Anatomy of a shut down
Billing fraud and the demise of Oswego Community Hospital
Oswego Community Hospital shut its doors on Feb. 14, leaving its 65 employees without a job and a community of 1,700 without an emergency room.
That same day, two more rural hospitals went down — one in Sweet Springs, Missouri and another in Plymouth, North Carolina.
By the end of March, a dozen rural hospitals in six states had either folded or were seized by court appointed receivers.
All of them were part of the HMC Hospitals chain, cobbled together during the run up to the Great Recession, and all of them were doomed by a Miami businessman accused of orchestrating billing fraud scams.
Jorge Perez had promised to increase revenues and profits for the chain by ramping up billing for urine and blood testing.
It was a strategy that Perez and his associates deployed at a half dozen hospitals from California to Georgia since 2015.
Perez, who could not be reached for comment, has insisted in the past that his strategy is legal. Under laws passed in the late 1990s, rural hospitals are entitled to reimbursement rates for testing that are up to 100 times higher than those received by private labs.
But at least four lawsuits filed by major health insurers — two of them resulting in confidential settlements — and a report issued by the Missouri State Auditor in 2017, tell a different story.
They accuse Perez and his associates of pushing billing schemes far beyond what was intended under the law.
Instead of just charging insurance companies for urine samples tested at hospitals in the chain, they billed for thousands of samples processed by outside labs located all over the country, while claiming that all work was conducted locally.
Insurance companies alleged that this “fraudulent scheme” was “deceptive, unfair and unlawful.”
In the end, Oswego and the other 11 hospitals in the chain succumbed to a financial crisis that has plagued rural America for decades.
Ever since the advent of managed care more than 30 years ago, rural hospitals have battled to break even in communities beset by declining and aging populations, reduced job opportunities, sagging wages, rising poverty and the lack of health insurance.
Politicians have tried to make things easier by passing laws like the one that allows rural hospitals to charge more for lab testing. And wave after wave of investors have taken a crack at shifting their downward trajectory.
But so far, success has been limited, and rural hospitals like Oswego have staggered from calamity to catastrophe.
The town of Drumright, Oklahoma, for example, saw its hospital shut down in 2001. But residents voted to raise sales taxes and build a new facility two years later.
In Arkansas, Dequeen Regional Medical Hospital filed for bankruptcy protection in 2004 after struggling for years to pay its bills. It was rescued in 2005 by a buyer willing to infuse $3.5 million in fresh capital.
The story is roughly the same at I-70 Medical Center in Sweet Springs, Missouri. Residents there used tax dollars to build a 15-bed hospital in 2005 only to see it sold three years later in the midst of a cash flow crisis.
“The board believed that the only way to keep that hospital alive was to sell it,” said Robert Schnieders, a lawyer involved in the transaction.
Ten years have passed since those efforts were made and they’ve only postponed the inevitable.
Drumright Community Hospital is in bankruptcy.
DeQueen Regional and I-70 Medical Center have been shuttered.
There’s nothing left of Oswego Community Hospital but a decrepit building, and prospects for other hospitals in the chain are bleak.
Some may reopen, but the financial landscape hasn’t changed.
“Rural hospitals have long faced challenges of declining populations, poor payer mix, higher numbers of un- and under-insured, and older, poorer and sicker patients,” said George Pink, a health policy and management professor at the University of North Carolina in Chapel Hill. “In the past decade, the cumulative pressure of these long-term challenges and access to capital, provider shortages, the cost of new technology, and an industry trend of consolidation has placed an increasing number of rural hospitals at high risk of financial distress and closure.”
Those economic and demographic forces go a long way to explaining why Perez was able to gain a foothold by presenting himself as “the last best hope” for America’s rural hospitals and their communities.
In a deal signed in 2016, Perez promised that dollars generated from urine testing would allow the hospitals to break even and pay off debts. But financial documents obtained by The Morning Sun and GateHouse Media show that his company was not able to fully implement the plan before problems with his prior deals caught up with him.
Only four of the 12 hospitals in the chain experienced a significant bump in lab charges, according to Medicare cost reports. Oswego wasn’t one of them.
That didn’t save Oswego or the other hospitals from suspicion or investigation.
The Kansas Attorney General is looking into Oswego’s demise, and both federal and state authorities are investigating other hospitals in the chain.
There is even a national criminal investigation into billing practices at some of the hospitals previously managed by Perez, according to recent court documents filed by federal bankruptcy trustee in North Carolina. At this point, however, no charges have been filed.
But while Oswego never saw a spike in laboratory billing, it was Perez’s billing operations that put the hospital out of business.
Once Blue Cross and Blue Shield and other major health insurers discovered that some hospitals managed by Perez and his associates were inflating charges for urine tests processed outside of rural hospitals, they stopped paying reimbursements to all the hospitals managed by Perez.
Cash flows dried up over the ensuing months.
Taxes and utility bills went unpaid.
Inventories of food, drugs and medical supplies dwindled.
Employees saw their paychecks and contributions to health and retirement plans delayed and then halted.
“They were taking (money) out of our paychecks and we weren’t benefiting from any of it,” said Dusty Jones, who worked as a billing specialist and admissions clerk at Oswego County Hospital. “There were some employees that had medical bills, you know, come up, because they used their health insurance and their health insurance wasn’t any good, and so they got stuck with hundreds of dollars’ worth of medical bills … They weren’t covered when they thought they were.”
Waves of optimism
The chain of 12 hospitals that Perez came to manage was stitched together during the real estate and banking boom of the mid-2000s.
A group of nine optimistic health care consultants, led by Larry Arthur and James Shaffer, believed they could turn around struggling rural hospitals by taking out government subsidized loans and borrowing from banks to build newer more efficient facilities.
With easy access to credit, the group purchased at least 14 hospitals in seven states for little or no money between 2007 and 2010 and trotted out plans for at least four new facilities from Hillsboro, Kansas to Ripley, Tennessee.
But the Great Recession got in the way. Financial promises fell through. Construction plans were put on hold, and the chain was forced to file for bankruptcy protection in 2011.
Financial reports show the hospitals collectively lost more than $50 million that year.
By shedding some debts and borrowing more money, the chain was able to re-emerge from bankruptcy in January 2013.
Shaffer remained chairman and most of his colleagues stayed connected, but day-to-day management was turned over to a new chief executive — Paul Nusbaum.
The former secretary of health and human resources for West Virginia, Nusbaum brought more than 20 years of experience managing nursing homes and hospitals to the job. His company also provided $6 million in convertible debt.
But by 2015, the chain was hemorrhaging again, losing $3.6 million that year.
Things got so bad, that Nusbaum opted to shut down a hospital in North Carolina after the town of Yadkinville declined to pay $300,000 to cover indigent care.
Residents complained bitterly. Yadkin County even filed suit against Nusbaum’s company — Rural Community Hospitals of America — saying the closure was unjustified and “resulted in the termination of all or nearly all hospital employees, many of whom dedicated their lives to caring for our local citizens.”
Yadkin county ultimately won a $1 million settlement, but the hospital did not reopen.
Desperate to keep the rest of the hospitals alive, Nusbaum approached a business broker in California, Jack Eskanazi.
Eskanazi introduced him to Perez, who promised to turn around the chain by deploying his laboratory billing strategy.
Nusbaum signed off on the plan and defended the strategy when it was criticized by insurance companies and the press.
Eskanazi, who later sued Nusbaum for refusing to pay a finder’s fee, said in his lawsuit that the 12-hospital chain “was in financial distress with the real possibility of a bankruptcy filing or the closing of some of the hospitals” at that time.
“In these circumstances and in these dire straits, (Nusbaum’s company) reached out to (Eskanazi) in an attempt to release its financial pressure and avoid economic disaster,” the lawsuit said.
Nusbaum has denied owing Eskanazi any money and the case has been dismissed. He did not return two calls to his unlisted number in West Virginia.
The sins of others
Financial reports filed with the Center for Medicare & Medicaid Services show only four hospitals in the chain saw a rapid rise in laboratory billings after Perez took over.
At Washington County Hospital in North Carolina, billings leapt from just under $11 million in 2016 to nearly $32 million the following year.
At I-70 Medical Center in Missouri, lab charges more than doubled from $1.8 million to $5.1 million over the same time period.
Other hospitals, including Oswego, saw no such jump.
But when health insurers started filing lawsuits accusing Perez, his companies and his associates of committing billing fraud at hospitals outside of the chain, hospitals inside the chain suffered the consequences.
The first major blow came in August 2017.
That’s when Missouri State Auditor Nicole Galloway came out with a well-publicized report chronicling the billing scheme that Perez and his then partner, David L. Byrns, allegedly implemented a year earlier at Putnam County Memorial Hospital — a 14-bed facility in Unionville — population 1,790.
Insurance companies said in a lawsuit that Putnam Memorial billed for just 85 urine tests during the first six months of 2016, before Perez and Byrns arrived on the scene. Billings then spiked to 37,000 during the same six-month period a year later.
More than $92 million in lab payments flooded into Putnam Memorial – far exceeding its total revenues of $7.5 million the year before. And more than 80 percent of the money flowed right back out to the bank accounts of Byrns, Perez and their associates at physician practices and medical labs across the country.
The lawsuit remains pending.
Perez has insisted in court documents and in a statement to the press that his billing strategy was “authorized by law,” and that the state auditor’s report “was a gross mischaracterization” of a standard practice.
His strategy clearly benefited the hospital, allowing it to pay off about $6 million in debt and record a $12 million profit in 2016. But Galloway did not like what she saw.
Under Putnam’s contract with insurance companies, all urine samples were supposed to be tested at the hospital. But that’s not what happened.
“Based on our review of hospital accounts, the vast majority of laboratory billings are for out-of-state activity for individuals who are not patients of hospital physicians,” Galloway said in her report.
Galloway went on to bash Putnam for billing insurance companies for at least $20 million in tests even before setting up a lab at the hospital, and for paying out $68,000 a month to 33 phlebotomists around the country in what were believed to be kickbacks for referrals from physicians and drug rehab facilities.
Galloway’s report also outlined what she believed to be self-dealing on the part of Byrns, a Florida businessman with a criminal record and bankruptcy in his recent past.
Court records show Byrns pleaded guilty to soliciting prostitution in Fort Lauderdale in the late 1990s, and he was arrested for forging a $130,000 check at a Louisiana hospital he managed in 2013. He later repaid the money and the charges were dropped. In 2014, his former company – Frontier Hospitals Inc. – filed for bankruptcy protection.
At Putnam, Byrns increased his salary from $160,000 to $200,000 without board approval, Galloway’s report says. He funneled $700,000 into his management company, and he had the hospital reimburse him for nearly $20,000 in expenses that included meals at his Florida home, alcohol, cigarettes, prescriptions meds, cell phone accessories, razor blades, skin care products, car washes and luggage.
Reached at his home in Lighthouse Point, Florida, Byrns immediately hung up. He did not return a message left on his cell phone.
As if the Missouri State Auditor’s assessment wasn’t damaging enough, reports began circulating that this was not the first time Perez had orchestrated a billing fraud scheme.
A company he was associated with — People’s Choice Hospital — allegedly did the same thing at the Campbellton-Graceville Hospital in North Florida a year earlier, according to an adversarial proceeding filed by a federal bankruptcy trustee.
The hospital was in a bad financial state at that time.
But soon after Perez implemented his billing scheme, the hospital saw its income from outside activities rocket to $37.4 million in 2016 from just $1.3 million the year before.
For Gary Ayers, an independent contractor who worked with the hospital, the sudden spike in income didn’t sit right.
Ayers complained to the board that he saw Perez and a hospital employee remove unopened boxes of urine specimens from the hospital, according to documents filed by People’s Choice Hospital. When confronted about it, Ayers said Perez did not have a legitimate explanation.
In response to these complaints and suspicions, Campbellton-Graceville’s board of directors obtained a court injunction to remove Perez as chief executive.
People’s Choice Hospital, which is owned by Chicago businessman Seth Guterman, fought back, denying any wrongdoing and accusing the hospital of breaching its consulting agreement.
At the same time, however, Guterman’s company said it had begun investigating Perez and “discovered a number of questionable billing and operational practices.”
The hospital filed for bankruptcy protection in May of the following year and shut down a month later.
Perez and his associates told CBS News and other media outlets in March 2018, that Perez was not the bad guy — that he was actually a whistleblower who helped to uncover the fraud at Campbellton-Graceville Hospital and that his signature on lab contracts had been forged.
Perez added that when it came to Putnam Memorial, he was “merely an investor.”
“You’re always quick to hear when negative things come out and you make it in the news,” Perez told the Columbia Daily Tribune in September 2017. “But you never make it in the news with all the great things you do.”
Mike Murtha, a former Florida senate staffer and president of the National Alliance of Rural Hospitals — an industry trade group created by Perez in 2016 — also came to Perez’s defense, repeatedly championing his laboratory billing strategy and encouraging more rural hospitals to adopt it.
“It’s a really good opportunity for hospitals at risk of dying,” Murtha told the Daily Oklahoman in February 2018. Murtha did not return two calls from GateHouse Media.
Nusbaum, who also served on the board of the National Alliance of Rural Hospitals, took a similar tack. He said it wasn’t Perez’s billing strategy that threatened the survival of rural hospitals, it was the response by insurance companies.
“Nobody in Oklahoma should be surprised these hospitals are struggling because of what Blue Cross did,” Nusbaum said after the insurance company stopped paying insurance claims filed by four Oklahoma hospitals in 2018.
Claims and counterclaims
Between March and July of last year, dozens of major insurance companies and health plans joined in lawsuits against Perez, his associates and their companies, accusing them of overbilling by hundreds of millions of dollars.
One suit in Georgia claimed they used the rural status of Chestatee Regional Hospital in Dahlonega to charge $1,400 for tests that should have commanded no more than $300 if billed correctly.
“To maximize their profits, defendants leveraged a nationwide network of healthcare providers and laboratories, who provided patient’s specimens because the pass-through scheme made the testing immensely profitable,” the lawsuit filed in Georgia states. “Had the claims been billed directly by the labs, many would not have been paid and those that were would have been paid at substantially lower rates.”
Insurers alleged that they paid approximately $111 million in illegitimate claims.
The suit was settled in April and the terms were not disclosed.
Accusations were similar in a lawsuit filed by insurers after allegations of billing fraud surfaced at Putman Memorial.
Insurers said that the hospital received $73 million in payments it was not entitled to.
“Since at least 2016 defendants have engaged in an illegal and fraudulent scheme using Putnam Memorial Hospital to enrich themselves at plaintiffs’ expense by billing for laboratory services that were not payable by plaintiffs, were fraudulent, were in violation of RightChoice’s contract with Putnam and were otherwise unlawful,” RightChoice Managed Care said in its lawsuit against Perez, Byrns and their associates.
Perez and his colleagues denied the claims and the suit is still pending. But the damage was done.
Once insurance companies lost confidence in Perez and his associates, the game was over.
Hospitals began folding one after the next, leaving nurses and other medical staff without pay or health insurance and local residents anxious about where they would go when the next emergency struck.
“I just feel like it’s a sad deal for everybody,” said Jones, who formerly worked as billing specialist and admissions clerk at Oswego Community Hospital. “I mean the employees were trying their best to make sure the patients had the best healthcare and the patients that are without a primary care provider anymore, you know, felt like they were just stuck and not having any other place to go.”