Lab companies and bankrupt hospitals: Dancing around medical billing fraud

New twist on pass-through billing scheme targets small, financially-troubled facilities

This is an excerpt from a 2,000-word article in the May 29, 2018 issue of THE DARK REPORT. The complete article is to all readers as long as the article limit has not been reached, and always available to paid members of the Dark Intelligence Group.

medical fraud billing - surprise valley hospitalCEO SUMMARY: Seeking the higher lab-test payment rates that insurers pay hospital labs, some lab testing companies are buying rural, financially-struggling hospitals. THE DARK REPORT notes that this might be the latest twist on the pass-through billing strategy that certain lab testing firms have found to be lucrative in recent years – some of which have wandered into medical billing fraud territory. Currently, two lab companies are seeking to buy such hospitals. One such pending purchase is in Cedarville, Calif. The other is in Jamestown, Tenn.

TWO DIFFERENT LAB COMPANIES want to buy, own, and operate small, rural, and financially struggling hospitals in what appears to be the latest twist on a lab-billing strategy to use hospitals to bill for lab-testing services in an effort to get the higher rates that hospitals charge over that of independent labs.

In one case, Cadira Group Holdings, of Denver, wants to buy the 26-bed Surprise Valley Hospital in Cedarville, Calif. (population: 514). In another case, Rennova Health, a lab testing company in West Palm Beach, Fla., plans to buy the 85-bed Tennova Healthcare-Jamestown Hospital in Jamestown, Tenn. (population: 1,959).

In both cases, the hospitals are in financial trouble with substantial debt, raising questions about the lab companies’ motives. In buying these hospitals, both lab companies may see opportunities to use the hospitals’ managed care contracts to bill health insurers at higher in-network rates than the labs would get otherwise.

Also, these lab companies may plan to use the hospitals they own to submit lab test claims for patients who are not in the hospitals’ service areas, thus developing a new way to bill insurers under what’s known as pass-through or hospital outpatient department (HOPD) billing arrangements.

Reimbursement for lab services using the hospitals’ favorable payer contracts can produce test payment rates as high as $2,000 per test, according to an article by Tara Bannow in Modern Healthcare.

Insurers are challenging these billing strategies by filing lawsuits against operators of these schemes, claiming the schemes constitute medical billing fraud. (See TDR, May 7, 2018.)

Could this sudden interest in having lab test companies buy failing rural hospitals be due to the lab owners’ belief that having a hospital owned by the lab submit lab claims will make the arrangement compliant with federal and state laws and payer contracts, instead of being perceived as medical billing fraud? Time may provide the answer to that question.

In an article on how labs are partnering with hospitals, Tannow interviewed Brock Slabach, Senior Vice President of the National Rural Health Association. When hospitals are desperate financially, such arrangements may be their only option, Slabach said.

“When you’re desperate, you’re looking at bankruptcy or you’re looking at some kind of dire situation you’re facing financially, and one of these companies comes along and offers something that’s too good to be true. It’s tempting to listen to this presentation and say, ‘Well, one answer is, what do we have to lose? We’re going to close anyway,’” Slabach told Bannow.

Millions in Liabilities

In January, Becker’s Hospital Review reported that the Surprise Valley Health Care District in Northeastern California filed for bankruptcy protection because the liabilities of the Surprise Valley Hospital that the district runs in Cedarville, Calif., greatly exceeded its assets. In its petition for bankruptcy, the district said it had assets of less than $1 million and liabilities of $1 million to $10 million.

In an effort to keep the hospital open, the district board agreed to partner with SeroDynamics, a lab testing company affiliated with Cadira Group Holdings. Under the agreement, Cadira will lend the healthcare district as much as $1.5 million if the district sells the hospital to Cadira, Becker’s Hospital Review reported.

Lab Company Buys Hospital

In April, Dan Margolis of High Plains Public Radio in Garden City, Kan., reported that Beau Gertz is CEO of Cadira Group Holdings, a limited liability corporation registered in Delaware. Gertz also is the president of SeroDynamics of Denver, a lab company that lists itself as a wholly owned laboratory of Surprise Valley Hospital. SeroDynamics also lists Bill W. Massey, PhD, as its Medical Director and Chief Science Officer. His PhD is in pharmacology.

Cadira loaned the hospital $1.5 million to keep the hospital open, Gertz added. “As part of the loan agreement with Cadira, we were provided the right to purchase the hospital in exchange for forgiving the $1.5 million loan and paying the hospital’s then-outstanding debts, which are presently estimated to be about $3.85 million,” he commented.

If voters approve the ballot measure on June 5, Cadira would remove as much as $5 million in Cedarville liabilities, he said. “It is presently believed that the $5 million will comprise all of Cedarville’s liabilities so that there would be no additional taxes on the town,” added Gertz.

In the article for KCUR radio, reporters Margolis and Bram Sable-Smith linked Gertz to Jorge Perez, CEO of EmpowerHMS, a company in Kansas City, Mo., that says it helps “distressed and underperforming hospitals.” Margolis and Sable-Smith wrote that EmpowerHMS has affiliates that have been involved in taking over the operations of many rural hospitals.

The reporters also wrote about how Gertz described the business model he would use for the Surprise Valley Hospital. Margolis and Sable-Smith quoted Gertz as saying, “I’m trying to overcome my association with Perez and EmpowerHMS. I was a subcontractor of Empower and I ran away as fast as possible when I discovered how they were using hospitals to run offsite labs and that there was no common ownership between the labs and hospitals in Perez and Empower’s business model.”

Also, Margolis and Sable-Smith reported that Gertz added, “With Perez, there was no common ownership between labs and hospitals. Here [meaning with the Surprise Valley Hospital] it’s different. There is common ownership between the Surprise Valley Hospital and SeroDynamics Laboratory. I do it the right way, I have legal advice from Denton’s, the largest law firm in the world.”

If voters approve the sale of the hospital to Cadira Group as Gertz proposed, the quotes from Gertz could mean that SeroDynamics would bill for lab tests done at Surprise Valley Hospital for any patient, whether in the Cedarville area or other states, as other labs operating pass-through billing arrangements have done.

The fact that Gertz said he has legal advice from Denton’s, a law firm that describes itself as the world’s largest, may indicate that Gertz and SeroDynamics have discussed how to get the most value from the purchase of Surprise Valley Hospital without engaging in medical billing fraud. Using pass-through billing would be one way to boost hospital revenue.

THE DARK REPORT requested comment from Gertz by phone and email and made a similar request for comment from Perez but did not get a response as of press time.

As in the case of the California hospital sale, the acquisition in Tennessee also involves a financially-struggling rural hospital. Community Health Systems, of Franklin, Tenn., is selling Tennova Healthcare-Jamestown to Rennova Health, for $1 plus the amount of net working capital on the closing date, according to Modern Healthcare reporter Tara Bannow.

The buyer of this rural hospital has other financial problems. In its recent filing with the Securities and Exchange Commission, publicly-traded Rennova reported a $51 million net loss from continuing operations last year and a $16 million operating loss on less than $5 million in revenue. On Feb. 2, 2018, the company was delisted from NASDAQ because of excessive stock-splitting. At that time, Becker’s Hospital Review reported that Rennova started as a lab testing company.

Do you believe the apparent plans to use newly-acquired hospitals to funnel test payment billing allow the labs to avoid medical fraud billing? Please share your thoughts with us in the comments below.


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