Hospital is facing a bleak prognosis

In September, state Atty. Gen. Kamala D. Harris killed the proposed takeover of a struggling Victorville hospital by a nonprofit arm of Prime Healthcare Corp., saying it was "not in the public interest."

Her ruling was anything but casual. Basing the decision on what she said was her own department's investigation, as well as testimony at a marathon public hearing in August, Harris indicated that the takeover would result in the reduced availability of healthcare in the High Desert.

Her concerns included Prime's "disturbing business model," which includes canceling managed-care contracts at the hospitals it acquires, driving up costs for those payers and forcing many patients to travel long distances to find affordable care elsewhere.

One would have thought that was that. The attorney general has explicit jurisdiction over transfers of ownership of California nonprofit hospitals, such as the bankrupt 101-bed Victor Valley Community Hospital.

Yet the attorney general believes her order is being flouted. The hospital has gone ahead and signed two agreements with Prime, including one for a $6-million line of credit, that Harris says will give Prime effective control of Victor Valley over her objections. In a separate frontal attack on Harris' authority, the hospital has asked a San Bernardino County Superior Court judge to overturn her veto.

What makes this more than just a dust-up in the desert is the involvement of Prime Healthcare, which owns 14 hospitals in California and one in Texas. In recent years, Prime has drawn the scrutiny of state and federal regulators over its patient treatment policies, its billings to government healthcare agencies and its employment practices.

Prime defends its record, but these concerns raise the question of whether even allowing Victor Valley to shut down might be preferable to turning it over to Prime.

For the community, that's not a serious question. "No one in the High Desert wants this hospital to close," says its interim chief executive, Edward Matthews. But it does underscore the excruciating choices involved in keeping it open.

If there's a secret to making hospitals profitable, Prime seems to have found it. The creation of Dr. Prem Reddy, an India-born cardiologist who came to the U.S. in 1976, Prime has assembled a portfolio of institutional castoffs — "Every hospital I acquire, I acquire in bankruptcy," Reddy once said of his corporate strategy.

The company earned nearly $248 million in 2010 on revenue of $1.6 billion, according to an income statement filed with the Securities and Exchange Commission. (The privately held Prime's financial statements were filed by a publicly traded real estate investment trust that is financially dependent on its business.)

Prime achieves this in part by stripping low-margin or unprofitable medical services out of its hospitals. As The Times has reported, Prime closed more than half of Centinela Hospital's operating rooms and cut back on chemotherapy and birthing services after taking over the institution in 2007.

The hospital, a healthcare linchpin for South Los Angeles, served 146,000 outpatients, including emergency room patients, in 2006, according to state records; last year the figure was 55,000. But Centinela swung from a $10-million loss in 2006 to a profit of nearly $11 million in 2010.

Prime has acknowledged in legal filings that it avoids contracting with managed-care insurance plans, or HMOs. That frees the company from the obligation to deliver emergency care to those plans' members at a low contracted rate. Instead, it charges those patients or their health plans what the market will bear.

In 2008 and 2009, auditors from the state Department of Health Care Services caught the firm trying to stick the Medi-Cal program with more than $4 million in what the auditors considered inappropriate expenses, including $838,000 for a Beverly Hills home, more than $1.4 million for a helicopter and hundreds of thousands of dollars more for a company Bentley.

The agency has referred the expenses to the attorney general's office for a possible fraud investigation. Prime said this week that it "came to agreements with Medi-Cal" on some of the disallowed items and appealed others, but did not give details on the outcome of the agreement.

It should go without saying (but I'll say it anyway) that if these billings weren't caught by the auditors and subtracted from Medi-Cal claims filed by Prime hospitals, they'd wind up inflating your state healthcare bills. That might give you a different perspective on what Prime says is its gift for delivering more efficient healthcare.

Some questions about Prime's operations prompted state regulators to put any new approvals for the transfer of hospitals to the company on hold earlier this year. The issue was the accusation, first leveled by the Service Employees International Union and later by the investigative reporting organization California Watch, that Prime systematically inflated its billings to Medicare and Medi-Cal.

Prime's method, they charged, was to pump up claims for patient diagnoses that produced higher reimbursements from the government agencies — a process known as "upcoding" — especially for conditions such as malnutrition and septicemia, a blood infection.

In 2009, SEIU researcher Adam Weisberg testified at the August public hearing, seven of the 12 hospitals with the highest septicemia rates in the U.S. and 10 of the 12 with the highest malnutrition rates in the state were Prime hospitals. If these statistics resulted from upcoding, that could mean millions of dollars in excess billings to the taxpayer-financed programs.

Prime turned down my request to interview Reddy about the Victor Valley takeover, Prime's business model and other issues, citing litigation involving these issues. But after the SEIU first made its analyses public, Prime called its work incomplete and said its high rates of certain conditions are due to the characteristics of its patient population.

The state Department of Public Health, which pulled patients' charts to check out the accusation, said it found some apparent deficiencies in record-keeping and other infractions at Prime hospitals, but says it couldn't be sure there was upcoding. It has passed the issue on to Medi-Cal and Medicare authorities for further investigation, which is pending. Meanwhile, the agency has lifted its hold on new licenses for Prime.

The saga of Victor Valley Community Hospital has unfolded against this backdrop.

There's no disagreement that Victor Valley is in a bad way. In its September 2010 bankruptcy filing, the hospital stated that it was overwhelmed by the cost of providing care to the High Desert poor. In court last month, a San Bernardino judge noted that the hospital's expenses are running ahead of revenue by at least $1.2 million a month.

Testimony at the August hearing made it clear that no one in the community wants to see Victor Valley close; the quandary is that there seems to be no good option for keeping it open.

Harris argues that Prime's takeover is not the only option; a $31-million takeover offer is on the table from a group headed by Dr. Kali P. Chaudhuri, a Hemet physician whose companies control six Southern California hospitals with 1,100 beds among them.

Chaudhuri's attorney and spokesman, William E. Thomas, says he's ready to close the deal right now and keep the hospital operating without shifting to Prime's business model.

The Victor Valley board is skeptical of Chaudhuri's offer, which is a revision of a $37-million bid he made last year. After that bid won the approval of former Atty. Gen. (now Gov.) Jerry Brown, Chaudhuri withdrew it, contending that he had found financial "irregularities" in the hospital's books.

Victor Valley's management believes the real reason for Chaudhuri's withdrawal was that Brown imposed costly conditions on the sale. These included the requirement that Chaudhuri put $6 million in escrow to cover future hospital expenses and reach a coverage agreement with Inland Empire Health Plan, a crucial Medi-Cal HMO in the community. "There were no 'irregularities,' " says Matthews, who was its chief financial officer during the period in question.

Matthews says the Victor Valley board has been put in a difficult situation by Harris' veto of Prime, in part because Prime provided financing desperately sought by the bankrupt hospital in its hour of need.

"When the board looks at the performance of Prime and Chaudhuri, they are starkly different," he told me. "But it goes without saying that Prime has its challenges with the attorney general." If only the healthcare of an entire community didn't hang in the balance.

Michael Hiltzik's column appears Sundays and Wednesdays. His latest book is "The New Deal: A Modern History." Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.

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