Atty. Gen. Kamala D. Harris in September killed the proposed takeover of a struggling Victorville hospital by a nonprofit arm of Prime Healthcare Corp., saying it was “not in the public interest.” (Paui Sakuma, Associated Press / December 13, 2011)

By Michael Hiltzik
December 28, 2011

In September, state Atty. Gen. Kamala D. Harris killed the proposed takeover of a struggling Victorville hospital by a nonprofit arm of Prime Healthcare Corp., saying it was “not in the public interest.”

Her ruling was anything but casual. Basing the decision on what she said was her own department’s investigation, as well as testimony at a marathon public hearing in August, Harris indicated that the takeover would result in the reduced availability of healthcare in the High Desert.

Her concerns included Prime’s “disturbing business model,” which includes canceling managed-care contracts at the hospitals it acquires, driving up costs for those payers and forcing many patients to travel long distances to find affordable care elsewhere.

One would have thought that was that. The attorney general has explicit jurisdiction over transfers of ownership of California nonprofit hospitals, such as the bankrupt 101-bed Victor Valley Community Hospital.

Yet the attorney general believes her order is being flouted. The hospital has gone ahead and signed two agreements with Prime, including one for a $6-million line of credit, that Harris says will give Prime effective control of Victor Valley over her objections. In a separate frontal attack on Harris’ authority, the hospital has asked a San Bernardino County Superior Court judge to overturn her veto.

What makes this more than just a dust-up in the desert is the involvement of Prime Healthcare, which owns 14 hospitals in California and one in Texas. In recent years, Prime has drawn the scrutiny of state and federal regulators over its patient treatment policies, its billings to government healthcare agencies and its employment practices.

Prime defends its record, but these concerns raise the question of whether even allowing Victor Valley to shut down might be preferable to turning it over to Prime.

For the community, that’s not a serious question. “No one in the High Desert wants this hospital to close,” says its interim chief executive, Edward Matthews. But it does underscore the excruciating choices involved in keeping it open.

If there’s a secret to making hospitals profitable, Prime seems to have found it. The creation of Dr. Prem Reddy, an India-born cardiologist who came to the U.S. in 1976, Prime has assembled a portfolio of institutional castoffs — “Every hospital I acquire, I acquire in bankruptcy,” Reddy once said of his corporate strategy.

The company earned nearly $248 million in 2010 on revenue of $1.6 billion, according to an income statement filed with the Securities and Exchange Commission. (The privately held Prime’s financial statements were filed by a publicly traded real estate investment trust that is financially dependent on its business.)

Prime achieves this in part by stripping low-margin or unprofitable medical services out of its hospitals. As The Times has reported, Prime closed more than half of Centinela Hospital’s operating rooms and cut back on chemotherapy and birthing services after taking over the institution in 2007.

The hospital, a healthcare linchpin for South Los Angeles, served 146,000 outpatients, including emergency room patients, in 2006, according to state records; last year the figure was 55,000. But Centinela swung from a $10-million loss in 2006 to a profit of nearly $11 million in 2010.

Prime has acknowledged in legal filings that it avoids contracting with managed-care insurance plans, or HMOs. That frees the company from the obligation to deliver emergency care to those plans’ members at a low contracted rate. Instead, it charges those patients or their health plans what the market will bear.

In 2008 and 2009, auditors from the state Department of Health Care Services caught the firm trying to stick the Medi-Cal program with more than $4 million in what the auditors considered inappropriate expenses, including $838,000 for a Beverly Hills home, more than $1.4 million for a helicopter and hundreds of thousands of dollars more for a company Bentley.

The agency has referred the expenses to the attorney general’s office for a possible fraud investigation. Prime said this week that it “came to agreements with Medi-Cal” on some of the disallowed items and appealed others, but did not give details on the outcome of the agreement.

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