Exactly when do contracts between surgery centers and management and development companies begin and end? Those questions are at issue in 2 federal lawsuits involving a pair of Indiana surgery centers and ASC management company Woodrum/ASD.
In the first case, Woodrum helped 9 orthopods develop Lakeshore Surgicare in Chesterton, Ind., a small town outside of Gary, starting in 2004. In 2005 the surgery center and the management company, based out of Chicago, Dallas and Los Angeles, discussed Woodrum's becoming a partner in the center and providing ongoing management services. The surgery center's law firm drafted a letter of intent and an operating agreement for the center, and both included Woodrum as a 20% partner with an investment of $200,000. The issue apparently was discussed during several meetings, but neither agreement was ever signed, and Woodrum never contributed the $200,000, according to court documents.
Signing the agreement would have been a formality, says Woodrum's attorney, Robert Lang, JD, of Chicago law firm of Holland and Knight. "They formally agreed to all the terms," Mr. Lang tells Outpatient Surgery Magazine. "The doctors held it up."
In 2006, the physicians sold the surgery center to Lake Park Surgicare, a hospital-owned surgery center in Hobart, Ind., for an undisclosed sum. Woodrum says it was cut out of the proceeds. In the lawsuit filed in March 2008 in U.S. District Court for the Northern District of Illinois, Woodrum claims that the unsigned operating agreement is valid and that the physicians owe the company an unspecified portion of the proceeds of the sale. It would be unjust if the "manpower, brainpower and money" that it invested in making the center a reality were not recognized, claims the company in court documents.
Mr. Lang says Woodrum didn't contribute the money because the project wasn't finished yet. Only a foundation was built when the physicians sold the surgery center. He estimates that Woodrum's share plus damages are worth about $800,000.
Representatives of the surgeon group testified that the doctors extended an offer to Woodrum to purchase an interest in the surgery center in 2005, but Woodrum "failed to accept this offer" by not contributing any capital. The surgeons acknowledge that the letter of intent and operating agreement were drafted but never executed, according to court documents. An attorney representing the surgeon group said she could not comment, since the case is still in litigation.
In another case, Woodrum is suing over early termination of its management contract at the Merrillville (Ind.) Surgery Center, which opened in September 2006.
According to the documents filed in federal court in Illinois, the surgery center was a partnership between 18 local physicians and Methodist Hospital in Gary. From the beginning, apparently, the surgery center lost money, which may be one of the reasons the center hired Woodrum to manage it in May 2007. The surgery center agreed to pay Woodrum $12,000 per month plus expenses to oversee tasks like contracting, billing, collections and scheduling. The contract was to last until May 2009. Despite the change in management, the center continued to lose money, claims Methodist Hospital in court documents.
In August 2008, Methodist bought out the physicians' interest in the surgery center and in November notified Woodrum that its contract would be terminated at year's end. The reason: "persistent and material failure to effectively manage the Surgicenter," according to a letter to Woodrum principal David Woodrum, MHE, FACHE. Methodist complained that the center was failing because it could not obtain good managed care contracts, increase physician participation or effectively manage accounts receivable.
On Dec. 1, the hospital closed the surgery center. Woodrum, claiming that the management agreement had been terminated prematurely, asked an arbitratror to force Merrillville Surgery Center and Methodist Hospital to pay the balance its contract. In June 2009 the arbitrator sided with Woodrum and awarded the company $93,086.42. But Woodrum never got paid because the surgery center subsequently declared Chapter 7 bankruptcy. A U.S. District Court in Northern Indiana will now decide whether Methodist Hospital must also enter into arbitration with Woodrum.
Mr. Lang says that Mr. Woodrum and his company are not usually litigious, but in both of these cases, "he feels wronged."
Kent Steinriede
