The City of Weslaco Files Suit, Questioning the Validity of the Hospital's Sale to Prime Healthcare Foundation
Law Feature — June 2015
Tex Med. 2015;111(6):47-50.
By Crystal Zuzek
The City of Weslaco wants its hospital back. The 2013 sale of Knapp Medical Center to California-based Prime Healthcare Foundation, created by for-profit Prime Healthcare Services, Inc., raised questions regarding the validity of the transaction and prompted the city to sue Knapp Medical Center Foundation, Prime Healthcare Foundation, Prime Healthcare Services, and former Knapp Chief Executive Officer James A. Summersett III.
The medical community and people of Weslaco learned of the hospital's new ownership after the deal had closed on Jan. 2, 2013, via an announcement on Prime's website. Information in a PowerPoint presentation given by the city's attorney, Mary Ibarra, at an open meeting in Weslaco indicates the sale was for approximately $100 million, including $81 million transferred from Knapp to the newly formed Knapp Community Cares Foundation (KCCF). About $20 million came from Prime Healthcare Services through Prime Healthcare Foundation. Before the sale announcement, according to a summary of the pleadings on file in the case, Knapp Medical Center was worth more than $167 million.
Weslaco Health Facilities Development Corporation and City of Weslaco v. Knapp Medical Center revolves around the question of ownership of the hospital.
A January 2013 news release says Prime Healthcare Foundation "obtained a controlling interest in Knapp Medical Center." At issue in the case is Prime Healthcare Foundation's nonprofit status because Knapp Medical Center's existing deed restriction prohibits a for-profit entity from owning the community hospital. Prime Healthcare Foundation is associated with and shares for-profit Prime Healthcare Services' leadership.
A summary of the pleadings on file in the case describe how Prime Healthcare Systems has been buying up hospitals — many of them financially struggling — across the country, including 26 in California, Texas, Pennsylvania, Kansas, Michigan, Rhode Island, and New Jersey. Of the six nonprofit hospitals, Prime Healthcare Services bought five of them and donated them to Prime Healthcare Foundation. Prime Healthcare Foundation purchased Knapp with funds donated by for-profit Prime Healthcare Services.
According to a March 10 article in the Los Angeles Times, "Prime Healthcare Deal for 6 Hospitals Collapses; Bankruptcy Is an Option," the privately held company owns 34 hospitals across the country. "It specializes in acquiring distressed hospitals and making them profitable, often through cost-cutting and aggressive negotiations with insurers," the article states.
Pleadings in the case point to the City of Weslaco's assertion that Prime Healthcare Foundation is the alter ego of Prime Healthcare Services, forming the basis for the city's allegation that Prime's for-profit entity acquired Knapp.
The lawsuit is ongoing. The city is asking the court to halt any property transfer to Prime and prevent the breach of Knapp’s deed restrictions.
McAllen newspaper The Monitor reported Feb. 24 that the City of Weslaco asked Prime Healthcare Foundation "to pay the city $350,000 to settle the lawsuit before ultimately being rejected by hospital officials." The newspaper reported that a "second settlement worth $575,000 would have lifted the city's deed restriction, but it died when commissioners failed to break a tie vote at its Feb. 17 regular meeting."
Weslaco surgeon Sandra Esquivel, MD, says she hopes the case can be resolved soon.
"This sale occurred in one of the poorest counties in the United States, and this hospital receives millions in federal monies. Where is the oversight in the sale of a multimillion-dollar nonprofit entity? Where is the oversight if a board of a nonprofit entity does not perform its due diligence? Apparently, there is no oversight," she said.
When asked whether the Texas Attorney General's Office was investigating the sale of Knapp to Prime, a spokesperson with the agency said it "doesn't acknowledge investigations."
Under New Ownership
Weslaco's Knapp Medical Center is no stranger to controversy. Attempts by the hospital's leaders to sell the facility have ignited a bitter dispute over the future of Knapp, pitting members of the medical staff and local officials against hospital administrators. Physicians and community leaders have fought tirelessly to ensure the hospital puts patients ahead of profits.
Past proposals to sell Knapp Medical Center to a larger system failed, due in part to resistance from concerned physicians and city leaders. In late 2011, Knapp's leaders announced they would sell the hospital to South Texas Health System, the local branch of Universal Health Services, Inc. (UHS), a Pennsylvania-based, for-profit health care management company that operates seven facilities in the Rio Grande Valley.
The City of Weslaco opposed the sale, citing the deed restriction. At the time, the Texas Medical Association and the American Medical Association joined physicians in their court battles to obtain financial documents from the hospital.
The pending deal fell apart in 2012 after Knapp and the now-dissolved Weslaco Hospital Authority Board did not reach an agreement to settle the sale dispute. Despite the authority board's success in preventing UHS from buying Knapp, Dr. Esquivel knew it was just a matter of time before the right buyer came along.
"The hospital's administration seemed intent on selling the hospital. It was just a matter of legal maneuvering to get around the deed restriction," she said.
Dr. Esquivel says she has some concerns about the hospital's new owners.
"I think Prime is trying to address problems at the hospital, but I wonder how much of a priority Knapp Medical Center is since they own so many facilities and are headquartered in California. There's confusion about how medical staff is supposed to go about bringing up concerns. If we need new machines, is there money for that, and how do we get approval?" Dr. Esquivel said.
She says she and other physicians in the community had "heard rumors for a while prior to the sale that Prime was interested in purchasing the hospital. Some physicians and I learned Prime had past legal issues."
Prime has been sued for falsifying records and billing for medically unnecessary inpatient admissions to receive higher payments from government health care programs. A Prime employee whistleblower alleges in a False Claims Act suit that the company overcharged Medicare and Medicaid about $50 million for patient stays by deliberately falsifying admissions information.
And a recent deal for Prime to purchase some California nonprofit hospitals fell apart following scrutiny by California Attorney General Kamala Harris. Prime had planned to purchase six financially struggling Catholic hospitals but walked away after General Harris imposed 78 pages worth of conditions on the deal. Among the provisions, the attorney general required Prime to keep all of the hospitals open for 10 years and to provide Daughters of Charity's same level of charity care to poor patients.
Dr. Esquivel, former president of the Weslaco Hospital Authority Board and former member of the Knapp Board of Directors, often treats patients in Knapp's emergency department. She says changes at the hospital have happened gradually since Prime bought it.
Last year, the hospital went through a round of layoffs, cutting about 50 people, including members of the information technology staff and medical records department and the entire staff of the Diabetes Education Center.
"At first, the hospital promised us nothing would change, but things started to change little by little," Dr. Esquivel says.
She has noticed a dip in patient volume at Knapp Medical Center.
"Surgical volume is down, and other hospitals in the area are opening new facilities, increasing competition for business," she said, adding that she worries about Knapp's future. "If the hospital is struggling, it makes me wonder who else they'll try to sell to. I'm concerned ownership of the hospital will become a revolving door, going to the highest bidder."
Serving Those in Need
The lawsuit notes that in a statement regarding the sale of Knapp, Prime Healthcare Services President Prem Reddy, MD, didn't reference the city's 1987 deed agreement. Dr. Reddy stated the decision to purchase Knapp Medical Center "was based on our desire to better serve the residents and the surrounding communities that rely on it for quality health care."
"The proposed Prime bid … contravenes the restrictive covenants by which the hospital property must be operated. It is insufficient to merely rely on Prime's 501(c)(3) status," the lawsuit states.
According to the suit, Knapp Medical Center serves as a vital source of health care to low-income Rio Grande Valley residents. Seventy-five percent of the patients who seek emergency care from Knapp Medical Center participate in federal Medicaid and Medicare programs, the lawsuit states.
The lawsuit outlines these details in the sale of Knapp Medical Center to Prime Healthcare Foundation:
- Around 2012, Knapp Medical Center secured a bid for sale of the hospital property to Prime Healthcare Foundation.
- Prime Healthcare Foundation claims to have more than $100 million in assets.
- Under the terms of the sale agreement, Knapp Medical Center will continue to operate as an acute care hospital with the same charity care programs in place.
- Prime Healthcare Services will invest at least $10 million in capital improvements.
- The new KCCF has been formed as a result of the inclusion of Knapp Medical Center into the Prime system. The lawsuit states Prime Healthcare Foundation offers no quid pro quo as to the services to be offered. The bid does not limit those services Prime Healthcare Foundation may choose to eliminate after it assumes control.
Fight for Transparency Lost
In 2012, TMA supported efforts by a 26-physician trust to obtain Knapp Medical Center's financial records. Thanks in part to TMA's legal arguments, Judge Israel Ramon Jr. ordered Knapp to release financial records, including balance sheets, cash flow statements, and IRS forms.
TMA attorneys argued in a brief to Judge Ramon that "transparency promotes quality patient care and accountability. Every employee of and patient treated at a hospital is affected by the financial decisions made by those in charge. Financial mismanagement by hospital leadership is paid for by patients and employees. Patient safety is compromised when hospitals do not use their financial resources to further quality of care."
The physician trust alleged financial improprieties at the medical center and reported quality-of-care concerns such as inadequate coverage by specialists and an insufficient number and high turnover of nurses and support staff.
Knapp appealed Judge Ramon's ruling in February 2012. The AMA Litigation Center joined TMA in filing an amicus curiae brief urging the appeals court to uphold Judge Ramon's ruling, but in June 2013, the 13th Court of Appeals overturned it in a 2-1 decision.
Months later, in January 2014, the Texas Supreme Court declined to hear the physicians' case.
Dr. Esquivel says she was "frustrated" by and in "disbelief" over the Texas Supreme Court's ruling.
"I couldn't believe it would have been possible to sell a nonprofit hospital without anyone seeing any financial records," she said.
Crystal Zuzek can be reached by phone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by email.