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Lawsuits get more complex

Filed: 05/17/2001

By MICHELLE TERWILLEGER
Californian staff writer
e-mail: mterwilleger@bakersfield.com

Allegations in medical community fly -- including bribery, conspiracy.

A pair of lawsuits in the medical community that started out as disputes over money have developed into complex litigation involving allegations of bribery and possible plots to put people out of business.

It seemed simple enough at first.

In April 2000, San Joaquin Community Hospital, Catholic Healthcare West and Bakersfield Memorial Hospital filed lawsuits against Dr. Richard Merkin, owner of Bakersfield Family Medical Center and its parent company, Heritage Provider Network, alleging $3.7 million and $2.9 million in unpaid hospital bills, respectively.

BFMC and Heritage contract with health insurance companies to pay for medical care -- both outpatient and inpatient -- for their clients.

BFMC responded to the suits in June by countersuing both organizations, accusing them of attempting to put the center out of business and of violating anti-referral and anti-kickback laws.

According to the complaints, the hospitals had financial relationships with doctors to influence them into referring their patients to their hospitals.

Attorneys for both CHW and San Joaquin denied the claims.

The scope of the lawsuits became even wider last month when BFMC added several new defendants to the CHW countersuit, including: Golden Empire Managed Care, Mercy Memorial Medical Associates, 12 physicians that worked for Mercy Memorial Medical Associates, and several former CHW officials, including former CEO Bernard Herman and former CFO Doug Clary.

The lawsuit accuses CHW of providing management services to GEMCare and Mercy Memorial Medical Associates, a physicians practice that folded in November, for rates below fair market value in return for having those physicians refer their patients to CHW hospitals.

"They were concerned that Kaiser and BFMC were the fastest growing managed care entities in town. They did not have stable relationships with those two entities," said Arthur Chenen, attorney for BFMC.

"They felt they had to support a medical group to make sure they would continue to get patient referrals. ... The relationship between CHW ... and MMMA violated corporate practice of medicine law. It was so totally dominated by Catholic Healthcare West."

The lawsuit also accuses CHW of participating in the illegal corporate practice of medicine, through Dr. Jerry Royer, sole owner of Mercy Memorial Medical Associates, who also was a CHW vice president.

Dr. William Baker, who served as CEO of Mercy Memorial Medical Associates and is named in the lawsuit, denied BFMC's allegations and said CHW did not play a role in business operations.

"MMMA functioned as an independent business. It always did from the beginning," he said.

"The relationship between Jerry Royer and MMMA was as the physician owner of MMMA."

Barry Goldner, attorney for GEMCare, rejected BFMC's allegations toward the organization by saying it was simply a counter-maneuver.

John Libby, attorney for CHW, said he would not address specifics in the lawsuit, but said CHW would contest them in court.

"It's a misguided attempt to try to put pressure on us to settle," Libby said.

"I can tell you that's not going to work."

The CHW case is scheduled to be heard in Kern County Superior Court on Oct. 29, Libby said.

BFMC also increased the number of defendants in the San Joaquin lawsuit and made similar allegations.

According to the cross-complaint, San Joaquin had financial relationships with doctors that also amounted to the corporate practice of medicine and kickbacks for hospital referrals.

San Joaquin Community Hospital lent money to Dr. Carlos Alvarez and later the hospital used the unpaid debt as equity to create a management company, VMG Management Services.

BFMC alleges that the creation of VMG was designed to construct a sham organization so Alvarez would not have to pay his loan back, and it amounted to a kickback for sending patients to San Joaquin.

"It was created solely for the purpose of sharing of the revenue from the medical practice," Chenen said.

That was a violation of law forbidding the corporate practice of medicine, Chenen alleged.

However, Bob Crockett, attorney for San Joaquin, said the hospital's motives were completely different.

"Dr. Alvarez is part of the hospital's religious mission to serve the poor and underserved of Kern County. ... The hospital set up a program where it would extend loans to Dr. Alvarez to help him continue his practice," Crockett said.

Because Alvarez could not pay back the loans, the hospital helped set up VMG as a way to invest in Alvarez's practice to collect on the unpaid loan, Crockett said.

"The purpose was to comply with federal and state law to make sure that the debt Dr. Alvarez owed was collected or pursued," he said. "The only thing Dr. Alvarez had to offer was his practice."

BFMC also alleged that San Joaquin Community Medical Group, an industrial medical group, was controlled by San Joaquin through two physicians who own shares in the group.

Crockett said the various additions to BFMC's lawsuits were just a legal strategy.

"This is a diversionary tactic to sue innocent doctors," he said. "This is just the way that BFMC and its owners play hardball in litigation."

The San Joaquin case is scheduled to be heard on Sept. 10 in Kern County Superior Court.