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Missouri State Auditor Faces Lawsuit As Battle For Control Of Tiny Rural Hospital Escalates

Dan Margolies
KCUR 89.3
Tiny Putnam County Memorial Hospital in Unionville, Missouri, was acquired by Hospital Partners in September 2016.

A battle royale has erupted in tiny Unionville, Missouri, over the town’s endangered community hospital.

Trustees of Putnam County Memorial Hospital in the north central community are trying to get rid of the company that took over the ailing institution in 2016 and then ran more than $90 million in questionable lab billings through the hospital.

The move has triggered a lawsuit by the company, Hospital Partners Inc., which claims it was illegally booted out and is seeking $2 million in damages from the hospital’s board of trustees and Missouri State Auditor Nicole Galloway.

Related: Woes Pile Up For The Man Once Greeted As A Savior Of Rural Hospitals

Galloway last August issued a scathing audit of the tiny 15-bed hospital, raising questions about a lab billing arrangement initiated by Hospital Partners and some of the people linked to the company. A subsequent investigation by KCUR, KBIA and Side Effects Public Media found that the same operators had bought about 20 struggling rural hospitals in other states and pursued some of the same controversial business practices to salvage them.

In many instances, insurers have balked at paying the lab bills being run through the hospitals by the companies, which are controlled by Jorge Perez – the Florida resident greeted as a savior when he stepped in to take over Putnam County Memorial Hospital in 2016.

The lab billing program took advantage of the higher reimbursement rates paid to rural hospitals, using Putnam County Memorial Hospital’s billing number when charging private insurers for the lab tests. The hospital received about 20 percent of the money and the rest went to a lab company called Hospital Lab Partners LLC. According to Galloway’s audit, Hospital Lab Partners was paid more than $10.6 million in management fees from November 2016 through February 2017.

Credit Dan Margolies / KCUR 89.3
KCUR 89.3
Jorge Perez, pictured in September at the headquarters of one of his companies, EmpowerHMS in Kansas City.

All told, Galloway’s audit found that the hospital had received more than $90 million in insurance payments over approximately 10 months. Almost all the billings were for patients who had never set foot in the hospital. Rather, the hospital was used as a vehicle to bill the insurance companies, reducing it to what Galloway in a press release called “essentially a shell organization for labs across the country.”

After the audit’s release, KCUR, KBIA and Side Effects reported in November that one of Perez’s affiliates, Empower H.I.S., oversaw the lab billings at Putnam County Memorial Hospital. Between November 2016 and March 2017, Empower was paid $11.8 million by the hospital, or nearly as much as the hospital had grossed in any given year before Perez took it over.

‘Life’s mission’

Hospital Partners’ lawsuit, filed in Putnam County Circuit Court last week, accuses the hospital’s board of trustees of illegally terminating the company’s management contract. And it accuses Galloway of overstepping her bounds by auditing a hospital that’s now in private hands.

According to the lawsuit:

In late 2015, the man who was to become CEO of Putnam County Memorial Hospital, David Byrns, approached Perez about “various opportunities in the rural hospital space” and identified Putnam County Memorial as such an opportunity. The two formed Hospital Partners in late 2015, with Byrns owning 51 percent and Perez 49 percent, as the vehicle for Perez “to provide capital and support to any agreed upon rural hospitals.”

“Mr. Perez has made it his life’s mission to preserve and protect ‘rural healthcare’ through his various related entities,” the lawsuit states.

In September 2016, the hospital, which was in dire financial straits, signed a management agreement with Hospital Partners and, subsequently, a lease agreement. Byrns then assumed the hospital’s reins.

But in October 2017, the lawsuit charges, “in large part due to the improper audit” by Galloway “and the negative press springing therefrom,” the hospital board demanded that Perez buy out Byrns.

(The audit had raised numerous questions about Byrns, finding that in the 10 months since he had become CEO, he had paid more than $700,000 to Hospital Partners and paid himself a $200,000 salary without board approval. He also received $5,000 in questionable expenses for items such as alcohol, cigarettes, car washes and golf outings, the audit found.)

Perez spent about $2 million to buy out Byrns. But after that, the hospital board declared the old management contract invalid and began discussions with Hospital 

Credit Dan Margolies / KCUR 89.3
KCUR 89.3
Unionville, Missouri, is the county seat of Putnam County.

Partners about a new contract.

‘Bizarre scenario’

On Feb. 28, Hospital Partners was told by the lawyer for the hospital board, Joe Bednar, that the board had decided not to extend its contract and was commencing its own audit “after essentially performing what can only be described as an ‘illegal eviction’” of Hospital Partners.

“In a completely bizarre scenario,” the lawsuit states, Galloway reappeared at the hospital on March 8 and was granted full access to its books and records, even though the hospital was no longer a public entity subject to her jurisdiction.

The suit seeks a court order that Hospital Partners is entitled to remain in control of the hospital and that Galloway “shall immediately retract her prior audits, and publish an update and retraction” and “stay out of the Hospital.”

Bednar, the attorney for the hospital’s trustees, said on Tuesday that the board had not been served with the lawsuit yet, “but, obviously, we’ll defend the lawsuit.”

“We feel we’re in the right in our interpretation of the contracts and we’re offended and disappointed in this lawsuit,” Bednar said.

Galloway’s spokeswoman, Steph Deidrick, asked to comment on the lawsuit’s allegation that Galloway had overstepped her bounds, responded in an email: “When tax dollars are mismanaged, this office absolutely has the authority to audit, as is the case with Putnam County Memorial Hospital. Any claims to the contrary are troubling.”

Deidrick was referring to $7.63 million in voter-approved bonds issued by Putnam County in 2012 to refinance bonds issued six years earlier to pay for improvements to the hospital.

Hospital Partners’ lawyer, Anthony Dylan Gauldin, did not return calls. Gauldin, who received his law degree last year from UMKC School of Law, lists himself as chief legal counsel at EmpowerHMS, one of many companies associated with Perez. 

The battle over control of Putnam County Memorial Hospital takes place as another rural hospital acquired by Perez, Fulton Medical Hospital in Fulton, about 160 miles due southeast, is embroiled in a similar dispute.

Not long after taking over Putnam County Memorial Hospital, Perez negotiated a deal to take over that hospital, which was also troubled. But last month the CEO of the hospital told the Jefferson City News Tribune that the sale had not gone through and the hospital continues to be largely owned by NueHealth, a management company based in Leawood, Kansas.

Dan Margolies is a senior reporter and editor for KCUR. You can reach him on Twitter @DanMargolies.

Bram Sable-Smith reports on health for KBIA in Columbia, Mo. and for Side Effects. @besables

Dan Margolies has been a reporter for the Kansas City Business Journal, The Kansas City Star, and KCUR Public Radio. He retired as a reporter in December 2022 after a 37-year journalism career.
Bram Sable-Smith is the Midwest correspondent for KFF Health News. Email him at brams@kff.org.
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