Making a profit in the hospital business is tough. At least, that’s the explanation for the surge in hospital mergers we’ve been seeing recently.

According to the federal government, however, one California-based hospital chain has figured out how to squeeze the absolute maximum income from Medicare and other government programs and send the money directly to its bottom line. The chain is Prime Healthcare, and the feds say its technique involves systematic fraud.

Prime’s policies and procedures led to the submission of false or fraudulent claims for inpatient medical services. U.S. Department of Justice

According to a complaint the Department of Justice filed in federal court at the end of June, Prime’s strategies include admitting emergency room patients as inpatients, rather than sending them home or admitting them merely for observation. Inpatient stays are reimbursed at a rate as much as three or four times higher, even when an observation involves an overnight stay.


The government says some patients could have received medically unnecessary treatment, or spent more time in the hospital than they should have — itself a threat to the patients’ health. “Prime’s policies and procedures,” the government says, “led to the submission of false or fraudulent claims for inpatient medical services.” The DOJ says the government investigation indicates that Prime’s 14 California hospitals and the parent company “have claimed and received millions of dollars in inflated reimbursements for medically unnecessary inpatient admissions.” That’s money you’re laying out through your taxes.

The case is important because Prime’s alleged strategy strikes at the heart of a major government cost-control initiative in healthcare: putting a leash on unnecessary medical procedures and hospital stays. Authorities have been paying special attention to inpatient hospital stays of a day or so, on the grounds that they often could be handled on an outpatient basis at much lower cost. When Medicare’s agents launched a nationwide audit of claims for such stays starting in 2009, more than 1 million reimbursement claims were rejected.

As part of this campaign, Medicare examined more than 11,000 of Prime’s short-stay claims and rejected more than 8,000; about 1,900 rejections were overturned on appeal. But although the government offered to settle most other hospitals’ short-stay claims for about 68 cents on the dollar to reduce a huge appeals backlog, it refused to strike the same deal with Prime. The reason, Medicare authorities say, is that Prime is under investigation. Prime has sued the feds for $23 million — 68% of the $34 million it claimed for the challenged hospital stays.

Prime says the government lawsuit is essentially an attempt to weasel out of that debt by staging “an end run around the Medicare appeals process,” says Mark S. Hardiman, an attorney for Prime. The government, he says, alleges that Prime “successfully pressured or coerced thousands of physicians to fabricate the need for inpatient admissions.” That’s a misinterpretation, he says: What actually happened is that Prime painstakingly educated doctors to document every last complication or condition relevant to the patient’s treatment — in part to improve care, but also to “be paid as much as we are legally entitled to.


“In a land of care-driven reimbursement,” he says, “it’s critical now for physicians to document everything the patient has, to make sure we are not missing co-morbidities or complications.”

The government allegations shine the spotlight yet again on Prime, which has created headaches for California health regulators for years. Founded in 2001 by Prem Reddy, an India-born cardiologist, the company now owns 43 hospitals in 14 states.

Prime’s expansion hasn’t progressed without controversy. Reddy’s strategy is to take over struggling hospitals and cut out the least lucrative or money-losing services. Prime often cancels insurance contracts at its newly acquired hospitals, enabling it to charge the insurers higher rates for treating their members. Patients have been caught in the middle. In 2008, Prime sent out collection notices to 6,000 Kaiser members, some for tens of thousands of dollars, after Kaiser challenged what it said were grossly inflated charges by Prime for services provided to its members. A court enjoined Prime from pursuing the collections and the two companies eventually settled the dispute.

Prime’s business practices cost it at least two acquisition deals. In 2011, California Atty. Gen. Kamala D. Harris killed Prime’s proposed acquisition of a struggling Victorville hospital as “not in the public interest.” She cited the company’s “disturbing business model.” At the time, the company had been hit with accusations that it had inflated charges to Medicare and Medi-Cal — California’s Medicaid program — by diagnosing high-reimbursement conditions such as malnutrition and septicemia, a blood infection, at suspiciously high rates. Prime denies the accusations, which were made by the Service Employees International Union and by the investigative reporting organization California Watch, but they’re still under investigation by federal healthcare regulators and may yet become part of the current lawsuit.


Last year, Harris threw a wrench into Prime’s proposed $843-million acquisition of California’s six-hospital Daughters of Charity system by imposing conditions that Prime assailed as “unprecedented” and “onerous.” Among them were requirements that Prime continue providing existing services at the hospitals, which include St. Vincent Medical Center in Los Angeles and St. Francis Medical Center in Lynwood, for at least 10 years. Prime pulled out of the deal and sued Harris, alleging that she was in cahoots with the SEIU. The case is pending.

Prime hasn’t responded specifically to most of the government’s most recent allegations, which came in a supplemental complaint in a case initially filed in 2011 by Karin Berntsen, a supervisor at Prime’s Alvarado Hospital Medical Center in San Diego.

Berntsen alleged that Reddy personally met with Alvarado’s medical staff and advised them to avoid designating patients for “observation,” which earns much lower reimbursements. Prime has denied Berntsen’s allegations.

The DOJ revealed in May that it has been issuing subpoenas to Prime and its medical providers since at least 2013 and has reviewed hundreds of medical records. Witnesses say Reddy would circulate marked-up emergency room logs showing where he thought diagnoses that could have justified admitting a patient had been “missed.”


Prime contends that the government is simply grousing that Prime systematically chose a more expensive admissions code, not that it delivered substandard care.

Prime says the inpatient admissions reflect the “clinical judgment” of “independent physicians” acting in their patients’ interest. But Berntsen and the DOJ allege that those doctors have been intimidated by Reddy and other Prime officials into admitting patients improperly. Emergency room doctors and supervisors were admonished or marked for dismissal if they failed to admit 20% to 30% of their emergency patients as inpatients, the lawsuits allege.

One fair conclusion about Reddy’s management is that it transforms money-losing hospitals into profitable institutions. That’s good for the company’s bottom line, but the communities served by its hospitals may see things differently. After Prime’s 2007 takeover of Centinela Hospital, a healthcare linchpin for South Los Angeles, the company closed more than half of the institution’s operating rooms and cut back on chemotherapy and obstetric services. The hospital’s outpatient census, including ER visits, dropped from 146,000 in 2006 to 55,000 in 2010, but its bottom line moved from a $10-million loss to a profit of nearly $11 million.

Prime clearly knows something other hospital chains don’t know. The question is: Do we want them to know? Spreading the word could be very expensive, for local communities and taxpayers alike.