NJ, citing 'questionable' costs, pushes for more transparency at private hospitals

New Jersey is calling for greater transparency in private hospital ownership, as part of an effort to rein in what officials have called “questionable” management fees being paid out to outside parties.

A $158 million payout, made over three years by three for-profit N.J. hospitals to three principles, have come under scrutiny by the state’s Department of Health. One of those institutions includes the co-founder of startup Clover Health, and the others run by CarePoint and Prime Healthcare.

Those large payouts have raised questions about state hospital costs and oversight. In a March report issued by the DoH, officials asserted that “certain hospitals have paid or are due to pay tens of millions of dollars in questionable management fees and allocations to private entities known as ‘related parties.’”

As a result, the agency has proposed adding a slew of affiliate and third-party disclosure rules, according to a copy of a letter sent to hospitals that was obtained by Yahoo Finance.

The report noted that “these related-party management entities have no employees and only limited operating expenses which, in combination with other information, raises questions about the nature of their operations.”

While the payments cited by New Jersey officials appear legal, their discovery could affect hospital owners outside the state, in California and Pennsylvania—where existing owners of private state hospitals are based.

In some cases, hospital owners have benefited from the arrangements, state officials found. In their letter to hospitals, DoH explained the proposed changes would shine more daylight on key financial decisions.

“Specifically, the NJDOH anticipates that the rules will set forth steps to allow the state to take certain actions to increase oversight of hospitals that report information that indicates financial distress,” the report said.

‘Incentive payments’

Transparency has become one of the biggest buzzwords in health care policy. At the federal level, President Donald Trump’s administration has focused on peeling back the curtain on hospital, drug and insurance costs, in an effort to give patients more information about their care.

In one case cited by the state, Vivek Garipalli, James Lawler and Jeffrey Mandler—who served as CEO of the hospitals from 2015 to 2017—operated through two shell companies to provide services that resulted in payments to third parties. Garipalli is co-founder of Clover Health, which is in part backed by Alphabet’s ($GOOG) venture arm GV.

Of the three owners of the separately owned hospitals, through various structures, Garipalli held a majority interest. He authorized the relationships between the holding companies and the hospitals.

The payments, made from 2013 to 2016, were sent to IJKG and Sequioia Healthcare Management.

In the report, Garipalli testified that the payments from the hospitals to IJKG and Sequoia Healthcare Management are “incentive payments,” structured in a way that they’d be paid out only if the hospitals were successful.

However, documents obtained by Yahoo Finance show those fees were paid despite low operating margin ratios at two hospitals, and even after some employees were laid off.

In 2017, two of the three hospitals claimed operating margins of less than 3%, while one claimed an operating margin of 17%. Meanwhile, the facilities have been criticized for charging the highest rates to Medicare in the country.

The N.J. report acknowledged the three principles saved the hospitals, which were in bankruptcy, from shutting their doors by acquiring them over a period of time from 2008 to 2012.

Yet they were being paid millions through the management service companies —which had no other clients.

“Based on evidence reviewed by the SCI, neither Sequoia Healthcare Management nor IJKG receive any revenue from any client (or any source) other than the CarePoint hospitals. Accordingly, it is reasonable to conclude that neither Sequoia Healthcare Management nor IJKG have other clients,” the report said.

While the arrangement appeared unusual, N.J. officials stopped short of calling it improper or illegal. Still, the report said the DoH should be able to exercise more oversight, and appoint a monitor, if needed.

In a statement to Yahoo Finance, CarePoint spokeswoman Jennifer Morrill said the health system is aware of New Jersey’s attempt to increase transparency.

“As we said in March when the SCI released its report, we fully support increased transparency,” she said.

Similarly, Prime Healthcare Services, a California based for-profit hospital owner which owns a hospital in New Jersey, voiced support for the DoH’s changes.

“Prime Healthcare supports and complies with government efforts to provide transparency and oversight of hospital financial operations at our 45 hospitals throughout the country,” a spokesperson told Yahoo Finance in an emailed statement.

“We believe that these regulations are an important tool to managing healthcare costs while providing patients with quality and life-saving care.”

Prospect Medical Holdings, another for-profit hospital owner of a New Jersey facility, which is rumored to be selling the hospital, declined to comment.