Is It a Nonprofit or For-Profit Hospital Scandal in Prime Healthcare’s Alleged Overcharging Scheme—or Both?

July 23, 2011; Source: California Watch | The nonprofit investigative team at California Watch reports that Prime Healthcare Systems has an interesting business model.  Patients admitted to the emergency rooms at Prime Healthcare facilities appear to be admitted as full hospital patients at much higher rate than its competitors. 

According to California Watch, in 2009, 63 percent of Prime Healthcare’s ER patients were shifted to hospital beds compared to 39 percent of ER patients at Tenet Healthcare Corp., identified in the article as “the other large chain in California.”  The proportion of patients admitted from the ER increased 40 percent at Prime hospitals between 2005 and 2009 while other hospitals averaged an eight percent decline in ER-related admissions. 

The target population of ER patients that Prime shifts to hospital beds are Medicare patients and those with medical insurance coverage such as Kaiser Permanente, allegedly generating for Prime a steady stream of Medicare and health insurance reimbursements. California Watch says that from 2005 through 2009, Prime Healthcare’s above average rate of Medicare admissions generated an additional $220 million in revenues for the firm.  In 2009 alone, California Watch says that “Prime reaped an additional $107 million in revenue by admitting about 8,800 more Medicare patients than would be expected.”  The charge is that Prime is “upcoding,” that is, exaggerating patients’ conditions in order to charge Medicare more money. 

The California Watch reports patients being shifted from the ER to regular hospital beds with Prime Healthcare resisting family efforts to leave or move, one describing the situation as equivalent to an episode of the “Twilight Zone” as doctors and staff resisted efforts to transfer a patient to a different hospital where her family doctor had privileges.  Former Prime staff acknowledge “an orchestrated campaign” to admit disproportionate numbers of Medicare and Kaiser patients as a strategy to turn around money-losing hospitals. 

A “gold mine” is how the chain’s founder and board chair, Dr. Prem Reddy, described the ER’s access to Medicare patients.  Kaiser actually went to court to stop Prime Healthcare’s ER strategy, though the article doesn’t say whether the courts ruled for or against the insurer/managed care provider.  It would appear that for Kaiser and others, it is more expensive to pay Prime full freight for hospital admissions than for some patients to get treated by managed care companies once their emergency situations have been dealt with and stabilized. 

What the article doesn’t talk about is whether Prime is a for-profit or a nonprofit.  Maybe it doesn’t matter, but we found two of the eleven hospitals in the list of Prime facilities that appeared to be owned not by Prime Healthcare Systems, but by the Prime Healthcare Systems Foundation, a private foundation initially established, according to the Foundation website, with a “generous” donation of $1 million from Dr. Reddy and “further handsome donations” each year to grow the fund.  The foundation claims to carry out charitable activities such as scholarships, free eyeglasses for elementary school children, and other activities (the 990s show a small and odd array of foundation grants), though despite the Reddy donation, it appears to be converting from an operating foundation to a public charity. 

We cannot know from the California Watch story whether Prime is really up-coding for inappropriate profits or not, but the financial intersections of the for-profit hospital system and the nonprofit hospital system, all run by Reddy, with the intention of converting to a public charity, seemed to merit analysis and clarification.  If California Watch continues to look at Reddy’s hospital empire, it should clarify the nonprofit and for-profit aspects of the story.—Rick Cohen

About

Rick Cohen

Rick joined NPQ in 2006, after almost eight years as the executive director of the National Committee for Responsive Philanthropy (NCRP). Before that he played various roles as a community worker and advisor to others doing community work. He has also worked in government. Cohen pursues investigative and analytical articles, advocates for increased philanthropic giving and access for disenfranchised constituencies, and promotes increased philanthropic and nonprofit accountability.