Why Lab Companies Buy Bankrupt Rural Hospitals

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

CEO SUMMARY: Seeking the higher lab-test payment rates that insurers pay hospital labs, some lab testing companies are buying rural, financially-struggling hospitals in what may be the latest twist on the pass-through billing strategy that certain lab testing firms have found to be lucrative in recent years. Currently, two lab companies are seeking to buy struggling rural 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 deparment (HOPD) billing arrangements. Insurers are challenging these billing strategies by filing lawsuits against operators of these schemes. (See TDR, May 7, 2018.)

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.

Next week residents of Modoc County, Calif., will vote on a measure authorizing the Surprise Valley Health Care District to sell and transfer the hospital and other district assets to Cadira Group Holdings LLC, or any other qualified buyer, according to Ballotopedia, an online encyclopedia of elections.

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.”

Millions in Liabilities

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. 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.

One of nation’s largest operators of general acute care hospitals, CHS operates or leases 126 hospitals in 20 states. The deal to sell Tennova Healthcare-Jamestown includes a physician practice, a medical office building, outpatient facilities, and ancillary services, she added.

In her article, Bannow wrote, “Rennova ended the year with no cash on hand from continuing operations, and has been sued by landlords and contractors alleging unpaid bills, according to the SEC filings. Three former employees have sued Rennova in Palm Beach County court alleging unpaid wages,” she added.

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.

Some Lab Companies Want to Own Rural Hospitals to Have Claims Paid at Hospitals’ Higher Rates

ONE REASON PROMOTERS of pass-through billing schemes and HOPD arrangements have partnered with struggling rural hospitals in recent years is that the lab companies can get paid higher lab test payment rates from health insurers when they use the hospitals as the billing entities. This method of billing is called pass-through billing.

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.

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.

The arrangement between the two companies in the proposed sale of Tennova Healthcare-Jamestown to Rennova Health, a lab testing company in West Palm Beach, Fla., is similar to other such arrangements in which lab companies bill through the clinical laboratories of financially struggling rural hospitals. One source Bannow cited said he had seen eight to 10 such lab test billing arrangements.

In recent years, Rennova’s revenue has come from urine toxicology testing, CEO Seamus Lagan told Bannow. Believing that some labs have been overtesting, health insurers have cut back sharply on payments for such testing. In 2017, Rennova’s lab test volume billed to health insurers dropped by 80% over the volume it recorded in 2016, Lagan told Bannow. Previously, Rennova operated five labs, and now runs only two, he added.

“Lagan said that acquiring the hospital to alter lab reimbursements is ‘absolutely’ not his intention in purchasing Tennova Healthcare-Jamestown,” Bannow wrote. He’s aware of the pass-through model, but said Tennova Healthcare-Jamestown would not bill in that way.

Rennova is proud of its record of compliance and does not plan to use the Tennova hospital to bill for toxicology or other lab tests for anyone who is not a patient in the hospital or who gets care from local doctors, Lagan told Bannow.

“That is not an area we have any interest in pursuing or looking at,” Lagan told Bannow. “We see these hospitals as a good little business on their own with increasing the services that are required by the local community and absolutely without the need to get into any complicated or convoluted agreements with far-away companies.”

Rennova’s First Acquisition

Kristi Nelson reporting for Knox News of the USA Today Network wrote that the Tennova Healthcare-Jamestown facility will be the second hospital Rennova has purchased in recent years. In 2016, Rennova bought Scott County Hospital in Oneida, Tenn., from Pioneer Health Services Inc. of Mississippi after Pioneer filed for bankruptcy and closed the acute-care hospital in July 2016.

When Rennova announced an agreement to purchase Tennova Healthcare-Jamestown Hospital, Becker’s wrote, “Evidently, Rennova CEO Seamus Lagan expects the addition of the new hospital to help stabilize the company’s finances.”

As Becker’s reported, Lagan said, “This acquisition further demonstrates our commitment to expanding Rennova’s rural hospital model to provide necessary services to patients while securing more predictable recurring revenues. This hospital is approximately 38 miles from our current hospital in Oneida and will benefit by receiving patients from Oneida who require operations and treatment not provided there. The synergy of management and services in a close geographic location creates numerous efficiencies for Rennova and will allow us to support a greater number of healthcare providers and residents in the local area.”

Lab Services Provided

Rennova, which describes itself as providing diagnostic and support software for billing, record management, and lab services, agreed to pay as much as $450,000 of debt Pioneer Health Services owed, wrote Bannow in Modern Healthcare. Although the names Rennova and Tennova are similar, the two companies are unrelated, she added.

THE DARK REPORT has written about how a large number of lab testing companies—particularly those offering toxicology and pain management tests—have partnered with small rural hospitals in arrangements for these hospitals to bill for the lab tests that lab companies perform. Promoters of these schemes commonly use the term HOPD to describe the arrangement. (See TDR, Oct. 30, 2017.)

The new California and Tennessee examples of this trend show how promoters who own lab testing companies want to purchase financially-desperate hospitals that have substantial debt. In other examples of such arrangements, the operators have sent lab test volume from multiple states through the hospitals so they can submit test claims to payers at the higher rates health insurers typically pay to rural hospitals.

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? Time may provide the answer to that question.

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