Attorney general
denies sale to
hospital chain
September 20, 2011
Christina Jewett
California Watch

In a widely watched decision,
the state attorney general's
office today denied the sale of
Victor Valley Community
Hospital to Prime Healthcare
Services' nonprofit
foundation, saying the sale
would not be "in the public

Prime's nonprofit foundation
blasted the decision as
"unexpected" and
"inexplicable." Prime accused
the attorney general of siding
with a labor union that "has
been running a blatantly false
smear campaign of vilification
against hospitals operated by
Prime Healthcare."

Prime, which owns 14
hospitals, has come under
increasing fire for its business
practices and is under
investigation for possibly
exaggerating the severity of
patient illnesses for profit.
Kaiser Permanente, which has
6.8 million California
members, has also accused
the company of "trapping" its
patients and then sending
inflated bills for their care.

California Watch has
documented the chain’s
record of buying hospitals and
then admitting rising numbers
of Medicare patients for
further treatment in their
hospitals, sometimes over the
objections of patients' families.

The chain also has reported
outsized rates of medical
conditions that Medicare pays
a premium to treat, such as
septicemia and serious
malnutrition. California Watch
reports on the rates have
been followed by state

In the statement issued today,
Prime warned that the
decision "could have an
immediate and dire impact on
the needs of an already-
underserved High Desert

Bill Thomas, a Riverside
attorney representing an
acquisition firm formed by
Hemet doctor Kali Chaudhuri,
said he is poised to submit a
backup offer for the hospital.
The attorney general initially
approved the sale to that
group, but it did not close the
sale in time for a June
deadline, making way for
Prime's bid.

Prime also singled out the
Service Employees
International Union as swaying
the decision. SEIU's United
Healthcare Workers West
researchers initially presented
data showing some of the
nation's highest rates of
septicemia at Prime hospitals.
The group hailed the attorney
general's decision, calling it "a
victory for caregivers, patients
and consumers who depend
on quality healthcare.”

In a brief letter [PDF] about
the decision released today,
the attorney general’s office
noted that the sale would
“likely create a significant
effect on the availability or
accessibility of health care
services to the affected

Parties objecting to the sale
before a bankruptcy judge
noted that Prime tends to
cancel contracts with health
insurers and charge higher
prices for services.

If the sale went through and
Prime canceled contracts,
many area patients would rely
on the single hospital not
owned by Prime in the
isolated desert plateau. The
bankruptcy judge ultimately
approved the sale several
weeks ago. As a matter of
course, the attorney general
also reviews sales of nonprofit

The attorney general’s office
convened a hearing Aug. 17
to hear comments on the
proposed sale of the bankrupt
Victor Valley, which is near
another Prime hospital in the
High Desert region of the

Prime Healthcare vice
president and general
counsel Michael Sarrao
argued that the sale to the
nonprofit Prime foundation
should be approved, saying
the firm would increase
efficiency and provide more
charity care. Sarrao also said
Prime would maintain labor
and delivery services and
contract for five years with a
program meant to fund care
for low-income patients.

Dr. Victor Sabo, chief of staff
at Prime’s Desert Valley
Hospital, warned about others’
testimony at the hearing:
“Allegations being made by
those who only wish to create
doubt and mistrust are false
and shouldn’t be believed.”

A range of objections also
were raised during the

Pat Aguirre, a phlebotomist at
Encino Hospital Medical
Center in Los Angeles
County, testified that she
worked at the hospital for 13
years. She said dozens of
surgeons left after Prime took
over the hospital in mid-2008,
and the 150-bed hospital
patient counts sunk to roughly
50 at times.

“I’ve heard many people here
today say, 'I don’t want to see
this hospital close,' ” Aguirre
said at the hearing. “But yet
for many people who (have)
different insurances, our
hospital is closed to them, and
that will happen here.”

Dr. Eric Hansen, who said he
practiced medicine in the area
for nine years, testified that
he canceled his privileges to
see patients at Prime’s High
Desert hospital, Desert Valley.
He explained that his patients
were admitted to the hospital
and were told that he was

However, Hansen said he
never learned of their hospital
stays until patients asked why
he didn’t come see them. He
said he was left “out of the
loop” by the hospital and
noted that patients were given
unnecessary tests.

For those patients, he said,
“there’s essentially no limit on
what can be billed for

Hansen’s comments echoed a
lawsuit by Kaiser that the
chain's hospitals “trap” its
patients and misrepresent to
patients that Kaiser doctors
are aware of the situation.
Prime has denied the
allegations, and the matter is
pending in Los Angeles
County Superior Court.

The family of a deceased
Desert Valley Hospital patient
also testified about the
hospital’s delay in transferring
Victoria Kulyas, 45, to a
hospital equipped to treat her
acute case of leukemia in

Victoria’s mother, Ardis
Kulyas, testified the hospital
charged her insurer $144,000
for part of the stay* soon after
her daughter’s death later
that month. “I’m asking that
you please stop the sale,
prevent others from suffering
the loss of a child.”

In a story last month,
California Watch reported that
a foundation controlled by
Prime owner and board
chairman Dr. Prem Reddy
may have avoided paying
hundreds of thousands of
dollars in federal taxes
through a questionable gift to
another charity.

Public records show that in
2009, a $1 million charitable
donation made by the Dr.
Prem Reddy Family
Foundation wound up in the
coffers of the Prime
Healthcare Services
Foundation, the Reddy-
controlled nonprofit that tried
to purchase Victor Valley.

Experts who reviewed the
transactions for California
Watch said Reddy’s
foundations appeared to have
avoided hundreds of
thousands of dollars in federal
taxes that should have been
paid on the transfer of the
funds. Prime contended that
all transactions were “in full
compliance with all applicable

The attorney general’s office
also denied Prime’s effort to
buy Anaheim Memorial
Medical Center in 2007. The
hearing over that matter also
featured the testimony of
critics, including a lawmaker
who accused Prime of patient
admission practices that were
“breaking the law.”
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Award-Winning Prime Healthcare Under Siege
Richard Springer, Staff Reporter
Jan 27, 2012

Prem Reddy-founded Prime Healthcare Services, Inc., is one of the most successful
and industry-lauded for-profit hospital management companies in the U.S. It is also
under attack by a variety of critics and legal adversaries.

The healthcare firm is involved in several lawsuits and embattled by critical investigative
reports and brickbats leveled by opponents ranging from giant healthcare group Kaiser
Permanente and the powerful Service Employees International Union (SEIU) to a
leading California investigative journalism unit and California Attorney General Kamala

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

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

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.
Prime Healthcare heart failure