December 1, 2014

Meet the CEO behind the country's fastest-growing hospital system

Daily Briefing

Modern Healthcare's Beth Kutscher takes an in-depth look at Prime Healthcare Services CEO Prem Reddy and his strategies for turning around failing hospitals.   

Since it was founded in 2001, Prime Healthcare has grown to include 29 hospitals, and there are deals in place to add 11 more. According to Modern Healthcare, this makes Prime Healthcare the nation's fastest-growing hospital chain.

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Where Reddy learned how to turned around bankrupt hospitals

Reddy was born in a small village in India and knew he wanted to be a cardiologist from a young age. In 1976, he moved to New York with his wife to begin a cardiovascular disease residency. The pair relocated to Apple Valley, California, five years later.

From 1985 to 1990, Reddy founded Desert Valley Medical Group, a conglomeration of managed-care facilities, and PrimeCare International, a physician-practice management company now operating in several states.

In 1994, he opened Desert Valley Hospital with $7 million in private funding and $15 million from a real estate investment trust.

Reddy sold Desert Valley and PrimeCare, but repurchased Desert Valley in 2001 after the new owners improperly managed the acquisition. The hospital lost nearly $7 million in its first nine months, but it was just $3 million in the red by the end of the year. It turned a profit in year two. 

Reddy says, "That's when I learned exactly how to turn around a bankrupt hospital." And according to Kutscher, he quickly realized the concepts applied at Desert Valley would be applied to other failing facilities.

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That same year, Reddy founded Prime Healthcare Services.

Taking his turnaround approach national

Reddy's experience in turning around failing hospitals proved useful as he has expanded his hospital network throughout the years.

For instance, Prime in 2006 entered a $30 million bid to purchase Paradise Valley Hospital, an Adventist Health-owned safety-net facility near downtown San Diego that needed a $61 million renovation to make it "earthquake-compliant."

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After a nine-hour public hearing, Prime was granted the takeover—despite fierce opposition from some prominent physicians, including cardiologist Jerome Robinson. At the time Robinson said, "We are not-for-profit [and] [i]f we do anything with the profits that come from the sale of Paradise Valley Hospital, they need to stay in this community." During the hearing, Reddy says, "only one person spoke in favor—and that was me."

Now, Robinson praises the takeover. "In order to manage and stay open, we needed to be smarter," he says, adding, "What we've been able to see as a result of that: failing hospital eight years ago, not failing hospital today."

According to Kutscher, Reddy uses several specific tactics to turn around Paradise Valley and other hospitals, including:

  • Negotiating better deals from insurers;
  • Adding profitable service lines, like orthopedics and spine and joint facilities;
  • Meticulously studying billing codes and educating physicians on clinical documentation to ensure the hospital receives the greatest reimbursement possible;
  • Cutting unnecessary administrative positions; and
  • Keeping out unions.

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Prime also strove to bring down wait times at Paradise Valley, with protocols that aim to admit patients within a two-hour timeframe or send them home in under 90 minutes. Previously, the hospital's average wait time was 5.5 hours.

The commitment to keeping wait times low has helped the hospital increase its volumes and earned praise from the community. Paul Manos, an ED physician at the hospital, says, "It actually changed the entire community," explaining, "It has sort of become a standard for San Diego County."

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Prime continues to grow

Reddy says Prime's mission focuses on two principles: Saving as many hospitals as possible and expanding the network in California and elsewhere. 

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Currently, Prime is in a bid to purchase the Los Altos, California-based Daughters of Charity Health System, pledging nearly $843 million to the six-hospital system, including debt assumption. The acquisition would add about $1.3 billion in revenue to Prime's $2.5 billion, which would make the system the fifth-largest investor-owned chain in the country.

Daughters serves some of the area's lowest-income communities, and some of its commercial contracts pay reimbursement rates below the Medicare rate. Reddy says, "Its size is challenging—and I do these things for challenges," adding, "It best fits into my mission of saving the hospital, saving lives, and saving jobs."

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However, the takeover has many opponents, including the Service Employees International Union-United Healthcare Workers West. The union is pressuring California Attorney General Kamala Harris, who has the power to veto the takeover, with a "full-scale media and advertising blitz" that accuses Prime of overbilling Medicare and Medicaid, improperly admitting patients to the ED, and canceling contracts with insurers.

Meanwhile, Rep. Mike Honda (D) has written to Harris, "urging her thoughtful consideration on the impact of the quality and access to health care when she reviews the sale."

Harris has until February to approve the sale. Daughters CEO Robert Issai during an investor call said, "This is the superior solution to all that was available for us," adding, "We're very excited and the future looks very bright."

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According to Kutscher, Reddy is gearing up to take Prime through an IPO within the next two to three years (Kutscher, Modern Healthcare, 11/29 [subscription required]).

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