The collapse of a hospital empire — and towns left in the wreckage

Reviewed by James Ives, M.Psych. (Editor)Aug 20 2019

The money was so good in the beginning, and it seemed it might gush forever, right through tiny country hospitals in Missouri, Oklahoma, Tennessee and into the coffers of companies controlled by Jorge A. Perez, his family and business partners.

It was his "secret sauce," the rotund Miami entrepreneur would smilingly tell people in their no-stoplight towns. The money-making ventures he proposed sounded complicated, sure, but he said they would bring in enough cash to save their hospital and dozens, even hundreds, of good jobs in rural towns where gainful employment is hard to come by.

And, in town after town, the people believed him. He offered what they could not resist: hope, and the promise of survival.

Then a few major health insurance companies got suspicious, as did some government officials. How could Unionville, Mo. — a town of 1,790 — generate $92 million in hospital lab fees for blood and urine samples in just six months? Why had lab billings at a 25-bed hospital in Plymouth, N.C., nearly tripled to $32 million in the year after Perez's company took control?

The lab billings, insurers alleged, were simply fraudulent. Blue Cross Blue Shield and other insurers started filing lawsuits, stopped making reimbursements and shut off the spigot.

At the height of his operation, Perez and his Miami-based management company, EmpowerHMS, helped oversee a rural empire encompassing 18 hospitals across eight states. Perez owned or co-owned 11 of those hospitals and was CEO of the companies that provided their management and billing services. He was affiliated with companies that owned or managed the rest.

Now, with funding from the lab-billing venture dried up, 12 of the hospitals have entered bankruptcy and eight have closed their doors.

The staggering collapse left hundreds of employees without jobs and many more owed months of back pay. Only in recent months did they learn that their medical coverage had been terminated because EmpowerHMS had stopped making payments, according to interviews and bankruptcy documents.

At some of the hospitals, EmpowerHMS stopped paying employee payroll taxes, Perez acknowledged in an interview. Some of the shuttered hospitals owe hundreds of thousands in property taxes, according to local officials.

How companies run by this Miami businessman and his associates were able to drive so many hospitals into the ground so quickly, devastating their communities, is a story about the fragility of health care in rural America and the types of money-making ventures that have flourished in legal gray areas of America's complicated medical system.

Perez styled himself as a savior of rural hospitals. "My only fault is I tried everything in the world to save them," he told Kaiser Health News.

But for the townspeople left in the wreckage, the reality feels more sinister.

EmpowerHMS "is like a curse word," said Tara Brewer, head of the Chamber of Commerce in Sweet Springs, Mo., where the I-70 Community Hospital closed in February, taking with it dozens of jobs and emergency care.

The town's mayor, Francis Vaught, put it more simply: "We were robbed."

Building An Empire On Promises

Jorge Perez's company jet never seemed to take off on time.

Whether he was headed to Kansas, Missouri or Arkansas, Perez always was running late, said Scottie Collins, who joined the Empower team in 2017 with the expectation his Florida-based drug rehab program would be integrated into the burgeoning hospital group. It struck Collins as a luxury, given the flight crew charged by the hour, but neither Perez nor his entourage seemed concerned.

In September 2017, Perez and his team swooped into Fulton, Mo., days before the town's nearly 100-year-old hospital was set to close. Fulton Medical Center, with 140 staffers, was a major employer and the only hospital in Callaway County. The hospital had struggled for a quarter-century, escaping closure at least three times as the economic forces battering rural hospitals across America took their toll.

At what was supposed to have been a farewell potluck for the facility's staff, Perez appeared, announcing that he'd just bought the hospital and was keeping it open, according to media reports. From the podium, he delivered what had become his standard pitch in small towns across the Midwest: He saw a community desperately fighting to keep its hospital, and he would help them win.

"He seemed to be a nice enough guy," said LeRoy Benton, Fulton's mayor at the time, "and seemed to say the right things."

If the communities he wooed had the time or capacity to look deeper, they might have seen a red flag: Perez had no experience managing hospitals. Trained as an electrical engineer, Perez helped his father run a medical billing company in Miami that served doctors and hospitals. He repeatedly saw rural hospitals closing, he said, and felt moved to save them.

In 2015, Perez partnered with a company run by a Chicago-based emergency room physician, Dr. Seth Guterman, to take over the Campbellton-Graceville Hospital in Graceville, a town of 2,200 people in the Florida Panhandle.

Perez told the local paper the new ownership group would invest $2 million and reduce costs by 30%. "Consider Campbellton-Graceville Hospital SAVED," enthused the Jackson County Times.

A year later, he invested in a struggling hospital in Williston, Fla., and with partner David Byrns landed a management contract for Putnam County Memorial in Unionville, Mo. In 2017, Perez formed a partnership with Paul Nusbaum, a former secretary of health and human resources in West Virginia, and acquired controlling interest in 10 hospitals in Oklahoma, Kansas, Missouri, Tennessee and North Carolina, swallowing them whole.

"When you rescue a hospital, you rescue a community" was his mantra on social media.

People describe Perez as genial and courteous — "Everybody that knows me says I have a big heart," he said of himself. But his inner circle included some people with questionable backgrounds.

One of Empower's top executives, J.T. Lander, had done time in federal prison after being convicted in 2009 of mail fraud and money laundering while serving as county attorney for Florida's Dixie County. Byrns' criminal record includes an arrest for check forgery at a Louisiana hospital he managed. (Byrns returned the money, and criminal charges were dropped.)

Neither Byrns nor Lander responded to a request for comment; a woman who answered Nusbaum's phone said he was unavailable for comment.

Fernando Barroso, who worked as an assistant controller for EmpowerHMS in 2018, said the company's financial systems were a mess, even as it wrestled with massive debt accumulated through rapid-fire hospital acquisitions.

"I've been an accountant for a long time and I thought I'd seen everything, but I'd never seen anything like this," Barroso said. "It was total disorder."

A Lucrative Venture

To generate income for foundering hospitals, Jorge Perez took advantage of federal health care regulations that allow some rural hospitals to bill for laboratory tests at substantially higher rates than other providers. The goal is to keep hospitals that provide vital care in remote areas afloat, by paying generously for the relatively small number of tests needed in such locations.

But several of the Perez-affiliated hospitals established lab programs that reached well beyond the hospital doors. They contracted with outside labs, in other cities and states, to draw and process blood and urine tests for thousands of people who never set foot in the hospital. Insurers were billed using the higher rates afforded the rural hospitals, and the contractors got a portion of the proceeds.

In recent years, Perez and a handful of other rural hospital owners who have established similar operations have defended the billing setup as in alignment with federal regulations. But among some medical finance experts, it's considered legally murky and has resulted in allegations of fraud involving owners in several states.

What is not in dispute is that the strategy can be lucrative. At 14-bed Putnam County Memorial alone, the lab-billing operation generated nearly $120 million in payments to outside vendors in the first six months of 2017, according to internal documents obtained by Kaiser Health News. And a chunk of those payments — nearly $80 million in lab-related charges — went to Perez-affiliated companies, according to the documents.

In interviews, multiple employees said they had no idea what Empower did with the money their hospitals earned, since the facilities seemed perpetually starved for cash.

Melva Price Lilley, an X-ray technician at Washington County Hospital in Plymouth, N.C., recalled regularly being short of supplies. "Sometimes we wouldn't have soap to bathe patients," Lilley said. "We didn't have any crackers, orange juice. We didn't have enough staff at night to run a code."

"They never invested any money in our hospital," she said. "You have to go on top of the roof to adjust the heat or air conditioning with a broomstick."

Perez had taken control of the regional hospital in Drumright, Okla., in 2017 promising brighter days, said Tracy Byers, hospital CEO at the time. Instead, he said, the bills quickly piled up.

“I would dread Mondays as that's when all the certified letters would start showing up in the mail,” Byers said. “Typically, by Thursday and Friday, you'd have an idea of what bills you could pay, if any.”

Even as the hospitals struggled, Perez, on his own and through Empower-affiliated companies, was investing in real estate in 2016 and 2017, buying up nine South Florida properties that totaled more than $3.7 million, including three condos on Key Largo, according to property records.

In an interview, Perez maintained that the Florida properties were bought with earnings from unrelated software companies. He declined to get into details about his finances. "The little I have left I need to preserve and protect," he said. "I'm as broke today as anybody out there."

Fallout From A Damning Report

In August 2017, Missouri State Auditor Nicole Galloway delivered a stunning blow.

A routine audit of Putnam County Memorial had uncovered questionable financial dealings. From December 2016 to May 2017, Perez and Byrns' company, Hospital Partners, had managed to generate $92 million from lab tests run through Putnam. By comparison, hospital revenue totaled $7.5 million in fiscal year 2016, according to the audit.

The analysis found 80% of that money was flowing to laboratory companies, including some in which Byrns had a financial stake; another 6% to a Perez-controlled billing company; and a major portion to 33 out-of-state phlebotomists — blood draw specialists — they had put on the hospital payroll.

"What was astounding to me was that the hospital was not better off during and after this lab activity," Galloway told KHN.

The reaction was explosive. Dozens of major insurers banded together to file lawsuits against Perez-affiliated hospitals in Missouri and other states, demanding hundreds of millions in restitution. The lawsuits, still ongoing, describe the lab-billing operation as a "widespread fraudulent scheme" that aimed to enrich Perez, some of his associates and affiliated companies, as well as participating labs.

In court documents, Perez has denied wrongdoing and asked for dismissal based on questions of jurisdiction, among other issues. In an interview, he said his billing setup was "done according to Medicare and state guidelines." He added: "I'm still waiting [to see] where we've done anything wrong."

Legal or not, as public scrutiny intensified, the revenue generated by lab tests slowed to a trickle. Blue Cross Blue Shield of Oklahoma dropped four Perez-affiliated hospitals from its network, cutting off a crucial source of funding. Lenders took Perez and his partners to court to force them out of other hospitals.

Across the Midwest, employees were living the fallout. In hospital after hospital, paychecks came late — and then not at all, according to employee interviews and bankruptcy court documents. Doctors quit. Vendors stopped delivering vital supplies.

At Haskell County Community Hospital in Stigler, Okla., former laboratory supervisor Shawna Smith recalled an alarming shortage of antibiotics and IV catheters as early as October 2018. By January 2019, she said, employees weren't getting paid. The Ladies Auxiliary set up a fund for employees who couldn't pay their utility bills. One resident brought packages of hamburger and bison for every employee.

About two hours west, the local middle school in Prague, Okla., held a drive to collect toilet paper and cleaning supplies for Prague Community Hospital. A veterinary clinic delivered medical essentials. Still, supplies fell so low, said City Manager Jim Greff, that the hospital had to stop admitting patients.

At Drumright Regional Hospital, Human Resources Director Allyson Lunsford said they ran out of oxygen and blood. By December, she said, they were so far behind on bills that the company that rented them hospital beds came to repossess them — despite patients still using them.

A Sense Of Betrayal

By March 2019, seven Perez-affiliated hospitals had closed. And as bankruptcy proceedings unfolded at those and others, employees got more devastating news, according to interviews and trustee reports: Along with missing paychecks, the company had stopped funding their health insurance; their medical and dental policies had been discontinued.

Perez said in an interview that the hospitals were not making enough money to cover their expenses and debt. He said he faced constant pressure about which bills to pay.

"I had a whole executive team of experts, and they made decisions — we all made decisions — of what needed to be paid so we can live another day," Perez said. "Do we pay the medication? Do we pay the pharmacy stuff? Do we pay the doctors? Do we pay the nurse?"

"We felt at that moment we were going to be able to pull out of it in a month or two," he said of the missed payroll taxes. "Hindsight on that looks bad."

In February, the I-70 Community Hospital in Sweet Springs became one of the latest Empower hospitals to shut its doors, leaving its red-lettered "Emergency" sign shrouded in a white sheet. It marks a searing loss for a town where the last dentist recently closed shop and multiple storefronts sit abandoned.

The closure left $300,000 in unpaid property taxes that could have been spent on schools, according to the county assessor. Mayor Vaught said the town lost dozens of jobs. Medical equipment bought with money raised at hot dog fundraisers sits unused.

Brewer, the Chamber of Commerce head, worries Sweet Springs won't survive the hit. "What is it that we're going to have for our kids?" she asked.

It's not clear what recourse the towns have. Bankruptcy court documents indicate the Department of Justice is investigating Perez's companies, though DOJ officials would not comment. Perez has not been criminally charged, but federal prosecutors recently indicted one of his associates.

On July 9, Kyle Marcotte, owner of a Jacksonville Beach, Fla., addiction treatment center pleaded guilty for his part in a $57 million lab-billing scheme involving two Perez-affiliated hospitals, including Campbellton-Graceville. Marcotte admitted cooperating with unnamed hospital managers to provide urine samples from his patients for lab testing that was billed through the rural hospitals and, in exchange, getting a cut of the proceeds. His sentencing has yet to be scheduled.

Perez, who still lives in Miami, said the company jet has been sold and he is turning his attention to software development. He told KHN he is losing sleep over the possibility he could go to jail but was adamant he has operated in the best interests of the communities he sought to serve. If anything, he said, the townspeople should thank him, because he gave their dying hospitals "two to three years of life."

"I wanted to see if I could save these rural hospitals in America," Perez said. "I'm that kind of person."

This KHN story first published on California Healthline, a service of the California Health Care Foundation.