AVH District Sues Alecto, Accuses It Of Fraud

Accusing it of malfeasance and fraud, the Antelope Valley Healthcare District has sued Long Beach-based hospital management company Alecto Healthcare, claiming its brief tenure running the 422-bed hospital left it in disarray and led to millions of dollars in extra costs.

The suit filed on June 1 in Los Angeles County Superior Court, stands out for its sharp words, particularly for the relatively genteel world of hospital management. It contends that Alecto’s management of the hospital last year was “deplorable” and damaged relationships with nurses and hospitalist physicians. It also accused Alecto of making decisions without consulting with the publicly-elected hospital board. The suit seeks damages for fraud, breach of contract, breach of fiduciary duties and negligence.

Neither attorneys for the district or Alecto responded to requests for comment.

Alecto was hired by Antelope Valley, one of the largest hospital districts in California, in late 2015 to provide C-suite management and handle the day-to-day operations of the hospital, which is located in the high desert city of Lancaster, about 60 miles northeast of Los Angeles. The district agreed to pay Alecto $1.5 million a year – nearly $400,000 more than if it had hired its own senior executives -- and 1.25% of the hospital’s net operating revenue. Less than a year into the contract, the district reversed course after two new board members who had campaigned against Alecto were elected. Alecto’s contract was terminated without cause on a 3-2 vote at a special meeting that occurred two days before last Christmas. The district had to pay Alecto $6.3 million, although its suit contends the company is asking for an additional $1.4 million.

According to the suit, Alecto began wreaking havoc at the hospital almost immediately. “Within just (30) days of its engagement, Alecto began a widespread, slash-and-burn strategy of reducing staff, destructively altering hospital processed, concealing information from the board, and acting beyond its authority,” the suit claims. Among the accusations contained in the suit:

• Alecto management immediately slashed nurse-to-patient ratios, damaging morale and nearly tripling annual nursing turnover. That led to the first-ever strike by nurses against the hospital in its 55-year history. Alecto also contracted with a traveling nurse firm that led to the quadrupling of average nursing costs from $200,000 a month to $800,000 a month.
  
• Alecto obtained a $30 million line of credit for the hospital with White Oak Global Advisors, a firm with which Alecto was described as having a close relationship. The line of credit was obtained just after the district had refinanced its bond issues and had $140 million cash on hand. White Oak charged the hospital $735,000 to open the line of credit and was prompted to immediately draw down $1 million, from which was being charged $197,000 in quarterly interest payments. It cost the district another $900,000 to shut the line of credit down, according to the suit.
  
• Alecto fired 22 employees from the hospital’s IT department, then failed to complete Antelope Valley’s 2016 federal security assessment or pay for it. The hospital missed out on $1.6 million in federal Meaningful Use funds partly as a result, and was out of compliance with HIPAA rules in several areas.
  
• Alecto entered into an agreement with a new hospitalist group at $3 million per year that was unauthorized by the board, leading to the termination of the contract with the existing group, which was being paid $1.6 million per year. The hospital had to pay $1.2 million to terminate the new contract. And while it entered into a new contract with the old hospitalist company, it was at the cost of $2.2 million annually – $600,000 a year more than the prior contract.
  
• Alecto dragged its feet for months on replacing aging medical equipment sterilizers, despite the fact their replacement had been approved by the district board. As a result of equipment breakdowns, the hospital had to reschedule numerous elective surgeries last February and March, as well as obtain emergency permits to use backup equipment.
  
• The hospital was compliant with state rules requiring registration of at least 90% of birth certificates within 10 days of a birth. Under Alecto’s management, that fell to 76% compliance.

The suit concludes that the relationship with Alecto led to $30 million in losses for the district. Late last year, an attorney who represents Alecto said the contract had led to a pre-tax earnings of $24 million during the first five months of the 2017 fiscal year, compared to $22 million during the same period in fiscal 2016.