The man behind the nation's fastest-growing hospital chain

1.   The man behind the nation's fastest-growing  hospital chain      In 2006, ​Paradise Valley Hospital​, just 13 miles from Mexico and a world away from the luxury condos, convention hotels and craft beer bars that dot nearby downtown San Diego, faced imminent closure. The money-losing safety net hospital needed a $61 million renovation to make it earthquake-compliant. Owner Adventist Health searched desperately for a financial savior. Only two came forward: a locally organized Paradise Preservation Group, which government officials doubted could finance the deal; and ​Prime Healthcare Services​, a small, relatively new for-profit hospital chain owned by ​Dr. Prem Reddy​, which offered to buy the hospital for $30 million and finance the upgrades. During an emotional, nine-hour public hearing that drew more than 100 people, Dr. Jerome Robinson, a respected cardiologist who grew up in a Pittsburgh housing project, spoke for the community bid. He railed against a Prime takeover. “We are not-for-profit,” he said. “If we do anything with the profits that come from the sale of Paradise Valley Hospital, they need to stay in this community.” Today, Robinson has nothing but praise for Prime and Reddy. “In order to manage and stay open, we needed to be smarter,” Robinson said. “What we've been able to see as a result of that: failing hospital eight years ago, not failing hospital today.” Reddy's Prime deployed the same controversial tactics at Paradise Valley that it has used to become the nation's fastest-growing hospital chain, now 29 hospitals strong with deals in place    

2.     for 11 more. It wrangled better rates from insurers. It added profitable services lines and implemented aggressive billing tactics. Prime also looks inward for savings. When Prime comes in, it slashes bloated managements. It stands its ground on negotiating with unions. And it has even fought with politicians and quality raters such as Truven Health Analytics, which gives several of the chain's hospitals high marks, but in at least one case has withdrawn its approval. The results, the company boasts, can be seen in its financial statements. Every one of its operating facilities— almost all of which were losing money when Prime took over—are now debt-free and profitable, the company claims. In almost every takeover battle, Prime has had to overcome local opposition such as that in National City, population 60,000, home of Paradise Valley hospital. “Only one person spoke in favor—and that was me,” recalled Reddy, 66, company founder and CEO. In an interview at Prime's headquarters in Ontario, Calif., the native of a small village in southern India wore a black suit with an American flag pin affixed to his lapel. Reddy bristles when asked about his critics. But otherwise, he is at turns jovial and matter-of-fact, reducing his mission to two simple principles: “We want to save as many hospitals as we can. We want to expand in California and beyond.” Today, Reddy's Prime is on the cusp of its  biggest and most challenging takeover. It  has pledged nearly $843 million, which  includes debt assumption, to take on the  failing finances of the six-hospital  Daughters of Charity Health System,  headquartered in Los Altos, Calif. The deal  would add $1.3 billion in revenue to Prime's  $2.5 billion, which would make it the  fifth-largest investor-owned chain in the  U.S.    2 

3.     Located in the expensive Bay Area, wages and benefits are a hefty part of Daughters' balance  sheet, even as its hospitals serve some of the area's poorest communities. Many of its  commercial contracts pay less than even Medicare. After talks with Ascension Health collapsed,  four new bidders submitted offers; Prime's was by far the strongest.  “Its size is challenging—and I do these things for challenges,” Reddy said. “It best fits into my  mission of saving the hospital, saving lives and saving jobs.”  With approval of the takeover now before California Attorney General Kamala Harris, opposition  is mounting. The ​Service Employees International Union-United Healthcare Workers West​ is  pressuring Harris with a full-scale media and advertising blitz accusing Prime of overbilling  Medicare and Medi-Cal (California's Medicaid program), inappropriately admitting patients  through its emergency departments and canceling contracts with insurers, which can lead to  exorbitant out-of-network emergency department charges.  A recent SEIU video posted on YouTube paints Reddy as synonymous with corporate excess,  using images of a Bentley, a Beverly Hills home, a private helicopter and luxury hotel rooms in  Las Vegas allegedly paid for by government insurers. “Every time we think we've heard every  example of Prime Healthcare jacking up its billings at the expense of taxpayers, we seem to find  one more,” said Dave Regan, president of the SEIU-UHW.  A number of elected officials have joined the chorus. Rep. Mike Honda, a Democrat whose  district includes Silicon Valley, wrote to Harris “urging her thoughtful consideration on the  impact on the quality and access to healthcare when she reviews the sale of the Daughters of  Charity hospitals.”  Under similar pressure in 2011, Harris blocked Prime's takeover of Victory Valley Community  Hospital, citing concerns for how it would affect the availability or accessibility of healthcare  services. Harris' short denial letter points to her office's own investigation, reports from  consultants and advisers, and comments from “the public, the parties and potential alternative  bidders.”  Focusing on the ER and billing    3 

4.     Prime has succeeded in turning around troubled hospitals by relentlessly focusing on delivering  higher volumes of lucrative services in the most efficient manner possible. The hub of Paradise  Valley, for instance, is its modern 19-room emergency department.  Like all of Prime's facilities, the hospital aims to admit patients within a two-hour timeframe or  send them home within 90 minutes. Its staff closely tracks metrics such as how many people  leave without being seen.  Its reputation for short waits has earned the hospital additional volume. “It actually changed the  entire community,” said Dr. Paul Manos, an emergency physician at Paradise Valley, where waits  once averaged 5½ hours. “It has sort of become a standard for San Diego County.”  Prime sees a competitive advantage in having patients come to its EDs instead of making the  drive to another system's hospital, as it outlined in a 2011 lawsuit against Kaiser Permanente.  Under the Patient Protection and Affordable Care Act, insurers must pay for basic emergency  assessment and treatment services on the same basis in out-of-network hospitals as in network  facilities.  Prime's lawsuit argued that Kaiser owes $100 million in unpaid medical claims and was  conspiring with the SEIU to keep it out of the market. A judge dismissed the suit, but Prime is  appealing.  In New Jersey, where Prime owns one hospital and is in negotiations to buy two more, insurers  fear that the state's strong consumer protections tie their hands when they're hit with an inflated  bill for out-of-network care. There has been a spike in for-profit hospital companies canceling  insurance contracts to collect higher out-of-network fees.  “There's a concern that Prime will follow that path,” said Ward Sanders, president of the New  Jersey Association of Health Plans. “There's a suspicion in the payer community that this is  about billing. There's no leverage in this context. There's no limitation on what they can charge.”  But Prime counters that when a hospital is struggling, insurers have the upper hand. At one New  Jersey hospital, commercial rates were 72% below Medicare, said Luis Leon, Prime's president  of operations.    4 

5.     “In certain markets, payers can decide that a hospital is not essential,” said Joe Lupica,  chairman of Newpoint Healthcare Advisors, a consulting firm. “(Reddy) gave some powerful  economic resistance to the managed-care companies that they have not been used to and  brought them back to the table.”  In addition to its ED strategy, Prime obsessively studies CMS billing and coding requirements  and educates physicians about clinical documentation. For example, it encourages physicians  to code for a specific type of heart failure, rather than the more general congestive heart failure.  “Many physicians understand quality, but they don't understand the cost,” Reddy said. “We have  to give them the tools to understand those metrics. What it does is standardize the quality of  care.”  Not everyone sees it that way. In 2011, a whistle-blower suit filed in Los Angeles alleged that  Prime's emphasis on adding comorbidities to diagnostic codes was a way of extracting more  money from Medicare—so-called upcoding. The Justice Department launched an investigation  into the allegations as well as Prime's short-stay admissions practices. It opened another  investigation into whether the unusually high rates of septicemia, or blood infections, and  kwashiorkor, a form of severe malnutrition, among Prime's patients represented fraudulent  billing practices.  But Prime insists its thoroughness on coding ultimately will be vindicated. The Justice  Department declined to join the 2011 whistle-blower suit, which was unsealed last January.  Suits without the department's backing are less likely to succeed.  Reddy rejects claims that Prime's physicians are encouraged to ignore the overall cost of care.  He cited the example of implanting new knees or hips in young, active orthopedics patients  compared to older patients in nursing homes. “At times, certain patients would not necessarily  need the same prosthesis,” he said. “So someone, especially the doctor, has to be cognizant of  the cost to Medicare.”  Sitting next to him at the conference table, his youngest daughter, Sunitha Reddy, vice president  of hospital operations, interjects. “It's just providing information and making sure the doctor is  aware,” she said.    5 

6.     A mission and a plan  While Paradise Valley's survival under Prime is no miracle, the hospital still celebrates its  religious roots. Its walls feature the story of Ellen G. White, a member of the Seventh-day  Adventist Church who purchased the property in 1904 to open a much-needed hospital despite  its lack of potable water.  Believing God would provide, she ordered a well digger to go deeper and deeper until, finally, he  struck water. The original well is still preserved on the Paradise Valley campus.  The hospital also touts its inclusion as one of Truven's 15 Top Health Systems in 2012 and  2013. A banner celebrating those honors hangs from one of its medical office buildings.  Yet the recognition is in jeopardy. The research firm stripped another Prime hospital, Desert  Valley in Victorville, Calif., of its 2012 and 2013 awards after the hospital received a $50,000  sanction from the California Department of Health for performing non-emergency cardiac  catheterizations in a lab licensed only for diagnostic procedures. One patient died and two  others were injured in the 2011 incidents.  Reddy ripped Truven's decision last year after it was announced. “I have never paid a $10 fine,”  he said at the time, his voice rising in anger. “That $50,000—we will never pay.”  Eleven months later, he is still vowing to fight the sanction, even though the lengthy appeals  process will cost far more than $50,000. “We want it to be erased—that's why we're fighting,” he  said. “Truven knows they made a mistake; they overreacted.”  Prime contends that the politically powerfully SEIU is mounting what Reddy calls a smear  campaign to strong-arm the firm into recognizing the union at non-union hospitals such as  Paradise Valley. In August, the chain sued the SEIU under the federal Racketeer Influenced and  Corrupt Organizations Act, a law whose original intent was to prosecute organized crime.  In recent months, Reddy has stepped back from the spotlight, in part to deflect criticism from  the SEIU. He is now focusing on lining up investment banks to take Prime through an initial  public offering within the next two to three years.    6 

7.     “It's not just about money,” said Arnie Kimmel, who previously oversaw business development  for Prime but left last year to become CEO of Franciscan St. James Health in Chicago Heights,  Ill. “(Reddy) has said that his legacy will be a certain number—now a rapidly expanding  number—of communities that would not have a hospital if it were not for Prime.”  Prem Reddy, who hails from an Indian village of 2,000 people, didn't see electricity until he went  to college. But he knew he wanted to be a cardiologist from childhood, using bamboo sticks to  give pretend injections.  Reddy left India in 1976 with his college sweetheart and wife of two years, Dr. Venkamma  Reddy, to begin a cardiovascular disease residency in New York. Five years later, he saw an ad  for a cardiologist position in the rural San Bernardino town of Apple Valley, about 90 miles east  of Los Angeles. With only 7,000 people, it felt almost like home.  He immediately plunged into what in those days was one of the riskier procedures in medicine:  performing angioplasties. “I practice very aggressive medicine,” Reddy said. “Those are very  risky procedures and I have never constrained myself by risk.”  As his patient load grew, Reddy founded Desert Valley Medical Group in 1985. Believing he  could operate profitably in the managed-care environment just then taking hold in California, he  opened Desert Valley Hospital in 1994 with $7 million in private capital, including his own  savings, and $15 million from a real estate investment trust.  “He broke into the scene early on when it was all about the cost containment,” said Nestor  Valencia, a former managed-care executive and founder of the grass-roots organization Our  Salud, a vocal opponent of the Daughters sale. “He comes in and says, 'I'll fix that.' He was tough  on the doctors and he was tough on the HMOs as well.”  In 1990, Reddy established PrimeCare International, a physician-practice management company  that grew to have operations in several states. He had plans to take PrimeCare all the way to an  IPO but ran into a tough market. “The people who were trying to take me through an IPO said we  missed the window,” Reddy said. So he sold PrimeCare and Desert Valley to another PPM,  Phycor.    7 

8.     But the new owners mismanaged the acquisition. In 2001, Reddy decided to buy back Desert  Valley. “That's when I learned exactly how to turn around a bankrupt hospital,” he said. “Of  course I was scared … I was overanxious. I was everywhere—I would pull shifts in the ER.”  During those first nine months, Desert Valley lost $7 million. But by year-end, it was only $3  million in the red. In year two, it turned a profit.  The strategy was replicable. During its first decade, Prime added 11 hospitals in California.  Since 2011, it has widened its net to include operations in nine states with deals in place in two  more.  Inside its hospitals, Prime runs a lean operation. One of the first things it does when it takes  over a facility is make deep cuts in the administrative fat. Reddy calls the management cuts “a  substantial portion of our recovery.”  Prime has invested $10 million in Paradise Valley. Although it will never be a destination  medical center, Prime focuses on profitable service lines.  It is building a spine and joint center. Its new orthopedics wing has 10 private rooms and was  designed with a cabana theme. The unit once served pediatric patients, but Paradise Valley  couldn't compete with Rady Children's Hospital 11 miles away. The hospital that once found it  impossible to recruit doctors has added seven orthopedic specialists.  Attorney General Harris has until early February to approve the Daughters of Charity sale, which  would apply many of the same approaches seen at Paradise Valley to its six safety net  hospitals. The Catholic system's financial advisers understood the risk of rejection, but the other  three options lacked Prime's financial strength and capital commitments.  Reddy says the challenging business environment in California is his main ally since Medi-Cal  rates are some of the lowest in the country and the high cost of living drives up wages. “None of  the major health systems want to come to California,” he said. “You can't produce a lot of profits  in the practice of medicine. You have to be able to derive pleasure to save so many people and  so many lives.”      8