Hospital group rejects system and cashes in

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.”

daniel.costello@latimes.com

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(BEGIN TEXT OF INFOBOX)

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.”

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(BEGIN TEXT OF INFOBOX)

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 2006 Percent Service charge charge change Use of mechanical ventilator, first day $256 $6,144 +2,298% CL drug-eluting stent, to prevent blood $16,000 $63,900 +334% clots 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

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Prime Healthcare Services’ network

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*--* Year Number acquired County of beds Desert Valley Hospital 1995 San Bernardino 83 Chino Valley Medical Center 2004 San Bernardino 126 Montclair Hospital Medical Center 2005 San Bernardino 102 Sherman Oaks Hospital and Grossman Burn Center 2006 Los Angeles 153 West Anaheim Medical Center 2006 Orange 219 Huntington Beach Hospital 2006 Orange 131 La Palma Intercommunity Hospital 2006 Orange 141 Paradise Valley Hospital 2007 San Diego 301 Anaheim Memorial Medical Center 2007* Orange 217

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*Pending state approval

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Sources: Office of Statewide Health Planning and Development, Times research