Silicon Valley's Surgeons of Fortune
The anesthesiologists’ ball was raging when Dr. Thomas Elardo and his wife arrived on a December night in 2010. It was 11 p.m., and the Opera House in downtown Los Gatos, Calif., 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 away from his wife. 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. 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 aggressively 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 of Saratoga, Calif. 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 25 times as much as those in-network facilities charge. They pay 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 a fee for performing surgeries. Patients pay little—the chain sometimes waives or reduces their co-pays—and high-quality care keeps the chain’s reputation rock-solid.
“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 declined opportunities to invest in Bay Area Surgical Management 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—and envy of neighboring tech tycoons—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 profits, 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, Fla., collect about $100 million a year in revenue, 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.
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 and Aetna. 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 by 9 percent in 2011, while contributing to a 4.4 percent rise in U.S. health-care costs—already the highest in the world at $2.6 trillion. 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 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—that they threaten the possibility of affordable health care. Aetna’s separate complaint with the Medical Board of California could shut the centers down and jeopardize the surgeons’ licenses. Aetna 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. The case continues to wind its way through the courts, but Hashemieh denies wrongdoing, insisting she is saving America’s doctors from corporate consolidation by helping them earn a respectable living.
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, but doctors who saw the check place it in the range of $700,000 to $960,000.)
As the community wrestles with the legal and ethical questions surrounding the chain, 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 Hashemieh’s centers. “Doctors, like everybody else, want to make money. If they see an investment that they think is legal, what’s wrong with that?” asks Joseph. “I had a chance to buy Google at $100 a share. Why miss the boat?”
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.
The 36-year-old Sarnevesht is a natural salesman whose charm has made him equally loved and loathed in Silicon Valley. He’s 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, Calif. “I had my doubts Julia could pull this off,” says Edward Tennant, who helped launch Bay Area Surgical Management and is now an executive at HCA Holdings, 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 said she’d shoot herself and leave a note blaming the inspectors 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. Sarnevesht says he was “thrown out of a hundred doctor’s offices” as he pitched his facility. “You learn a lot about life getting tossed on the street.” 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, Calif., if they would do surgeries at Bay Area Surgical Group, according to three doctors who declined the offer. “It seemed fishy,” said pediatric orthopedist Jeffrey Kanel, one of the surgeons who declined the offer and 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, which belongs to Sarnevesht and a group of doctors that includes two of the busiest surgeons in Silicon 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.
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 began bringing their patients there. Sarnevesht says Haber’s involvement was “a godsend.” The facility went from break-even in 2006 to nearly $9 million in profits 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.” 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 downpayment, as did he.
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.
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 policies 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.
“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 and Blue Cross & Blue Shield plans.) Sarnevesht sent Delaney another text message last month, threatening to sue the doctor for breaching a nondisclosure agreement. (Delaney is now an investor in competing surgery centers.) “See you in court,” Sarnevesht wrote. Hashemieh’s firm sued Delaney on July 10, claiming that he breached a nondisclosure agreement “that has resulted in lawsuits being filed against Bay Area over erroneous information.”
Patients who wonder about their co-pays are relieved to learn they are 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 of Dillingham’s SOAR Surgery 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. “The doctor took care of everything,” Deras says.
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 one of Hashemieh’s and Sarnevesht’s marketing handouts. 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 out 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 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. The law bars doctors from accepting any compensation, including free or discounted office space, in exchange for providing patient referrals. But these 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 the center’s services.
After a yearlong investigation, Aetna filed a complaint with the Medical Board of California 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 kickback scheme,” the complaint said. Sarnevesht says the charge is ridiculous—health plans don’t pay for liposuction.
Aetna pressed its claims in its lawsuit this February, saying the company paid Hashemieh’s centers $23 million from 2008 through 2011 for 1,900 procedures that would have cost just $3 million at in-network facilities. Hashemieh’s centers collect nearly $20,000 in facility fees for knee arthroscopies that cost just $3,000 in-network, according to Aetna. A disc surgery for lower-back pain, called a laminectomy, costs Aetna about $6,000 in-network yet reaps nearly $120,000 for Bay Area Surgical. Spinal injections, or epidurals, that cost less than $1,000 in-network bring in nearly $7,000 for Hashemieh’s centers. 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 Aetna of illegally pressuring physicians and patients not to use out-of-network facilities. Both cases are pending.
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 patient co-pays—a practice their lawyers argue in court briefs is perfectly legal anyway. The reason their surgeon-partners earn such high rates of return, Sarnevesht says, is simply 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.”
Hashemieh sees the clash with Aetna as an Old World feud between herself and Mark Bertolini, Aetna’s chairman and CEO. 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 Hashemieh’s 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, Calif., in 2010. “We don’t do this for the money.”
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. 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.”
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.