Baylor Health Care System hopes its heart hospital joint venture with physicians is a national model for how general hospitals can deal with the threat from physician-owned specialty hospitals. But HCA fears that regulators and the rest of the industry agree with Baylor, and the investor-owned giant has acted on that fear.
Baylor disclosed last week that federal and state fraud enforcers are looking into its partnership with physicians in the Baylor Jack and Jane Hamilton Heart and Vascular Hospital on the campus of Baylor University Medical Center in Dallas. Baylor said in a disclosure to bondholders that the investigations were triggered by allegations made by Nashville-based HCA, which operates 11 hospitals and nine surgery centers in the Dallas-Fort Worth area. HCA confirmed that it filed complaints with several federal agencies and the Texas attorney general's office because the company discovered what it believes are potential violations of the Medicare anti-kickback statute, the Stark self-referral laws and Internal Revenue Service regulations governing not-for-profit organizations.
In a statement, Baylor said that it cannot discuss the specific allegations that HCA has made because of the ongoing investigations -- both the U.S. Justice Department and the Texas attorney general's office have notified Baylor of their probes of the heart hospital -- but it defended the structure and operation of the heart hospital. "We can say that Baylor Health Care System structured this transaction to be in compliance with applicable laws and regulations," the statement said. "The original valuation that formed the basis of the transaction was conducted by nationally recognized, independent valuation experts." Baylor is cooperating with the investigations.
Baylor's heart hospital partnership has garnered positive reviews from Congress. Baylor officials testified at three hearings before different congressional committees last year, and HCA Senior Vice President Victor Campbell attended two of the hearings. What he heard got him thinking.
"It was portrayed by some, certainly in Washington, as 'the model,' 'the Baylor model.' That was one of the reasons that I wanted to understand how that particular venture had been structured, and maybe learn something from it," Campbell said in an interview. After researching the joint venture by studying bond documents, Medicare cost reports and financial filings with Texas regulators, Campbell said, "We came away with a feeling and a belief that that venture is an improper inducement for referrals."
HCA has made two broad allegations about the heart hospital: The physicians did not pay fair-market value for their share of the heart hospital, and the heart hospital is subsidized on an ongoing basis by fees paid by Baylor University Medical Center, said Sam Hazen, president of HCA's Western Group, which includes Texas. HCA's research -- which Hazen acknowledges is limited to publicly available documents -- indicates that the physicians who own 49% of the heart hospital paid $8 million for their stake, Hazen said. Other documents put the annual revenue of the heart hospital, which largely took over the cardiology and vascular services provided at BUMC, at greater than $80 million with a net income of around $21 million.
HCA hired an appraiser to review the documents, and the appraiser's valuation for the business was about 14 times what the physicians seem to have paid for it, Campbell said. "How could you sell such a thriving business for such a meager amount?" Hazen asked rhetorically.
Moreover, the heart hospital relied on debt for almost all of its financing, but that debt was guaranteed by the Baylor system as a whole, making the debt very secure for bondholders and making the heart hospital venture very secure for the physicians, Hazen added. The price the physicians paid to invest in the heart hospital, however, only makes sense if they are bearing a lot of the risk, he said.
HCA also alleges that BUMC subsidizes the heart hospital. BUMC's emergency department transfers most patients with heart-related conditions to the heart hospital and pays a fee when it does, Hazen said. For commercial patients, that fee reflects the reimbursement that BUMC will receive for those patients. But for patients insured by Medicare and Medicaid or who are self-pay, the fee is greater than what the university medical center will take in, and that's a subsidy for the heart hospital, which would otherwise take a loss to treat those lower- or nonpaying customers, Hazen said.
Also, the heart hospital is spared the expense of building and staffing its own emergency department by its connection to BUMC, he added. Hazen acknowledged there may be other terms to this arrangement -- for instance, in return for these considerations, the physicians may have agreed to provide specialist coverage for BUMC's emergency department -- that aren't detailed in publicly available documents.
HCA sent Baylor a cease-and-desist letter dated Dec. 22, 2005, that outlined its allegations and notified Baylor that those allegations were detailed in complaints that HCA filed with the Justice Department, the IRS, the HHS inspector general's office and general counsel's office for the CMS, and the Texas attorney general's office. A spokesman for the Texas attorney general said that HCA filed a complaint about Baylor with his office in August 2005, but he declined to comment further.
Robert Salcido, a former Justice Department lawyer who now works as a healthcare defense lawyer with Akin Gump Strauss Hauer & Feld in Washington, said it is common for a hospital operator to ask its lawyers to research whether a competitor is breaking the law, but rare for the request to amount to anything. HCA's research must have been persuasive to spur law enforcers to act on it, he said.
HCA, in particular, may be sensitive to what its competitors are promising to physicians because many of its legal problems from the Columbia/HCA Healthcare Corp. era stemmed from partnerships with physicians, said Salcido, who has never represented HCA. "You come to a business decision not to do (these partnerships), but you look across the street and your competitors are doing it. That has to create a huge incentive to step up and do something about it," Salcido said. Additionally, as a national hospital operator, HCA's interest in thwarting these physician arrangements goes well beyond the Dallas-Fort Worth market, Salcido pointed out.
In an interview, Michael Taylor, senior vice president of Baylor Health Care System, said the system relied on its legal counsel, both in-house and external, to review all aspects of the deal. Baylor and the physicians each arranged to have a third party produce a valuation report on the deal to ensure the physicians were paying fair-market value for their share, as federal law requires.
"Are we always guaranteed to be perfect? No, there are always gray areas," Taylor said. "Am I confident that we did the right things with our intentions? Yes."
Taylor, who worked for specialty hospital operator MedCath Corp. before joining Baylor in 2003, said aligning the interests of physicians and hospitals has repeatedly delivered high-quality, cost-efficient healthcare services. Taylor said he views HCA as moving from offense to defense.
"I think competition brings better outcomes to outpatients," Taylor said. The Baylor system is so pleased with the clinical outcomes at the heart hospital that it is looking to do a similar joint venture with cardiologists and vascular surgeons at the system's 96-bed hospital in Plano, Texas, he added. Baylor and physicians are also working on a joint venture for an ambulatory surgery center in Fort Worth. HCA's allegations won't slow those projects, Taylor said.
"Are we concerned because a federal and state level review is going on? Of course," Taylor said. "We want to show our communities that we're doing everything possible to do the right thing."