The Closing of the Laser Spine Institute

On March 1, 2019, the Laser Spine Institute (LSI) closed abruptly. Creditors of the company seized all the assets of the company and turned them over to an “assignee,” who will determine the value of the assets and try to sell them for the benefit of the creditors.

LSI CEO Jake Brace issued a press release saying the company’s banks “precipitously and surprisingly made the decision to freeze the company’s accounts and strip the cash out of these accounts.”

In addition to its Tampa, Florida, headquarters, the institute also closed its locations in Ohio, Arizona and Missouri.

So comes the end for one of the most iconic symbols of the modern business of spine surgery. Anyone who flew in an airplane over the past 10 years saw the image in the LSI ad of a young woman in a bikini standing on the beach with a small Band-Aid on her lower back in the airline’s magazines.

The Dismemberment of Laserscopic Spinal Centers

Why the sudden collapse? Brace didn’t say, but a recently concluded lawsuit between the four individuals who came up with the original idea for an endoscopic spinal surgery center certainly contributed to the demise.

According to findings by a Florida trial court, the idea for a business that would provide endoscopic minimally invasive spine surgery started around 2004 when Joe Bailey, Ted Suhl and orthopedic surgeons, James St. Louis, D.O, and Michael Perry, M.D., formed Laserscopic Spinal Centers of America, Inc.

The partnership quickly fell apart as the two surgeons saw greener pastures and joined new investors who copied the Laserscopic business model and formed the Laser Spine Institute. LSI opened in 2005 with Drs. St. Louis, Perry and another surgeon, Glenn Hamburg, M.D.

$264 Million Bite

Bailey and Suhl sued in 2006 and won. A trial court awarded them $1.6 million in damages, but no punitive damages. On December 28, 2019, an appeals court in Florida said, nope, Bailey and Suhl are entitled to punitive damages and the trial court upped the award to $264 million.

That bite was too big for LSI creditors and they moved to salvage what they could.

The trial court determined the business model was unique, and St. Louis was one of between four and ten surgeons in the country who specialized in endoscopic minimally invasive spine surgery.

Laserscopic began providing services to patients in August 2004.

By October 2004, the company showed significant growth results and the number of surgical procedures performed increased in each of the three months. Revenue went from $75,000 to $650,000 in those three months.

Grammen, Esping and EFO Holdings

The four owners went looking for a loan and found William Esping, the managing director of EFO Holdings L.P., and Robert Grammen, a partner with EFO.

To get the loan, the partners provided a copy of its business plan to Esping and Grammen. Esping and Grammen agreed to keep the business plan confidential. Laserscopic Spinal’s financial information was provided to EFO to allow EFO to conduct a due diligence investigation on site.

Instead of offering a loan, EFO offered to invest $3 million in Laserscopic in exchange for a 55% interest in the company, permanent control of the board, and a preferential 7% return on its invested capital with the agreement that no distributions could be made to other investors until EFO’s invested capital was repaid.

According to the trial court, this caught the four partners by surprise. When Bailey called Grammen to discuss these “unexpected” terms, Grammen told Bailey that “you’re going to accept this offer or we’re going to take your doctors and we’re going to take your company. And we’re going to go up the street, and we’re going to do it ourselves.”

Sowing Discord

EFO made good on its threat.

To drive a wedge between the partners, the court found that Grammen and another individual raised concerns with St. Louis and Perry about the company’s expenses, operations and capitalization. Without having investigated these matters.

The court said EFO used the records provided to them in confidence during their due diligence investigation to mislead St. Louis and Perry and cause them to question Bailey’s integrity. Court documents state they did this in an effort to leverage their position in negotiations to force a sale of Laserscopic with St. Louis and Perry’s support.

When another individual with an option to purchase an investor’s interest in Laserscopic refused to sell his option to EFO, Grammen threatened that “they would lose the company.”

When the investor threatened to sue if Grammen and EFO interfered with the business, Grammen was not concerned and said EFO would make ten times whatever damages they might have to pay in a lawsuit.

Surgeons Team With EFO

Two days after Grammen and EFO’s offer to take over Laserscopic, St. Louis and Perry told Bailey they were leaving Laserscopic to start up a competing venture with EFO. St. Louis and Perry, as owners, officers, directors and employees of Laserscopic, had numerous phone calls with and met privately with Esping and Grammen.

The trial court found that St. Louis and Perry conspired with EFO to establish a competing business, Laser Spine Institute, LLC.

Laser Spine’s incorporation papers were signed 22 days after EFO’s offer to take over Laserscopic.

But that’s not all the new LSI guys did.

The trial court found that they “made use of Laserscopic’s business plan, confidential documents, key personnel including the entire surgical team and other employees, internal forms and documents, and patient leads.

“They obtained the critical head start and benefit of time and know-how, which gave them a significant advantage in the market.”

EFO admitted the LSI business plan was a “cut and paste job” of Laserscopic’s confidential business plan that EFO had received during due diligence.

LSI then used Laserscopic’s confidential business plan to seek funding from lenders. LSI, said the court, never created its own comprehensive business plan.

St. Louis and Perry falsely told Laserscopic employees that Bailey was stealing corporate assets. St. Louis also told employees that Bailey had many aliases, was a wanted felon, and had “possible” sexual offenses.

The trial court specifically found that all of these allegations were false and, furthermore, “[there was] no evidence that St. Louis and Perry had a good faith belief the statements about Bailey were accurate at the time that they were made.”

Deboning Laserscopic “With Surgical Skill”

The Florida appeals court said it wasn’t enough for the LSI defendants to “gut” Laserscopic, but “deboned it with surgical skill.”

St. Louis, Perry and EFO paid numerous employees to quit working at Laserscopic and continued to pay them until LSI was ready to open.

Perry also incited employees to quit by falsely telling them that Bailey was going to fire them. St. Louis told one employee to stop scheduling surgeries, which directly affected at least ten patients.

Laserscopic’s list of patient lists and leads, accounts payable information, and operating room supplies were also misappropriated.

The court found that as many as 30 to 40 patients of Laserscopic were scheduled for surgery by LSI. Patients of Laserscopic were sent a notice by LSI stating that their clinic had simply moved locations.

LSI even created a patient success story advertisement, which actually featured a patient of Laserscopic.

When Bailey tried to hire another surgeon, who specializes in minimally invasive spine surgery. St. Louis and Perry contacted that surgeon and discouraged him from joining Bailey and Laserscopic. Grammen also contacted the surgeon and stated that they thought Laserscopic would fail and offered to pay the surgeon not to work for Laserscopic.

After all this, the trial judge awarded Bailey $1.6 million in damages, but no punitive damages.

Bailey appealed and the appeals court said the trial judge erred in finding that the facts did not support an award of punitive damages. The trial judge then raised the award to $264 million.

That’s when LSI’s bankers swooped in to save what they could by seizing assets and organizing a sale of assets. LSI didn’t even have time to file for bankruptcy.

“An Intentional and Reprehensible Act”

To support the case for punitive damages, the appeals court cited an earlier case where the “behavior transcends the level of simple negligence, and even gross negligence, and enters the realm of wanton intentionality, exaggerated recklessness, or such an extreme degree of negligence as to parallel an intentional and reprehensible act.”

So why couldn’t LSI just pay the award? After all, the company reported $220 million in revenue in 2017, up from $216 million the previous year. They even opened a new 176,000-square-foot surgical center in 2014

In addition to this and other lawsuits, Jay Wolfson, DrPH, JD, a professor at the University of South Florida who specializes in health care issues, told the Tampa Bay Times that LSI’s business model wasn’t sustainable after the Affordable Care Act was being implemented. LSI didn’t take most insurance policies, forcing patients to pay out of pocket.

“This franchise-type model was bound to fail,” Wolfson said. “Laser Spine didn’t own their real estate or their medical equipment. They leased them. They had no assets to fall back on when cash flow became a problem.”

So, there it ends. The Band-Aid has been pulled off and the patient has bled to death.