Anaheim hospital again in play

A rapidly growing Inland Empire hospital chain, whose bid to buy an Anaheim hospital was rejected last summer by the state attorney general, is one of half a dozen companies trying again to buy the struggling medical center.

In July, the state declined to approve a $55-million sale of 223-bed Anaheim Memorial Medical Center to Prime Healthcare Services Inc. The firm is co-owned by Dr. Prem Reddy, a prominent and controversial cardiologist from Victorville, and a trust owned by his family.

The sale of the nonprofit hospital to Prime Healthcare, a for- profit company, was rejected after months of opposition from community activists and doctors. The attorney general must approve the sale of nonprofit hospitals to for-profit companies.

After a rancorous public hearing in June, the attorney general’s office said in July it was unable to conclude that “the sale is fair to Anaheim, reflects fair market value . . . and is consistent with the public interest.”

In recent years, Reddy and his company have launched an aggressive expansion program in Southern California. Prime Healthcare now owns eight area hospitals -- six of them bought in the last two years -- including Sherman Oaks Hospital and Huntington Beach Hospital. Reddy and his business activities have come under increased scrutiny by state officials, healthcare advocates and patients.

When the company takes over a hospital, it typically cancels the hospital’s private insurance contracts, allowing the hospital to collect steeply higher reimbursements from insurers. It has also suspended patient services -- such as chemotherapy treatments, mental health care and birthing centers -- that are often needed but aren’t lucrative for hospitals.

Critics say Reddy-owned hospitals routinely turn away uninsured patients.

In July, The Times profiled Reddy, chronicled his ascent in the Southern California hospital industry and reported on a wide range of concerns by critics about his company’s practices.

The company says it provides superior patient care and scores well on national accreditation surveys. It also dismisses critics and says it regularly treats uninsured patients. It adds the company has cut only those services that are rarely used and available in nearby facilities.

Some of the harshest criticism has come from inside the companies Reddy has run.

In a previously unreported lawsuit filed in 1997 and settled in 2003, Reddy and one of his companies, Desert Valley Medical Group, paid $1.4 million to settle a wrongful-termination lawsuit brought by a former chief financial officer.

In the lawsuit, William R. Benz sued Reddy and his company at the time, PrimeCare International Inc. Benz contended that company executives committed Medicare fraud, misused corporate funds and tried to falsify financial records.

Benz maintained that he was fired after sending a memo to company executives and outside auditors detailing alleged misdeeds.

He also contended that Reddy repeatedly asked him to falsify the company’s financial records. Benz alleged the company was inflating its profits and probably needed to restate its earnings.

In the memorandum, Benz alleged the company appeared to be defrauding Medicare by collecting money from patients for services, then billing the government for the same procedures.

I have “an obligation to immediately determine whether [the company] has committed any potentially fraudulent acts in its billing practices with Medicare,” Benz wrote, according to a summary of the memo in court records. Reddy and the company denied all the charges.

The dispute went to trial in 2000, and a jury found in Benz’s favor on some claims and awarded him $4.6 million. In the trial, the jury was unable to reach a verdict on the plaintiff’s Medicare fraud claims.

A Tennessee company bought the company originally sued by Benz, and that company settled with Benz in 2001 for $2.7 million. But Reddy appealed.

An appeals court ordered a new trial, but Reddy and Desert Valley Medical Group reached a settlement in 2003 and paid Benz another $1.4 million. Neither Reddy nor any of the companies admitted wrongdoing or liability. Benz declined to comment on the lawsuit.

A spokesman for Prime Healthcare said Monday that Reddy and any operations affiliated with him had never been found to be in violation of Medicare billing regulations and said Benz’s allegations were “made by a disgruntled former employee . . . over 11 years ago.”

Prime has been sued by other former employees who said they were fired for raising concerns about patient care and other issues.

In 2005, two former nurses at Prime’s Desert Valley Hospital won a lawsuit in which they alleged they were improperly fired after they accused hospital management of providing inadequate care to save money.

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.

As soon as the end of the year, the owner of Anaheim Memorial, Huntington Beach-based Memorial Health Services, is expected to settle on a bidder for the hospital.

The sale must be approved by the state’s attorney general office, which must first hold a public hearing about the sale before making a decision. No date has yet been set for the public hearing.

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daniel.costello@latimes.com