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R.I. slaps conditions on Prime acquisition amid Calif. controversy


By Beth Kutscher
Posted: December 27, 2013 - 6:00 pm ET
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Prime Healthcare Services is about to close its first acquisition in Rhode Island—and its first in New England—after agreeing to a lengthy list of conditions from the state's department of health.

The Ontario, Calif.-based chain embarked on a nationwide expansion strategy in 2011, and is poised to continue entering new markets. It has made a business out of turning around struggling community hospitals, often as the facilities are on the verge of shutting their doors.

Yet the approval agreement in Rhode Island highlights the paradox that Prime presents as a bidder. While the company has been successful at reviving once-failing hospitals, it has also attracted criticism and regulatory scrutiny.

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Landmark Medical Center and the Rehabilitation Hospital of Rhode Island owed more than $10 million in debt to their vendors when a special master was appointed to oversee their operations. A deal to sell the facilities to Steward Health Care Corp., a Boston-based for-profit chain, fell apart after Steward failed to reach an agreement with Blue Cross and Blue Shield of Rhode Island.

In a 116-page October report, the Rhode Island Department of Health outlined the issues dogging Prime, including federal investigations into allegations of upcoding and high rates of septicemia at its facilities, legal battles with Service Employees International Union and Kaiser Permanente, and failed takeover deals, particularly in its home state of California, where the attorney general in 2011 blocked its attempt to purchase Victor Valley Community Hospital.

But the state regulators also acknowledged that the alternative to Prime's bid is “an expected closure of the hospital, and considerable adverse economic impact” to the community it serves. “Given this reality … this acquisition is in the public interest.”

Under the terms of the transaction, Prime will invest $30 million over five years in capital improvements, service expansions and technology; at least $15 million in routine facility maintenance; and at least $4.5 million in physician recruitment.

It also agreed to operate Landmark as a full-service acute-care hospital for at least three years, pay back roughly $8.5 million owed to the hospital's creditors and extend a line of credit to the hospital, among other terms.

Prime also must meet 11 quality benchmarks, such as adopting programs to prevent unnecessary hospital admissions and readmissions, participating in a prescription monitoring program, reaching a 90% flu vaccination rate for its staff and ending elective caesarian sections before 39 weeks. The remaining 10 conditions cover financial and operational terms of the deal.

Josh Nemzoff, an M&A consultant who has represented both Landmark and Prime at various points in the sale process, said it’s not unusual for attorneys general to attach conditions to a deal—and he described Rhode Island’s terms as “tame” compared to those in some other states, such as New Jersey.

Prime, for its part, points out that the Joint Commission named 11 of its hospitals this year as “top performers on key quality measures.”

And it has repeatedly countered that it has been the target of a “smear campaign” by the SEIU that aims to force it into a neutrality agreement that would allow the SEIU to unionize its workforce. It also has sued the Kaiser Foundation Health Plan and the SEIU for conspiring to keep it out of the market—but was dealt a blow in August when a District Court judge in San Diego dismissed the suit for failing to provide sufficient facts demonstrating a conspiracy. Prime vowed that it will file a new complaint. Dr. Prem Reddy, the chain's chairman, president and CEO, emphasized that the U.S. Justice Department's investigations to date have not yielded any fines for the chain.

“There's no hospital, no health system, that hasn't been investigated and fined,” he said. “At Prime Healthcare, there have been no fines, only investigations.”

In California, Prime is appealing a recent $50,000 fine from the health department for performing non-emergency cardiac catheterization procedures that it wasn't licensed to perform. Three patients suffered adverse events at Desert Valley Hospital (PDF) in Victorville, including one who died.

Prime disputes that the procedures weren't an emergency. Reddy said the health department has looked at “hundreds” of claims against Prime, all of which have been dropped on appeal, and the company is appealing this one, too. “I have never paid a $10 fine,” he said. “That $50,000—we will never pay.”

A spokesman for the state's health department did not respond to a request for comment at deadline.

Under pressure from two California state legislators, Truven Health Analytics notified Prime that it could rescind Desert Valley Hospital's Top 100 Hospitals recognition, pending adjudication of the appeal.

In a letter to Truven, Reddy stressed that it was the cardiologist's decision to perform the procedures—not the hospital's. And he again said the “basis for CDPH's investigation and numerous other investigations by various other governmental agencies … has been the negative propaganda undertaken by the Service Employees International Union against PHS.”

Truven said it would wait for adjudication on whether the penalty would stand.

Meanwhile, the chain's expansion efforts continue. On Dec. 20, the New Jersey Department of Health and the state's attorney general approved its acquisition of St. Mary's Hospital in Passaic. Reddy said it will take another 90 to 120 days for the process to be completed, and then the chain plans to acquire another three or four facilities in the state.

It is also looking at “several other” buys in 2014, including hospitals in Michigan and Oklahoma, Reddy said.

Follow Beth Kutscher on Twitter: @MHbkutscher


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