From Crain's Business World: "Fraud drained Peninsula Hospital..."

Fraud drained Peninsula Hospital, suit says

Led by Steven Zakheim, Revival Home Health Care allegedly duped the health agency and bled the Queens hospital dry.

BY BARBARA BENSON

September 15, 2013

Peninsula Hospital Center was awash in red ink two years ago when a white knight suddenly arrived on the scene, pledging millions of dollars in loans and promising to save 1,000 hospital jobs by taking over the Far Rockaway, Queens, institution.

It wasn't long, however, before the plan cobbled together by affiliates of Revival Home Health Care, a Brooklyn home-care agency, dramatically unraveled. Instead of saving Peninsula, the company doomed it. Within weeks, Peninsula declared bankruptcy. The Revival team was accused of mismanagement. A judge-appointed Chapter 11 trustee soon took over, closed the hospital, and sold Peninsula's nursing home.

Now the trustee, Lori Lapin Jones, is going after Revival Home Health Care. In late August, she filed civil racketeering charges against Revival, its related entities, its owners, the former president of Peninsula and business associates. Citing the Racketeer Influenced and Corrupt Organizations Act, she alleges the defendants committed fraud, falsified information to the bankruptcy court and creditors, and lied to the state Department of Health.

Peninsula "suffered actual damages in an amount to be determined at trial, but believed to be at least several million dollars, plus punitive damages," according to the lawsuit.

In the eyes of Ms. Jones, Revival's offer to save Peninsula was an elaborate plot to milk the hospital for revenue that would be diverted to a web of Revival entities. She alleges that the engineer behind the plot was Steven Zakheim, a Brooklyn health care executive who had already been blacklisted by the state Department of Health for misconduct and whose involvement would have been a red flag for regulators—had they been told he was bankrolling the plan.

Mr. Zakheim's wife, Faye, owned Revival, but the lawsuit claims that Mr. Zakheim controlled all Revival entities as well as several other related companies. The Peninsula takeover was Mr. Zakheim's "illegal scheme to acquire the debtors [Peninsula and its nursing home] and integrate them into his health care empire," according to the lawsuit. Mr. Zakheim and Peninsula's president, who was secretly on Revival's payroll, duped the DOH in part because the state did not have the power to fully investigate its suspicions that Mr. Zakheim was backing Revival, the suit alleges.

It was only through Ms. Jones' broad powers, granted under bankruptcy law to pursue millions of dollars owed to Peninsula's creditors, that Mr. Zakheim's allegedly deep involvement in Peninsula came to light.

But the resolution of the suit, filed in late August, is far from certain. Mr. Zakheim died earlier this month.

Checkered history

The state had long been concerned with Mr. Zakheim's business practices. In 2003, he submitted a false application for an emergency medical technician license by attesting he had never been convicted of a crime, when he had been convicted of a misdemeanor for sexual assault. The lawsuit also describes a whistle-blower case against Mr. Zakheim and his ambulance companies, Metropolitan Ambulance & First Aid Corp. and Metro North Ambulance Corp., alleging he "caused the use of hundreds of forged documents for the purpose of defrauding Medicare of millions of dollars." In another example listed in the suit, Mr. Zakheim "pled guilty to making an illegal campaign contribution."

In 2005, the DOH required the Zakheims to sign affidavits stating he would not have any involvement in Revival Home Health Care's operations or finances.

An attorney for Mr. Zakheim, David Rabbach, said it is an extremely difficult time for the Zakheim family, given Mr. Zakheim's death. He declined to comment on the lawsuit. On behalf of the Zak-heim family, he said that when the hospital "was several days away from being closed in September 2011, the Zakheims lent approximately $3.5 million to Peninsula and expended considerable time and effort in order to try to save lives and jobs."

State health officials, aware of Mr. Zakheim's past, initially raised concerns about his possible involvement with Peninsula. But regulators lacked the power to subpoena Peninsula's board, executives and Revival. Ms. Jones' lawsuit highlights the state's limited ability to intervene in the management of hospitals it regulates.

Using the trustee's subpoena power to access documents and take depositions, Ms. Jones describes—through daily email exchanges between Mr. Zakheim and Mr. Miller—how Mr. Zakheim was allegedly pulling the strings at Peninsula for his own gain. He hired a longtime Revival executive, Todd Miller, as the hospital's president, even though Mr. Miller did not have any hospital management experience. Mr. Miller reported directly to Mr. Zakheim. Mr. Zakheim was even given an authorized Peninsula identification card in September 2011 that allowed him to "come and go throughout the facilities as he pleased."

Under oath, Mr. Miller was asked why he allowed Mr. Zakheim full access to the hospital's emergency department despite the fact Mr. Zakheim had "no medical training and no formal or disclosed relationship" with Peninsula. Mr. Miller answered that Mr. Zakheim was a "brilliant businessman who has about 30 years of experience working in most of the major hospitals in New York City."

But Mr. Zakheim, like Mr. Miller, had "no experience administering a hospital," according to the lawsuit. Mr. Zakheim ran ambulance companies, a medical supply firm and Revival, the home health care agency. Mr. Miller, who had worked for Mr. Zakheim for decades, was installed as Peninsula's president even as he remained Revival's chief operating officer for a short time. Mr. Miller did not respond to a request for comment.

In another example of the control Mr. Zakheim exerted over Peninsula, the lawsuit alleges that he told Mr. Miller to change the patient-intake process so that Mr. Zak-heim could keep tabs on which doctors were bringing in the most money relative to their salaries. "We want to keep the high admitters and kill the low ones," he allegedly said, according to the lawsuit.

Conflicts of interest

Mr. Zakheim also allegedly turned Peninsula into a customer for his other health care holdings. Peninsula paid at least $1.3 million to people or entities associated with Mr. Zakheim. He used his access to Peninsula's operations to keep tabs on business opportunities that could be steered to companies he owned. The lawsuit alleges that Mr. Zak-heim received on a daily basis the discharge reports generated when patients left the hospital—access that let him identify any patient who might need home health care or medical supplies.

One day in November 2011, Mr. Zakheim "berated" Mr. Miller because only three of five patients discharged for home care were directed to his Revival agency, and none were diagnosed as needing any medical equipment, according to the lawsuit.

"Why two cases to VNS & MJHS?" Mr. Zakheim asked, referring to two competitors. "Can't believe that not one patient needed even a cane."

Ms. Jones alleges that Mr. Miller's inexperience hastened Peninsula's unraveling. Mr. Miller, for example, had been warned that the hospital's lab was facing problems. But he allegedly took no meaningful action for months to fix them.

On Feb. 23, 2012, the DOH suspended the hospital's lab services after finding "serious deficiencies in the administration and operation relating to the clinical laboratory," according to the lawsuit. That was the hospital's final blow. When Mr. Miller learned the news, he immediately emailed Mr. Zakheim, according to subpoenaed emails.

Mr. Zakheim's response: "Can't we bribe anyone?"