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Three Small-Town Kansas Hospitals Declare Bankruptcy After Months Of Struggling

Dan Margolies
Jorge Perez, standing in front of EmpowerHMS' Kansas City office more than a year ago, orchestrated the takeover of ailing rural hospitals with the aim of turning them around.

Three Kansas hospitals are among six hospitals once run by a North Kansas City-based company that have filed for Chapter 11 bankruptcy protection.

Two of the three, Horton Community Hospital and Oswego Community Hospital, have closed in the last few weeks. The third, Hillsboro Community Hospital, remains open under the auspices of a court-ordered receivership.  

A spokesman for Kansas Attorney General Derek Schmidt said last week that his office is conducting an ongoing investigation into Horton Community Hospital, but he declined to provide details.

All six bankrupt hospitals at one time were operated by EmpowerHMS, which bought up ailing rural hospitals in Kansas, Missouri and other states with the aim of turning them around. Empower until recently was based in North Kansas City, but its office on 1700 Swift Avenue appears to have been vacated.

The other three Empower-run hospitals that declared Chapter 11 bankruptcy – Drumright Regional Hospital, Fairfax Community Hospital and Haskell County Community Hospital – are in Oklahoma.

A seventh Empower hospital, Washington County Hospital in Plymouth, North Carolina, was the subject of an involuntary bankruptcy petition brought by three creditors last month.

Two other hospitals in Missouri once operated by Empower have also run into trouble.

I-70 Community Hospital in Sweet Springs, Missouri, a 15-bed facility, voluntarily shut down last month. The hospital said it planned to reopen, but federal regulators have cut off its participation in Medicare, typically a death knell for small hospitals.

And Fulton Medical Center in Fulton, Missouri, a 37-bed facility, was placed under new management more than a month ago after it missed payroll and defaulted on its bills.

Nearly all the hospitals in Empower’s stable, more than a dozen in all, have encountered similar financial difficulties.

Credit Briana O'Higgins / KCUR 89.3
KCUR 89.3
This map shows the locations of the Kansas and Missouri hospitals once run by EmpowerHMS that have filed for bankruptcy, closed or been placed under new management.

Hillsboro Community Hospital sought bankruptcy protection in Kansas last week. The other five hospitals filed their petitions in North Carolina on Sunday.  

It’s not clear why the petitions were filed in North Carolina. The North Carolina bankruptcy lawyer representing the hospitals did not return phone calls seeking comment.

Credit Facebook
Horton Community Hospital, which closed last week, was one of three Kansas hospitals declaring Chapter 11bankruptcy.

Also unclear is whether the bankruptcy filings on behalf of the now-shuttered Horton and Oswego hospitals are intended to get them reopened or merely mechanisms for erasing their debts.

A Chapter 11 bankruptcy usually involves the reorganization of a company’s business affairs by restructuring its debts and obligations. However, Chapter 11 can also be used as a vehicle to liquidate a company.

Kansas City bankruptcy lawyer Bruce Strauss, who represents Hillsboro Community Hospital, said he was retained by the hospital’s receiver, Cohesive Healthcare Management + Consulting LLC, with the aim of keeping the hospital up and running.

“It’s an effort to try to save a community hospital, an urgent care facility,” Strauss said.  

Cohesive Healthcare was appointed in January to run Hillsboro after the hospital defaulted on a $9.6 million loan from Bank of Hays and the bank foreclosed.

Strauss said he knew nothing about the other bankruptcy filings in North Carolina.  

Lab billing scheme

Bankruptcy court documents indicate that Health Acquisition Company LLC of Kansas City owns an 80 percent interest in the hospitals and HMC/CAH Consolidated Inc., also of Kansas City, owns 20 percent.

Health Acquisition Company, like Empower, is controlled by Florida resident Jorge Perez, who could not be reached for comment.

Last year, the owners of HMC/CAH, James and Phyllis Shaffer of Mission Hills, Kansas, sued Health Acquisition Company, alleging it fraudulently took over a majority interest in the hospitals. The couple claimed Health Acquisition Company then put in place an illegal lab billing scheme designed to pump up the hospitals’ revenues and to enrich Perez and other defendants named in the lawsuit.

The various bankruptcy filings would block the Shaffers from taking action against the hospitals but not against Perez and the other defendants. 

“There wouldn't be any direct effect on the lawsuit,” C. Brooks Wood, the Shaffers' attorney, said. 

The Shaffers’ allegations are similar to those laid out in a scathing  August 2017 audit of Putnam County Memorial Hospital in Unionville, Missouri, which a company tied to Perez took over in late 2016.

The report on the 15-bed hospital by Missouri Auditor Nicole Galloway revealed the hospital had billed out more than $90 million for lab tests in a matter of months after Perez and his associates took control.

The scheme took advantage of the more favorable reimbursement rates for critical access hospitals, a federal designation intended to bolster the finances of small rural hospitals like Putnam Memorial and the other hospitals acquired by Perez.

In a 2017 interview with KCUR and KBIA, Perez insisted the arrangements were perfectly legal, but other health care experts have questioned their legality.

Perez is no longer involved with Putnam County Memorial Hospital;  the hospital’s trustees ousted his ownership group in early 2018. Perez later sued the hospital and Galloway, claiming the hospital’s action was illegal and Galloway had overstepped her bounds in auditing a privately owned facility. (Although the hospital was privately owned, Putnam County voters approved more than $7.6 million in general obligation bonds in 2012 to refinance previous revenue bonds and renovate a portion of the hospital.)

The lawsuit is pending, although there has been no activity in the case since June 2018, court records show.  

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

As a reporter covering breaking news and legal affairs, I want to demystify often-complex legal issues in order to expose the visible and invisible ways they affect people’s lives. I cover issues of justice and equity, and seek to ensure that significant and often under-covered developments get the attention they deserve so that KCUR listeners and readers are equipped with the knowledge they need to act as better informed citizens. Email me at dan@kcur.org.
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