Bloomberg News

Silicon Valley Surgeons Risk ‘Moral Authority’ for 200% Returns

July 19, 2012

Silicon Valley Surgeons Risk ‘Moral Authority’ for 200% Returns

A surgeon during theater. Photographer: Brendad Smialowski/AFP/Getty Images

The anesthesiolgists’ ball in December 2010 was already raging when Dr. Thomas Elardo and his wife arrived. It was 11 p.m., and the Opera House in downtown Los Gatos, California, was packed with nurses and doctors dancing to ’80s covers by The Microbes, an all-doctor band. Elardo climbed the stairs to the mezzanine bar and was immediately gladhanded by Bobby Sarnevesht, a local entrepreneur, and orthopedist Samir Sharma, who pulled Elardo aside.

Elardo had known Sharma for years, but the orthopedist had never given him the time of day. That night was different -- he had something to show Elardo. At the bar, Sharma flaunted a $960,000 check, Elardo recalls. Sharma said it was for his work as a surgeon and investor in an outpatient surgery center in Los Gatos, operated by Sarnevesht.

“They were saying, ‘This is the kind of money you can make. You’ve gotta come in!” recalls Elardo. “I was speechless.”

Sharma and Sarnevesht worked the room that night. In the days afterward, word of Sharma’s check raised eyebrows and spurred debate among local physicians about the surgery center chain operated by Bay Area Surgical Management LLC of Saratoga, California, Bloomberg Businessweek reports in its July 23 issue.

The facilities count some of the area’s best doctors as partners, including Michael Dillingham, a longtime San Francisco 49ers orthopedist who now works with the San Francisco Giants. By rejecting the discounted contracts that participating in- network providers sign with insurers, the surgery centers bill insurance companies at their own out-of-network rates, which are 5 to 35 times as much as the in-network facilities charge, and make a killing.

$53,000 Bunion

Knee arthroscopies that cost $3,000 in Aetna Inc. (AET:US)’s network earn nearly $20,000 in facility fees at Bay Area’s surgery centers, according to Aetna, the Hartford, Connecticut-based health insurer. A bunion repair that costs $3,700 in-network got almost $53,000 for Bay Area Surgical Group, one such center. A disc surgery for lower-back pain, called a laminectomy, costs about $6,000 in network yet reaps nearly $120,000 for Bay Area Surgical.

The company pays profits to some 60 surgeon-partners at rates of return that often exceed 200 percent a year. The doctors who buy into the centers get the return on their investments plus fees for performing surgeries. Patients pay little -- the chain sometimes waives or reduces their co-pays -- and high-quality care keeps the chain’s reputation intact.

Declined Opportunities

“You feel like an idiot for not doing it,” says Nathaniel Cohen, a Los Gatos orthopedist who attended the party. Both Cohen and Elardo, who each declined opportunities to invest in Bay Area Surgical Management facilities because of legal and ethical concerns, own shares in competing centers that have network contracts with insurers.

Founded by Sarnevesht and his mother, Julia Hashemieh, Bay Area Surgical Management has marshaled decades of doctor rage against insurance carriers into a profitable business. Hashemieh, the boss of the operation, likens herself to Robin Hood, pursuing justice in a medical community seething with discontent. She takes from rich insurers, keeps 15 to 25 percent of the profit, and gives the rest to surgeons -- whom she calls “the poor slaves” of managed care. Her seven Silicon Valley surgery centers, plus an eighth in Doral, Florida, collect about $100 million a year in revenues, according to Sarnevesht.

“I always tell Bobby, America is good to us and we’re going to pay them back,” says Hashemieh, a 55-year-old Iranian immigrant.

“Health plans don’t pay on the basis of billed charges, unless they determine that the billed charges are reasonable,” Sarnevesht said in an e-mail.

Facility Fees

While insurance companies don’t pay all of the centers’ bills in full, they pay enough so that Hashemieh’s facilities typically collect four to seven times what participating providers receive for the same services, according to data cited by Cigna Corp. (CI:US) and Aetna. The facility fees, which cover use of space, drugs and surgical equipment, are charged in addition to the surgical fees doctors receive.

Nationally, Aetna spent more than $500 million on out-of- network surgeries in 2011, an increase of more than 20 percent since 2009. The added cost helped drive up health-insurance premiums 9 percent in 2011, according to the Kaiser Family Foundation. It contributed to a 4.4 percent rise in U.S. health- care costs -- already the highest in the world at $2.6 trillion a year.

‘Exorbitant Prices’

While insurance companies are often pilloried for driving up health-care costs as middlemen, in this case it’s doctors who are “using deceptive tactics to exploit unsuspecting patients,” says David Lansky, president of the Pacific Business Group on Health (0287262D:US) in San Francisco, a coalition of corporate health-insurance buyers. “These exorbitant prices are ultimately taken out of everyone’s wages and contribute to the continuing escalation of health-care premiums.”

Fed up, Aetna sued Hashemieh and partners in February, claiming they gouge on rates, pay surgeons excessive compensation for referrals and defraud health plans. The insurer alleges that Bay Area’s facilities lured patients by routinely waiving their 20 percent to 50 percent co-pay responsibility for out-of-network care. Waiving co-pays wipes out patients’ incentive to use insurers’ discounted providers, undermining the cost-saving purpose of managed care, Aetna argues. The legality of waiving co-pays is in dispute, lawyers say, with contradictory legal rulings in several states.

No Obligation

Sarnevesht says Bay Area Surgical has no obligation to collect co-pays since it has no contract with the insurer. “This is not a statement about our practices; it is a statement about legal obligations,” he wrote in an e-mail Wednesday.

Aetna also filed a separate complaint with the Medical Board of California that could shut the centers down and jeopardize the surgeons’ licenses. The insurer’s executives say they’re going after Hashemieh and a few providers in Texas, New York and New Jersey to send a signal that out-of-network pricing is out of control. “We intend to take a very hard line,” says Carl King, Aetna’s head of national networks and contracting.

Hashemieh denies wrongdoing, insisting she is saving America’s doctors from corporate consolidation by helping them earn a respectable living. Sarnevesht says the chain’s surgeon- partners earn such high rates of return because he and his mother take out small management fees.

“It’s not rocket science,” he says. “We provide great service and charge physicians less.”

Dividend Check

In Hashemieh’s telling, the check Sharma waved around at that holiday party was for six months of dividends, and it couldn’t have been for $960,000 because she never wrote a check for that amount. (Recollections of the amount vary. Doctors who saw the check place it in the range of $700,000 to $960,000.)

One thing is clear: Hashemieh’s centers have brought a lot of doctors a lot of wealth. “I worry that situations like this cause doctors to lose our moral authority,” says Cohen. He shares an office with Ronald Joseph, an orthopedist who invested $40,000 in Hashemieh’s Knowles Surgery Center. The two remain friendly partners despite their differences over the centers.

“Doctors, like everybody else, want to make money,” Joseph said. “If they see an investment that they think is legal, what’s wrong with that? I had a chance to buy Google (GOOG:US) at $100 a share. Why miss the boat?”

Family Partners

A statuesque grandma with long brown hair and a thick Persian accent, Hashemieh landed in the U.S. in 1978 as a 21- year-old single mom fleeing the revolution in Iran. She earned a master’s degree in economics and held a series of jobs: owning a grocery store, running an all-you-can-eat buffet and selling used cars and life insurance. She put her son to work at age 12, carving roast beef in the family restaurant. He’s been at her side ever since, acting as her partner in a string of real estate deals and early Internet startups that sold computer parts and compact discs.

Sarnevesht, 36, is a natural salesman whose charm has made him equally loved and loathed in Silicon Valley. He has become the face of the family surgery business, and it’s paid off: Sarnevesht has a $4.3 million home on an old vineyard in the Los Gatos hills.

In 2003, Hashemieh was short on cash for spec homes she was building. Her sister and brother-in-law, a doctor, told her they were pulling in $10,000 a pop for colonoscopies performed out- of-network in a rented doctor’s office. Hashemieh was hooked. She and her son tapped out their credit cards and mortgages, raising about $400,000 from the tightknit Iranian-American community to start their own surgery center. They hired Bobby’s father, Nader, estranged from Hashemieh, to remodel a drafty warehouse in Santa Clara, California.

Tenacious Entrepreneur

“I had my doubts Julia could pull this off,” says Edward Tennant, who helped start Bay Area Surgical Management and is now an executive at HCA Holdings Inc. (HCA:US), one of the nation’s largest surgery-center operators. “But she’s the epitome of tenacious.”

Hashemieh spent months camped out in government offices obtaining permits, Tennant says. When state health inspectors delayed the center’s final walk-through, she told them that she’d shoot herself and leave a note blaming them for tying up her assets, he says. Sarnevesht says his mother was kidding. She got the permit.

In its first year, 2005, the Santa Clara center, named Bay Area Surgical Group, did only 54 surgeries and lost more than $400,000, according to state regulatory filings. “I was thrown out of a hundred doctor’s offices” pitching his facility, Sarnevesht says. “You learn a lot about life getting tossed on the street.”

Free Building

Then he and his mother figured out how to recruit doctors. In 2006, Sarnevesht approached several orthopedists with a proposal to give them, free of charge, a medical office building he was developing in Campbell, California, if they would do surgeries at Bay Area Surgical Group, according to three doctors who declined the offer.

“It seemed fishy,” said one of them, pediatric orthopedist Jeffrey Kanel, who now co-owns a competing center.

Sarnevesht negotiated the $4 million sale of the Campbell building in the summer of 2006, says Erik Hallgrimson, the real estate agent for the seller. The deed shows the buyer was Silicon Valley Center for Sports Medicine LLC, which belongs to Sarnevesht and a group of doctors that includes two of the busiest surgeons in the Valley, orthopedist Daniel Haber and spine surgeon Jeffrey Coe. They moved their medical offices into the building after Sarnevesht remodeled it, city records show. Sarnevesht “was trying to create an opportunity for doctors to participate in the ownership of the building,” Hallgrimson says.

New Partners

Around the time of the Campbell building transaction, Haber bought a 5 percent stake and Coe took a 3 percent interest in Hashemieh’s Bay Area Surgical Group in Santa Clara and they began bringing their patients there, according to Bay Area Surgical Group accounting documents. Sarnevesht says Haber’s involvement was “a godsend.” The facility went from break-even in 2006 to nearly $9 million in profit in 2009, according to the latest state regulatory filings. Its revenue-per-surgery doubled every year, reaching $21,293 in 2009.

Haber says the office building arrangement was entirely separate from his decision to invest in Bay Area Surgical and has no bearing on where he sends patients. “I take my cases where I think is ideal for my patients,” he said.

Sarnevesht also says the real estate deal was not related to the surgery center and that the doctors who participated put up money for the building’s down payment, as did he.

Word Spreads

Word of Hashemieh’s returns spread through local operating rooms, making recruiting easier. The busiest doctors in the Valley were offered 1 percent stakes in Bay Area Surgical Group for $10,000. Each 1 percent returned $24,000 in annual distributions in both 2007 and 2008, according to internal documents. In 2009, profits tripled.

By 2009, the company’s surgeon-investors were a Who’s Who of Silicon Valley doctors, including Dillingham, who operated on Joe Montana’s elbow, Steve Young’s shoulder and Jerry Rice’s knee during their Super Bowl years. Another Bay Area physician- investor, Kenneth Akizuki, performed surgery on San Francisco Giants catcher Buster Posey last year and helped reconstruct Giants closer Brian Wilson’s pitching elbow. Another Hashemieh surgeon, gynecologist Camran Nezhat, pioneered the use of laparoscopy, a minimally invasive technique that has revolutionized abdominal surgeries.

Plentiful Benefits

Elite doctors attract patients with generous health plans that cover a high proportion of out-of-network bills. According to investors, surgeons direct patients with hefty insurance benefits to Hashemieh’s centers and others are steered away. One former investor, orthopedist Terence Delaney, says his equity was terminated by Hashemieh and Sarnevesht after he failed to refer enough patients with plentiful out-of-network benefits. Delaney is now an investor in competing surgery centers.

“Simple rule of thumb is Aetna, United, Cigna and Blues with no daily max,” texted Sarnevesht to Delaney last year, exhorting the surgeon to bring in more sought-after patients. In addition to Aetna and Cigna, he was referring to UnitedHealth Group Inc. (UNH:US) and Blue Cross & Blue Shield plans.

Hashemieh’s firm sued Delaney on July 10, claiming that he breached a non-disclosure agreement “that has resulted in lawsuits being filed against Bay Area over erroneous information.”

In their single-story suburban headquarters in Saratoga, Hashemieh and Sarnevesht inveigh against their adversaries while defending their practices. Sarnevesht denies their centers routinely waive co-pays -- a practice that their lawyers argue in court briefs is perfectly legal anyway.

Charging In-Network

Still, callers to the chain’s SOAR Surgery Center are told they’ll be billed as if Hashemieh’s centers are in-network. “We will get paid out-of-network from your insurance company, but whatever your benefits are for in-network coverage, that’s what we will charge you,” explained Christa Luchetti, office manager at the center, in response to a phone inquiry.

Ramon Deras, a patient of Coe’s, had lower back surgery in 2009 that resulted in a $148,600 bill for Anthem Blue Cross & Blue Shield. Deras, 31, was supposed to pay a 20 percent co-pay, but Coe assured him he wouldn’t be charged, says Deras, an electrical-component salesman for Rexel SA. (RXL) “The doctor took care of everything,” Deras says. Coe didn’t respond to a request for comment. “There must have been a misunderstanding,” Sarnevesht said in an e-mailed response.

Marketing Handout

In March 2010, Mark Reynolds, the president of Aetna’s Northern California operations, was attending a meeting of surgery center owners when one of them slipped him a Bay Area marketing handout. For $10,000, surgeons could buy 1 percent shares of National Ambulatory Surgery Center in Los Gatos, entitling them to projected monthly payouts of $6,709 a share, according to the document.

That comes to an annual return of 805 percent -- “pretty outrageous,” says Laura Jackson, an Aetna in-house lawyer. Hashemieh’s centers were already on Aetna’s radar for billing high; the handout, by offering such an extraordinary rate of return, “suggested there was this implicit notion that the doctors would refer their insured cases to the centers” in exchange for exorbitant profits, Jackson says.

The setup appeared to Jackson to violate state and federal laws against physician kickbacks and self-referrals, which are designed to ensure that doctors don’t make medical decisions based on money.

Fair Value

The laws bar doctors from accepting any compensation, including free or discounted office space, in exchange for providing patient referrals. The statutes do allow physicians to send their own patients to surgery centers they invest in, provided the doctors pay “fair market value” for their shares and only receive dividends in proportion to their ownership and “commensurate” to the value of center’s services.

After a yearlong investigation, Aetna filed a complaint with the California medical board in November accusing Hashemieh’s “renegade centers” of charging “unconscionable” fees, and subverting quality of care “as physicians seek financial gain over patient safety.”

Aetna, the nation’s third-largest health insurer, cited the case of Lena Pho, a 38-year-old woman who bled to death last June at Hashemieh’s Forest Surgery Center after a plastic surgeon perforated her liver in a liposuction procedure, according to the Santa Clara County medical examiner’s report.

“It is highly likely” that Pho was referred for the surgery “as part of an elaborate insurance gouging kick-back scheme,” the complaint said. Sarnevesht says the charge is ridiculous -- health plans don’t pay for liposuction.

Aetna’s Claims

Aetna pressed its claims in its lawsuit this February, saying the company paid Hashemieh’s centers $23 million from 2008 through 2011 for procedures that would have cost just $3 million at in-network facilities. In June, UnitedHealth filed suit against Hashemieh’s centers, accusing them of submitting inflated and fraudulent bills and paying doctors to refer patients.

The Bay Area Surgical partners countered in a separate suit filed against Aetna on July 3 in which more than six dozen doctors, led by the California Medical Association, accused the insurer of illegally pressuring physicians and patients not to use out-of-network facilities. All three cases are pending.

Hashemieh sees the clash with Aetna as an Old World feud between herself and Mark Bertolini, the insurer’s chairman and chief executive officer. She rattles off Bertolini’s pay from memory ($10.6 million in 2011), how much Aetna spends on the CEO’s personal use of corporate aircraft ($217,000 in 2011), and how much its net income (AET:US) rose in 2011 from 2010, (12 percent, to $2 billion, or $5.22 a share.)

“The only way his profit can grow 12 percent is by paying doctors less than the Roto Rooter (CHE:US) man,” Hashemieh says.

‘They’re Bloodsuckers’

She arrived in America with nothing, she says, and now Bertolini wants to deny her what she’s earned. “They’re bloodsuckers,” Hashemieh says. “I could not be more honored to have come here penniless with a sick child, and now to be sued by a Fortune 500 company for helping doctors earn a decent living and not taking patients’ money. I’m not going to throw my doctors into the ditch. I’ll fight for them to the last drop of my blood.”

Hashemieh’s partners are just as loyal. Urologist Shahram Gholami owns shares and does surgeries in two of her centers, and is the landlord of one. “Julia and Bobby have put their heart and soul into protecting doctors,” says Gholami, who bought a $4.5 million home with an infinity pool in Monte Sereno, California, in 2010. “We don’t do this for the money.”

Growing Prosperity

Ronald Joseph, the Los Gatos orthopedist, waited three years before deciding to invest his $40,000 in Hashemieh’s Knowles Surgery Center. He initially declined to join because the profits seemed too good to be true. Finally, in December, he couldn’t ignore the growing prosperity of the surgeons who signed on.

“I’m sitting there saying, ‘If it’s a good deal, what am I doing sitting on the sidelines?’” says Joseph, 70, who has practiced medicine in Silicon Valley since 1981. With his medical fees falling in recent years and his overhead costs rising, Joseph needed extra income to shore up his retirement, he says.

“Every doctor I spoke to said the quality of care in her centers was high,” he says. “After three years, I felt if something were wrong, the government would have stopped it. The test of time said maybe it’s not illegal.”

120% Return

Since investing in Knowles, Joseph has earned $4,000 a month in dividends for an annualized rate of return of 120 percent. Still, the Aetna suit, and the chance of civil action against Hashemieh’s partners, spooked him.

“I don’t need the risk,” Joseph said in March, explaining that he was planning on dismantling his partnership with Hashemieh and Sarnevesht. As of mid-July, he hadn’t.

The cases are Aetna Life Insurance Co. v. Bay Area Surgical Management LLC, 112CV217943, Santa Clara County Superior Court; United HealthCare Services Inc. v. Bay Area Surgical Management LLC, 112CV226686, Santa Clara County Superior Court; and Los Angeles County Medical Association v. Aetna Health of California Inc., BC487670, Los Angeles County Superior Court.

To contact the reporter responsible for this story: Peter Waldman in San Francisco at pwaldman@bloomberg.net.

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.


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