In The News

 
Big award over failed hospital a partial win

Managers regret Calexico’s loss 
By Greg Moran
STAFF WRITER

June 5, 2006

 For almost 47 years, little Calexico Hospital was the only significant medical facility for the inhabitants of this sizzling border town, a 34-bed facility that residents cherished and depended upon.

 But in the 1990s the hospital ran into a litany of problems – poor inspection reports from state and federal regulators, ballooning debt and, finally, a descent into bankruptcy.

 The words “troubled” and “Calexico Hospital” could usually be found in the same sentence as more beds lay empty and tensions rose. So when the hospital closed its doors in 1998, it seemed the predictable end to a slow demise.

 Eight years later, in a small Imperial County courtroom, the reasons Calexico Hospital shut down were debated in front of 12 jurors, some of whom had been born at the very hospital whose last days they were now dissecting.

 After two months of trial, the jurors in March decided the cause of the hospital’s death was not bankruptcy, mismanagement or the unforgiving world of health care economics. 

No, it was a handful of state regulators, jurors decided, whose actions drove the hospital’s last chance of survival – a plan by two businessmen to run the hospital profitably – into defeat. 

The jury awarded the two men, Randy Smith and Jay Ash, $12 million in what is believed to be the largest verdict ever rendered against the state Department of Health Services or its employees, said Dan Lawton, the San Diego lawyer who represented Smith and Ash. 

It is also the third-highest judgment ever rendered in Imperial County courts. 

State lawyers say they will appeal, but if the award is not reversed the state will have to pay the full judgment and possibly an additional $5 million in legal fees, Lawton said.

 After years of often-acrimonious litigation, Calexico Hospital remains closed. Only an emergency care clinic, operated by Pioneers Memorial Healthcare District, occupies a small portion of the building.

Smith, a Palm Springs businessman, said he laments what the hospital could have become under a business plan he contends could have worked. 

“I never saw a place with a greater need for services,” he said. “I thought we could really do something out there.” 

Deputy Attorney General David Taglienti, who defended the health department workers, disputes that analysis. Among many issues at the trial, he contended that Smith and Ash were in over their heads and that the hospital failed because of their own errors.

 A spokeswoman for the Department of Health Services, or DHS, referred all comments to Taglienti. While the state and DHS were named in the original suit, they were dropped before trial because of legal immunities.

 The remaining defendants were current and former DHS employees – all but one have left the department. Even so, the state has to pay damages for employees who are found to violate the law in the course of their duties.

 The suit turned on an intriguing legal theory. 

Ash, who owns a collections business in San Diego, and Smith sued under the federal Civil Rights Act, claiming they were deprived of a “property interest” without due process of law.

That interest was Medicare and Medi-Cal reimbursement dollars – the lifeblood of most hospitals. It constituted about 90 percent of Calexico’s monthly revenues.

 To qualify for reimbursement, a hospital must be certified, which comes after health officials conduct an extensive survey. 

In effect, Ash and Smith argued that state health officials did not want the hospital to get certified. They contended that the state did a survey in August 1997 – which the hospital failed when a machine was turned on and caused a brief power outage – in an unfair way. 

Then, the two said, state health officials promised to do a second survey in October 1997, but never did.

 When the second survey was not done, Ash and Smith – who had sunk almost $500,000 of their own money into the hospital but were tapped out and then had no revenues coming in – had to close down.

 Lawton said his clients had a due process right to a fair survey, the key to securing state and federal reimbursement money. 

“This is the only hospital in the state this ever happened to,” Lawton said. No other facility had ever had to close because the state did not schedule a Medicare/Medi-Cal survey, he argued.

 Lawton said state officials were weary of the hospital’s troubles, and wary of its service area. He said the hospital is close to the border, drew patients from Mexicali and served illegal immigrants – at a time when concern over public services being provided to illegal immigrants was at a high pitch.

 Taglienti disputed that notion and said the hospital’s failings were its own doing. “There was at no time any intention to discriminate in any way,” he said. “It was the hospital’s failings to meet minimum state and federal guidelines that caused the end result.” 

Ash and Smith had contracted in 1996 with the hospital’s owner, Heffernan Memorial Hospital District, to run the facility. They were to receive 65 percent of the hospital’s gross revenue under a two-year deal. The district had placed the hospital in bankruptcy protection a year earlier and was ready to emerge from that but needed an operator. 

In August 1997, state health inspectors came out to do the survey. When the power outage occurred, the hospital was closed for two days. When it reopened, state inspectors had a long list of “deficiencies” that had to be corrected.

 Lawton said those were corrected by October, when Ash and Smith were ready for another survey. By then they had run through $1.7 million in operating capital. Lawton said he told state officials that they needed the survey done in three to four weeks and that state officials agreed to conduct one.

 But it never happened.

 Lawton said the assistant deputy director of DHS, Carla Framiglio, testified later that it had already been determined by the state that the hospital would close.

 Taglienti said that was not so – that state officials, based on the poor performance of the hospital, were prepared to tell the district to voluntarily give up the license for a year or face disciplinary action.

 In December 1997, with funds running out, another meeting was held, Lawton said. At this time, state officials dropped what he called a “bombshell,” telling Ash and Smith that before a survey could even begin, they needed Blue Cross insurance to review and approve yet another lengthy form. The two could not get it done before their dwindling funds ran out.

 At the trial, Lawton argued that the requirement for Blue Cross approval was a pretext used to close the hospital. When it was shuttered, Ash and Smith – who had put up houses and property as collateral to secure loans – were left in the lurch, Lawton said.

 The jurors agreed. In their verdict, they concluded that not only had the state officials deprived the pair of due process, but had done so in a way that “shocked the conscience.”

 Closure of the hospital is still a sore point in the city.

 Ray Felkin, a member of the hospital district board, said plans are under way to open a medical center and potentially a new hospital down the line to replace Calexico Hospital.

 He said he was surprised at the jury’s verdict and seemed to agree with the state’s position. “It wasn’t really the government’s fault,” he said. “It was the mismanagement of the hospital.” 

Ash said the verdict was vindication.

 “It’s been a living nightmare since we got involved in it,” he said. “The jurors just thought the state handled the whole thing miserably.” 

Greg Moran: (619) 542-4586; greg.moran@uniontrib.com