In 2012, Laxman “Lex” Reddy founded Alecto, which quickly set its sights on the Olympia Medical Center, a former Tenet hospital just east of Beverly Hills.
At some point before this spring, the Department of Justice appointed one of its veteran trial attorneys to chase down a $12.4 million debt owed to the federal government by a Los Angeles hospital for excess Medicare payments it had collected during the Bush administration.
What the attorney, 20-year agency veteran John Kresse, found was hardly surprising: Instead of paying the government as promised, the hospital’s owner, Alecto Healthcare Services, had spent hundreds of millions of dollars buying four other hospitals and funneling money through various limited-liability vehicles that were supposed to be discrete entities but in reality operated as one big commingled family.
Wherever the money landed, Alecto didn’t pay the bills. Hospital employees complained of regularly operating without basic sedatives, syringes, IV bags, and even toilet paper, and one ultrasound technician in Ohio poignantly told The New York Times in 2020 he had charged $63 onto his personal credit card to buy ultrasound film on eBay because “I hated having to tell [expecting parents] I can’t give you a picture today.” Alecto stopped making payments on employees’ health insurance premiums in 2019, even though it continued deducting the cost of those premiums from their paychecks, and was accused by many staffers of “raiding their 401(k) plans,” according to a physician who worked in its Texas hospital. It failed to forward the $550 monthly child support payments of at least one employee to his child’s mother, and skipped out on more than $1.4 million in taxes it owed in Texas, $821,000 in water and sewer charges and other fees it owed the city of Wheeling, West Virginia, and hundreds of thousands more in taxes and levies owed in Martins Ferry, Ohio.
By the end of 2020, four of Alecto’s five hospitals had either shut down or announced imminent plans to do so; the final one was recently sold to former colleagues of Alecto’s owners. (Nevertheless, Alecto’s hospitals received at least $49 million in CARES Act funds intended for the health care sector, according to coronavirus stimulus records, much of it after the hospitals in question had shut down and laid off all their employees.)
These kinds of hospital hit-and-runs have become so frequent in recent years you’d think they’d been victims of some kind of TikTok challenge, but with few exceptions the raiders have mostly emerged from the rubble unscathed, as small communities became too preoccupied by attempting to salvage their hospitals to bother examining where the money had gone. Experts assured that the hospital closure epidemic was a natural phenomenon driven by demographic shifts and the stinginess of the Centers for Medicare & Medicaid Services.
Earlier this year, though, DOJ’s Kresse unexpectedly sued Alecto and various of its owners and affiliates on behalf of the United States government, in a little-noticed complaint that matter-of-factly stated its allegation: fraud. And in a move that could have profound implications for dozens if not hundreds of hospitals, Kresse named Medical Properties Trust, the massive Alabama hospital real estate conglomerate the Prospect has been investigating for months, as a conspirator and recipient of alleged “fraudulent conveyance,” over its receipt of $13 million in rent payments and as much as $51 million from the sale of Alecto’s Los Angeles property to the University of California, Los Angeles health system.
As the Prospect reported in May, MPT began amassing what would become a global empire of community hospitals through its relationship with Prem Reddy, a California cardiologist and health care entrepreneur who saw an opportunity when big hospital chains like Tenet and HCA began shedding hospitals amid various Medicare fraud scandals in the early 2000s. With backing from MPT, Reddy, through a company called Prime, began buying up hospitals and turning quick profits through the use of then-aggressive, now normalized tactics like surprise billing: admitting an enormous percentage of Medicare patients who visited the hospitals’ emergency rooms under dubious pretenses, overbilling the government for treating exotic forms of malnutrition in overweight seniors, and refusing to discharge patients who did not need to be in the hospital.
For much of its early boom, Reddy’s brother-in-law Laxman “Lex” Reddy served as Prime’s CEO, but he resigned in 2012 and founded Alecto, which quickly set its sights on the Olympia Medical Center, a former Tenet hospital just east of Beverly Hills with a history of financial chicanery, the highest prices in the state of California, and treating B- and C-list celebrities.
The government alleges that the entire structure of the Alecto-MPT-Olympia Medical Center relationship was a sham.
But where Prime’s hospitals had (dubiously) thrived, Alecto’s shriveled, sometimes rapidly. A hospital consultant who has done business with both Prime and the founders of Alecto said Alecto was clearly Lex Reddy’s attempt to recreate his past success, but where his brother-in-law had bought his empire on the cheap and amassed enough profits to upgrade the hospitals he acquired, Alecto simply had “no capital.” All its funding came from MPT, which as a real estate investment trust was in theory supposed to act as nothing more than Olympia’s passive landlord.
But as the government’s lawsuit reveals, MPT also owned an interest in Alecto LA, a subsidiary of Alecto that held its Los Angeles properties and effectively, the government says, ran the hospital’s finances. While MPT represented this to investors as a “minority” stake of just 20 percent, it structured that stake so it maintained “priority in receiving profits.” Imposing such a structure was effectively illegal, according to the government, because Olympia was insolvent at the time Alecto acquired it. In fact, the merger agreement “explicitly noted that Alecto, Alecto LA, and Olympia understood that Olympia had outstanding Medicare repayment debts” totaling $15.3 million, according to the government’s lawsuit. That meant that every dollar extracted without paying back the debt constituted a “fraudulent conveyance.” And MPT in particular extracted at least $13 million in rent payments and $1.1 million in interest payments from Olympia, according to the government, followed by as much as $51 million in proceeds from the sale of the hospital’s real estate to UCLA. (MPT reported in its own financial statements receiving $43 million from that sale.)
Perhaps just as importantly, the government alleges that the entire structure of the Alecto-MPT-Olympia Medical Center relationship was a sham. On paper, Olympia was supposed to remain an independent entity that paid rent to third-party landlord MPT and management fees to “independent contractor” Alecto. In reality, Alecto ran Olympia, never received management fees, and upon taking over the hospital “promptly acted in ways that disregarded the corporate distinction” between itself and the hospital, and further “appears to have ignored the distinctions between and among” itself, Alecto LA, and three other holding companies in which Alecto and MPT held the hospital’s real estate.
For example, when Olympia began running out of cash to cover its operating expenses, mere months after its December 2013 sale, the complaint alleges that Alecto made an emergency zero-interest loan of $7 million to the hospital “with no formal documentation” other than an email. That same year, the government says, MPT loaned the Olympia hospital and one of its real estate subsidiaries an additional $10 million. MPT fronted another $65 million for Alecto’s purchase of hospitals in West Virginia and Texas that fall, and still another $40 to $60 million to add two more hospitals, in West Virginia and Ohio, in 2017.
It was a pattern that would replicate itself with many of MPT’s hospital tenants, from tiny Halsen Healthcare, explored in the Prospect’s June issue, to the $8 billion behemoth Steward Health, one of the largest for-profit hospital operators in the country. MPT fronted billions of dollars in cash to such operators to “buy” unwanted hospitals owned by large for-profit chains, but also distressed nonprofits. In numerous cases, the operator was almost certainly insolvent before MPT got involved and deeply insolvent after signing the company’s inflated lease agreements. But with the help of seemingly endless rounds of add-on loans and restructurings from MPT, the unexpected cash bonanza offered by the CARES Act, liberal exploitation of an accounting standard that requires REITs to recognize far more rent up front than they actually receive during the first few years of long leases, and zero-interest-rate policy, the operators managed to pay enough of their rent for a long enough time that REIT investors didn’t notice.
That blissful state is teetering, thanks to rate hikes and the sleuthing of a few obsessive gadflies. MPT stock has fallen from around $23 in January 2022 to around $7 today. (Its founder/CEO Ed Aldag has sold more than $50 million in stock since early 2018, but he still owns about 3.5 million shares.)
Far sadder than investor losses, of course, are the moribund hospitals left in MPT’s wake. In its lawsuit against Alecto, the government wonders if the Olympia Medical Center needed to shutter at all; between 2018 and its death in 2021, it not only made rent and interest payments to MPT but liberally subsidized Alecto’s other hospitals. In its last three years, according to the complaint, Olympia paid out a combined $49 million more than it drew into a line of credit it shared with the other four hospitals.
Some of that cash financed operations at the West Virginia and Sherman hospitals, according to the lawsuit. But by mid-2020, the hospitals in West Virginia and Ohio had all shut down. “Indeed, little or none of the total $17.8 million Olympia paid into the credit facility during 2020 was used to keep other hospitals open,” the lawsuit alleges, adding that “records and correspondence from Alecto indicate that Alecto itself was retaining these funds.”
Far sadder than investor losses, of course, are the moribund hospitals left in MPT’s wake.
What became of that money is not clear. When Alecto finally filed for bankruptcy protection after a judge ordered the company to pay $3.17 million in back pay to employees of one of its West Virginia hospitals, it listed just $3.5 million in assets and $86.2 million in liabilities.
The government’s lawsuit against MPT and Alecto is currently in limbo. The bankruptcy declaration placed a temporary stay on discovery in the case, and in a July 31 joint status report the government and MPT said that “progress is being made in resolving Plaintiff’s claims against the MPT defendants without further litigation.” (A spokesman for MPT had no comment but directed the Prospect to the filing; an email to Alecto general counsel Michael Sarrao was not returned.)
But that was before a few bombshells dropped on MPT’s stock. First, its third-biggest tenant, the zombie hospital chain Prospect Medical Systems, shut down emergency rooms and information systems at all 16 of its hospitals in response to an alleged ransomware attack apparently orchestrated by a franchisee of the “ransomware as a service” gang Rhysida on August 3. Five days later, MPT announced it would be taking over from Citigroup as the lead sponsor of a new line of credit for its troubled tenant Steward Health, during a disastrous earnings call that prompted one Wall Street analyst to downgrade the stock all the way from “strong buy” to “underperform.” The following week, The Wall Street Journal reported that an unorthodox deal that the company promised would net the company $655 million had been blocked by California state regulators, weeks before MPT had booked $68 million in quarterly “revenue” related to the deal.
Then this week, the Connecticut attorney general’s office confirmed it was investigating Prospect over $1.6 million in unpaid taxes it owed three counties in the state, shedding light on the lingering mystery of why its sale of its three hospitals to the Yale New Haven Health system—first announced nearly a year ago—has yet to close. (An attorney in the office refused to comment on the investigation, and emails to the agency were not returned.) That transaction, wherein MPT valued Prospect’s three hospitals at an astonishing $411 million, has been the source of considerable intrigue, because the REIT has said it expects to net $355 million from the sale, and it urgently needs the cash.
The hospital consultant told me that the hospitals Yale hopes to buy are worth less than $100 million, and that he does not expect them to fetch anything approaching the reported figure when the sale ultimately closes. “A few weeks ago, this was a done deal, but something changed and it’s not anymore,” the consultant said, speculating that the merger agreement contained a clause enabling Yale to back out or renegotiate in the case of a “materially adverse” event—like, perhaps, a ransomware attack, a state attorney general investigation, or even the California regulatory ruling. On its earnings call, MPT said the hospitals’ sale was “still progressing to close pursuant to the [asset purchase agreement]” and that neither MPT nor Prospect were “aware of any opposition to this transaction.”
Another storm cloud on the horizon is Steward, whose 2022 financial statements the Securities and Exchange Commission has asked MPT to disclose as soon as possible. (MPT says they are currently being audited.) Steward is notoriously secretive about its finances; some industry insiders have speculated to the Prospect that it abruptly moved its headquarters to Dallas from Boston in 2017 to escape the scrutiny of a Massachusetts state agency that tracks health care finances. It has not reported finances publicly since 2020, and its revenues have likely eroded, as critical vendors like the nurse staffing agency Aya Healthcare, Inc. and the dialysis provider Fresenius (and apparently, whoever the company hired to maintain the elevator at its Carney Hospital) have cut off the company’s hospitals for failure to pay bills. Importantly, the SEC is requiring MPT to disclose Steward’s numbers in compliance with a policy that REITs disclose the financials of any tenant representing in excess of 20 percent of their revenue. Given the degree to which Steward is, as Alecto was, financially enmeshed with MPT, any disclosure is likely to invite more questions from regulators than it answers.
Last Thursday, a group of former employees of the Ohio Valley Medical Center filed a motion calling for a comprehensive forensic analysis of the flow of funds to and from Alecto and its various subsidiaries in the years prior to its bankruptcy. The motion was triggered by revelations that Alecto had transferred more than $60 million to its Texas hospital, whose operating subsidiary Sherman/Grayson Hospital LLC filed for bankruptcy protection in a separate proceeding in June. Those transfers also interested the DOJ’s Kresse, who named Sherman/Grayson as a defendant in the agency’s lawsuit, months before Alecto announced it would be handing off the hospital’s reins to American Healthcare Systems, another startup hospital chain founded by a longtime top executive at Prime, former director of hospital operations Michael Sarian. “We are part of this community, we are not going anywhere, we’re not going to shut down anything,” Sarian told a local CBS affiliate.
Just five weeks later, though, AHS wrote the Missouri state health department to say it would be closing its flagship institution, a 154-year-old St. Louis hospital it had purchased just ten months earlier, the very next day. The cycle continues.
