A Company That Promised to Help a Failing Hospital Only Made It Worse

Brianna Bailey

June 04, 2020

It was the sort of miracle cure that the board of a rural Oklahoma hospital on the verge of closure had dreamed about: A newly formed management company promised access to wealthy investors eager to infuse millions of dollars.

The company, Alliance Health Southwest Oklahoma, secured an up to $1 million annual contract in July 2017 to manage the Mangum Regional Medical Center after agreeing to provide all necessary financial resources until the 18-bed hospital brought in enough money from patient services to pay its own bills.

But about a month later, hospital board members were summoned to an emergency meeting.

Early one morning in August 2017, Alliance's CEO Frank Avignone told hospital board members that his company, which had boasted of access to up to $255 million from well-heeled investors, was out of money.

Alliance needed a line of credit, and the bank required the board's permission to use the hospital's incoming payments as collateral. If board members didn't agree, paying nurses and other health care workers would be a "slight miracle," Avignone said, according to an audio recording of the meeting that was obtained by The Frontier and ProPublica.

"There were supposed to be so many millions available," Staci Goode, chairwoman of the hospital board, said during the meeting, asking what happened to the promises made just weeks earlier.

Investors needed to see an improvement in the hospital's finances before committing their money, Avignone replied.

"We're in a bad spot right now with our investors just like you are," he said. "We're out over our skis a little bit."

Exasperated, Mangum's hospital board approved the line of credit.

Over the next year and a half, Alliance borrowed millions of dollars from the bank. The company paid itself and businesses tied to its partners a significant chunk of the money and then used $4 million from Medicare to help pay down the line of credit, according to interviews with town leaders and court records obtained by The Frontier and ProPublica.

Financial pressures have forced the closures of 130 rural hospitals across the country in the past decade, leaving communities grasping for solutions to avoid losing health care in areas with the most need. Rural health experts fear many more won't survive the coronavirus pandemic.

An investigation by The Frontier and ProPublica found that some private management companies hired to save the most vulnerable hospitals in rural Oklahoma have instead failed them, bled them dry and expedited their demise.

It starts like this: Rural communities desperate to protect their hospitals hand the reins to management companies that portray themselves as turnaround experts and vow to invest millions of dollars.

Those companies are often hired without background checks or any requirement that they have experience running hospitals. They operate under nearly nonexistent state and local regulations with little oversight from volunteer governing boards. After they extract hefty monthly fees, they sometimes cut ties and leave rural communities scrambling.

In Mangum, a prairie town of 2,800 people in southwestern Oklahoma, the hospital is fighting several ongoing lawsuits stemming from Alliance's management. It also has filed its own litigation, accusing Alliance of fraud and of siphoning away millions of dollars from the hospital. Alliance disputes the allegations and is countersuing to collect $1 million in management fees it claims the hospital still owes for its services.

An administration building at Mangum Regional Medical Center
in Mangum, Oklahoma, on March 17.

Leaders from the Oklahoma towns of Seiling and Pauls Valley, who relied on Alliance's assurances that it could revive their hospitals, similarly accuse the company of making lofty promises and leaving them deeper in debt.

Alliance's failure to produce promised investments for the Pauls Valley Regional Medical Center made it harder for the hospital to escape the debt it had incurred under its previous management company, said Jocelyn Rushing, the town's mayor. The hospital closed in October 2018 under Alliance's management.

"What I can tell you is that Frank is a smooth talker, and he definitely knows how to play the media to his side," Rushing said, referring to Avignone. "And he left Pauls Valley high and dry."

Avignone denies wrongdoing. He said leaders in Mangum and other small towns have no experience running hospitals and don't understand enough about the industry to appreciate the work done by his management company.

"At the end of the day, we did save the hospital but, you know, no good deed goes unpunished," Avignone said of Mangum. "The local municipality decided they didn't want us and called us crooks and ran us out of town."

In the end, Avignone said, his company did the best it could given the economic pressures facing rural hospitals.

"Vulture Capitalists"

Across the country, rural hospitals struggle under crushing financial realities. They are more dependent on Medicare and Medicaid, which generally provide lower reimbursement rates than private insurance companies. They also treat higher percentages of uninsured patients and struggle to recruit doctors and nurses. And they have millions of dollars in costs for basic maintenance and repairs that are often deferred for years because of razor-thin profit margins.

study released in February by the Chartis Center for Rural Health estimates that about 450 rural hospitals across the country are vulnerable to closure.

The challenges are magnified in states like Oklahoma that have opted against expanding Medicaid for the working poor, as encouraged under the Affordable Care Act, hospital advocates and researchers say.

On June 30, Oklahoma voters will decide whether to expand Medicaid through a constitutional amendment. The state's Republican leadership has previously blocked expansion, but a petition drive supported by the Oklahoma Hospital Association landed the question on the primary ballot.

"Clearly, had these hospitals not been in such a precarious situation, these companies wouldn't even be in the picture," said Patti Davis, president of the hospital association.

Last year, the hospital association released guidance urging local officials to carefully assess the financial standing of management companies by requesting records that include tax returns and audited financial statements. The records, which offer a glimpse into a company's liabilities and assets, are not required under state law, but the association said refusing to produce them can be a red flag.

The guidance came as multiple rural hospitals struggled under the control of Missouri-based EmpowerHMS. One Oklahoma hospital run by the company closed in 2018 and four more entered bankruptcy in 2019.

Empower had boasted of its ability to increase revenue by entering into deals with outside toxicology laboratories that allowed flailing rural hospitals to bill at higher rates for blood and urine tests performed elsewhere. But insurance companies soon flagged ballooning laboratory bills as possible fraud and the U.S. Department of Justice launched a criminal investigation. It's not clear if the investigation is still ongoing. Empower has denied allegations of wrongdoing in response to a federal lawsuit filed by insurance companies.

The vast financial challenges facing rural hospitals can make it difficult to determine how much strain resulted from the management companies. A recent federal report found that hospitals owned by for-profit companies have a particularly high closure rate. Such hospitals represented 11% of rural medical facilities but 36% of closures from 2013 through 2017, according to a 2018 report from the U.S. Government Accountability Office.

Struggling hospitals can be good business for companies seeking to turn a quick profit, said Tom Getzen, professor emeritus of risk, insurance and health management at Temple University.

"What you've got is management companies that are vulture capitalists," Getzen said. "These are organizations that know that entities that are in difficulty probably would never be profitable but can have their assets stripped out and can therefore make money. It's important to recognize that troubled company management is actually a very profitable business."

As the coronavirus threatens to further hamstring rural hospitals, forcing them to cancel lucrative elective procedures and purchase additional medical supplies, concerns grow that more communities will fall prey to promises of magical turnarounds.

"You have these communities that are desperate, and they are willing to sign a deal with the devil," said Casey Murdock, a Republican state senator whose district includes nine of Oklahoma's more than 80 rural hospitals. "These companies strip the hospital down, make all they can make and move on to the next one."

"The Company Was Founded on a 1 a.m. Phone Call"

Alliance Health Southwest Oklahoma formed four days before the company signed a contract to manage the Mangum hospital.

In fact, Avignone, a co-owner of Praxeo Health, a Dallas-based laboratory services company, had never run a hospital.

But with help from Larry Troxell, a well-known Oklahoma hospital manager, as well as a company providing surgery services in Mangum, Alliance persuaded board members that it could provide a breadth of financial resources that no other company could.

"The company was founded on a 1 a.m. phone call," said Avignone, adding that a former business partner called to tell him the hospital would close the following day without assistance. Avignone didn't name the former partner.

This was not Mangum's first experience with a management company. In June 2017, right before it struck the deal with Alliance, the town had wrested control of the hospital from Little River Healthcare, a now-defunct company that filed for bankruptcy the following year.

In order to take over the operating license for the hospital, the governing board, which at the time was Mangum's city commission, had to absorb $2.1 million of debt accrued by the previous operators.

Town leaders didn't have money to run the hospital, but they knew that its closure would leave about 80 employees without jobs. Residents would have to travel at least 25 miles to get to the nearest emergency room if the hospital closed.

That's when they turned to Avignone.

Two months before the town took charge of the hospital, Troxell reached out to Avignone for help. The two had met in 2014 at Medical University of South Carolina while pursuing doctoral degrees in health administration. According to Troxell, who served as the interim CEO for the Mangum hospital during the transition, Avignone called him two years later to say he had a group of investors interested in buying hospitals.

Troxell was an investor in Greenfield Resources, a company that claimed to have developed new technology to treat wastewater. Greenfield, Praxeo Health and Alliance Management Group, owned by Darrell Parke, later partnered to form Alliance Health Southwest Oklahoma. Troxell said that while he invested in Greenfield, he had no ownership stake in any of the companies.

After Alliance was hired, it quickly became apparent that Avignone didn't have the money he had promised, said Troxell, who remained at the Mangum hospital working as an administrator. He said he went without pay in Mangum and used his personal credit card to purchase supplies.

Alliance did not respond to questions about his claim.

"The only thing I can tell you about Frank is he misled me. He misled everybody," said Troxell, now the CEO of a rural hospital in Texas. "And I believe that he had partners that had money that could bring it to the table at Mangum. And he didn't do it."

"I'm So Angry"

Tammy Sandifer never had a hard time trusting people until she accepted a job as a lab technician at the Pauls Valley Regional Medical Center, about 60 miles south of Oklahoma City.

In November 2017, Sandifer moved her family from Mississippi to Oklahoma on the assurance that the town's 64-bed hospital was financially stable.

Nearly a year later, a national television news crew that was in Pauls Valley to report on the financial pressures facing rural hospitals filmed as employees learned that they no longer had jobs.

Wearing a crisp white lab coat and medical scrubs, Avignone, who isn't a doctor, rubbed his face as he announced that the hospital was immediately closing its doors.

"You can only live on borrowed time for so long," Avignone told employees.

The hospital closed on Oct. 12, 2018. Five days later, Sandifer was diagnosed with cancer.

A mother of two and the primary breadwinner in her family, Sandifer had learned just weeks earlier that she didn't have health insurance.

The hospital had been deducting $566 from Sandifer's paycheck for health benefits for her family of four. An additional $70 a month was pulled from her paycheck for a supplemental cancer policy.

NewLight Healthcare, a different management company, was running the hospital when Sandifer was hired. It had missed payments for the self-funded employee health insurance plan, even as money continued to be deducted from workers' paychecks, according to interviews and a May 2018 letter from the hospital's health benefits administrator.

Alliance Health Southwest Oklahoma took charge of the hospital in July 2018. The company made some payments but never caught up.

The money to pay for insurance just wasn't available because "the previous manager let all of that lapse," Avignone said, referring to NewLight.

NewLight Healthcare did not answer detailed questions from The Frontier and ProPublica about the lapse in insurance payments at Pauls Valley, but it said in a statement that the company "consistently worked alongside community leaders, providers, state associations, and other leaders to attempt to create new models and programs that will improve the business climate for rural hospitals."

The company added that rural hospitals will continue suffering until government leaders provide additional funding.

Under Alliance, the hospital also stopped paying payroll taxes, according to city leaders who provided The Frontier and ProPublica with a spreadsheet indicating how much the hospital owed employees after the closure.

"None of the payroll taxes were being paid. Nothing — state, federal — nothing," said James Frizell, the city manager for Pauls Valley. "How do you do that? How do you with a good conscience even think about doing that?"

At least seven rural hospitals in Oklahoma run by management companies stopped paying workers' wages or failed to pay for health insurance benefits in 2018 and 2019, The Frontier and ProPublica found.

In the past year, the Oklahoma Department of Labor awarded more than $1 million in unpaid wages, benefits and damages to workers at rural hospitals that have either closed or experienced financial distress. But the agency doesn't have the power to enforce the judgments or make employers pay workers.

"It's been disappointing to see the number of claims this past year that we've had to investigate," said Don Schooler, general counsel for the Labor Department. "We recognize it has affected entire communities and huge, huge portions of the state."

Downtown Mangum on March 17.

Since the money had already been pulled from her paycheck, Sandifer spent weeks trying to gather enough to purchase health insurance through the federal exchange under the Affordable Care Act.

Sandifer said she signed up the first week in October but had to wait until November for the plan to take effect. She now pays $700 a month for an individual plan.

The lapse in insurance coverage meant Sandifer had to wait a month to start treatment at MD Anderson Cancer Center in Houston.

By then, Sandifer had to have a portion of her pancreas removed. She said a tumor on her pancreas grew from about the size of a nickel to a silver dollar during the time spent waiting for treatment.

Since her surgery, the cancer has spread to her liver and her spine. She is undergoing clinical trials, hoping for good news.

Sandifer, who returned to Mississippi to be close to her family, said she can't help but feel betrayed.

"I had uprooted my entire family and trusted that everything was the way it was supposed to be because that's what they told me to my face," Sandifer said. "The fact that somebody could just look me in my eye and just lie, you know a baldfaced lie, I'm so angry but probably hurt more than anything."

Millions at Stake but No Written Contract

The experience of Pauls Valley and Mangum illustrate the consequences of nearly nonexistent state regulations and little oversight from local governing boards.

The state has few laws that govern hospital management companies, and those that exist are rarely enforced.

In Oklahoma, a management company can either own the license to operate a hospital or it can run a hospital for which a local government or nonprofit organization holds the license. Under state law, the owner of a hospital license must be "of reputable and responsible character."

State officials could not provide The Frontier and ProPublica with clear criteria for disqualification and were unable to identify any companies that were denied an operating license. They said such information was confidential.

Even the lax state regulations that exist don't apply to management companies running hospitals owned by Oklahoma towns and counties.

In such cases, local governing boards are responsible for vetting companies and providing oversight. Many such towns hire management companies on little more than their word that they can reverse spiraling finances.

"No matter how much money you give these small towns, they're going to hire a management company," said T.J. Marti, a Republican state representative from Tulsa who supports legislation that would encourage nonprofit health care chains to take on management of rural hospitals. "They don't understand how health care works, and the management company literally takes every penny they can out of the hospital and reinvests nothing."

The Mangum hospital board didn't ask for proof that Alliance had the money it promised or get in writing how much investors were willing to commit. It approved a line of credit in Alliance's name but did not require that the company have board authorization when withdrawing money.

By comparison, the town of Seiling also approved a line of credit but insisted on keeping tight control over how the money would be spent. The hospital kept the line of credit in its name and required a vote of the board to withdraw money.

In Pauls Valley, the governing board handed control to Alliance on little more than a handshake. City leaders say no written contract exists despite minutes from a July 2018 meeting indicating that the hospital board approved a management agreement with Alliance.

"Unfortunately, most of it was implied," Frizell said.

NewLight loaned the hospital more than $1 million, charging it 9.75% interest annually. The hospital also owed the company for management fees that had been deferred.

By April 2018, the hospital owed NewLight more than $2 million, according to the company. Ready to cash out, the company cut ties with Pauls Valley and enforced a lien on the hospital's incoming payments, which meant it would be paid before employees and bills for medical supplies.

As town leaders scrambled to find a buyer for the hospital, a representative from Alliance contacted them to pitch the company's services. Alliance would manage the Pauls Valley hospital with the goal of eventually buying it.

"Frank Avignone, he comes and sells us a song and dance," Frizell said. "That he could infuse $1 million immediately in the hospital and $4 or $5 million in 90 days. That sounded good."

The multimillion-dollar investment never arrived.

Two months after taking over, Avignone instead sought to raise money by appealing to celebrities on social media.

"My friends and I that work at Pauls Valley Hospital in Oklahoma are reaching out to all the Hollywood stars to ask for your help in saving our little hospital," Avignone posted on the Facebook pages of television host Ellen DeGeneres and movie director Steven Spielberg in September 2018.

"The hospital has been in danger of closing for some time and we need help just getting the word out," Avignone wrote on country music star Shania Twain's Facebook page.

In a more personal Facebook plea to Darius Rucker, the lead singer of Hootie & the Blowfish, Avignone said: "Believe it or not you and I went to USC (University of South Carolina) at the same time! Now I find myself in a different part of the world trying to save a little country hospital in Pauls Valley Oklahoma."

"Little hospitals like this all over the country are in danger and I can only save one at a time," he wrote in the post. "So far my team and I have saved two others but right now I need help getting the word out about this one."

In an interview with The Frontier, Avignone said his plan to save the Pauls Valley hospital was pinned on his ability to tap the funding stream he discovered in Mangum. He wanted to obtain a line of credit by using the hospital's incoming payments as collateral. But Avignone said the plan was thwarted when he learned that NewLight had a stranglehold on the hospital's assets.

The Frontier and ProPublica requested any written contracts or agreements between the hospital and Alliance stipulating payments or promises and all financial records for the hospital. The city provided partial financial records but said many of the records were either lost or never existed.

Former Pauls Valley Mayor Gary Alfred said he knows the city should have done more to document Alliance's promises. But, he said, the town was desperate to save its hospital.

"If somebody comes in under the guise that they're going to provide for the hospital, that's not a stone you want to leave unturned," Alfred said.

"He's That Smooth"

In the year and a half that Alliance managed the Mangum hospital, the company and other businesses run by its owners were paid more than $3 million.

Alliance collected more than $1.2 million in fees and reimbursements, financial records show. Some employees were also reimbursed for expenses that included mileage to travel to the other two hospitals that the company managed in Oklahoma.

Mangum officials claim in litigation that Alliance lied about the hospital's financial position, skirting a provision in its contract that required the company to wait until all other financial obligations were met before collecting its management fee. Board members said that because they trusted the company's expertise, they relied on such representations when approving several payments they now dispute.

Praxeo Health, the laboratory services company co-owned by Avignone, was paid more than $350,000, records show. Avignone says the company was owed money after it paid employees in July 2017.

Two other companies, Medsurg Consulting and Surgery Center of Altus, which the Mangum hospital board says were co-owned by Darrell Parke, a partner in Alliance, collected $1.7 million, according to records.

Records show Parke signed contracts on behalf of both Medsurg and Surgery Center of Altus. Medsurg is registered in Oklahoma under Parke's name. While Surgery Center of Altus is registered under the name of a law firm, a contract Parke signed with Mangum lists him as a member of the company's ownership.

An attorney for Parke said his client denies the Mangum hospital board's claims. He declined to answer detailed questions from The Frontier and ProPublica.

In a May phone call, Avignone said he and his company were "being unfairly crucified by a lot of people." He also declined to answer detailed questions, saying instead that he would forward them to his attorneys, who would respond to The Frontier and ProPublica. They did not.

Mangum's hospital board fired Alliance in December 2018. In a letter severing its relationship with Alliance, the board said the company repeatedly breached its management agreement, citing a decision to use a $4 million cost reimbursement from the federal government to pay down the line of credit without the board's consent. It also highlighted payments to companies owned by Alliance's partners. Alliance never disclosed that its members were financially connected to some of those businesses, the board alleges in court documents.

A month later, the board voted to allow its attorneys to report Alliance to state and federal law enforcement. A formal complaint was never filed. Instead, the hospital board opted to sue Alliance.

"He's the greatest con man of all time," said Corry Kendall, Mangum's city attorney. "He would convince you that despite what all the paperwork says and what all the documents say and all the anecdotes say, that he's right. He's that smooth, and you want to believe that because he is one of those people that you want to believe."

Corry Kendall, Mangum's city attorney.

Making matters worse, it turns out that Medicare had overpaid the hospital based on flawed calculations, reimbursing it for a full year of costs instead of for the partial year that it was owed. The hospital board currently projects it will have to repay the federal government about $3.5 million, which will likely have to be returned with 10.25% interest, according to the current management.

The bank that provided the line of credit to Alliance is suing the hospital for $1.8 million that has yet to be paid. And Surgery Center of Altus and Medsurg Consulting are suing the hospital, seeking the return of medical equipment and alleging about $1 million in damages. Both lawsuits are ongoing. The hospital has returned some equipment, according to court documents, but disputes that it owes the companies any money.

"I understand where they were coming from, but nobody stole any money from that hospital," Avignone said in an interview in October 2019. "Every dime went back into that hospital. We did everything that we could, as good stewards of municipal money, to make sure that that hospital not only stayed open but grew."

"Blind Hope"

The Mangum hospital is again out of money. And, once again, the town has pinned its turnaround hopes on a for-profit company: Oklahoma-based Cohesive Healthcare Management and Consulting.

Barry Smith, Cohesive's chief executive officer, said he believes a turnaround is possible but cautioned that the hospital can't afford any more lawsuits. A prolonged outbreak of the coronavirus could also further strain finances, he said.

"When you have a huge hole, it just takes a very long time to dig out of," Smith said.

At the end of March, Mangum owed Cohesive $6.7 million in unpaid management fees and payroll expenses for the hospital's medical staff. The company absorbed many of the hospital's costs after it took over from Alliance.

Alliance Health Southwest Oklahoma is no longer operating. Avignone is now the CEO of Affinity Health Partners. The company operates the Washington Regional Medical Center in Plymouth, North Carolina, which entered bankruptcy in 2019 after the collapse of its former operator, EmpowerHMS.

In December, Affinity announced it couldn't come up with the money to pay hospital employees. Avignone blamed billing problems and a delay in funds from Medicare. The hospital later received a loan to cover payroll.

Kendall, Mangum's city attorney, said he's happy Alliance is no longer managing hospitals in Oklahoma, but he warned that the town's experience should encourage rural communities across the country to be more vigilant as they consider hiring for-profit companies.

"I'm hoping other communities elsewhere won't make the same pitfalls, fall in the same traps and mistakes, have the same lapses of judgment, the same blind hope that we had," Kendall said.

Benjamin Hardy contributed reporting.

This article was produced in partnership with The Frontier, which is a member of the ProPublica Local Reporting Network.

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