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Prime Health Care and Dr. Reddy part of $37.5 million settlement over alleged kickbacks and false claims

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LOS ANGELES –  Prime Healthcare, its founder and CEO, Dr. Prem Reddy, and a Victorville cardiologist have agreed to pay a total of $37.5 million to the federal government and the state of California to settle a whistleblower lawsuit filed by Phillips & Cohen LLP that alleged the for-profit hospital chain paid kickbacks to the cardiologist, buying his practice and surgical center for far more than they were worth. 

According to a news release from the law firm, “this appears to be the largest settlement of a case brought against a hospital over kickbacks allegedly paid to a single physician. Prime operates one of the biggest hospital systems in the nation.”

The United States and California entered into a settlement agreement with the Prime Healthcare Services system; Prime’s founder and Chief Executive Officer, Dr. Prem Reddy; and interventional cardiologist Dr. Siva Arunasalam to resolve alleged violations of the False Claims Act and the California False Claims Act based on kickbacks paid by Prime to Arunasalam for patient referrals. Prime includes the Ontario-based Prime Healthcare Services Inc., Prime Healthcare Foundation Inc., Prime Healthcare Management Inc., High Desert Heart Vascular Institute (HDHVI), and Desert Valley Hospital, according to a news release from the California Department of Justice.

Under the settlement agreement, Arunasalam will pay $2 million. Reddy has already paid $1,775,000, and Prime has paid $33,725,000. The United States will receive $35,463,057 of the settlement proceeds, and California will receive $2,036,943.

According to the complaint, Prime and its affiliates: 

  • Bought Dr. Siva Arunasalam’s cardiology business, High Desert Heart Institute (HDHI), and his surgery center in Victorville, California, in 2015 for an amount that was at least three times their total fair market value.·         
  • Paid Dr. Arunasalam a “steeply inflated” salary in exchange for referring patients to Prime’s Desert Valley Hospital in Victorville and shutting down his independent practice and surgery center.
  • In a second fraudulent scheme, submitted falsified invoices to government healthcare plans to claim higher prices for implantable medical devices such as pacemakers than Prime had actually paid. Higher prices meant higher reimbursement for Prime. 

“Doctors are permitted to sell their practices to hospitals and other competitors, but the payment must be for fair market value,” said Edward H. Arens, a whistleblower attorney and partner at Phillips & Cohen in its San Francisco office. “Throwing inflated sums of money at doctors for their medical practices and salaries as a hidden way to get patient referrals isn’t allowed. 

“Our client alleged that Prime baked a kickback into the price it paid Dr. Arunasalam so that he would send his patients to Prime,” Arens said. “Such arrangements usually result in higher prices charged to Medicare and Medicaid, which is why Congress prohibited them.” 

The complaint alleges that both Dr. Reddy and Dr. Arunasalam “knew and intended that [Dr. Arunasalam] would receive an outsized salary and above-market payment for his practices in exchange for referring his patients to [Desert Valley Hospital] where they would receive the same services at higher prices.”

According to the US Department of Justice in 2018, Prime and Reddy paid $65 million to settle unrelated allegations of false claims and overbilling.

“Doctors have a sworn duty to do no harm and to put their patients’ interests first,” said Acting United States Attorney Tracy L. Wilkison. “Kickbacks designed to increase the number of patient referrals corrupt the doctor-patient relationship and needlessly waste this nation’s health care resources.”

“Offering illegal financial incentives to physicians in return for patient referrals undermines the integrity of our health care system by denying patients the independent and objective judgment of their health care professionals,” said Acting Assistant Attorney General Brian M. Boynton of the Justice Department’s Civil Division. “Today’s settlement demonstrates the department’s commitment to protect federal health care programs against such violations, as well as other efforts to defraud these important programs.”

The whistleblower, Martin Mansukhani, was a regional chief financial officer for Prime from 2012 to 2017. Phillips & Cohen filed a qui tam lawsuit on his behalf in 2018 in federal district court in Riverside, California.

“Our client expressed concerns to upper management about the asset purchase arrangement and the employment agreement, but he was ignored and then sidelined,” said Arens.

To carry out its alleged scheme involving reimbursement for implantable devices such as pacemakers and joint replacements, Prime centralized its billing and collections using a small team of employees.

“We allege that one office became a ‘falsification factory’ that systematically altered invoices and purchase orders to make it appear that Prime spent more on implants than it really did,” said Molly Knobler, a whistleblower attorney at Phillips & Cohen. “Since Medi-Cal and other government healthcare programs reimburse healthcare providers based on the cost of implantable devices, inflating those costs is a way to fraudulently generate additional revenue.”

“In our cities and neighborhoods, hospitals are where we go for healing and care, which means they have to be a place that the people they serve can trust,” said California Attorney General Rob Bonta. “Today’s settlement should send a message that schemes like those alleged here, that put profits before people and seek to defraud our Medi-Cal program, will not be taken lightly.”

Prime Healthcare released the following response in regards to the DOJ settlement:

“Prime Healthcare, an award-winning national hospital system, announced today that it has reached a settlement with the Department of Justice (“DOJ”) on two related civil matters, with a complete release of any liability and no finding of fault.

The settled matters related to an isolated, single physician practice in Southern California between 2015-2017 and billing of forty-five implantable device claims. The allegations did not involve patient care, but instead related to the valuation of a physician practice and the appropriate documentation for a limited number of implant claims totaling approximately $200,000. As soon as these matters were identified, Prime conducted an exhaustive internal review, fully cooperated with the DOJ and negotiated a mutually acceptable resolution.

In order to ensure continued transparency, Prime has agreed to amend its current Corporate Integrity Agreement (“CIA”) to include testing on physician compensation arrangements as part of the settlement. CIAs are standard monitoring agreements in the healthcare industry and Prime has operated successfully under a CIA since 2018 and remains in full compliance. This settlement has already been fully disclosed and reserved in the 2020 year-end financials and audit report.

“This settlement creates resolution and allows Prime to focus on its mission of saving hospitals to save lives,” said Joel Richlin, Prime Healthcare General Counsel. “Our mission is to save hospitals and ensure compassionate, quality care is available in every community, which is now more important than ever before. As a physician-led health system nationally recognized for clinical excellence, Prime Healthcare always honors the integrity and independence of the physician-patient relationship. We are well positioned for future growth and will continue executing on our strategic plan, remaining steadfast in providing excellent and compassionate care to all patients during this unprecedented time.””

DOJ’s lists of allegations resolved by settlement:

• Prime paid kickbacks when it overpaid to purchase Arunasalam’s physician practice and surgery center because the company wanted Arunasalam to refer patients to its Desert Valley Hospital in Victorville. The purchase price, which was substantially negotiated by Reddy, exceeded fair market value and was not commercially reasonable. Prime also knowingly overcompensated the doctor when HDHVI entered into an employment agreement with him that was based on the volume and value of his patient referrals to Desert Valley Hospital;

• For approximately two years between 2015 and 2017, HDHVI and Arunasalam used Arunasalam’s billing number to bill Medicare and Medi-Cal for services that were provided by Dr. George Ponce, even though they knew Ponce’s Medicare and Medi-Cal billing privileges had been revoked, and that billing Ponce’s services under Arunasalam’s billing number was improper; and

 • Certain Prime hospitals billed Medi-Cal, the Federal Employees Health Benefits Program, and the U.S. Department of Labor’s Office of Workers’ Compensation Programs for false claims based on inflated invoices for implantable medical hardware. Arunasalam was not implicated in this conduct. 

The Anti-Kickback Statute prohibits offering, paying, soliciting, or receiving remuneration to induce referrals of items or services covered by a federal healthcare program, such as Medicare, Medicaid or TRICARE. Claims submitted in violation of the Anti-Kickback Statute may give rise to liability under the False Claims Act.

In connection with the settlement, Prime and Reddy entered into a five-year Corporate Integrity Agreement (CIA) with the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG). The CIA requires, among other things, that Prime maintain a compliance program and hire an Independent Review Organization to review arrangements entered into by or on behalf of its subsidiaries and affiliates.

“Federal healthcare funds are integral to the provision of necessary medical services to beneficiaries across the country,” said Special Agent in Charge Timothy B. DeFrancesca of the Office of Inspector General for the U.S. Department of Health and Human Services. “Therefore, we will address any actions, including those alleged in this case, that could compromise the system on which many patients rely. We will continue working with federal and state prosecutors to guard taxpayer funds that support these vital programs.”

The civil settlement includes the resolution of claims brought under the qui tam, or whistleblower, provisions of the False Claims Act in two lawsuits filed in federal court in Los Angeles. One suit was filed by Martin Mansukhani, a former Prime executive. The second suit was filed by Marsha Arnold and Joseph Hill, who were formerly employed in the billing office at Shasta Regional Medical Center, a Prime hospital in Redding, California.

Under the qui tam provisions of the False Claims Act, a private party can file an action on behalf of the United States and receive a portion of any recovery. Although the United States did not intervene in these cases, it continued to investigate the whistleblowers’ allegations and helped to negotiate the settlement announced today. Mr. Mansukhani will receive $9,929,656 as his share of the federal government’s recovery.

The cases are United States and the State of California ex rel. Martin Mansukhani v. Prime Healthcare Services, Inc., et al., CV18-371-RGK (C.D. Cal.); and United States and the State of California ex rel. Marsha Arnold and Joseph Hill v. Prime Healthcare Services, Inc., et al., CV18-2124-FLA (C.D. Cal.).

The resolutions obtained in these matters were the result of a coordinated effort among the U.S. Attorney’s Office for the Central District of California; the Civil Division’s Commercial Litigation Branch, Fraud Section; the California Attorney General’s Office’s Division of Medi-Cal Fraud and Elder Abuse; and HHS-OIG. 

The investigation and resolution of this matter illustrates the government’s emphasis on combating health care fraud. One of the most powerful tools in this effort is the False Claims Act. Tips and complaints from all sources about potential fraud, waste, abuse, and mismanagement, can be reported to the Department of Health and Human Services at 800-HHS-TIPS (800-447-8477).

The cases were handled by Assistant U.S. Attorneys Jack D. Ross and Abraham C. Meltzer, and Senior Trial Counsel Marie V. Bonkowski of the Justice Department’s Civil Division.  

The claims resolved by the settlement are allegations only and there has been no determination of liability.

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