Prem Reddy’s turn­around strat­egy

Ag­gres­sive tac­tics at strug­gling hos­pi­tals draw op­po­si­tion

Modern Healthcare - - NEWS - By Beth Kutscher

In 2006, Par­adise Val­ley Hos­pi­tal, just 13 miles from Mex­ico and a world away from the lux­ury con­dos, con­ven­tion ho­tels and craft beer bars that dot nearby down­town San Diego, faced im­mi­nent clo­sure. The money-los­ing safety net hos­pi­tal needed a $61 mil­lion ren­o­va­tion to make it earth­quake-com­pli­ant. Owner Ad­ven­tist Health searched des­per­ately for a fi­nan­cial sav­ior. Only two came for­ward: a lo­cally or­ga­nized Par­adise Preser­va­tion Group, which gov­ern­ment of­fi­cials doubted could fi­nance the deal; and Prime Health­care Ser­vices, a small, rel­a­tively new for-profit hos­pi­tal chain owned by Dr. Prem Reddy, which of­fered to buy the hos­pi­tal for $30 mil­lion and fi­nance the up­grades.

Dur­ing an emo­tional, nine­hour pub­lic hear­ing that drew more than 100 peo­ple, Dr. Jerome Robin­son, a re­spected car­di­ol­o­gist who grew up in a Pitts­burgh hous­ing project, spoke for the com­mu­nity bid. He railed against a Prime takeover. “We are not-for­profit,” he said. “If we do any­thing with the prof­its that come from the sale of Par­adise Val­ley Hos­pi­tal, they need to stay in this com­mu­nity.”

Today, Robin­son has noth­ing but praise for Prime and Reddy. “In or­der to man­age and stay open, we needed to be smarter,” Robin­son said. “What we’ve been able to see as a re­sult of that: fail­ing hos­pi­tal eight years ago, not fail­ing hos­pi­tal today.”

Reddy’s Prime de­ployed the same con­tro­ver­sial tac­tics at Par­adise Val­ley that it has used to be­come the na­tion’s fastest-grow­ing hos­pi­tal chain, now 29 hos­pi­tals strong with deals in place for 11 more. It wran­gled bet­ter rates from in­sur­ers. It added prof­itable ser­vices lines and im­ple­mented ag­gres­sive billing tac­tics.

Prime also looks in­ward for sav­ings. When Prime comes in, it slashes bloated man­age­ments. It stands its ground on ne­go­ti­at­ing with unions. And it has even fought with politi­cians and qual­ity raters such as Tru­ven Health An­a­lyt­ics, which gives sev­eral of the chain’s hos­pi­tals high marks, but in at least one case has with­drawn its ap­proval.

The re­sults, the com­pany boasts, can be seen in its fi­nan­cial state­ments. Ev­ery one of its op­er­at­ing fa­cil­i­ties— al­most all of which were los­ing money when Prime took over—are now debt­free and prof­itable, the com­pany claims. In al­most ev­ery takeover bat­tle, Prime has had to over­come lo­cal op­po­si­tion such as that in Na­tional City, pop­u­la­tion 60,000, home of Par­adise Val­ley hos­pi­tal. “Only one per­son spoke in fa­vor—and that was me,” re­called Reddy, 66, com­pany founder and CEO. In an in­ter­view at Prime’s head­quar­ters in On­tario, Calif., the na­tive of a small vil­lage in south­ern In­dia wore a black suit with an Amer­i­can flag pin af­fixed to his lapel.

Reddy bris­tles when asked about his crit­ics. But oth­er­wise, he is at turns jovial and mat­ter-of-fact, re­duc­ing his mis­sion to two sim­ple prin­ci­ples: “We want to save as many hos­pi­tals as we can. We want to ex­pand in Cal­i­for­nia and beyond.”

Today, Reddy’s Prime is on the cusp of its big­gest and most chal­leng­ing takeover. It has pledged nearly $843 mil­lion, which in­cludes debt as­sump­tion, to take on the fail­ing fi­nances of the six-hos­pi­tal Daugh­ters of Char­ity Health Sys­tem, head­quar­tered in Los Al­tos, Calif. The deal would add $1.3 bil­lion in rev­enue to Prime’s $2.5 bil­lion, which would make it the fifth-largest investor-owned chain in the U.S.

Lo­cated in the ex­pen­sive Bay Area, wages and ben­e­fits are a hefty part of Daugh­ters’ bal­ance sheet, even as its hos­pi­tals serve some of the area’s poor­est com­mu­ni­ties. Many of its com­mer­cial con­tracts pay less than even Medi­care. Af­ter talks with As­cen­sion Health col­lapsed, four new bid­ders sub­mit­ted of­fers; Prime’s was by far the strong­est.

“Its size is chal­leng­ing—and I do these things for chal­lenges,” Reddy said. “It best fits into my mis­sion of sav­ing the hos­pi­tal, sav­ing lives and sav­ing jobs.”

With ap­proval of the takeover now be­fore Cal­i­for­nia At­tor­ney Gen­eral Ka­mala Har­ris, op­po­si­tion is mount­ing. The Ser­vice Em­ploy­ees In­ter­na­tional Union-United Health­care Work­ers West is pres­sur­ing Har­ris with a full-scale me­dia and ad­ver­tis­ing blitz ac­cus­ing Prime of over­billing Medi­care and Med­i­Cal (Cal­i­for­nia’s Med­i­caid pro­gram), in­ap­pro­pri­ately ad­mit­ting pa­tients through its emer­gency de­part­ments and can­cel­ing con­tracts with in­sur­ers, which can lead to ex­or­bi­tant out-of-net­work emer­gency de­part­ment charges.

A re­cent SEIU video posted on YouTube paints Reddy as syn­ony­mous with cor­po­rate ex­cess, us­ing im­ages of a Bent­ley, a Bev­erly Hills home, a pri­vate he­li­copter and lux­ury ho­tel rooms in Las Ve­gas al­legedly paid for by gov­ern­ment in­sur­ers. “Ev­ery time we think we’ve heard ev­ery ex­am­ple of Prime Health­care jack­ing up its billings at the ex­pense of tax­pay­ers, we seem to find one more,” said Dave Re­gan, pres­i­dent of the SEIU-UHW.

A num­ber of elected of­fi­cials have joined the cho­rus. Rep. Mike Honda, a Demo­crat whose district in­cludes Sil­i­con Val­ley, wrote to Har­ris “urg­ing her thought­ful con­sid­er­a­tion on the im­pact on the qual­ity and ac­cess to health­care when she re­views the sale of the Daugh­ters of Char­ity hos­pi­tals.”

Under sim­i­lar pres­sure in 2011, Har­ris blocked Prime’s takeover of Vic­tory Val­ley Com­mu­nity Hos­pi­tal, cit­ing con­cerns for how it would af­fect the avail­abil­ity or ac­ces­si­bil­ity of health­care ser­vices. Har­ris’ short de­nial letter points to her of­fice’s own in­ves­ti­ga­tion, re­ports from con­sul­tants and ad­vis­ers, and com­ments from “the pub­lic, the par­ties and po­ten­tial al­ter­na­tive bid­ders.”

Fo­cus­ing on the ER and billing

Prime has suc­ceeded in turn­ing around trou­bled hos­pi­tals by re­lent­lessly fo­cus­ing on de­liv­er­ing higher vol­umes of lu­cra­tive ser­vices in the most ef­fi­cient man­ner pos­si­ble. The hub of Par­adise Val­ley, for in­stance, is its mod­ern 19-room emer­gency de­part­ment.

Like all of Prime’s fa­cil­i­ties, the hos­pi­tal aims to ad­mit pa­tients within a two-hour time­frame or send them home within 90 min­utes. Its staff closely tracks met­rics such as how

many peo­ple leave with­out be­ing seen.

Its rep­u­ta­tion for short waits has earned the hos­pi­tal ad­di­tional vol­ume. “It ac­tu­ally changed the en­tire com­mu­nity,” said Dr. Paul Manos, an emer­gency physi­cian at Par­adise Val­ley, where waits once av­er­aged 5½ hours. “It has sort of be­come a stan­dard for San Diego County.”

Prime sees a com­pet­i­tive ad­van­tage in hav­ing pa­tients come to its EDs in­stead of mak­ing the drive to another sys­tem’s hos­pi­tal, as it out­lined in a 2011 law­suit against Kaiser Per­ma­nente. Under the Pa­tient Pro­tec­tion and Af­ford­able Care Act, in­sur­ers must pay for ba­sic emer­gency assess­ment and treat­ment ser­vices on the same ba­sis in out-of-net­work hos­pi­tals as in net­work fa­cil­i­ties.

Prime’s law­suit ar­gued that Kaiser owes $100 mil­lion in un­paid med­i­cal claims and was con­spir­ing with the SEIU to keep it out of the mar­ket. A judge dis­missed the suit, but Prime is ap­peal­ing.

In New Jersey, where Prime owns one hos­pi­tal and is in ne­go­ti­a­tions to buy two more, in­sur­ers fear that the state’s strong con­sumer pro­tec­tions tie their hands when they’re hit with an in­flated bill for out-of-net­work care. There has been a spike in for-profit hos­pi­tal com­pa­nies can­cel­ing in­sur­ance con­tracts to col­lect higher out-of-net­work fees.

“There’s a con­cern that Prime will fol­low that path,” said Ward San­ders, pres­i­dent of the New Jersey As­so­ci­a­tion of Health Plans. “There’s a sus­pi­cion in the payer com­mu­nity that this is about billing. There’s no lever­age in this con­text. There’s no lim­i­ta­tion on what they can charge.”

But Prime coun­ters that when a hos­pi­tal is strug­gling, in­sur­ers have the up­per hand. At one New Jersey hos­pi­tal, com­mer­cial rates were 72% be­low Medi­care, said Luis Leon, Prime’s pres­i­dent of op­er­a­tions.

“In cer­tain mar­kets, pay­ers can de­cide that a hos­pi­tal is not es­sen­tial,” said Joe Lupica, chair­man of New­point Health­care Ad­vi­sors, a con­sult­ing firm. “(Reddy) gave some pow­er­ful eco­nomic re­sis­tance to the man­aged­care com­pa­nies that they have not been used to and brought them back to the table.”

In ad­di­tion to its ED strat­egy, Prime ob­ses­sively stud­ies CMS billing and cod­ing re­quire­ments and ed­u­cates physi­cians about clin­i­cal doc­u­men­ta­tion. For ex­am­ple, it en­cour­ages physi­cians to code for a spe­cific type of heart fail­ure, rather than the more gen­eral con­ges­tive heart fail­ure.

“Many physi­cians un­der­stand qual­ity, but they don’t un­der­stand the cost,” Reddy said. “We have to give them the tools to un­der­stand those met­rics. What it does is stan­dard­ize the qual­ity of care.”

Not ev­ery­one sees it that way. In 2011, a whis­tle-blower suit filed in Los An­ge­les al­leged that Prime’s em­pha­sis on adding co­mor­bidi­ties to di­ag­nos­tic codes was a way of ex­tract­ing more money from Medi­care—so-called up­cod­ing. The Jus­tice De­part­ment launched an in­ves­ti­ga­tion into the al­le­ga­tions as well as Prime’s short­stay ad­mis­sions prac­tices. It opened another in­ves­ti­ga­tion into whether the un­usu­ally high rates of sep­ticemia, or blood in­fec­tions, and kwash­iorkor, a form of se­vere mal­nu­tri­tion, among Prime’s pa­tients rep­re­sented fraud­u­lent billing prac­tices.

Many physi­cians un­der­stand qual­ity, but they don’t un­der­stand the cost. We have to give them the tools to un­der­stand those met­rics. What it does is stan­dard­ize the qual­ity of care.”

Dr. Prem Reddy

But Prime in­sists its thor­ough­ness on cod­ing ul­ti­mately will be vin­di­cated. The Jus­tice De­part­ment de­clined to join the 2011 whis­tle-blower suit, which was un­sealed last Jan­uary. Suits with­out the de­part­ment’s back­ing are less likely to suc­ceed.

Reddy re­jects claims that Prime’s physi­cians are en­cour­aged to ig­nore the over­all cost of care. He cited the ex­am­ple of im­plant­ing new knees or hips in young, ac­tive or­tho­pe­dics pa­tients com­pared to older pa­tients in nurs­ing homes. “At times, cer­tain pa­tients would not nec­es­sar­ily need the same pros­the­sis,” he said. “So some­one, es­pe­cially the doc­tor, has to be cog­nizant of the cost to Medi­care.”

Sit­ting next to him at the con­fer­ence table, his youngest daugh­ter, Su­nitha Reddy, vice pres­i­dent of hos­pi­tal op­er­a­tions, in­ter­jects. “It’s just pro­vid­ing in­for­ma­tion and mak­ing sure the doc­tor is aware,” she said.

A mis­sion and a plan

While Par­adise Val­ley’s sur­vival under Prime is no mir­a­cle, the hos­pi­tal still cel­e­brates its re­li­gious roots. Its walls fea­ture the story of Ellen G. White, a mem­ber of the Sev­enth-day Ad­ven­tist Church who pur­chased the prop­erty in 1904 to open a much-needed hos­pi­tal de­spite its lack of potable wa­ter. Be­liev­ing God would pro­vide, she or­dered a well dig­ger to go deeper and deeper un­til, fi­nally, he struck wa­ter. The orig­i­nal well is still pre­served on the Par­adise Val­ley cam­pus.

The hos­pi­tal also touts its in­clu­sion as one of Tru­ven’s 15 Top Health Sys­tems in 2012 and 2013. A ban­ner cel­e­brat­ing those hon­ors hangs from one of its med­i­cal of­fice build­ings.

Yet the recog­ni­tion is in jeop­ardy. The re­search firm stripped another Prime hos­pi­tal, Desert Val­ley in Vic­torville, Calif., of its 2012 and 2013 awards af­ter the hos­pi­tal re­ceived a $50,000 sanc­tion from the Cal­i­for­nia De­part­ment of Health for per­form­ing non-emer­gency car­diac catheter­i­za­tions in a lab li­censed only for di­ag­nos­tic pro­ce­dures. One pa­tient died and two oth­ers were in­jured in the 2011 in­ci­dents.

Reddy ripped Tru­ven’s de­ci­sion last year af­ter it was an­nounced. “I have never paid a $10 fine,” he said at the time, his voice ris­ing in anger. “That $50,000—we will never pay.”

Eleven months later, he is still vow­ing to fight the sanc­tion, even though the lengthy ap­peals process will cost far more than $50,000. “We want it to be erased—that’s why we’re fight­ing,” he said. “Tru­ven knows they made a mis­take; they over­re­acted.”

Prime con­tends that the po­lit­i­cally pow­er­fully SEIU is mount­ing what Reddy calls a smear cam­paign to strong-arm the firm into rec­og­niz­ing the union at non-union hos­pi­tals such as Par­adise Val­ley. In Au­gust, the chain sued the SEIU under the fed­eral Rack­e­teer In­flu­enced and Cor­rupt Or­ga­ni­za­tions Act, a law whose orig­i­nal in­tent was to pros­e­cute or­ga­nized crime.

In re­cent months, Reddy has stepped back from the spot­light, in part to de­flect crit­i­cism from the SEIU. He is now fo­cus­ing on lin­ing up in­vest­ment banks to take Prime through an ini­tial pub­lic of­fer­ing within the next two to three years.

“It’s not just about money,” said Arnie Kim­mel, who pre­vi­ously over­saw busi­ness de­vel­op­ment for Prime but left last year to be­come CEO of Fran­cis­can St. James Health in Chicago Heights, Ill. “(Reddy) has said that his legacy will be a cer­tain num­ber—now a rapidly ex­pand­ing num­ber—of com­mu­ni­ties that would not have a hos­pi­tal if it were not for Prime.”

Prem Reddy, who hails from an In­dian vil­lage of 2,000 peo­ple, didn’t see elec­tric­ity un­til he went to col­lege. But he knew he wanted to be a car­di­ol­o­gist from child­hood, us­ing bam­boo sticks to give pre­tend in­jec­tions.

Reddy left In­dia in 1976 with his col-

I have never paid a $10 fine. That $50,000— we will never pay.”

Dr. Prem Reddy

lege sweet­heart and wife of two years, Dr. Venkamma Reddy, to be­gin a car­dio­vas­cu­lar dis­ease res­i­dency in New York. Five years later, he saw an ad for a car­di­ol­o­gist po­si­tion in the ru­ral San Bernardino town of Ap­ple Val­ley, about 90 miles east of Los An­ge­les. With only 7,000 peo­ple, it felt al­most like home.

He im­me­di­ately plunged into what in those days was one of the riskier pro­ce­dures in medicine: per­form­ing an­gio­plas­ties. “I prac­tice very ag­gres­sive medicine,” Reddy said. “Those are very risky pro­ce­dures and I have never con­strained my­self by risk.”

As his pa­tient load grew, Reddy founded Desert Val­ley Med­i­cal Group in 1985. Be­liev­ing he could op­er­ate prof­itably in the man­aged-care en­vi­ron­ment just then tak­ing hold in Cal­i­for­nia, he opened Desert Val­ley Hos­pi­tal in 1994 with $7 mil­lion in pri­vate cap­i­tal, in­clud­ing his own sav­ings, and $15 mil­lion from a real es­tate in­vest­ment trust.

“He broke into the scene early on when it was all about the cost con­tain­ment,” said Nestor Valencia, a for­mer man­aged-care ex­ec­u­tive and founder of the grass-roots or­ga­ni­za­tion Our Salud, a vo­cal op­po­nent of the Daugh­ters sale. “He comes in and says, ‘I’ll fix that.’ He was tough on the doc­tors and he was tough on the HMOs as well.”

In 1990, Reddy es­tab­lished PrimeCare In­ter­na­tional, a physi­cian-prac­tice man­age­ment com­pany that grew to have op­er­a­tions in sev­eral states. He had plans to take PrimeCare all the way to an IPO but ran into a tough mar­ket. “The peo­ple who were try­ing to take me through an IPO said we missed the win­dow,” Reddy said. So he sold PrimeCare and Desert Val­ley to another PPM, Phy­cor.

But the new own­ers mis­man­aged the ac­qui­si­tion. In 2001, Reddy de­cided to buy back Desert Val­ley. “That’s when I learned ex­actly how to turn around a bank­rupt hos­pi­tal,” he said. “Of course I was scared … I was over­anx­ious. I was every­where—I would pull shifts in the ER.”

Dur­ing those first nine months, Desert Val­ley lost $7 mil­lion. But by year-end, it was only $3 mil­lion in the red. In year two, it turned a profit.

The strat­egy was repli­ca­ble. Dur­ing its first decade, Prime added 11 hos­pi­tals in Cal­i­for­nia. Since 2011, it has widened its net to in­clude op­er­a­tions in nine states with deals in place in two more.

In­side its hos­pi­tals, Prime runs a lean op­er­a­tion. One of the first things it does when it takes over a fa­cil­ity is make deep cuts in the ad­min­is­tra­tive fat. Reddy calls the man­age­ment cuts “a sub­stan­tial por­tion of our re­cov­ery.”

Prime has in­vested $10 mil­lion in Par­adise Val­ley. Although it will never be a des­ti­na­tion med­i­cal cen­ter, Prime fo­cuses on prof­itable ser­vice lines.

It is build­ing a spine and joint cen­ter. Its new or­tho­pe­dics wing has 10 pri­vate rooms and was de­signed with a ca­bana theme. The unit once served pe­di­atric pa­tients, but Par­adise Val­ley couldn’t com­pete with Rady Chil­dren’s Hos­pi­tal 11 miles away. The hos­pi­tal that once found it im­pos­si­ble to re­cruit doc­tors has added seven ortho­pe­dic spe­cial­ists.

At­tor­ney Gen­eral Har­ris has un­til early Fe­bru­ary to ap­prove the Daugh­ters of Char­ity sale, which would ap­ply many of the same ap­proaches seen at Par­adise Val­ley to its six safety net hos­pi­tals. The Catholic sys­tem’s fi­nan­cial ad­vis­ers un­der­stood the risk of re­jec­tion, but the other three op­tions lacked Prime’s fi­nan­cial strength and cap­i­tal com­mit­ments.

“This is the su­pe­rior so­lu­tion to all that was available for us,” CEO Robert Is­sai said dur­ing an investor call. “We’re very ex­cited and the fu­ture looks very bright for us.”

Reddy says the chal­leng­ing busi­ness en­vi­ron­ment in Cal­i­for­nia is his main ally since Medi-Cal rates are some of the low­est in the coun­try and the high cost of liv­ing drives up wages. “None of the ma­jor health sys­tems want to come to Cal­i­for­nia,” he said. “You can’t pro­duce a lot of prof­its in the prac­tice of medicine. You have to be able to de­rive plea­sure to save so many peo­ple and so many lives.”

PAUL AL­VAREZ

Luis Leon, Prime’s pres­i­dent of op­er­a­tions, with hos­pi­tal ad­min­is­tra­tor Neerav Jadeja. Leon is read­ing a sto­ry­board about the re­li­gious his­tory of Par­adise Val­ley.

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