VICTORVILLE—St. Mary Medical Center has made a highly competitive bid for Victor Valley Community Hospital, reducing considerably the likelihood that the bankrupt Victorville hospital, which for the last three months has been operating on an infusion of funds from Dr. Prem Reddy’s Prime Healthcare, Incorporated, will not be absorbed into Reddy’s portfolio.
St. Mary’s parent company, St. Joseph Health Systems, offered to purchase Victor Valley Community Hospital for $35 million and then pump an additional $25 million into the faltering hospital to make capital improvements over the next five years.
The St. Joseph/St. Mary offer brings to a total of three the number of health care entities willing to assume either sponsorship or ownership, control and operation of non-profit Victor Valley Community Hospital.

Alan Garrett

In 2010, Victor Valley Community Hospital, staggering under more than $20 million in debt, filed for Chapter 11 bankruptcy protection and the 101-bed hospital was put on the auction block. KPC Global Care, owned by Dr. Kali P. Chaudhuri, outbid Prime Healthcare, tendering a $37 million offer in November 2010 that was $2 million above Reddy’s offer. But after KPC obtained the state attorney general’s approval for the takeover, it failed to finalize the acquisition because it was not able to line up  financing and that deal fell apart in May 2011. Subsequently, a federal bankruptcy court judge approved an agreement allowing the non-profit arm of Reddy’s for-profit venture, known as Prime Healthcare Service Foundation, to purchase the hospital for $35 million.
On September 20, however, the state attorney general’s office intervened, blocking Reddy’s plan. A major consideration was that Victor Valley Community was founded and set up as a non-profit institution.  The attorney general’s office had moved to ensure that the High Desert preserve at least one non-profit hospital in an area with a multiplicity of for-profit medical centers, including one already owned by Reddy, Desert Valley Hospital.
“We have concluded that this proposed sale is not in the public interest and will likely create a significant effect on the availability or accessibility of health care services to the affected community,” acting chief deputy attorney general Michael Troncoso said at that time.
Nevertheless, with Victor Valley Community teetering on the brink of financial collapse, Reddy on October 14, 2011 proffered capital in the form of loans and a consulting arrangement to prevent the hospital from having to close its doors. That assistance was codified in the form of what was called a “post-petition revolving credit and security agreement between Victor Valley Community Hospital as borrower and Prime Healthcare Management, Inc. as lender.”
The California Attorney General’s office redoubled its effort to prevent that agreement from being actuated and filed on October 28 for a temporary restraining order to prevent the hospital from entering into a financing plan and consulting arrangement with Prime Healthcare. On October 31, Superior Court Judge Steve Malone tentatively denied the attorney general’s request for the restraining order. In November, Malone again denied the state attorney general office’s effort to block the $6 million financing and consulting agreement.
The scenario was made more complicated when, also in November, KPC Global reasserted its interest in acquiring Victor Valley Community, filing legal and financial documents to create an entity known as Victor Valley Hospital Acquisition Inc., and indicating it stood ready to put up $31.1 million toward that end. Victor Valley Community Hospital officials were somewhat resistant to the KPC Global offer at that point, and were seemingly more favorably disposed to working with Prime Healthcare.
The St. Joseph/St. Mary bid was provided to the Victor Valley Community Hospital board at its January 9 meeting.
Immediately, the Victor Valley Community Hospital board directed its legal team to open up a dialogue with regard to a sale. The board’s willingness to begin negotiations with St. Joseph/St. Mary demonstrated that Reddy’s grip on Victor Valley Community was tenuous, at best.
A complicating factor now facing Alan Garrett, the CEO of St. Mary Hospital in Apple Valley, is how much of the purchase price will go to Reddy.

Prem Reddy

According to the complaint for injunctive relief filed by the attorney general on October 28, “The consulting agreement transfers control of a material amount of the operations of VVCH [Victor Valley Community Hospital] to Prime Healthcare management. The loan agreement conveys and transfers a material amount of VVCH’s assets to Prime, Inc.  By entering into this loan agreement without the attorney general’s consent, VVCH will incur additional administrative costs by $6 million, thereby increasing the amount of cash necessary for other potential buyers to purchase VVCH. By increasing VVCH’s debt, the parties will be manipulating the market value of the hospital. The loan agreement also subjects VVCH to default. The loan agreement provides that if VVCH subsequently defaults on the loan agreement, all of Prime Inc.’s loan must be paid in full, in cash immediately.”
It thus appears that at least $6 million of the agreed-upon purchase price will go to Prime Healtcare.
Victor Valley Community Hospital officials may be relieved that another viable entity has entered the picture. In recent months, Reddy and Prime Healthcare have been dogged with accusations of improper billing practices.
The Sentinel has learned that the FBI, at the direction of the U.S. Attorney’s Office, is looking into reports that Prime Healthcare facilities consistently billed Medicare for treating elderly patients with specific medical issues at a frequency far beyond the billing patterns of several other comparable hospitals.
One unconfirmed report was that the FBI investigation is touching upon  previous accusations leveled at Prime Healthcare with regard to Medi-Cal and Medicare billing irregularities that were investigated by the state. That probe was closed out with no action when investigators failed to turn up sufficient evidence to warrant a prosecution or further action. According to that report, the referral to the U.S. Attorney’s Office originated with the California Attorney General’s Office.
Publicly obtained documents show that Prime Healthcare facilities have a pattern of billing for rare and serious medical conditions that typically generate bonus payments to the hospital. Elderly patients admitted to three Prime Healthcare facilities –  Chino Valley Medical Center, Alvarado Medical Center in San Diego and  Shasta Regional Medical Center – are listed as suffering from medical conditions such as acute heart failure, kwashiorkor (a form of severe malnutrition), accelerated hypertension, and septicemia at rates that are far beyond the statistical average at hospitals in California.
Medicare payment formulas remunerate doctors and medical facilities with more substantial payments for treating more serious conditions.
Fraudulently inflating Medicare billings by misrepresenting the gravity of a patient’s medical condition, known as “upcoding” in the medical business, is prohibited under federal statute. Prime Healthcare maintains it does not engage in upcoding and that diagnosing patient conditions is carried out by medical doctors and is not a function of the billing department.
While there are reports that the FBI has interested itself in allegations of upcoding at Prime Healthcare facilities, in October the California Department of Public Health closed out an investigation into whether Prime Healthcare Services had artificially inflated reports of its documentation of bloodstream infections, concluding there was insufficient evidence to proceed with a criminal or administrative case against the hospital chain.