Legal wrangling surrounds four rural Oklahoma hospitals

By Meg Wingerter

NewsOK Medical & Health reporter 

Oklahoma City — The way the plaintiffs in one lawsuit tell it, Health Acquisition Company promised a flat, well-trod road ahead, but instead led four rural hospitals in Oklahoma and several in other states off a financial cliff.

Or, if you believe the allegations in a different lawsuit, Health Acquisition Company was doing its best for the rural hospitals, but longtime investors undermined that work for their own profit.

And that’s leaving aside a third lawsuit that doesn’t try to sort out who’s to blame, but demands the hospitals pay up on bills that supposedly are close to a year overdue.

The legal controversies surround four critical access hospitals, each with less than 25 beds: Drumright Regional Hospital, Fairfax Community Hospital, Prague Community Hospital and Haskell County Community Hospital. The hospitals left Blue Cross Blue Shield of Oklahoma’s provider network in February, after Blue Cross took exception to their laboratory billing practices.

Insurance companies typically pay higher rates for lab tests at rural hospitals, and management companies have pitched hospitals across the country with ideas for drawing more from that revenue stream. That’s not illegal, but some insurance companies say the management companies crossed the line into fraud when they claimed rural hospitals did tests that were performed elsewhere.

That’s what happened in the case of the Drumright, Fairfax, Prague and Haskell County hospitals, according to two hospital investors.

History of trouble

Until March 2017, the four Oklahoma hospitals were owned by HMC/CAH Consolidated, a Kansas City, Mo., company that also owned hospitals in other states. HMC had taken out a $6 million loan from Health Acquisition in 2013, and Health Acquisition decided to give up the right to keep collecting on that loan in exchange for an 80 percent share in the hospitals.

HMC’s investors still owned 20 percent of each hospital, but Health Acquisition and its partners took over day-to-day management of the hospitals, according to James and Phyllis Shaffer, Kansas investors who sued Health Acquisition earlier this month. James Shaffer was president of HMC when Health Acquisition took over majority ownership in March 2017, and claims he was misled into agreeing to the arrangement.

The Shaffers said Health Acquisition, which is based in West Virginia, wasn’t interested in running the hospitals and just wanted to use them as vehicles for fraudulent billing. They allege Health Acquisition submitted false records to insurance companies, making it appear that they had done blood and urine tests at the rural hospitals so they could collect the higher rate, when the work had been done at labs in other states.

Clifford Wood, an attorney representing the Shaffers, declined to discuss how the alleged scheme affected the hospitals, but said the Shaffers hope their lawsuit will eliminate any ongoing illegal conduct.

“To the extent those things are ended, the hospitals would benefit,” he said.

The lawsuit also claims Health Acquisition and its partners took $2 million of the hospitals’ funds for themselves, overcharged the hospitals for management services and paid kickbacks to clinics that sent a steady stream of blood and urine to Health Acquisition’s partner labs.

It isn’t the defendants’ first brush with legal trouble. The lawsuit also names Empower HMS, a management company that shares ownership with Health Acquisition. A bankruptcy filing in California alleges Empower HMS took over rural Surprise Valley Hospital, dramatically increased its revenue through lab billing for two months, and then “abandoned” it, according to Kaiser Health News.

Other lawsuits in Florida and Missouri accuse companies owned by Miami, Fla., resident Jorge Perez, who owns Empower HMS and has a stake in Health Acquisition, of fraud and other illegal conduct. A Missouri auditor’s report found a Perez-owned company had used Putnam County Memorial Hospital, a small facility in Unionville, Mo., for fraudulent laboratory billing. Perez also used to hold an executive role in People’s Choice Hospitals, which Aetna is suing for alleged billing fraud at Newman Memorial Hospital in Shattuck.

A ‘business model’

Mike Murtha, president of the National Association of Rural Hospitals, said Shaffer and his fellow investors were the ones engaged in bad conduct. Murtha spoke on behalf of Perez, who is the association’s chairman, and some of the other defendants.

HMC was running an improper billing program while Shaffer was president, Murtha said, and Health Acquisition had to clean up the mess.

“There were some lab problems at the time (Shaffer) oversaw them,” he said. “Now he comes back and he’s apparently the last honest man in the building.”

A separate case is pending in West Virginia. In it, Rural Community Hospitals of America, which is run by many of the same people as Health Acquisition, alleges Shaffer and other high-ranking HMC officials hid that Medicare had overpaid their hospitals by $8 million, which had to be paid back and made the hospitals less valuable.

RCHA also claimed Shaffer and a colleague took $500,000 from the hospitals for themselves and used company resources to build a competing business.

Murtha alleged Shaffer filed his lawsuit in retaliation for RCHA’s suit, and said Health Acquisition could have foreclosed when HMC couldn’t make its loan payments, but decided to keep the hospitals going.

“One person’s scheme is another person’s business model, and there’s nothing illicit about performing a service that’s ordered by a doctor,” he said. “That (lab) money could go to a rural community that’s trying to keep its hospital open, or it could go somewhere else.”

Bills pile up

Whoever is at fault, the hospitals face a series of challenges.

Insurer Cigna is suing HMC and the hospitals for $1.3 million in unpaid premiums. Cigna alleges HMC failed to pay for employees’ medical and dental coverage from June 2017 to the end of September when HMC canceled coverage.

If the debt is divided up among the hospitals, Cigna claims Drumright would owe about $92,000; Prague, $90,000; Haskell County, $82,000; and Fairfax, $78,000.

The hospitals still aren’t in Blue Cross’ network, so patients who have Blue Cross insurance must choose whether to pay more or drive elsewhere for nonemergency services. A network is a group of hospitals, doctors and other providers that have agreed to perform services for an insurance company’s customers for certain rates.

Dr. Joseph Cunningham, chief medical officer at Blue Cross, said less than 10 percent of the company’s customers in the area are choosing the four hospitals in question for their care, but the company would have kept them in network if not for the lab issue.

“As long as they’re playing by the rules, they can be in-network,” he said. “The oath I took when I became a doctor was to do no harm to patients, and that includes financial harm.”

Representatives for three of the four hospitals didn’t return calls seeking comment. Tina Steele, administrator of Fairfax Community Hospital, said she wasn’t familiar with the details of the lawsuits, but the hospital has made changes to accommodate Blue Cross customers. It offers to send their lab tests and X-rays elsewhere, she said, but can still treat them in the emergency room.

“We’re going to make sure people get the care they need,” she said.

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