Vulnerable Rural Hospitals Face Tough Decisions On Questionable Billing Schemes

The only hospital serving the community of rural Callaway County, Mo. — Fulton Medical Center — was set to shut down last September. When staff arrived one afternoon for a potluck goodbye party, they were met with an unexpected guest, Jorge Perez, a management consultant from Florida. He announced he'd just bought the hospital, and planned to keep it open.

When Perez spoke about the takeover four days later to a packed city council chambers in Fulton, Mo., he got a standing ovation.

"We travel all over the country and we see the same thing we see here in Fulton: a town that's fighting to keep their hospital," Perez told the crowd.

Rural hospitals, such as Fulton Medical, serve as a lifeline for health care and jobs in small towns, but they face dwindling revenues. Eighty-five of them have closed down in the last eight years and nearly 700 more, about one-third of the facilities, are at risk of closing.

Yet despite their typically slim operating margins, Perez has been buying them. He and his business partners own or manage nearly 20 rural hospitals in Missouri, Kansas, Oklahoma, Florida and elsewhere. By the end of this year, he says, he wants to own 50 of them. A serial entrepreneur with a background in IT, he's known for coming in to rural hospitals on the brink of closure with a promise to turn them around.

"Part of our secret sauce is that we will bring in new services that didn't exist before," Perez said in an interview following the event in Fulton last September.

But an investigation by NPR and its reporting partners uncovered a pattern of controversial business practices by management companies with ties to Perez, which can lead to big profits for the management companies, but high risks for vulnerable hospitals.

'A shell company'

Two and half hours drive north of Fulton, another Missouri rural hospital was nearing closure when one of Perez's companies stepped in.

Putnam County Memorial hospital, a 25-bed critical access hospital, in Unionville, Mo. had struggled to stay in business for several years. It had scrambled back from the brink of bankruptcy in 2011, but budgets were still tight.

Then in September 2016, Florida-based management company, Hospital Partners Inc., which Perez co-owns, took over operation of the hospital. David Byrns, co-owner of Hospital Partners, became Putnam County Memorial's CEO.

The new management had dramatic effects on the hospital's finances, according to a report from the Missouri state auditor. In six months, Putnam Memorial generated $92 million in revenue. By comparison, the audit reported, the hospital had generated just $7.5 million the year before.

But little of that revenue was staying with the hospital, according to Missouri auditor Nicole Galloway's August 2017 audit report. "It appears that Putnam County Memorial Hospital is being used as a shell company for questionable lab activity that's occurring across the country," Galloway said in an interview after releasing the audit.

According to Galloway's report, Putnam hospital had started acting as a reference lab, and billing insurance for tests, including many performed elsewhere.

Here's how the hospital's new management appear to have managed its turnaround, according to documents and hospital and court records NPR obtained:

Within days of Hospital Partners' takeover of Putnam County Memorial, a completely separate company with ties to Byrns and Perez — Hospital Laboratory Partners — was incorporated in Florida, according to the auditor's report and claims in court records. This new lab company started billing insurers for tests through Putnam County Memorial hospital.

Many hospitals have in-house laboratories to test specimens, such as blood or urine samples. But some tests are sent to specialized reference laboratories.

"It's a common practice," says Tommy Barnhart, a health care consultant who focuses on rural health.

The reference lab will bill the hospital at a negotiated rate, and then the hospital turns around and bills the patient's insurance. "The hospital can charge whatever," Barnhart says.

The audit questioned the propriety of the lab billings at Putnam. It noted that 80 percent of the revenue did not stay in the hospital's coffers: It went to private lab companies —some with ties to Perez—such as Hospital Laboratory Partners.

"Based on our review of hospital accounts, the vast majority of laboratory billings are for out-of-state lab activity for individuals who are not patients of hospital physicians," Galloway wrote in the audit.

A public records request of the hospital revealed that between November 2016 and March 2017, Putnam County Memorial paid for over $26 million to Hospital Laboratory Partners alone.

There's another way that Perez and Byrn's companies profited from their relationship with the hospital. Galloway noted in the audit that, during the same time period, Putnam Memorial contracted with a billing company that received 6 percent of the revenue generated by the lab program.

A public records request showed Florida-based software and billings company Empower H.I.S. LLC was paid $11.8 million by the hospital between November 2016 and March 2017. Empower was registered in 2014 by Perez.

In a press release announcing the audit, Galloway stated that she had turned her findings over to criminal authorities. U.S. Senator Claire McCaskill has called for a federal investigation into the billing arrangements, and the Missouri Attorney General's office confirmed in a statement that it's actively investigating the matter as well.

A financial lifeline

In an interview at his Kansas City offices, Perez dismissed concerns about the lab billing arrangement, saying he runs similar programs at some of his other hospitals. He argued that the arrangements are legal — that there are even books on how to structure them (NPR located one such book, The Profit Machine in the Hospital Basement, published in 2016).

Perez strongly defended the practice as a desperately needed lifeline for struggling community hospitals. "The only other opportunity this hospital had to survive was to put [together] a lab outreach program," Perez said of Putnam County Memorial in an interview.

Following release of Galloway's audit, Hospital Partners issued a statement saying that since taking over the hospital's operations, it had paid off $6 million of the hospital's debts.

Lab billing programs can sometimes be money-makers for small rural hospitals such as Putnam County Memorial — and others around the country that are trying the same strategy. Insurance companies typically cut small hospitals a deal, paying them at higher rates than other hospitals, says Michigan health care attorney Brian Bauer who advises hospitals on legal and financial matters.

Bauer says he has seen several similar lab billing arrangements in the past two years. He says that while they may be legal, there's a catch.

When insurance companies make these deals with rural hospitals, he said, they aren't anticipating a high-volume lab program, which can generate up to tens of millions of dollars a year.

"It's not uncommon to have one or more of the insurance companies come back and say, 'this is not what we agreed to'," Bauer says.

And that can be bad news for hospitals.

Legal repercussions

In Georgia, several insurance companies are suing Perez and others, seeking to recoup more than $111 million from a similar lab arrangement at a rural hospital there. That small hospital — which has the only emergency room in Lumpkin County, Georgia — is named as a defendant in the lawsuit. Perez and the hospital have asked the court to dismiss the case.

Perez is also named in a $60 million lawsuit filed by insurers in Missouri in April over the billing arrangement in Putnam County. The county's hospital is not a defendant in that lawsuit.

In addition to the lawsuit in Georgia, Blue Cross Blue Shield of Oklahoma said it would no longer include four rural hospitals in its network based on its concerns about their "questionable" lab billing practices. Those hospitals had been taken over by another company tied to Perez.

In March, the board of directors at Putnam County Memorial Hospital in Unionville, Mo., ousted Perez and his team. That move has triggered a lawsuit by Perez's company, Hospital Partners Inc., which claims it was illegally driven out and is seeking $2 million in damages from the hospital's board of trustees and Missouri State Auditor Nicole Galloway, who issued the audit of the hospital back in August.

The question of whether Putnam County Memorial Hospital will be able to keep its doors open without Perez and his billing program remains unanswered. It's a reminder of the stakes for small communities like Putnam County, Mo., as well rural communities across America.

This story is part of a reporting partnership with NPR, Side Effects Public Media, KBIA, KCUR and Kaiser Health News.

Copyright 2018 Side Effects Public Media. To see more, visit Side Effects Public Media.