Santa Ana-based KPC Healthcare Inc. is betting that its employee stock ownership program is aligned with contemporary standards for healthcare systems, adding incentive for employees to provide better care and better results for patients and shareholders.
The equity-based benefit plan, similar to a traditional profit-sharing program, is 100% employee-owned.
The idea is that the added incentives will attract and retain employees, as well as motivate performance, bringing better patient outcomes and greater reimbursements from insurers—a group that has increasingly linked payments to results.
“The reason I work so hard in America is because I own my own business, and our employees will work hard because they are owners,” said Kali Chaudhuri, chairman and founder of parent company KPC Group.
The employee stock program was created specifically for KPC Healthcare and its four acute care hospitals in Orange County.
KPC Healthcare is a subsidiary of KPC Group, which is based in Riverside and owns subsidiaries engaged in an array of businesses, including information technology, real estate, pharmaceuticals and healthcare services. The parent entity owns seven acute-care hospitals in all—branded Global Medical Centers—and operates several of them. KPC Group also has independent physician associations, medical groups and various multispecialty medical facilities in Southern California under its umbrella.
OC Hospitals
The KPC Healthcare subsidiary’s four OC hospitals are South Coast Global Medical Center in Santa Ana; Chapman Global Medical Center in Orange; Anaheim Global Medical Center; and Orange County Global Medical Center, also in Santa Ana.
The four hospitals combined for 2,756 employees and 755 licensed beds, and had net revenue of approximately $427 million for 2016, according to the state office of Statewide Health Planning and Development.
Chaudhuri is an orthopedist in the Riverside County town of Hemet who came to own the OC hospitals in 2005 through a series of controversial circumstances.
He initially led Costa Mesa-based Integrated Healthcare Holdings Inc.’s bid to buy the hospitals—previously known as Western Medical Center-Santa Ana; Western Medical Center-Anaheim; Chapman Medical Center; and Coastal Communities Hospital—from Dallas-based Tenet Healthcare Corp. in 2004. Integrated Healthcare is a publicly traded hospital acquisition and management company.
He backed away when local doctors and a state legislator intervened—a backlash that stemmed from the bankruptcy of another one of Chaudhuri’s companies, KPC Medical Management Inc. The bankruptcy in 2000 resulted in its closure of 38 clinics, leaving 300,000 patients without care and, in many cases, without their medical records. The closing of the Anaheim-based medical practice stood out in a statewide trend—it was the largest of some 20 that struck physician groups in California that year.
KPC Medical was founded when Chaudhuri paid $24 million for the failing physician practice management company once owned by Birmingham, Ala.-based MedPartners Inc.
MedPartners’ California health plan fell into a financial crisis that resulted in it being seized and forced into bankruptcy by the state in March 1999. KPC acquired virtually all of MedPartners’ remaining Southern California assets, comprising 3,500 in-network physicians, over 60 medical clinics and nearly 1 million patients. The operation continued to struggle with financial and management problems, including charges beyond co-payments, breach-of-contract issues and delay in care, scheduling of medical procedures, filling prescriptions and reassignment to new doctors.
KPC Medical received two bailouts of more than $40 million from a half-dozen health plans before it went bankrupt in November 2000. The company collapsed owing $450 million to local doctors and other creditors.
State laws then prohibited the state to intervene in medical practices such as KPC Medical.
Chaudhuri’s other companies were not part of the bankruptcy.
The tumult cost Chaudhuri the chance to take control of the four Tenet-owned hospitals in 2004. He proceeded to take a majority stake and become principle lender of Integrated Healthcare, which struck a deal for the hospitals the following year.
Silver Point
Chaudhuri reportedly got the backing of distressed-debt specialist Silver Point Partners, and came up with $70 million to pay off high-interest loans. The deal formed the backbone of what is now KPC Healthcare, the four OC hospitals under Chaudhuri’s umbrella.
The real estate involved in the hospital properties was transferred to Pacific Coast Holdings Investments LLC, which was 51% owned by West Coast Holdings LLC—owned in part by Anil Shah—and 49% owned by Ganesha Realty LLC—owned in part by Chaudhuri, according to Securities and Exchange Commission filings.
Integrated Healthcare leased back from Pacific Coast all of the hospital properties.
Shah, a Santa Ana cardiologist, led Orange County Physicians Investment Network LLC, the doctor’s group that owned a majority stake in Integrated Healthcare. The group, which has billed itself as a counterweight to Chaudhuri, eventually sold him its stake in the operations, which were renamed KPC Healthcare in mid-2014.
Employee Stakes
The employee stock ownership program was launched about a year later and began its first full year last year. The share price doubled from the opening price of $2.50 per share, according to KPC Health Chief Executive Suzanne Richards. “We want to award employees who stay with us,” she said.
Employees of the hospital will see their stakes grow over time if they stick with the company. Eligible employees must be 21 and work a minimum of 1,000 hours per year––an average of 19 hours per week. The executive management team and physicians—doctors who work at the four hospitals but cannot under state law be employed directly for them—are excluded.
Full vesting comes over six years, starting at 20% at the end of the second year, increasing 20% year-over-year, and reaching 100% by the sixth year. The amount of shares issued to an employee is calculated based on the employee’s salary as a percentage of the total payroll of KPC.
“We need to treat our employees differently—we need to make our employees feel appreciated [that they] have ownership in our success. We need to not wait till [the hospitals are] profitable before we start sharing that success,” she said.
The program operates through a trust and is treated like a 401K, IRA or other employer contribution-based retirement benefit program. Shares are not purchased but automatically given to eligible KPC employees. It does not affect employees’ paychecks, benefits or retirement program. Shares are not publicly traded.
“True, I give my shares to [employees], but if they stay for five years [or more], it’s a win for us—how you ensure people stay with you—[that] is a far richer and revolutionary conversation in healthcare,” Chaudhuri said.
