No one at the hospital in Fulton, Missouri (population 12,790) had ever heard of a management consultant named Jorge Perez until he showed up at its potluck in September.
The potluck was meant to be a goodbye party. Fulton Medical Center, the only hospital in rural Callaway County, Missouri, was scheduled to close by September 22. Instead, Perez came and shared some good news: He鈥檇 just bought the hospital and planned to keep it open.
He spoke four days later to a packed city council chambers in Fulton.
鈥淲e travel all over the country and we see the same thing we see here in Fulton: a town that鈥檚 fighting to keep their hospital,鈥� Perez told the crowd while announcing his takeover of the hospital. He received a standing ovation.
Rural hospitals such as Fulton Medical serve as a lifeline for health care and jobs in small towns but face dwindling revenues. Had it closed, Fulton Medical Center would have been the 20th rural hospital in the country to shutter in just the past two years. of the nation's rural hospitals, about one-third of the facilities, are at risk of closing.
Yet despite their notoriously slim operating margins, Perez has purchased close to 20 rural hospitals in recent years in Missouri, Kansas, Oklahoma, Florida and elsewhere. By next year, he said he wants to own 50 of them.
鈥淧art of our secret sauce is that we will bring in new services that didn鈥檛 exist before,鈥� Perez said in an interview in the still-crowded room following the event in Fulton.
But a report issued by the Missouri State Auditor in August raises serious questions about how one of Perez鈥檚 companies is running another Missouri hospital: Putnam County Memorial in Unionville.
And an investigation by Side Effects Public Media, KCUR and KBIA uncovered a pattern of controversial businesses practices by management companies with ties to Perez, which can lead to big profits for the management companies but high risks for vulnerable hospitals.
鈥淎 shell company鈥�
In September 2016, a Florida-based management company, Hospital Partners Inc., took over operations of the 25-bed critical access hospital in Unionville.
Jorge Perez co-owns Hospital Partners along with the company鈥檚 president, David Byrns. Byrns became Putnam County Memorial鈥檚 CEO.
Within days, a separate company called Hospital Laboratory Partners, which also has ties to Perez, was incorporated in Florida and started billing insurance companies for laboratory work through the Putnam County hospital, including lab work not performed at the hospital.
Here鈥檚 how this works. Many hospitals have laboratories to test specimens, such as blood or urine samples. Some highly specialized tests are sent to specialized reference laboratories but can still be billed to insurance via the hospital. Putnam started acting as a reference lab, and billing for tests, including many performed elsewhere. This may be allowed under certain circumstances under Medicare rules.
This had dramatic effects on the hospital鈥檚 finances. In six months, Putnam Memorial generated $92 million in revenue. By comparison, the hospital had generated just $7.5 million the year before.
The problem was that little of that revenue was staying with the hospital. That was one of the findings in Missouri auditor Nicole Galloway鈥檚 August audit.
鈥淚t appears that Putnam County Memorial Hospital is being used as a shell company for questionable lab activity that's occurring across the country,鈥� Galloway said in an interview after releasing the .
The scathing report questioned the propriety of the lab billings. It noted 80 percent of the revenue went to private lab companies 鈥攕ome of them with ties to Perez 鈥� such as Hospital Laboratory Partners.
鈥淏ased on our review of hospital accounts, the vast majority of laboratory billings are for out-of-state lab activity for individuals who are not patients of hospital physicians,鈥� Galloway said.
A public records request of the hospital by Side Effects revealed between November 2016 and March 2017, Putnam County Memorial paid over $26 million to Hospital Laboratory Partners alone.
Galloway also noted that during the same time period, Putnam Memorial contracted with a billing company to handle its billing and that company received 6 percent of the revenue generated by the lab program.
The public records request showed Florida-based software and billings company Empower H.I.S. LLC was paid $11.8 million by the hospital between November 2016 and March 2017. Empower was registered in 2014 by Perez.
Galloway turned her findings over to criminal authorities, including the FBI.
Perez defends the lab billing program, saying he runs similar programs at some of his other hospitals. In an interview, he said that it's legal and noted someone even wrote a book about how to do it. (The book, 鈥淭he Profit Machine in the Hospital Basement,鈥� was published by Ellsworth Press last June.)
But most of all, he defended the practice as a desperately-needed lifeline for struggling community hospitals.
鈥淭he only other opportunity this hospital had to survive was to put [together] a lab outreach program,鈥� Perez said of Putnam County Memorial.
Lab billing programs can be money makers for small rural hospitals such as Putnam County Memorial because insurance companies typically cut small hospitals a deal, paying them at higher rates than other hospitals.
Following the release of Galloways鈥� audit, Hospital Partners issued a statement saying that since taking over the hospital鈥檚 operations, it had paid off $6 million of the hospital鈥檚 debts.
Michigan health care attorney Brian Bauer, a shareholder with the health care law firm Hall Render, has seen several similar lab billing arrangements in the past two years. He says that while they may be legal, there鈥檚 a catch.
When insurance companies make these deals with rural hospitals, he said, they aren鈥檛 envisioning a high-volume lab program, which can generate tens of millions of dollars a year.
鈥淚t鈥檚 not uncommon to have one or more of the insurance companies come back and say this is not what we agreed to,鈥� Bauer said.
And that鈥檚 a real risk for Putnam County. If an insurance company tries to recoup its money, the hospital itself may be on the hook because it did the billing. And small hospitals like Putnam may not have the resources to repay what鈥檚 owed.
In fact, Blue Cross & Blue Shield of Mississippi is suing a rural hospital in that state 鈥� as well as several lab companies 鈥� for nearly $34 million over a similar lab billing program. The insurer says the scheme was used to disguise fraudulent claims and wants the hospital to reimburse it.
In Putnam County, less than 15 percent of the laboratory proceeds stayed with the hospital. So while $6 million of the hospital鈥檚 debt may have been paid off since Hospital Partners took over, there鈥檚 a lot more money on the line if insurers decide to sue to get their money back. That could jeopardize the hospital鈥檚 ability to stay open.
And according to Galloway鈥檚 audit report, at least two insurance companies have already flagged Putnam County Memorial Hospital鈥檚 lab billing arrangement.
Alive today because of the hospital
Before Perez came along, Putnam Memorial had been struggling.
Like other rural hospitals, its patient base was mostly insured by Medicare and Medicaid, and the hospital couldn鈥檛 bring in enough revenue to keep up with costs.
But the hospital has been part of this community since 1963 and the county rallied to keep it alive. In 2012, the county passed a $7.6 million municipal bond issue to expand and renovate the hospital. If the hospital closes, the county and its taxpayers will be on the hook to pay off that debt, another reminder of the high stakes of keeping the hospital open.
The hospital鈥檚 vulnerability worries Charley Pittman, the mayor of the county seat, Unionville, which has a population of 1,800 and is the self-described 鈥淗unting Capitol of Missouri.鈥�
Pittman said there are people alive today who would not be if it weren鈥檛 for the hospital. Losing it, he said, would be devastating.
鈥淎ny time you lose something in a town of 1,800 people in a county of only 4,500, it will have a big impact,鈥� Pittman said. 鈥淲e are a surviving town 鈥� we鈥檙e not a progressive town.鈥�
But the hospital鈥檚 board may not have understood what it was getting into with Jorge Perez. The auditor鈥檚 report was critical of the board, saying it had not exercised due diligence in handing over control of the hospital to Perez鈥檚 management company. But like many rural hospitals, most of the members of the hospital鈥檚 board are laypeople 鈥� retired educators, farmers, even an undertaker. And Pittman defends them.
鈥淚t鈥檚 a thankless job,鈥� Pittman said. 鈥淭he board is non-paying, they get nothing for their time. They get a lot of crap. They don鈥檛 get glory.鈥�
Pittman wants to believe in the new management company that鈥檚 calling the shots, but he鈥檚 not sure he understands its approach.
鈥淟aboratories, laboratories, laboratories. That鈥檚 what I hear,鈥� the 80-something mayor said.
鈥淲hen it sounds too good to be true...鈥�
Jorge Perez claims there are 鈥渢housands of hospitals around the country鈥� running lab billing programs similar to the one he initiated in Putnam County.
鈥淚 didn鈥檛 invent this,鈥� he said in an interview. 鈥淚 just looked, being in this industry for many years, I had to think outside the hat and I looked at what some hospitals are doing.鈥�
In fact, Medicare regulations do allow critical access hospitals to bill for laboratory tests done for non-patients, said Marc Hartstein, a former Medicare official with expertise in government billing and payment regulations.
鈥淪o on its face, there鈥檚 nothing wrong with that,鈥� he said.
But, he added, the situation with Putnam County Memorial Hospital raises a lot of questions.
鈥淗ow is it that after a change of ownership, suddenly there have been lots of referrals for laboratory tests to this one small hospital in rural Missouri, which you would not expect would be able to perform this many laboratory tests?鈥� Hartstein asks.
Eric Shell, a healthcare consultant with Stroudwater Associates in Portland, Maine, said that he鈥檚 been approached by five or six hospitals that have asked him about entering into similar lab billing arrangements. He cautioned them against it.
鈥淭his reference lab comes in, they promise they鈥檙e going to provide all these reference lab tests and they can generate hundreds of thousands of dollars, if not more, on these tests,鈥� Shell said, describing the pitch.
鈥淲hen it sounds too good to be true, it鈥檚 probably not true, and that was my caution to each one of them,鈥� he said. 鈥淪omething doesn鈥檛 seem right there.鈥�
Other rural hospitals have come to grief after attempting similar lab billing arrangements.
Like Putnam County Memorial Hospital, Campbellton-Graceville Hospital in Graceville, Florida was a financially distressed, 25-bed critical access hospital on the brink of closing when it turned its operations over to a private management company, People鈥檚 Choice Hospital LLC.
The hospital closed in June after filing for Chapter 11 bankruptcy. It sued People鈥檚 Choice, claiming it entered into lab billing contracts that weren鈥檛 approved by the hospital鈥檚 board and improperly directed the hospital to wire transfer $1.2 million to People鈥檚 Choice during a 45-day period.
Earlier this year, People鈥檚 Choice briefly took over management of another small hospital, Newman Memorial in Shattuck, Oklahoma. That arrangement, which included a lab billing program, lasted only a matter of months before the hospital parted ways with People鈥檚 Choice.
Joe Neely, the hospital鈥檚 CEO, said he had been advised by the hospital鈥檚 attorneys not to talk about what happened, but he added: 鈥淚t鈥檚 good you鈥檙e investigating this because more people need to know about it.鈥�
A troubled history
Jorge Perez and his business partner David Byrns, who served as CEO at Putnam Memorial in Missouri until this fall, both have ties to People鈥檚 Choice and the hospital in Graceville, Florida. People鈥檚 Choice contracted with a company Perez owned, Empower H.I.S. LLC, to handle Campbellton-Graceville Hospital鈥檚 software and billing services. And the hospital鈥檚 attorney, Michelle Blankenship Jordan, said People鈥檚 Choice referenced Jorge Perez as an employee.
Perez denies he was an employee of People鈥檚 Choice and said he was actually the one who blew the whistle on the company. But People鈥檚 Choice appointed him CEO of the Campbellton-Graceville Hospital for a time. And later, the hospital鈥檚 board sought to deny Perez and other People鈥檚 Choice executives signatory access to the hospital鈥檚 bank accounts.
Byrns also played a role in People鈥檚 Choice鈥檚 takeover of Campbellton-Graceville. Blankenship Jordan, the hospital鈥檚 attorney, said Byrns approached the hospital on behalf of People鈥檚 Choice.
鈥淗e was known as 鈥楥owboy,鈥欌�� Jordan said.
Byrns has a troubled history with hospital management. He was CEO of a company called Frontier Hospitals that took over management of a struggling 25-bed hospital in Louisiana in 2011. That deal went south after the hospital evicted Frontier and obtained a judgment for $200,000.
The Louisiana hospital later pressed criminal charges against Byrns in Calcasieu Parish, Louisiana for allegedly altering a $30,000 check from the hospital to read $130,000.
The hospital鈥檚 attorney, Jennifer Jones, said the forged amount was later repaid. The criminal charges have since been dropped, according to the parish鈥檚 public records administrator.
鈥淭hese people are just terrible, they really are,鈥� Jones said. 鈥淗ow they could steal from us I just don鈥檛 know, but it didn鈥檛 seem to bother them.鈥�
Back in Putnam County Missouri, Missouri state auditor Galloway also had harsh words for Byrns, criticizing him for using his position as CEO to benefit himself and Hospital Partners, the management company he and Perez run.
In addition to paying himself a $200,000 salary without board approval, Galloway said, he paid more than $700,000 in fees to Hospital Partners in little more than six months. In addition, she said, he expensed the hospital at least $5,000 for alcohol, cigarettes, car washes and golf outings.
Perez claimed he was merely an investor in Hospital Partners, leaving the day-to-day operations to Byrns, whom he called 鈥渁 super guy.鈥� In September, Perez said he would be replacing Byrns as CEO of Putnam County Memorial Hospital but keeping him on as a consultant.
鈥淗e knows that hospital better than we do, and we need to understand all the accounting and all the idiosyncrasies of each hospital,鈥� Perez said. 鈥淵ou have to understand, a hospital is a complex thing.鈥�
This story was produced as part of a collaboration between , and .
Dan Margolies is a senior reporter and editor at KCUR Public Media in Kansas City, Mo. @DanMargolies
Bram Sable-Smith reports on health for KBIA in Columbia, Mo. and for Side Effects. @besables
Emma Brown, Ryan Famuliner, James Gordon and Nathan Lawrence contributed reporting.
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