When a Conflict of Interest Claim Fails


The Citizen

SUTTER vs THE DISTRICTReeling in debt and forced to file bankruptcy in 2007, Valley Health System, the local healthcare district representing two Inland Empire hospitals was in dire need of help, by most accounts, struggling with barely over two week’s worth of operating cash on hand. Its two underperforming hospitals, Hemet Valley Medical Center and Menifee Valley Medical Center, were being courted by the Physicians for Healthy Hospitals, a 132-person doctor’s group led by local physician Dr. Kali Chaudhuri, but a rapidly growing Southern California hospital chain with an affinity for gobbling up facilities from the scrap heap of bankruptcy was lurking.

Dr. Prem Reddy’s Prime Healthcare, the same group who attempted a bid for San Leandro Hospital last summer, had the two facilities in his sights so much that he purchased a small portion of the district’s debt to become a creditor. When a bankrcuptcy judge approved the sale to the physicians group in October for $162 million, Prime was the only creditor to vote against the deal. Prime charges they were being shutout from making an offer and labeled District’s proposed sale to the doctor’s group an insider deal. In December, 87 percent of resident approved the sale of the district’s assets to Physicians for Healthy Hospitals, but Prime charged three members of the district’s board of having conflicts of interest in making the deal with Chaudhuri and the doctor’s group.

The issue may have a direct impact to the Eden Township Healthcare District’s allegation that two members of the board were employed by Sutter Health along with the CEO of Eden Medical Center, when they signed the infamous 2007 agreements that now put the future of San Leandro Hospital in doubt.

The interesting role-reversal in the Riverside case highlights just how difficult proving a conflict of interest may be for the Eden Township District. U.S. Bankruptcy Judge Peter Carroll, who approved the sale to the physicians group, ruled against Prime’s conflict of interest allegation April 8. In court documents, Prime charged three members of the healthcare district, known as Valley Health Systems, with being employed by a facility with ties to Chaudhuri or having a spouse who did. Carroll dismissed all of Prime’s claims, including the conflict of interest claims.

In the Eden Township Healthcare District countersuit against Sutter, current board member Dr. Rajendra Ratnesar, former member Dr. Francisco Rico and Eden Medical Center CEO George Bischalaney were alleged to have had financial ties to the negotiation and implementation of the 2007 Memoradum of Understanding which Sutter agreed to rebuild Eden Medical Center and allow San Leandro Hospital two years to turn a profit. At the time of the agreements, Bischalaney also served as the CEO of the Eden Township Healthcare District. In a response to the District’s allegations, Sutter denied any conflict of interest and said Bischalaney had recused himself from the negotiations.

A Hayward attorney, who chose not be named, said the main difference between the two cases may favor the Eden Township Healthcare District. Without speculating to its outcome, the attorney said it may be less difficult for the District’s lawyers to prove a conflict since Sutter readily admits two of three people in the lawsuit served on the negotiating team rather than the more specious claim by Prime that the healthcare boardmembers in Riverside conducted business with the doctor’s group in a surreptitious manner. Eden Township Board Chair Carole Rogers has publicly said numerous times the conflicts of interest claims against the three can be proven merely by a quick look at the W-2 forms, but it will take more than showing a pay stub from Sutter to sway a judge.

In the Riverside case, the judge dismissed Prime’s allegations against the three board members calling them “remote and speculative,” despite apparent ties to Chaudhuri. The courts decision, instead, was based on the direct ties between the doctor’s group and the agreement made with Valley Health Systems. In all three instances, the judge ruled against any violation of the state’s conflict of interest code 1090 since none of the members were employees or investors of Chaudhuri’s investor group.

The ruling could put a damper on the validity of the District’s claim against Sutter. One Valley Health System board member Dr. William Cherry was found to not have a conflict with the deal despite working for a medical group of which Chaudhuri owned 38 percent and was chairman. According to court papers, six of the initial investors in Physicians for Healthy Hospitals came from this medical group. Another, Dr. Vinay Rao, described as an “at will” employee, worked for Hemet Surgery of which Chaudhuri was an investor. And board member Madeleine Dreier, who is married to a former chief of staff of one of the two hospitals the doctor’s group stands to purchase, although the judge ruled his appointment to the position occured five years before their marriage. Nevertheless, the judge failed to view the petitioner’s claims reached the legal threshold of conflict of interest. One county official told The Citizen, it is going to be difficult for the District to prove any wrongdoing when Rico and Ratnesar can simply say they were acting in the best interest of the District at the time.

Rogers dismissed the Prime case in Riverside has bearing on their current legal battle with Sutter and an attorney for the District declined to comment on the whether the decision could be used as precedent against the District’s case.

Prime Healthcare owns 13 hospitals in the state, primarily in the Southern California. Its business model of canceling existing insurance and employee contracts along with funneling more patients through the emergency room is controversial among health care officials. Purchasing hospitals out of bankruptcy is nothing new for Prime. A majority of its acquisitions have been underperforming hospitals.

A recent turnaround of a facility in Redding last year brought Shasta Regional Medical Center from bankruptcy to $38 million in revenue in one year, but the miraculous comeback did not come without problems. The area’s other hospital was inundated with patients after insurance companies spurned by Prime’s business model urged their customers to visit nearby Mercy Hospital instead, causing it to be overrun and later cited for health violations after the steep increase in volume.

Categories: Eden hospital, Eden Township, Prem Reddy, Prime, S.L. Hospital, Sutter

4 replies

  1. I have a copy of this case and I previously read it. Your presentation is pretty fair and accurate.


  2. Dr. Rico, I believe all of his reporting is both fair and accurate, even when you were on the recceiving end of some tough comments, I find Steve to be non biased on his reporting on all issues he writes about, what one needs is an open mind and no agenda when they read his writings since Steve has no agenda and no horse in this race. I for one appreciate your acknowledgement of his accuracy and fairness. I hope you continue to read his writings with the same attitude you read this column.


  3. I don't have a problem with Steve, only with some of the comments and I know he is not responsible for them nor does he endorse them.


  4. I remember in a story here in the Citizen that attorney Roger Brown was hired to give a legal opinion to the District Board regarding each Director's conflict of interest. Is this the same Roger Brown, formerly in charge of enforcement of the State's FPPC (Fair Political Practices Commission?)Do you think he knows anything about conflicts?


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