Los Angeles Times / July 8, 2007
Hospital group rejects system and cashes in
A Southland doctor's company prospers by canceling insurance contracts
and, some say, shortchanging patients.
By Daniel Costello, Times Staff Writer

As he piloted his new, $1.4-million helicopter from his Apple Valley
home to Orange County one recent morning, Dr. Prem Reddy enjoyed a
cloudless view of his growing empire.

Today, the five-seat Eurocopter EC120 whisks him to Anaheim, where he
recently agreed to buy two hospitals. On other days, he sweeps over
endless miles of gridlock to his facilities in Sherman Oaks,
Huntington Beach and San Diego.

The 58-year-old cardiologist has scooped up six of his eight hospitals
in the last two years and could take over as many as six more in the
coming months.

The buying spree is making his company one of the largest hospital
owners in the state, placing it in a position to challenge industry
leaders including Kaiser Permanente and Catholic Healthcare West.

"There's a lot of sacrifice in a doctor's life," Reddy said, over the
whir of the chopper's blades. "But there are many rewards."

What is more extraordinary is how Reddy is building his empire. Modern
healthcare is largely based on the model in which insurers seek to
control costs by paying fixed amounts to doctors and hospitals. Reddy
is tearing that down.

When Reddy's company, Prime Healthcare Services Inc., takes over a
hospital, it typically cancels insurance contracts, allowing the
hospital to collect steeply higher reimbursements. It has suspended
services - such as chemotherapy treatments, mental health care and
birthing centers - that patients need but aren't lucrative.

Critics say Reddy-owned hospitals routinely turn away uninsured
patients, an allegation the company denies.

On four occasions since 2002, inspectors have found that Prime
Healthcare facilities failed to meet minimum federal safety standards,
placing their Medicare funding at risk.

Records show that in one two-hour period during 2003, three uninsured
patients left the emergency room at Desert Valley Hospital in
Victorville after waiting up to four hours without being treated. Two
of them were under 2 years old, including a 16-month-old girl who
arrived with burns on her left hand.

The same year, Reddy discharged an uninsured patient he was personally
treating who was in kidney failure, suggesting that the patient go to
a nearby county facility where he could sign up for free care. The
patient waited until the following day to visit another emergency
room, records show.

State regulators found that the medical staff failed to make sure that
discharging the patient "would not create a medical hazard."

In an interview, Reddy said the problems found by regulators in recent
years were "insignificant" for a hospital chain of its size and that
state data show Prime Healthcare hospitals have increased charity care
to the uninsured. He said the company had taken corrective measures.

Reddy confirmed that he discharged the kidney patient, but said he did
so after another doctor verified that the patient was stable. He added
that the patient could apply for state Medi-Cal insurance at the
county hospital more quickly.

More than a dozen current and former medical staffers and
administrators interviewed by The Times said they were concerned that
the company's business practices were putting patients in jeopardy.
Many declined to talk on the record for fear of losing their job or
being sued.

Experts say Prime Healthcare's unusual business model reduces patient
access to services, significantly raises costs and, as the company
grows, could destabilize California's healthcare system.

"Once you really take a look at what he's doing, it's hard to say the
community benefits under his system," said Stan Otake, an Orange
County healthcare consultant and former chief executive of Bellflower
Medical Center.

Some describe Reddy as a bully who often clashes with his own medical
staff. Two former associates, including a doctor, obtained restraining
orders against him in 1999 for allegedly attacking the doctor and
harassing an employee at the same facility. Reddy denied the
allegations.

"I am a healer, a challenger; I am a maverick," he said in a series of
interviews with The Times. "There isn't anybody like Prem Reddy that
can face so many challenges in the medical field."

Reddy said his company's approach allowed it to be more efficient than
its rivals, and he remained unapologetic to those who said the company
was too focused on the bottom line. Patients, he said, may simply
deserve only the amount of care they can afford.

"Why is it in healthcare we expect to have the same?" he asked. "It's
an entitlement mentality. Why aren't the same people asking why
everybody shouldn't be eating the same foods, or have the same clothes
or same homes? Those are as essential services as healthcare."

High desert extravagance

Prem Reddy was the eldest of four children from a farming family in
Nellore, India. He said his family didn't have electricity until he
was 17.

Reddy's father, a village elder, encouraged him to become a doctor. He
attended Sri Venkateswara University, where he met his wife,
Venkamma.

The couple immigrated to the United States in 1976. After Reddy
completed his residency training at State University of New York,
Brooklyn, he accepted a job as a cardiologist at St. Mary Medical
Center in Apple Valley.

Three decades later, Reddy has, by many accounts, become one of the
richest doctors in the Southland. He said in an interview that he was
worth "more than $300 million," but wouldn't elaborate.

His 628-word Wikipedia entry describes him as a "gifted cardiologist,
successful entrepreneur and a dedicated philanthropist" and says he
has donated millions of dollars to numerous charities around the
state. A health school at Victor Valley College in Victorville and a
lecture hall at Western University of Health Sciences in Pomona bear
his name. He says he has built hundreds of homes for the poor in
India.

Reddy has brought lifestyles of the rich and famous to an area
surrounded by working-class communities. He regularly travels in a
chauffeured car, an unusual sight in the high desert, and his company
bought the helicopter for him to use after he grew tired of weekly
commutes to his hospitals. A full-time pilot also is always on call.

Reddy's 15,000-square-foot mansion, a local landmark, has become a way
station for politicians. Valued at between $3 million and $5 million
in estimates by local real estate agents, the Mediterranean-style
house is in the former neighborhood of cowboy star Roy Rogers. It
features gold-plated toilets and expensive collectibles such as a
nearly 4-foot-long model of Cinderella's horse and carriage made of
expensive Spanish Lladro porcelain. Another home in Beverly Hills is
valued at more than $9 million.

Reddy is a registered Republican - he was Republican of the Year in
San Bernardino County in 1995 - who says he has hosted fundraisers for
many officeholders, including the four most recent U.S. presidents. In
September, he held a $1,000-a-plate benefit at his Apple Valley home
for Gov. Arnold Schwarzenegger that raised $230,000.

A new business model

Reddy said his decision to wage battle against private health insurers
was triggered by a mix of confidence and necessity.

He founded the Desert Valley Medical Group in 1985 and turned it into
one of the largest such operations in the country, with 480 doctors
and nearly $450 million in annual revenue. He later sold the company
to a Tennessee physician management group for $150 million, he said,
but that company eventually went bankrupt.

In 2001, Reddy repurchased the failing medical group and the
affiliated 83-bed Desert Valley Hospital through his new company,
Prime Healthcare Services.

Reddy is chairman of the company, which is owned by Prime A
Investments LLC. The cardiologist owns 10% of the shares in the parent
company, with the remaining 90% held by a trust he set up in his
children's names. Reddy says he runs the day-to-day operations of
Prime Healthcare. "I do all the actions," he said.

Most hospitals make their money on patients who have private health
insurance. They earn little on those with Medicare or Medi-Cal, the
state's insurance program for the poor, because government programs
reimburse little, if anything, above the cost of care.

Hospitals sign contracts with insurance companies in part to assure
themselves a steady stream of patients. In exchange for that business,
however, the hospitals collect as little as 30% of their costs from
the insurance companies. As insurers consolidate and get more
powerful, hospitals say they have had to accept even less money.

A few months after buying it, Reddy said, he realized Desert Valley
was losing about $7 million a year.

"Somewhere along the line, the insurance industry has gone bad," he
said. "They want to pay $1,100 a day for patients that cost $1,700 to
treat. They are bilking the system and getting rich at everyone else's
expense."

While in his office one night, Reddy had an idea about how to make
Desert Valley profitable. If his company canceled the hospital's
private insurance contracts, it might be able to make up for the loss
in patients by increasing traffic through the emergency rooms and
admitting those who needed more care into his hospitals for longer
stays.

To ensure business, Reddy said, he did everything he could to speed up
care in his emergency room and treat as many patients as possible.

To save diagnostic time, the hospital had laboratory equipment moved
to the ER. Emergency beds and medical staff were increased. Reddy
demanded that patients be seen within 20 minutes of arrival. With few
options, paramedics eagerly showed up because, unlike many hospitals
these days, it was rarely too full to accept patients.

Insurers typically negotiate with hospitals to pay the smallest fee
they can for each medical service, often much lower than what
hospitals claim it costs. That sets up a two-tiered pricing system
under which uninsured patients may pay two to three times more than
insured patients for the same service.

Free of most contracts, Prime Healthcare's hospitals can collect the
patient's entire bill, calculated at the higher rate, whether the
patient has insurance or not. And, under state law, insurers must pay
up.

At Desert Valley, for example, the hospital collected about $4,100 per
patient per day in 2002, according to state data. In 2005, it took in
about $10,000 per patient per day.

According to Reddy, his hospital company's revenue is more than $500
million a year, and profit at several of his facilities hovers around
15%, far above the industry average.

Flush with cash, Prime has acquired seven hospitals since 2004,
including four last year: West Anaheim Medical Center, Huntington
Beach Hospital, Sherman Oaks Hospital and La Palma Intercommunity
Hospital. The company now has 1,256 beds under its control.

This month, Reddy said, the company is expected to announce "a major
acquisition" that could include a large hospital in Los Angeles, and
Reddy recently expressed interest in two large hospitals in Orange
County.

No friend of insurers

Reddy says that once his company takes over a facility, savings are
sought everywhere. The company often cuts staffs as much as 10%
because most are bloated, he said. (State law requires a specific
nurse-to-patient ratio, but it doesn't cover management, who typically
comprise as much as one-fifth of the staff.) It discourages doctors
from giving patients treatment they can't afford, including newer
heart pacemakers and knee replacements.

"I use the same set of skills when I go into a hospital as I do as a
clinician," Reddy said. "I diagnose the problems and I fix them."

Doctors and staff members at Reddy's hospitals say he has never tried
to influence their medical decisions or cut costs in ways that have
affected care.

"I have never worked with someone more conscientious about what he
does and interested in providing top-quality care," said Suzanne
Richards, vice president of nursing for Prime Healthcare.

However, insurers, who have been criticized in recent years for
raising patient premiums while restricting care, say they have found a
tenacious adversary in Reddy.

"His policies will equate to higher premiums and higher cost of care
for everyone," said Josh Valdez, senior vice president of Blue Cross
of California, which reluctantly pays Prime Healthcare's bills.
"People of California are not going to stand for it."

Anaheim sale opposed

At a public hearing in Anaheim last month to determine whether Prime
Healthcare can acquire Anaheim Memorial Medical Center, dozens of
residents, community activists and other critics spoke out against the
pending sale.

One speaker cited a federal report from early June that detailed how,
days after the company took over Paradise Valley Hospital near San
Diego, hospital administrators allegedly changed patient care
directives - including canceling chemotherapy services and requiring
doctors to get prior authorization for cardiac treatment without
alerting the medical staff beforehand.

According to the report, one doctor interviewed by regulators said
Reddy suggested that the hospital no longer perform some Medicare and
Medi-Cal procedures because of poor reimbursement. Reddy denies that.

Richards said the hospital discussed the changes with some of the
medical staff - but not all of them - before the changes were made.

When Reddy and his company's billing and patient care practices were
described to him in an interview, Dr. David Goldstein, director of the
USC Pacific Center for Health Policy and Ethics, said he worried that
the company's business model ignored the medical profession's
responsibility to care for all patients equally.

"Everyone needs to make money, of course, and we can't fault him for
that," Goldstein said. "But this is not like making widgets. In
medicine, we have a duty to provide the best care we possibly can."

Run-ins with staff

Court records and interviews with former employees show that Reddy has
repeatedly clashed with medical staff who questioned his practices.

In 2005, two former nurses at Desert Valley Hospital won a lawsuit in
which they claimed they were improperly fired after they accused
hospital management of providing inadequate care to save money and
Reddy of repeatedly reporting to work while under the influence of
alcohol. (Reddy had first sued the nurses for breach of contract,
alleging that they conspired to trigger investigations of his hospital
by regulators.)

In an interview, Reddy acknowledged that he once had a drinking
problem but denied that he ever treated patients after drinking. "I
never did, I never will see a patient under the influence of alcohol,"
he said.

Reddy also says he has never lost a medical malpractice case against
him in more than 30 years of practice.

In the lawsuit, Lisa Crouch, the former chief emergency room nurse at
Desert Valley Hospital, said that during frequent visits to the ER,
Reddy pressured staffers to treat insured patients more favorably and
turn away uninsured patients.

A jury awarded the nurses $883,456 in compensatory damages. That
verdict was set aside after a judge, citing jury misconduct, declared
a mistrial. The case was later settled. Through her lawyer, Crouch
declined to comment.

In a deposition, Dr. Panch Jeyakumar, Desert Valley's former medical
director and chief operating officer, corroborated the nurses' account
about treatment directives.

"The general policy [at the hospital] was that patients with insurance
are to be given preference over noninsurance patients," he said in the
deposition. "It was the general concept which pervaded the entire
organization during that time."

A separate suit - involving a former Desert Valley Hospital doctor,
Dr. Omer Ahmed, who accused Prime Healthcare of wrongfully firing him
after Ahmed raised questions about patient care - is expected to go to
trial this fall. Ahmed didn't respond to requests for an interview.

Reddy said that Ahmed's case was over a "minor" disagreement and that
he expected it to be settled this summer.

Some of the suits go beyond contractual disputes.

Virginia Budington, a former vice president of business affairs at
Desert Valley Medical Group, obtained a restraining order against
Reddy after a judge found that Reddy posed a threat to her.

"I didn't feel safe around him," she said in an interview. "He'd be
nice one minute and the next be out of control."

Reddy denied that he harassed Budington and said the restraining order
was unjustified.

In February 1999, Reddy was arrested for allegedly attacking Dr. Harry
Lifschutz at Desert Valley Medical Group. Reddy jumped over a desk in
the doctor's waiting room and allegedly attempted to choke him and
take a laptop from Lifschutz's office.

Reddy was charged with a felony count of trespassing, one count of
making a terrorist threat and two counts of battery. The charges were
later reduced to misdemeanors.

San Bernardino County Judge Robert E. Law ordered Reddy to stay at
least 1,000 yards from Budington and Lifschutz after determining that
Reddy was a "dangerous man" and that two people with Reddy on the day
he allegedly attacked the doctor had handguns in their possession.

Reddy denied that he posed a threat to the two former associates. He
said his driver carried a gun on the day he was arrested but removed
it before entering Lifschutz's office.

In 2001, the criminal charges against Reddy were dropped after
Lifschutz sent a letter to the district attorney withdrawing his
earlier allegations. Lifschutz's lawyer said the letter was sent as
part of a settlement agreement in a civil suit Lifschutz had filed
against Reddy.

A spokesman for the San Bernardino County district attorney's office
said prosecutors had no option but to drop their case after they
received Lifschutz's letter withdrawing his allegations.

After the case was dismissed, Reddy got his arrest records expunged by
asking a judge to find him factually innocent of the charge and to
seal the records.

"It was an unfortunate event that amounts to a minute of misjudgment
on my part and does not portray me or my life," he said.

Today, Reddy excitedly talks about expanding his empire. He envisions
his company spreading across California, then beyond.

"I have gotten calls from hospitals in Hawaii and Nevada asking me if
I will come there and consider" buying their hospitals, Reddy said.
"This will be a billion-dollar company."

Even his competitors say Reddy's ambitions don't seem farfetched.

Dr. Jack Terner, president of Lancaster-based Prospect Medical Group,
which represents 85,000 patients in the Southland, said he would be
surprised if others didn't soon follow Prime Healthcare's business
model.

Said Terner, "In many ways what he's doing is obvious, but no one ever
thought they could pull it off."

--------------------------------------------------------------------------------

Inspectors find standards unmet

Critics say Prime Healthcare hospitals cut costs and boost profits in
ways that put patients at risk. Chairman Dr. Prem Reddy denies that,
saying the company's facilities provide care superior to that of its
competitors.

Records show that on four occasions since 2002 state and federal
health inspectors have found the company's hospitals failed to meet
minimum federal safety standards, placing their Medicare funding at
risk.

Among their findings:

·  An 88-year-old women with a history of heart trouble who arrived in
2004 at the Desert Valley Hospital's emergency room in Victorville
with shortness of breath and rib pain waited 2 1/2 hours for
treatment, during which time her insurance coverage was confirmed. She
was called from the lobby three minutes after it was verified, after
five other patients had been seen. Regulators found the "facility
failed to ensure that there was no delay of a patient's medical
screening examination in order to inquire about the individual's
method of payment."

·  In 2004, a patient listed as uninsured who was reportedly suicidal
arrived at the Desert Valley ER after taking cyanide and waited 20
minutes to be treated by a doctor, during which time a less ill,
insured patient was placed in a bed. The suicidal patient lost
consciousness soon after and later died. Suzanne Richards, vice
president of nursing for the company, says cyanide patients rarely
survive.

·  Early this year, a pregnant patient with severe abdominal pain and
whose 8-month-old fetus had an elevated heart rate was discharged from
Huntington Beach Hospital without adequate medical screening. The
patient later gave birth in a nearby hospital.

The inspections even included meal service. A review of the patient
food trays one day at La Palma Hospital showed roast pork being served
in 1-ounce portions when the menu called for 3-ounce portions.

Reddy characterized the state and federal findings regarding Prime
Healthcare as "insignificant" for a hospital chain its size and that
the company had taken corrective measures. He said his hospitals
continued to score highly on national accreditation surveys, including
Desert Valley Hospital, which scored 98% on its most recent survey.

Reddy said state data showed that Prime Healthcare had increased the
amount of care provided to the uninsured.

"The quality [of our care] is better than any of our peers," Reddy
said. "I am a doctor and nothing is more important to me than my
patients."

--

X-ray of a profitable operation

Prime Healthcare Services is rewriting how hospitals make money,
bycanceling managed-care contracts, collecting more from insurers
andshuttering unprofitable services. At Desert Valley Hospital
inVictorville, the company raised the bottom line by:

Examples of price changes for selected services and products at Desert
Valley Hospital

                         2005 charge   2006 charge   Percent change
ServiceUse of mechanical ventilator, first day $256 $6,144 +2,298%
CL drug-eluting stent, to prevent blood clots $16,000 $63,900 +334%
Vaginal delivery in maternity ward $1,475 $4,061 +175%
One-hour ambulatory surgery $2,500 $4,000 +60%
Blood test (CBC) $54 $76 +40%
Pacemaker, single chamber $32,500 $22,500 -31%
Angiogram $5,211 $2,957 -57%

Note: Hospitals prices reported to the state may not reflect the final
charge on a patients bill.

Source: Office of Statewide Health Planning and Development. Graphics
reporting by Daniel Costello

--------------------------------------------------------------------------------