The story of Santa Ana-based hospital operator Integrated Healthcare Holdings Inc. is worthy of “General Hospital.”
What started as a way to keep four Orange County hospitals running has turned into three years of legal turmoil and infighting among executives and doctors. There have been charges of fraud, mismanagement, slander and even claims of a planted gun.
The soap opera is a distraction for Integrated, which is working on a turnaround.
The company, which trades on the low-profile Bulletin Board exchange, expects to report a loss of $3 million for the three months through June, narrowed from $6 million a year earlier.
Revenue could come in at $94 million, up 8% from a year earlier.
Integrated’s thinly traded shares have a recent market value of about $20 million, down by about half since January.
What’s at stake are four local hospitals that serve some of the county’s poorest residents.
Integrated runs Western Medical Center-Santa Ana, Western Medical Center-Anaheim, Santa Ana’s Coastal Communities Hospital and Chapman Medical Center in Orange.
The hospitals make up 12% of Orange County’s hospital beds.
Integrated bought them from Tenet Healthcare Corp. of Dallas in 2005 for $70 million. Tenet sold them as it was dealing with a federal probe into suspected Medicare fraud.
The latest chapter in Integrated’s saga came in July, when a group of doctors sued the company and Chief Executive Bruce Mogel over allegations of fraud and breached fiduciary duty.
The doctor’s group, Orange County Physicians Investment Network LLC, owns 43% of Integrated.
The group contends Integrated’s $91 million financing deal with Anaheim’s Medical Capital Corp. is “oppressive” and at “outrageous rates,” according to the lawsuit.
The suit also takes issue with pay raises for Chief Executive Mogel amid losses and questions his past performance at Los Angeles-based Alta HealthCare System Inc., now part of Prospect Medical Holdings Inc. of Culver City.
The suit “is a direct result of the mismanagement of the company by its CEO,” said Marc Miles, a lawyer with Callahan & Blaine in Santa Ana who represents the 36-doctor group.
Mogel and Riverside doctor and medical entrepreneur Kali P. Chaudhuri control about 40% of Integrated’s stock.
In a statement issued through Sitrick & Co., a Los Angeles firm hired to handle Integrated’s media relations, Mogel called the doctors’ allegations “outrageous and untrue.”
“However, legal prudence dictates that I not discuss the case in the press because of the litigation,” Mogel said. “The truth will come out.”
Lawsuit Status
Integrated has asked the court to combine the July suit with three others and hold off on hearing it until after a suit by Integrated against Anil Shah, a cardiologist who heads the doctors group.
The Integrated suit is scheduled to go to trial in January. A hearing on Integrated’s consolidation motion is set for Sept. 29.
In a sign of how bitter the fight has become, the doctors’ July suit goes as far as accusing Mogel of setting up Michael Fitzgibbons, a doctor and former chief of staff at Western Medical Center-Santa Ana who opposed the sale to Integrated and remains one of the company’s biggest critics.
In 2006, Fitzgibbons was arrested by Santa Ana police after a gun was found in his car. The arrest came a year after Fitzgibbons spoke out about Integrated and conditions at Western Medical Center-Santa Ana.
Integrated later sued Fitzgibbons for alleged slander and interference with its business in a suit that was thrown out in 2006.
The doctors’ suit alleges Mogel planted the gun in Fitzgibbons’ car as revenge for his criticism.
“Mogel took matters into his own hands,” the suit said.
Charges were never filed against Fitzgibbons in the gun case.
In a court filing by Integrated and Mogel, the framing allegation is called “sensational” and is “contradicted by credible documentary evidence.”
Integrated and Mogel contend the allegation stems from who they call a disgruntled former president, Larry Anderson, who left in January.
Fitzgibbons remains critical.
Western Medical Center-Santa Ana “is over 100 years old,” he said. “But for the management, that hospital would be thriving.”
The hospital has many of the same types of insurers, doctors and patients as nearby St. Joseph Hospital-Orange, Fitzgibbons said. That hospital is run by Orange-based St. Joseph Health System.
“Explain to me why this is a tale of two cities,one hospital thrives and the other is barely surviving,” he said. “The answer is clearly the management.”
Integrated is making progress toward turning around the hospitals, which were losing money when they were acquired, said David Robinson, a lawyer with Enterprise Counsel Group of Irvine who represents Integrated.
“Under the present management, that trend has massively been reversed,” he said. “On the other hand, they’re not out of the danger zone.”
Without the doctors’ lawsuits, “I’m more than confident that these hospitals would be fully profitable and fully vibrant,” Robinson said.
Next Controversy?
The next controversy at Integrated could involve investor Chaudhuri.
In 2005, Chaudhuri pulled back from a proposal to become Integrated’s dominant shareholder, giving the doctors an opening to acquire their stake.
His involvement sparked criticism over the 2000 closure of his KPC Medical Management Inc. medical clinic chain, which left some 300,000 Californians without healthcare and many doctors unpaid.
Chaudhuri is set to become Integrated’s majority owner by exercising an option to buy an additional 15% of its stock, according to William Thomas, his lawyer and an Integrated director.
Chaudhuri recently struck a deal with Integrated that included the purchase of 63 million shares and warrants that convert into 24 million shares.
Integrated raised $11 million from the deal and used proceeds to pay debt down.
Chaudhuri “is concerned about the legal situation and wishes all the cases could be settled,” Thomas said. “Having said that, he understands that Integrated needs to take appropriate steps to protect itself under the circumstances and he supports the company.”
Some may ask why Chaudhuri is putting more money into Integrated, which has been a money loser for its investors.
“It’s a very strong hospital system,” Thomas said. “It’s well located, has good doctors, really excellent investment potential. But it seemed to be kind of at war with itself.”
Chaudhuri hopes to stabilize Integrated with his investment, according to Thomas.
“The company is turning around very nicely and it’s getting stronger and more stable,” he said. “Although that process is not complete yet, it’s moving in the right direction, meeting our expectations.”
