SCI: CarePoint owners used shell companies to extract $157M from 3 hospitals

Taken from Politico Pro

By Sam Sutton

03/19/2019

The principal owners of CarePoint Health set up shell companies to pull more than $157 million in “management fees” from the three Hudson County hospitals they rescued from insolvency, according to a report from the New Jersey State Commission of Investigation.

Between 2013 and 2016, Bayonne Medical Center, Christ Hospital in Jersey City and Hoboken University Medical Center paid annual amounts ranging from $6.3 million to $33.3 million to a pair of entities, IJKG and Sequoia Healthcare Management, that were controlled by the for-profit health system’s three principal owners — Vivek Garipalli, James Lawler and Jeffrey Mandler.

The SCI found that neither entity had any employees and had little in the way of operating expenses. But both had been contracted to provide “certain services” related to the management and operation of each of CarePoint’s hospitals.

IJKG collected the bulk of the fees — almost $99 million — from Bayonne Medical Center. Christ Hospital and Hoboken University Medical Center paid more than $58 million combined to Sequoia. Neither entity collected revenue from any other client or source, according to the report.

According to SCI, Garipalli, the former Blackstone Group executive who orchestrated CarePoint’s 2013 formation and the acquisition of the three hospitals, testified that the payments were intended as an “incentive” to CarePoint’s owners and operators, and were only made if the hospitals were covering their expenses, loan obligations and covenants.

In 2016, when CarePoint laid off about 90 employees, the three hospitals coughed up roughly $30 million to IJKG and Sequoia. A separate LLC linked to Mandler, then CarePoint’s CEO, was also receiving $10,000 a week in compensation during that time, according to the SCI report.

Separately, all three hospitals had management services contracts with an LLC called CarePoint Health Management Associates, which labor department records indicate employed more than 350 people and paid out roughly $30 million in salaries. Garipalli holds an 80 percent stake in that LLC through several unique structures, according to the SCI report.

“Although these three individuals have provided services to the three CarePoint Health hospitals, the extent of the services leading to more than $157 million in management fees and allocations for a four-year period is unclear,” the SCI report stated, adding that the circumstances of these arrangements “do not necessarily establish impropriety.”

The primary beneficiary of these arrangements appears to have been Garipalli, who holds controlling or majority interests in the myriad LLCs and trusts connected to the “intertwined” ownership structures of CarePoint, the hospitals and the shell companies, according to the report.

In 2016, Garipalli was revealed to be the source of a $1 million donation to a super PAC with ties to Jersey City Mayor Steven Fulop, who was then weighing a run for governor.

Garipalli, who is also the founder of Medicare Advantage PPO carrier Clover Health, was on a flight and could not be immediately reached for comment, according to a spokesperson.

Last year, CarePoint was at the center of the fight surrounding New Jersey’s out-of-network bill, which bars hospitals and doctors from balance billing patients in emergency and surprise situations and established an arbitration process for providers and insurers to resolve billing disputes.

For years, CarePoint was notorious for operating outside the networks of the state’s largest insurance carriers, which resulted in the three Hudson County hospitals billing some of the highest rates in the country for common medical procedures — including excessive rates for out-of-network care delivered in emergency rooms.

The SCI recommended the state Department of Health develop new mechanisms by which it can better understand the management structures and ownership groups controlling hospitals in the state. A 2008 New Jersey law that established an “early warning system” by which the health department can determine if a hospital is on the verge of financial collapse doesn’t account for the types of transactions engaged in by CarePoint, according to the report.

“The Department is already working on an internal electronic automated licensing system which will keep up-to-date records of management structures in hospitals. The Department is also actively working on the second phase of hospital transparency regulations,” according to a statement provided by the Department of Health. “If, through financial transparency and reporting, the Department 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.”

In a statement, CarePoint spokesperson Jennifer Morrill said CarePoint supported the SCI’s findings.

“This report confirms CarePoint has acted in good faith within the state’s rules and regulations regarding transparency,” she stated. “CarePoint supports the suggestions in this report and has offered its commitment to the Department of Health to share additional information and to help craft supplemental reporting requirements beyond the extensive ones that are already in place. These ongoing discussions will now benefit from the recommendations in the SCI’s report.”

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