Local CEOs worked for $1 billion public company
The top executives of six New Mexico nonprofits receiving almost $30 million a year in Medicaid payments to deliver behavioral health services were on the payroll of a publicly traded Arizona company until they were forced out earlier this summer by the state Human Services Department.
Providence Service Corp., of Tucson, with annual revenues of $1 billion, employed the top managers and, in some cases, the chief financial officer of the New Mexico nonprofits, which along with nine other providers had their state Medicaid payments suspended after an audit allegedly turned up evidence of fraud and abuse.
New Mexico’s Human Services Department chief says the relationships between the nonprofit providers and the for-profit Arizona company appear fraught with conflicts of interest. The former head of one of the nonprofits says they follow a commonly used business model.
The CEO employment relationship wasn’t the only tie Providence had with the New Mexico nonprofits.
IRS filings reviewed by the Journal show the nonprofits also paid amounts ranging from $200,000 to $900,000 a year to a Providence subsidiary and another nonprofit firm under the control of Providence for providing administrative support services that included Medicaid billing to the state.
The CEOs of the nonprofits were actually employees of Providence. The six nonprofits are the Counseling Center of Alamogordo, Counseling Associates of Roswell, Valencia Counseling Services Inc. of Los Lunas and three Las Cruces-based firms: Families and Youth Inc., Southern New Mexico Human Development and Southwest Counseling Center.
The CEO of a seventh nonprofit – Border Area Mental Health of Silver City – was not on the Providence payroll, although the mental health agency was part of the Providence network.
The controversy over the audit and replacement of the management teams has garnered headlines and legislative hearings, but Providence Service Corp.’s management role in nearly half of the New Mexico nonprofits has remained under the radar.
Federal tax returns filed at the IRS and financial statements filed with the state Attorney General’s Office show Providence has had a hand in the day-to-day operations of the Medicaid providers since 2005 – by employing the CEOs and the arrangement by which the nonprofits pay Providence-controlled companies for business services.
HSD officials, who have been under fire for suspending payments to 15 nonprofits and bringing in outside nonprofit companies from Arizona to manage 12 of them, find the business relationships troubling.
HSD Secretary Sidonie Squier said the situation “is riddled with financial conflicts of interest, and it calls into question whether Medicaid dollars are being spent appropriately.”
But Roque Garcia of Las Cruces, a Providence employee since 2001 who was instrumental in setting up the network, said, “It is a perfectly legal business model that has been used around the country. It was designed to help small behavioral health providers survive.”
The suspension of Medicaid payments was spurred by what the agency said were audit findings of credible evidence of fraud and abuse. Administration officials say the findings could amount to $36 million.
HSD officials brought in other Arizona nonprofit companies to manage the nonprofits and insist the goal is no disruption of services.
Providence is a $1 billion-a-year company traded on Nasdaq.
According to HSD officials, Providence initially provided the state with information about its role in New Mexico but cut off communications when state officials asked to see specific contracts with CEOs of the New Mexico nonprofits.
The former CEOs have complained about local nonprofits being shunted aside because of the HSD audits that remain secret at the request of Attorney General Gary King, whose office is conducting a criminal investigation.
In court records and in public statements to the media and legislative committees, the former CEOs have said little or nothing about the fact that Providence Service Corp. was paying their salaries.
But Garcia said it “has never been a secret.”
“All the agreements between the nonprofit agencies and Providence were approved by each agency’s unpaid and independent board of directors and could be canceled at any time,” Garcia said.
While not discussing the audit findings, Squier said that from the public records reviewed by the Journal, “It would appear that a for-profit Arizona corporation has been employing CEOs of New Mexico nonprofits, who are at the same time making large payments with Medicaid funds to management/billing companies that they help oversee … and which, in at least one case, is owned by that same for-profit Arizona corporation that pays the CEOs’ salaries.”
Garcia said he was never given a chance to explain to HSD how Providence’s network operated.
Providence Service Corp. entered New Mexico’s Medicaid industry in 2001, when the company hired Garcia, who had been running a nonprofit behavioral health provider.
“The first thing that attracted the nonprofit providers to align with Providence was that it allowed them to come under Providence’s health care insurance, which reduced health insurance costs dramatically,” Garcia said.
The idea, Garcia said, was to build a network of nonprofit providers that would combine their administrative services under one roof and pay a fixed fee for those services.
“It was a business model for nonprofits,” Garcia said. “We would have the aid of a large company, to help move us away from paper billing to computers.”
He said other services included accounting, human resources, online training, quality assurance oversight and legal advice.
Those services were handled by Rio Grande Behavioral Health Services, which is run by a board – a majority of whose members are CEOs on Providence’s payroll.
Garcia said many nonprofits found Providence networking idea attractive.
“Annual administrative costs were set instead of being a moving target,” Garcia said. “It allows for better planning and concentrating on delivering services to the people who need it.”
Rio Grande Management LLC, a Providence subsidiary, was set up to handle the costs of paying the salaries and benefits for CEOs of participating nonprofits.
Garcia said Arizona nonprofits brought into New Mexico as a result of the HSD audits to run New Mexico nonprofits use the same model.
“Providence does this around the country,” said Garcia, who is no longer on Providence’s payroll.
HSD Secretary Squier said, “Regardless of the work they do elsewhere, we can only speak to what’s happening in New Mexico. It is deeply concerning and there are many questions that remain. We’re talking about Medicaid dollars here, which are designed to help those in need.”
The business relationships between Providence and the nonprofits are included in annual IRS tax forms the nonprofits must file and financial statements they file with the Attorney General’s Office.
The information is public record, in some cases found in “auditor’s notes” in the annual filings. It can be confusing.
For instance, Families and Youth Inc. is one of the largest Medicaid providers in Las Cruces – around $15 million a year for a wide range of services, from foster children to substance abuse treatment.
FYI, as it is known, was headed by Jose Frietze until he was forced out by the HSD in July. Frietze has been an employee of Providence since 2005, making $135,000 a year.
He sits on the board of directors of Rio Grande Behavioral Health Services, a nonprofit controlled by a board of CEOs paid by Providence. Financial statements show FYI paid Rio Grande Behavioral Health Services $474,902 for administrative services such as accounting, billing and human resources in 2011.
That same year, FYI paid Rio Grande Management LLC., a for-profit subsidiary of Providence, another $487,200 for management services that covered Frietze’s salary and benefits and part of FYI’s financial officer.
Similar relationships were true for other nonprofits that have had management removed by HSD and replaced by managers from Arizona nonprofits.