SCI Probe Raises Questions About State Oversight of Hospitals

Lilo H. Stainton | March 20, 2019 | Health Care
NJ’s watchdog agency finds complex web of corporate and financial ties in entities connected to three for-profit hospitals in Hudson County

Bayonne Medical Center
A trio of for-profit hospitals in Hudson County paid $157 million in consulting and management fees to a network of companies that essentially funneled much of the money to several of the hospitals’ principal owners, according to a new report from an independent fact-finding agency.

The findings, published Tuesday by the State Commission of Investigation, did not allege any impropriety or illegality, but they do raise questions about New Jersey’s capacity to oversee such arrangements and its ability to effectively monitor the fiscal health of its hospital system.

The SCI — which is charged with investigating potential waste, fraud and abuse of government dollars — found that acute-care facilities in Bayonne, Hoboken and Jersey City owned by CarePoint Health System spent tens of millions of dollars with various holding companies, management groups and other “related entities” between 2012 and 2016.

These related entities had few, if any employees and limited expenses on their own, and some were paid to provide what appeared to be duplicative management and consulting services to the hospitals, the commission noted. These companies also enabled three of the hospitals’ principal owners — Vivek Garipalli, James Lawler and Jeffrey Mandler — to benefit from the payments.

CarePoint spokeswoman Jennifer Morrill said the organization supports the recommendations outlined in the SCI’s report and has offered to provide the state with more information, or help craft new regulations. “Transparency is an integral part of CarePoint Health’s mission to provide high-quality care,” she said. “This report confirms CarePoint has acted in good faith within the state’s rules and regulations regarding transparency.”

Buyers kept once-bankrupt hospitals open

The SCI report points out that the commitment of these individuals and others at CarePoint may have prevented the three once-bankrupt hospitals — Bayonne Medical Center, Hoboken University Medical Center, and Christ Hospital, in Jersey City — from closing once again. These owners also took an investment risk in the process, it notes, a burden not usually faced by leaders at nonprofit facilities.

But the complex web of corporate and financial ties uncovered through the commission’s research prompted SCI officials to share their concerns about the state’s ability to regulate the complex ownership systems of some hospitals and properly assess their financial stability.

“Under the current hospital oversight system, DOH cannot be assured that it is fully aware of and properly reviews intertwined ownership structures and the possible risk posed by those structures,” the report states.

To address these gaps, the SCI recommended the state Department of Health, which plays a leading role in regulating hospitals and their ownership, beef up regulations to ensure hospital officials are properly reporting payments to related entities and improve transparency around these entities in general. It should also expand its capacity to track these ownership issues and monitor hospital finances on an ongoing basis.

The DOH, which has been strengthening hospital reporting requirements over the past years, said that very process is continuing. The department is also working on an “internal electronic automated licensing system” that will make it easier for state officials to stay up to date on these complex ownership structures, according to communications director Donna Leusner.

“The mission of the Department of Health is to protect public health, and access to high quality healthcare services. Part of that is assessing the financial health of hospitals,” Leusner said.

“We can’t do that unless financial reporting is done accurately and in a manner that reflects true costs and services,” she added, urging hospitals to properly account for management contracts related to hospital services.

However, if the DOH were to “find management expenses that do not reflect commensurate value in services delivered, the Department would welcome the opportunity to work with the Legislature to ensure appropriate enforcement authority,” Leusner added.

Big changes in business of small hospitals

As healthcare evolves, some smaller community hospitals in rural and urban areas of New Jersey have struggled to survive, leading to a growing number of bankruptcies, closures and mergers with larger systems. Several — including, most recently, Memorial Hospital of Salem County — have been sold to for-profit companies that, in some cases, seek to tweak services to improve their bottom line and economic sustainability.

CarePoint Health, which acquired the three Hudson County hospitals between 2008 and 2012 (they are independently owned, through multiple entities, but operate under the company’s name), also runs community health clinics and other medical services in some of these communities.

The company has occasionally clashed with healthcare institutions like Horizon Blue Cross Blue Shield, with which it settled a $76-million claims dispute lawsuit in 2017 and RWJ Barnabas Health, the state’s largest provider group, which expanded the reach of its Jersey City Medical Center with a Bayonne outpost just blocks from CarePoint’s own hospital there.

“As CarePoint has evolved into the fully integrated system it has become, its singular commitment to continuing to deliver outstanding, patient-centered care to the communities we serve has been unwavering. This commitment remains as we look toward the future in our continued efforts to provide access to vital healthcare services in the communities we serve,” Morrill said. “CarePoint has also recently installed a new leadership team to guide it toward a sustainable future that continues its historic commitment to high quality, readily accessible health care for all.”

The state’s oversight of for-profit healthcare facilities is governed in large part by a 2014 law designed to improve the transparency of hospital finances. The measure — a compromise version of a stronger proposal vetoed by former Gov. Chris Christie — stemmed in part from concerns raised by lawmakers, healthcare unions and other advocates regarding the financial dealings of what was then Meadowlands Hospital Medical Center, in Secaucus.

In 2016, NJ Spotlight published a series of articles on Meadowlands Hospital that exposed a web of complex business entities that were tied to some of the owners, and also received payments from the hospital for various questionable services. The hospital — which has since been sold to another for-profit owner and renamed Hudson Regional Hospital — was also seeking to generate revenue by attracting Russian women to travel to the United States and give birth at the Secaucus facility, a process that would entitle the babies to American citizenship.

Concerns about the state’s ability to manage these increasingly complex deals prompted the 50-year old SCI, which reviews healthcare matters on an ongoing basis, to launch this latest investigation. The commission hopes its recommendations can be integrated with the DOH’s new regulations related to financial transparency.

Details from the SCI report

Among other things, the report concluded that between 2012 and 2016, Bayonne Medical Center paid an entity called IJKG nearly $99 million in monthly management fees and other allocations “in exchange for certain services related to its operations.” Christ Hospital dispersed nearly $30 million over that time to Sequoia Healthcare Management, for the same reason, and Hoboken UMC paid almost $29 million to an unnamed organization for similar services.

Additional research revealed IJKG is essentially a holding company and neither it, nor Sequoia, had any employees. But the SCI determined that both entities funneled payments to Garipalli, Lawler and Mandler in return for their management expertise or the “sweat equity” they invested in rebuilding the hospitals. These three individuals also have ownership stakes in IJKG and Sequoia, through a network of other legal entities. In fact, Garipalli signed on behalf of both Sequoia and a hospital on several consulting deals, the SCI found.

Each of the three hospitals also paid a total of nearly $60 million annually to another management consultant, CarePoint Health Management Associates, which did have a significant staff and payroll, according to the report. Ownership of CPHMA also overlaps with that of the hospital, the SCI notes, but these fees were not included in filings the hospitals made to state regulators.

And IJKG, Sequoia and CPHMA, as well as other related entities and holding companies, all share the same business address in Jersey City, the commission found. “Although these circumstances are not, in and of themselves, evidence of wrongdoing, they do indicate the potential interrelationship of the companies involved and highlight the need for further review,” the SCI wrote.

The SCI urged state health officials to create regulations that clearly define what a “related entity” is and require hospitals to produce financial information detailing their spending with these organizations. Officials should also review payments to these entities to make sure they are not unreasonable, and hospitals should have to provide documentation of these services.

In addition, the state should have access to better information about ownership trusts, the SCI said, and should do more within existing regulations to monitor hospital finances on an ongoing basis.

“Self dealing and conflicts of interest can lead to losses that endanger the health care system, compromise access to hospital care, and bring into question the stewardship of public funds. In particular, transactions with related parties may be entered into for fraudulent purposes rather than for legitimate business purposes,” the report notes, quoting from the DOH’s own report on transparency, issued in 2014.