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Chain profits by admitting ER patients

Leonard Ortiz/The Orange County RegisterSandy Taylor-Davey holds a 1994 photo of her with her grandparents, Gerald and Dorothy Taylor.

A Southern California hospital chain has transferred an unusually high number of patients from its emergency rooms to its hospital beds, gaining hundreds of millions of dollars by targeting people with Medicare, a California Watch investigation has found.

Patients and their families have described feeling trapped by doctors and administrators working at Prime Healthcare Services facilities. They entered the emergency room and were stuck in a “Twilight Zone,” as one family member described it, unable to see their own doctor at another facility or faced with treatment that seemed unnecessary.

These patients came to Prime hospitals with legitimate medical problems. But they ended up targets of a business strategy meant to maximize the number of insured patients treated in hospitals owned by the company, according to an analysis of state data, interviews and a review of 2,700 pages of court and public testimony.

Eight California hospitals had higher Medicare patient admission rates than Prime hospitals in 2009, records show. But as a chain, Prime stands out. The other large chain in California, Tenet Healthcare Corp., admitted about 39 percent of its ER patients at its hospitals, compared with 63 percent at Prime hospitals.

For some patients, an unexpected trip to a Prime emergency room has meant frustration and headaches.

Leonard Ortiz/The Orange County RegisterSandy Taylor-Davey, 32, took her grandmother, Dorothy Taylor, to West Anaheim Medical Center in June 2009 because it was the closest hospital.

Sandra Taylor-Davey of Garden Grove said she argued in vain with the staff at West Anaheim Medical Center to transfer her grandmother, Dorothy Taylor, to another hospital to see her own doctor – a physician who knew her case and had access to her medical records.

Taylor, then 70, had been brought into the emergency room in June 2009 when she was suffering from a fever. Family members believed she was well enough to move, but their requests were dismissed, Taylor-Davey said.

“It was the most bizarre experience I think I’ve ever been through,” said Taylor-Davey, who used the “Twilight Zone” analogy to describe her experience at Prime. “They did not want to let her out of there.”

Focusing on elderly Medicare patients has been lucrative for the chain, which was founded in 2001 and operates 14 hospitals in California. From 2005 through 2009, Prime’s above-average Medicare admission rates have resulted in an additional $220 million in revenues, the analysis of state records show.

Editor's note: It came to our attention late Friday that Prime Healthcare had issued a press release saying it had taken legal action against California Watch. We have not been served and can’t fully comment until we have reviewed any legal filings. In our dealings with Prime over the course of the past several months, the company has yet to present to us a single factual error that has merited correction or clarification. We continue to stand by our reporting.

California Watch has detailed in previous stories Prime’s high rates of certain medical conditions among Medicare patients – conditions that entitle the chain to increased payments. Time after time, the Ontario-based chain has purchased struggling hospitals and helped turn them around by overhauling admission practices, leading to accusations from rivals that it has acted unfairly.

Executives from Prime declined to comment in detail for this story. The chain’s explanation for its admission policies have been taken from court testimony and public hearings.

Kaiser denounces Prime’s tactics

Taylor-Davey’s account echoes those documented by Kaiser Permanente, the medical insurance and hospital chain with 6.8 million California members.

Oakland-based Kaiser has accused Prime of unnecessarily keeping its customers in a medical limbo instead of moving them to a Kaiser-operated facility. When patients stay an extra day or two in a Prime hospital, the chain can seek thousands more in reimbursement from Kaiser or Medicare.

Former Prime employees have described an orchestrated campaign of admitting Medicare and Kaiser patients – moving them from the emergency room to a hospital bed – in the interest of changing the fortune of a money-losing hospital.

The chain’s founder and board chairman, Dr. Prem Reddy, once described the emergency room as a “gold mine” of Medicare and Kaiser patients, according to the former medical director of Desert Valley Hospital in Victorville.

In a court case from 2005, Reddy testified that one way he had shored up hospital finances was by bringing in more Medicare patients.

Kaiser contends that Prime's admission practices are driven by Reddy, and the company has asked a superior court judge to stop him “or anyone acting at his direction” from determining the practice of medicine at any chain hospital.

Prime has denied Kaiser’s allegations in court.

State data shows that after the hospital chain took over 11 hospitals beginning in 2005, the percentage of Medicare patients who were admitted from the emergency room to Prime hospital beds increased from about 45 to 63 percent. 

That 40 percent increase contrasts with other California hospitals that saw an average 8 percent decline from 2005 to 2009 in Medicare patients moved from the emergency rooms to hospital beds, data shows.

Prime Healthcare’s vice president and general counsel, Michael Sarrao, said the analysis of admission rates is “deeply flawed” but would not respond to specific questions about the chain’s practices.

“(The analysis) utterly fails to consider the medical basis for admissions, and uses unexplained statistics to attempt to question the judgment of doctors as to what is best for patients,” Sarrao wrote in an e-mail.

Contributing to high health costs

Prime Healthcare’s high Medicare admission rates worry health care experts who point to spiraling health costs that threaten to cripple the entitlement program, which serves about 47 million elderly and disabled Americans. By 2019, Medicare spending is expected to rise to $878 billion, up from about $524 billion last year, the Kaiser Family Foundation reported.

Patients admitted to hospitals also can be exposed to dangers inherent in any stay, such as medical errors and tough-to-treat infections.

Shannon Brownlee, acting director of the New America Foundation’s Health Policy Program, who reviewed the California Watch analysis, said the findings raise the question of whether the increase in admissions is in the best interest of patients.

“The real tragedy here is that most patients assume that their physician is doing what’s best for them,” said Brownlee, who also wrote a book about the overuse of medical resources. “They assume that the financial needs of the hospital come second and their needs come first. But that may not be the case in this situation.”

Like Kaiser, the Heritage Provider Network, a Southern California managed care firm with about 500,000 members, has challenged Prime in court, saying the hospital chain unnecessarily boosts its patient admissions in the interest of profit. 

Prime initially sued Kaiser and Heritage, claiming they wrongfully denied payment for treating their customers. 

But in counter-lawsuits, Kaiser and Heritage contend that Prime failed to give managed care providers an opportunity to care for their patients after an emergency situation had been stabilized. Hospitals are required by law to communicate with managed care companies once a patient appears ready for transfer.

Kaiser has accused Prime of using improper medical criteria to “capture” its patients, treating them without authorization and performing unneeded tests to create hefty bills. 

Heritage has argued that Prime admits far more of its patients for brief and “unnecessary” hospital stays than other hospitals. Heritage claims Prime is engaging in racketeering when it “mislabels” Heritage members as too sick to be transferred back to the managed care network.

Prime has denied the allegations in both lawsuits, which are pending.

Extra Medicare revenue

Even as Prime has battled over payment with managed care firms, it has benefitted from Medicare policies that require rapid reimbursement of hospitals. 

In total for 2009, Prime reaped an additional $107 million in revenue by admitting about 8,800 more Medicare patients than would be expected based on the state-average patient admission rates, records show.

While Prime hospitals have treated rising numbers of Medicare patients, California Watch found that Prime hospitals have claimed to treat higher-than-average rates of sepsis, a bloodstream infection, and kwashiorkor, a strain of malnutrition widely associated with children in developing nations. 

The findings have spurred investigations by state and federal authorities into whether the chain is “upcoding,” or exaggerating patient conditions to earn extra money. The U.S. Department of Health and Human Services Office of Inspector General, which reports to the U.S. Department of Justice, is investigating Prime’s billing practices.

State Sen. Ed Hernandez, D-West Covina, chairman of the Senate Health Committee, said he finds it unconscionable that Prime may be upcoding even as its hospitals are admitting patients who “may not need to be admitted.”

“People want to know why health care costs are escalating so rapidly, here’s one good example,” Hernandez said in a statement. “We all end up paying for this behavior.”

In legal filings and public statements, Prime executives have described the financial pressures on hospitals that have gone bankrupt or closed. Prime argues that insurers and managed care companies refuse to negotiate contracts that cover the true cost of hospital care. 

Meanwhile, Prime has said insurers enjoy soaring profits and reward executives with tens of millions in bonus payments.

Prime has canceled contracts with insurers and filed lawsuits decrying industry-standard practices meant to keep insured patients within their own network of hospitals and clinics. Prime says its doctors at the bedside are better suited to make care decisions than insurers who are financially motivated to reunite patients with their usual network of care. 

Attorneys for Prime argue in court filings that the chain’s business model “keeps critically needed community hospitals open, results in greater access to care for all members of the community and improves the quality of care at all of the hospitals acquired by Prime.”

The company also contends it serves more critically ill patients than other hospitals.

“Prime principally devotes its resources to enhancing its emergency room capacity and quality and then matches its enhanced emergency room capacity with actual enhanced ER care for all patients,” the Prime legal filing says.

Trial highlights Prime policies

Ana Venegas/The Orange County RegisterDr. Prem Reddy, a cardiologist and founder of Prime Healthcare Services, was said to have called emergency rooms "a gold mine."

Top Prime officials have testified publicly about the chain’s success in improving efficiency and reducing wait times in emergency rooms. Reddy has said during public hearings that the hospitals rarely go on “saturation,” a term for periods when the emergency room is so busy that it turns away ambulances.

That very policy and many others, though, rankled doctors and nurses who testified in 2005 against Reddy during a 39-day trial in a Victorville courtroom.

The case provides a glimpse into the hands-on role Prime’s founder played in turning around the first hospital in the chain.

One after another, doctors and nurses from Desert Valley Hospital took the witness stand and described how, in 2002, Reddy donned blue scrubs and a white lab coat, taking command of the emergency room. He was there to reverse the course of the money-losing hospital he bought in 2001. 

The 2005 trial came after Reddy sued two former nurse managers, accusing them of violating the terms of their employment. The nurses sued back, arguing that Reddy fired them for challenging his efforts to bring well-insured patients into the hospital and push the uninsured out.

Tina Buchanan, the hospital’s former chief nursing officer, testified that Reddy began to require emergency room staff to put a yellow sheet of paper on each patient record that listed their health insurance status.

She said he would go through the “goldenrods,” as the papers were called, and point out the Medicare or Kaiser patients and say, “Make sure you get this one admitted.”

“If it was … an uninsured patient, he would tell them, ‘Get them out of my hospital,’ ” Buchanan testified.

Reddy testified that the number of uninsured patients treated at the hospital increased when it became more efficient. He also said “some of them we tried to transfer” to the county hospital because it got special funding for uninsured patients. 

Buchanan also spoke about her concern when Reddy began to prevent staff from briefly closing the emergency room when it was extremely busy and the staff was overwhelmed.

The reason, she said, was that Reddy did not want to miss an opportunity to admit a well-insured patient into the hospital.

“Dr. Reddy told us that things were going to be different around here from now on,” Buchanan testified. “Our focus would now be financial, as opposed to quality, and we were going to make money at any cost.”

Buchanan also testified that Reddy looked for Medicare patient records and wrote orders on them for patient tests so “he would get paid for that service.”

Reddy testified that his hospital sought to increase Medicare patient admissions by advertising in the newspaper, sending brochures to senior homes and sending doctors to do rounds in nursing homes.

‘This is a gold mine’

Dr. Panch Jeyakumar, former Desert Valley medical director, testified on the nurses’ behalf. He recalled Reddy’s excitement during a night in late 2002 when the emergency room was full of paying customers.  

“(Reddy) saw me, and he just yelled across the room, ‘Panch, this is a gold mine,’ and he waved the (patient medical records),” Jeyakumar testified, saying Reddy was referring to the number of Kaiser and Medicare patients in the emergency room.

Reddy testified that he didn’t recall whether he made the “gold mine” comment, “but I accept the responsibility.”

The jury awarded Buchanan and Lisa Crouch, another emergency room nurse manager, more than $880,000. The verdict was overturned after a judge found juror misconduct.

According to state data analyzed by California Watch, patients with private insurance were nearly two and a half times more likely to be admitted to Desert Valley Hospital compared with other California hospitals in 2009. And Medicare patients were nearly 50 percent more likely to be admitted from the emergency room to the hospital floor, state data shows.

After the 2005 trial, controversy about Prime’s admission practices persisted.

During a 2006 Orange County Board of Supervisors hearing, Dr. Abdul Khan, a doctor at Huntington Beach Hospital, said that after Prime took over that year, doctors were told to admit insured patients who arrive in the emergency room with maladies as minor as a headache. 

Court records show that another Orange County physician, who was not publicly named, said Reddy instructed staff at Huntington Beach Hospital in 2007 to admit patients for further care after two hours and keep them for 25 hours or more to maximize reimbursement.

Khan testified that one reason for the practice was to get increased reimbursement for an MRI, which can be $1,400 for a patient staying in the hospital, compared with $400 for an outpatient. 

“Anybody with health insurance who walks through their ER is admitted,” Khan testified, “even for a minor problem.”

State data shows that admission rates indeed went up in Orange County hospitals after Prime bought them. 

In late 2006, Prime took over hospitals in Anaheim, Huntington Beach and La Palma. The chain took over a Garden Grove hospital in mid-2008. By 2009, those hospitals, on average, admitted 64 percent of Medicare patients to hospital beds – compared with the 44 percent admission rate at those same hospitals in 2005. 

More than a dozen other Orange County hospitals also admitted about 45 percent of Medicare patients in 2009. 

This story was edited by Robert Salladay and Mark Katches. It was copy edited by Nikki Frick.

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