The federal government has now thrown its weight behind long-circulated allegations that part of Prime Healthcare Services' turnaround strategy is to drive up revenue by leaning hard on doctors to admit more patients. But that may not stop the fast-growing chain from snapping up more troubled hospitals.
“From a (mergers and acquisitions) perspective, it's not an automatic disqualification,” said Joe R. Lupica, a consultant who advises hospitals on affiliations, of news that the government had joined the lawsuit. “People will look behind the shocking news.”
The government announced last week it would partially intervene in a whistle-blower lawsuit accusing Prime founder and CEO Dr. Prem Reddy and 14 Prime hospitals in California of fraudulently billing Medicare for beneficiaries admitted as inpatients when they should have been outpatients placed on “observation” status. Whistle-blower lawsuits typically have a better chance of succeeding when the government steps in.
Prime General Counsel Troy Schell said in a statement last week he believes Prime will be exonerated. He said Prime has “great confidence” in its physicians' medical judgment.
“The allegations under investigation arise from complex regulation and a lack of clarity between what federal regulators and physicians believe necessary to adequately document medical necessity for hospital admission,” Schell said. He noted that almost every major health system has been involved in similar investigations.
According to the government, however, multiple witnesses who worked at Prime told federal investigators that Reddy would criticize emergency department doctors who passed up opportunities to admit Medicare beneficiaries; request more hours for ED doctors whose patients had high rates of admissions and fewer hours for those whose patients had lower rates of admissions; and tell doctors to find ways to admit all patients over age 65, among other allegations.
The government said its own analysis of Medicare claims data showed that hospital billings for beneficiaries on “observation” status plummeted after Prime acquired a hospital.
Prime Healthcare Services and its not-for-profit arm, Prime Healthcare Foundation, own and operate 43 acute-care hospitals across the country. Since its founding in 2001, Prime has steadily scooped up troubled hospitals, turning them around by negotiating better rates from insurers, adding profitable service lines and implementing aggressive billing tactics, among other strategies.
The approach has drawn praise and scorn. This isn't the first whistle-blower lawsuit the system has faced, and some of its proposed acquisitions have drawn intense resistance. Last year the company abandoned a bid to buy the Daughters of Charity Health System in Los Altos Hills, Calif., after the California attorney general set hundreds of conditions on the deal. The system was later acquired by a private equity firm and renamed Verity Health System.
Prime has also been tangled in labor disputes for years with the Service Employees International Union-United Healthcare Workers West, which has publicized a variety of allegations against the company.
“Most folks know that Prime is the target of quite a bit of lawsuits and picketing,” Lupica said. “They face resistance in almost every situation where they're acquiring hospitals, yet they do acquire them.”
Joshua Nemzoff, a consultant who specializes in hospital mergers and acquisitions, said the government's involvement in this latest lawsuit won't necessarily sink Prime's future deals. Nemzoff, who has consulted with Prime on a number of deals, said, “They've been accused of all kinds of things over the last five years or so, and it turned out none of it stuck, none of it's been true.”
That's not to say, however, that the government's involvement in the lawsuit won't raise questions among hospital boards looking to do business with Prime, said Roger Strode, a healthcare mergers and acquisitions partner at Foley & Lardner. That may be especially true for not-for-profit hospitals that already worry about a for-profit acquirer being more financially aggressive than they'd like.
“If it's going to be a choice and they get down to a situation where there are two or three active bidders, I can't imagine it doesn't at least weigh into their thinking,” Strode said. “If you're Prime, you're going to have to do some explaining.”