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Lawsuits follow Allegiance Health: hospital management firm faces problems including tax liens.

The abrupt resignation last month of the CEO of North Metro Medical Center in Jacksonville is the latest in a series of problems facing the company that manages the hospital, Allegiance Health Management Inc. of Shreveport.

* A whistleblower lawsuit filed in 2010 in U.S. District Court in Arkansas accused Allegiance Health of providing medically unnecessary psychotherapy services. The case against Allegiance is pending, but 16 of its client hospitals--including two in Arkansas--recently agreed to pay almost $16 million to settle the False Claims Act allegations.

* Since December, the IRS has filed three federal tax liens against North Metro Medical Center for not paying a total of $1.8 million in payroll taxes in 2014.

* North Metro Medical Center has been sued six times by vendors since May 2014 for not paying its bills. None of the bills exceeded $60,000 and one was less than $5,400.

* The city of Pocahontas fired Allegiance Health Management in 2008 after less than a year of managing the city's Five Rivers Medical Center. The city paid $300,000 to settle a breach-of-contract claim filed by Allegiance, and after years of struggling financially, the hospital reported an improved financial picture in 2014. (See sidebar.)

Rock Bordelon, Allegiance's founder, president and CEO, didn't return several calls from Arkansas Business. Chief Operating Officer Don Cameron and one of the company's attorneys, R. David Freeze of Texarkana, Texas, also didn't return calls.

In addition to North Metro, Allegiance operates hospitals in Eureka Springs and Dardanelle. It began doing business in Arkansas in 2007,

The administrator at River Valley Medical Center in Dardanelle didn't return a call for comment last week, but a member of the hospital commission in Eureka Springs praised Allegiance's work.

"The hospital is doing very well," hospital commissioner Pamela Crockett told Arkansas Business. "Patients are happy. ... I have heard no complaints about the way the patients are treated."

The relationship with the hospital commission wasn't always friendly. The Board of Commissioners of Eureka Springs Hospital sued Allegiance in 2009 in a dispute over a $162,000 payment Allegiance received. Crockett, who chaired the commission at the time, said the case was settled and the issue was "behind us."

Litigation

Lawsuits filed in Arkansas suggest the company has a track record of unpaid bills and questions about its management. Allegiance's biggest headache, though, stems from the allegations in the whistleblower lawsuit.

In May, the U.S. Department of Justice announced that 16 hospitals had agreed to pay $15.7 million to settle their parts of the case. Those included Southwest Regional Medical Center in Little Rock, which is now closed, and Summit Medical Center in Van Buren.

Both were operated by Health Management Associates Inc. of Naples, Florida, but intensive outpatient psychotherapy services for the hospitals were typically provided by Allegiance Health, according to DOJ's news release.

All of the documents in the case have been filed under seal, which is the practice with federal whistleblower cases. Attorney Cliff Johnson of Jackson, Mississippi, who represents the whistleblower, Ryan Ladner, a former employee at an Allegiance facility in Mississippi, offered some insight.

"We certainly believe, based on the information available to us, that [Allegiance] was part of a far-reaching scheme to get money from Medicare that never should have been paid," Johnson said, "a scheme that involved dozens of hospitals from several states, including Arkansas."

Johnson said Medicare might have lost "tens of millions of dollars" in the billing program between 2005 and 2013.

Allegiance Health has denied the allegations of wrongdoing.

"Allegiance remains confident that the outpatient psychiatric services provided in the [intensive outpatient psychotherapies] managed or operated by Allegiance were medically necessary and appropriate as has been confirmed by various government contractors and agencies on multiple occasions through audits, surveys and other inquiries," Michael Schulze, an attorney for Allegiance, said in a statement quoted by the Associated Press.

The Founder

A few years after graduating from high school in 1991, Bordelon became a licensed practical nurse, according to a deposition he gave in June 2013 as part of the breach-of-contract suit Allegiance filed against the city of Pocahontas. He said he had attended Louisiana State University at Alexandria and Phoenix University but left the programs before graduating.

In 1998, Bordelon started working for a nursing home chain and managed 12 nursing homes, an acute care hospital and a psychiatric hospital. He left that company in 2002 to start Allegiance Health Management.

The company grew to manage inpatient geriatric psychiatric units, intensive outpatient psychiatric services and hospitals.

By 2013, Bordelon said in the deposition, Allegiance had between 35 and 40 employees and owned five hospitals. It also had five or six contracts for outpatient psychiatric services at the time. It is unclear how many health care facilities Allegiance operates now.

The Pitch

To persuade the owners of a hospital to let Allegiance operate the facility, Bordelon said in his deposition, Allegiance's "spiel was basically ... we are a company that comes in and our goal, our desire is to grow the hospital, to make it successful."

He said he discourages potential customers from partnering with larger hospitals.

"Those guys tend to reduce your business and try to bring as much as they can upstream," Bordelon said. "And we are the exact opposite. You are our revenue strength. The hospital is what makes us live."

The sales pitch worked. In 2007, Allegiance signed management contracts to operate hospitals in Pocahontas, Eureka Springs and Dardanelle. It added North Metro in Jacksonville in 2009. It bought North Metro's property and a day care center from the city of Jacksonville in 2012 for $10.2 million.

Problems With Allegiance

Not all the hospitals enjoyed working with Allegiance, however. The city of Pocahontas fired Allegiance for paying itself a management fee that the city said it wasn't entitled to, even though the hospital lost money during that period.

In addition, doctors weren't impressed with the management of the hospital. In March 2008, the doctors at the Pocahontas Medical Clinic gave a vote of no confidence in Allegiance, according to a letter from the clinic that was part of the court record in the Allegiance lawsuit against the city. Allegiance said in the lawsuit that it was entitled to recover the maximum management fee of $50,000 a month, or $1.6 million, as a result of the termination of its contract. Allegiance eventually agreed to settle the case for $300,000.

In Jacksonville, an internal dispute became public when Joe Farrer resigned as CEO of North Metro Medical Center on Sept. 9 after only three months on the job. Farrer, a Republican serving his second term in the state House of Representatives, told Arkansas Business that he didn't think Allegiance had managed the hospital properly.

"They weren't paying the vendors," Farrer said. Several vendors have sued Allegiance over unpaid bills.

North Metro reported losing $4.2 million on net patient revenue of $20.7 million for the fiscal year that ended June 30, 2014.

When he became CEO, Farrer said, he was trying to get the hospital's financial house in order. But trouble arose when he wanted to fire Dr. Tracy Phillips.

Phillips was cited for DUI in 2012, and Farrer said alcohol was found in the physician's lounge Phillips had used.

Still, "I could not prove that he had been drinking at all," Farrer acknowledged.

Farrer claimed that Phillips had put his resignation on Farrer's desk, but CEO Bordelon and COO Cameron "basically reinstated him."

Phillips vehemently denied any wrongdoing and denied Farrer's version of the events. Phillips told Arkansas Business that he and Farrer had "butted heads," and Farrer wanted him gone.

"So he concocts this rumor about me drinking alcohol," Phillips said. "There was no alcohol issue whatsoever."

Phillips said he volunteered to be regularly tested for alcohol and hasn't had a drink in nearly two years.

Farrer said CEO Bordelon and COO Cameron pushed to keep the doctor, who ended up staying.

"Why would they put their hospital in jeopardy like that? I don't have the answer," Farrer said. "I wasn't going to be a part of it. I'm responsible for every patient in that hospital, ... and I couldn't do it."

Allegiance had sold itself to hospitals with its strategy of improving a hospital's finances by offering outpatient psychiatric services, Bordelon said in the 2013 deposition.

"The way the outpatient services work, you have to provide the services for a month, and then, after you provide services for a month, build up the census, build up the program, start receiving funds," he said. "It is typically 90 to 120 days later before you start seeing a profit for that type of service."

But once it was up and running, the program "would make the hospital even more profitable," Bordelon said.

Johnson, the attorney in the whistleblower case, said that Allegiance approached dozens of hospitals in several states and offered the service. All Allegiance needed from the hospitals was some space and authority to bill through the hospital's Medicare provider number, Johnson said.

In exchange, the hospitals got 20 percent of the amount reimbursed by Medicare, and Allegiance kept the rest, he said.

"It was a something-for-nothing proposition," Johnson said.

Some small, rural hospitals were attracted to the offer because they desperately needed revenue, he said.

"The temptation is there to defer to a company like Allegiance and their alleged expertise," Johnson said. "It's an interesting, unfortunately, not unusual story. People see significant dollars that are available though federal programs, and they do whatever they have to to access them."

In 2005, Allegiance began operating Inspirations Outpatient Psychiatric Counseling from space at Southwest Regional Medical Center in Little Rock. That arrangement lasted until 2011, when Allegiance left the building, leaving behind almost $200,000 in unpaid rent, according to documents filed in Pulaski County Circuit Court. Allegiance eventually settled that lawsuit.

It's unclear how long Allegiance worked with Summit Medical Center in Van Buren. Summit became part of Sparks Health System of Fort Smith in February.

Investigation

The alleged scheme began to unravel in July 2007 when Allegiance hired Ryan Ladner as a director of one of its facilities in Mississippi, Johnson said.

Ladner had "absolutely no health care background," Johnson said. "He had worked in a mortgage company and in the hardwood flooring business. And they hired him as a director of an intensive outpatient psychotherapy program, which is telling."

When Ladner started investigating the Medicare regulations, he "realized there was a real problem," Johnson said. The services that Allegiance was providing didn't qualify for Medicare reimbursements, according to the Department of Justice news release.

Ladner left Allegiance in January 2008, after only six months on the job, and filed his whistleblower lawsuit in 2010 under the False Claims Act. The act allows private citizens to sue on behalf of the United States and share in any settlements or judgments that result.

The U.S. Attorney's Office for the Eastern District of Arkansas is pursuing Ladner's lawsuit.

In October 2013, federal prosecutors settled similar allegations against LifePoint Hospitals Inc. of Brentwood, Tennessee, and two of its subsidiaries for $4.7 million.

LifePoint said in a 2012 U.S. Securities & Exchange Commission filing that Allegiance had managed the outpatient psychiatric program. In 2011, one of LifePoint's hospitals voluntarily disclosed its concerns regarding these services to the" Office of Inspector General.

Ladner will receive more than $3 million from the settlements, Johnson said.

"The interesting question will be whether Allegiance seeks to resolve these matters through a settlement or risks the long-term viability of the company by taking this matter to trial and subjecting itself to the substantial damages and penalties that it would face if it chooses to go forward," Johnson said.

Allegiance Disputed Dumas Hospital Deal

In addition to more recent disputes, Allegiance Health Management Inc. of Shreveport also ended up in litigation over the management contract for Delta Memorial Hospital in Dumas.

Craig Ortego, owner of Quality Health Management Inc. of Lafayette, Louisiana, had experience operating rural hospitals and began working with Allegiance CEO Rock Bordelon around 2004. Ortego was responsible for bringing several hospitals to Allegiance, including Five Rivers Medical Center at Pocahontas.

That business arrangement with Ortego soured in 2009 when Allegiance accused Ortego of fraud in a lawsuit filed in Pulaski County Circuit Court.

Allegiance said it had received a lead in 2008 that Delta Memorial Hospital in Dumas was interested in contracting with a hospital management firm. Ortego offered to investigate the lead. He reported that Delta was only interested in limited services and he ended up taking the job.

Allegiance said it later learned that Ortego had signed a general management contract to operate Delta. Allegiance sued but asked that the case against Ortego be dismissed less than six months after it was filed.

"I really cannot speak about that," Ortego, who hasn't worked with Delta Memorial for several years, told Arkansas Business. "I'm sorry... but there's a lot of reasons why, but I just cannot speak about the company."

--Mark Friedman

Pocahontas Hospital Reports Improved Health

Five Rivers Medical Center in Pocahontas nearly closed in 2007.

"This hospital has had a history for probably 15-plus years of being financially troubled," CEO Luther Lewis recently told Arkansas Business in his office at the 50-bed hospital.

Its worst year came in 2013, when the city-owned hospital reported a $2.4 million loss on $16.3 million of patient revenue.

Five Rivers was in the same boat as other small, rural hospitals, Lewis said. It didn't treat enough patients to cover its expenses.

But Lewis credited federal health care reform for a dramatic improvement in the hospital s financial picture. Patients who obtained insurance through Arkansas' Medicaid expansion known as the "private option" contributed about $700,000 in patient revenue to the hospital in 2014, he said.

The additional insurance revenue combined with ruthless expense control resulted in the best financial performance in decades: net income of $651,000 on patient revenue of $13.6 million. Lewis said the hospital is on a path to post similar numbers for 2015.

Lewis, 63, was named CEO of the hospital in September 2011, and he soon discovered that he had taken on a bigger turnaround project than he had anticipated.

Even though a 1 percent sales tax generated about $1 million a year to support the hospital, it wasn't enough to offset its losses.

Lewis began slashing programs. One of the first to go was the outpatient psychiatric program that was started by the hospital's former manager, Allegiance Health Management Inc. of Shreveport. Allegiance, which had managed the hospital for less than a year when the city terminated its contract in 2008, touted outpatient psychiatric services as a way to improve a hospital's finances.

But that didn't work at Five Rivers. "That program was losing $25,000 a month," Lewis said. "There were just not enough patients in our service area to support the program."

That program ended in 2012. And between 2012 and 2013, Lewis trimmed the hospital's staff from 190 full-time equivalents to 130.

The employees who remained saw their benefits shrink and are now covering more of the cost of their health insurance. Employees haven't had a raise since 2012, and the approximately 15 managers at the hospital took a 10 percent pay cut, Lewis said.

"I can't stress enough how much the employees contribute to the success that we're seeing today," he said.

The hospital is finally paying down outstanding debts. "We're real close to having everything current, which is the first time in many, many years," Lewis said.

He wants the hospital to continue to grow its cardiology services in 2016. Lewis also would like to see employees receive raises.

"By and large, we're over the hump, but we've got to keep focusing on new opportunities that this hospital can provide to the citizens of this area," he said.

Someday, he'd like to offer OB-GYN services so expectant mothers in Pocahontas don't have to drive nearly an hour to deliver. To get into the baby business would cost about $10 million.

"It's not impossible," Lewis said. "We just got to keep building our basics here... and just have that on the table for a long-term project."

--Mark Friedman

By Mark Friedman

MFriedman@ABPG.com

[PHOTO BY KAREN E. SEGRAVE]

Caption: State Rep. Joe Farrer resigned as CEO of North Metro Medical Center in Jacksonville after a dispute with Allegiance.

[PHOTO BY MARK FRIEDMAN]

Caption: North Metro Medical Center, Jacksonville.

Caption: Luther Lewis
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Title Annotation:SPOTLIGHT: Hospitals
Comment:Lawsuits follow Allegiance Health: hospital management firm faces problems including tax liens.(SPOTLIGHT: Hospitals)
Author:Friedman, Mark
Publication:Arkansas Business
Geographic Code:1U7LA
Date:Oct 5, 2015
Words:2753
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