responded to one newspaper that the heart failure diagnoses at Chino Valley were accurate and were made by treating physicians, not the hospital. He called California's Watch’s analysis “faulty, unfair and biased.”

 

Chino Valley has a high rate of acute heart failure because its patients are especially prone to the ailment, Glassman said. “Compared with other hospitals, more patients come from nursing homes, and an “exceptionally high” number of heart patients are admitted via the emergency department, he added.

 

Another recent controversy for Prime involves a patient diagnosed with malnutrition at a Prime hospital. She later disclosed to the media some of her medical records in her case. An official at the Prime hospital then disclosed her medical records to rebut her claims, saying her disclosures released the hospital from privacy safeguards, thus angering medical privacy advocates.

 

 

California Attorney General Kamala Harris became embroiled with Prime Sept. 20 when she rejected the hospital management company’s $31.5 million proposal to buy Victor Valley Community Hospital in Victorville, Calif., and operate it as a nonprofit hospital (I-W, Oct. 28, 2011).

 

She said it came after testimony at a public hearing in August, and reflected her concerns including Prime’s “disturbing business model," which includes canceling managed-care contracts at the hospitals it buys and driving up costs for those payers.

 

Prime fought back by accusing Harris of using “the legal authority of her office to make league with one particular labor organization [SEIU] that has been running a blatantly false smear campaign of vilification against hospitals operated by Prime Healthcare.”

 

Dave Regan, president of SEIU-United Healthcare Workers West, which represents 3,000 workers at Prime facilities in California, issued another broadside. “In the wake of revelations about extremely high septicemia and malnutrition rates at Prime-operated hospitals and deeply troubling practices in its emergency rooms, Prime should be thoroughly investigated before any acquisitions are permitted in the state of California.”

 

In November, a Victorville judge denied Harris’ attempt to prevent Prime from helping keep bankrupt Victor Valley Community Hospital open. Harris had filed a motion in Victorville Superior Court to impose a preliminary injunction against a $6 million line of credit and consulting agreement between VVCH and Prime. VVCH officials argued loans from Prime will allow the hospital to stay open.

 

Harris claimed in a brief that the agreement was intended for the hospital to avoid her oversight and transfer its governance to Prime. The judge rejected her argument, saying VVCH hired Prime as an independent contractor and its major decisions still require the hospital board’s approval.

 

“The factual base for what (Harris) did is really non-existent,” Charles E. Slyngstad, VVCH’s attorney, told a local newspaper. “Prime is not making decisions for this hospital. It's been my client since 1995 and it’s been run by a board of directors for all those years and that is still the case.”

 

Sarrao confirmed that Prime is still interested in acquiring the hospital, but that the letter of credit does not commit VVCH to the deal. Whatever the controversies, the industry awards keep coming for Prime. HIMSS Analytics in February will honor Prime hospitals for implementing technology solutions to improve patient safety and care.

 

Thirteen of the Prime and Prime foundation hospitals have achieved the Stage 6 designation of the HIMSS Analytics Electronic Medical Record Adoption Models. Currently, only 256 hospitals (4.8 percent) in the U.S. and only 269 hospitals in the world carry a Stage 6 designation.