Factors that contributed to Tulare Regional Medical Center’s shutdown last year included its former management company’s “high costs,” declines in patient volume, and the former board’s replacement of its Medical Executive Committee (MEC) according to a report by the California State Auditor’s office.
Healthcare Conglomerate Associates (HCCA), the former management partner, also failed to bill for services rendered and pay its vendors for services the hospital received, with accounts payable increasing $11m in the four month period between June and October 2017.
The report found that the company also charged Tulare upwards of $400,000 for employees to work at the Southern Inyo Hospital, another facility managed by HCCA.
Auditors also found that Alan Germany, CFO for the Tulare Local Healthcare District and HCCA, “should have been working full time on the district’s activities.” Instead, Germany was the Chief Restructuring Officer at Southern Inyo while also CFO for Tulare.
Additionally, the district’s plans to reopen Tulare Regional could be jeopardized by a failure to account for its pre-bankruptcy debt incurred under previous management, particularly if the hospital is not able to make good with its vendors, the report states. Hospital officials disagreed with those conclusions; and, currently, officials plan to reopen on October 15.
Kevin Northcraft, the district board’s chair, said that he appreciated the work the auditors did, but disagreed with some of its findings.
“Our opinion was confirmed that the prior board did not act in the best interests of the district or the community. We want to thank the state auditor and our state representatives, who assisted the board in the current board’s request for this audit,” Northcraft said. “While the last three findings are outdated and irrelevant, we much appreciate this review.”
October in Jeopardy?
“Although the district currently plans to reopen the medical center before its suspended license expires in late October 2018, it can request an extension of its suspension from the California Department of Public Health if it is not able to open by the planned timeline. However, the district has not yet requested an extension,” the report states.
A failure to seek an extension could cause the district to incur additional expenses if it is unable to open in time, the auditor’s office said, and the office felt that the reopening could be off schedule.
Hospital officials bristled at this section of the report.
In a response to the auditor’s office, the hospital’s interim CEO, Larry Blitz, wrote that he was “aghast at some of the conclusions and tone of [the section.]”
“To conclude that the reopening is ‘uncertain’ without any factual evidence, is unacceptable to our thinking and practice,” he added.
District officials said in a September 14 response that an agreement had been made with the California Department of Public Health so that a “simple notice” would suffice to extend the suspension status.
However, the auditor’s office replied that Blitz had written a letter on September 7 requesting an extension of the suspension, and that state officials approved that request on September 19.
“The district’s disagreement with our recommendation to request an extension of its license suspension is disingenuous,” the reply read. “We are disappointed that the district chose not to be forthright about its request for an extension. Nonetheless, we are pleased that the district obtained the extension, as we had recommended in our draft report to the district.”
Equipment, Staffing and Budgeting
As of September 2018, the report states that officials with the district and Adventist Health have not fully staffed clinical laboratory scientists, stocked up prescription drugs and bandages, nor have they fully met equipment, repair, and policy requirements, nor had they fully renegotiated contracts with vendors, including potentially settling pre-bankruptcy debt.
Some equipment had not yet been inspected or repaired, the report added, such as intravenous hoods — which could take up to two weeks from initial testing to a final result, the report noted.
A response from hospital officials stated that the district could not settle pre-bankruptcy debt, as the United States Bankruptcy Court would decide the fate of each creditor well into 2019; hospital officials added that “no known supplies are being withheld due to vendor issues.”
Additionally, they stated that “all of the pharmacy challenges are resolved and reported,” and that if any tasks were not completed, staff would work to resolve them and extend the license if necessary.
The auditor’s office also claims that existing budgets for reopening could be too optimistic. Currently, the district is operating off of a $10m loan from Adventist Health with an agreed-upon budget.
“If repair costs exceed estimates included in the budget and the medical center does not receive supplemental funds on time, the costs to reopen may exceed the amounts included in the budget and the district may not have the funds available to reopen,” the report states.
“The district included all of the known costs to reestablish relationships with vendors at the time of submitting such information to the audit team,” the district replied. “Each week, based on need, our team of vendors may be identified as to particular issues with credit and shipping.”
The auditor’s office provided three recommendations for the reopening of the hospital:
- To ensure that the district is able to reopen by mid‑October 2018, it should continue to address requirements to reinstate its license and should arrange for Public Health to verify compliance with licensing operational requirements as soon as it has completed addressing the requirements to reopen.
- To ensure that the district budgets for all costs necessary to reopen, it should immediately include in its budget the costs to pay pre‑petition debt for vendors with whom it must reestablish relationships before it can resume operations.
- To ensure that the district is able to obtain the supplies and purchased services necessary to reopen the medical center, the district should continue its efforts toward reestablishing relationships with vendors so that it can reopen the medical center by mid‑October 2018.
HCCA wasn’t the most qualified choice to manage the hospital, the report found, yet the board still unanimously voted to allow the newly-created company to manage Tulare Regional.
Based on data from Medical Development Specialists, a firm the district hired in 2013 to search for a management partner, the auditor’s office showed that familiar faces — Adventist Health and Community Medical Centers — were highly rated.
Others, such as Alecto Healthcare Services, Bridgewater Healthcare Group, and Strategic Global Mangement, had strengths and weaknesses. They were still rated higher than HCCA, which was simply “unknown” across all categories: financial strength, position in marketplace, company history and experience, executive experience, willingness to provide capital, commitment to continue hospital services, strategic advantages, and opportunity to provide corporate synergy.
Sherrie Bell, board chair at the time HCCA was awarded its contract, said that in place of the recommendations of the consultant, “she relied on the counsel of trusted individuals in the community, such as a former city manager for Tulare, a former council member, and some doctors that practiced in Tulare, to assist her in deciding which prospective affiliate to select.”
She told the auditor’s office that she and another member of the partner selection subcommittee did not review written proposals and that she felt the firm “did not provide a lot of information on the proposals.”
Dr. Parmod Kumar, the board vice-chair, told the office that HCCA provided “the best presentation and was the most honest,” according to the report — he would later go on to work at HCCA’s other managed hospital in Southern Inyo, and was part of a group of doctors that would later strike out and create a new medical executive committee.
HCCA’s contractual restrictions on the board’s access to the hospital and the hospital’s IT infrastructure, amongst other restrictions, meant that the board did not “adequately protect the district’s interests,” the report found.
Contract provisions requiring all employees to be hired as HCCA employees and requiring a 30% “compensation premium” be paid to HCCA on top of each employee’s payroll costs also gave auditors pause.
“The former board chair could not explain why she agreed to the contract provisions transferring the district’s employees to HCCA,” the report read, “nor how doing so was in the best interest of the district, although she believed the 30 percent was to pay for employee benefits.”
In a 2014 email to his accountant, Dr. Yorai “Benny” Benzeevi, HCCA CEO, estimated his revenue from the 30% premium to be nine million dollars per year, according to a recent filing by the Tulare County District Attorney’s office.
The controversial terms weren’t present in HCCA’s contract with the Southern Inyo Healthcare District, which operates the Southern Inyo Hospital, auditors wrote, and as a similar Voice analysis found.
Tulare may have received the short end of the stick in another way, as well: HCCA may have also misappropriated Tulare’s funds when it billed the hospital for employees to work at Southern Inyo, the report found.
“Based on [Tulare’s interim controller’s] estimate of nearly 4,500 employee hours paid for by the district but spent on HCCA’s directed activities at Inyo, the district had paid more than $400,000 as of November 2017 for which it had received no services,” the report read. “Based on the interim controller’s assessment, HCCA’s payments could constitute a misappropriation of public funds, which is a violation of state law. Pursuant to government auditing standards applicable to our office, we are forwarding this information to the Tulare County District Attorney.”
The auditor’s office provided the following recommendations after reflecting on HCCA’s time at Tulare:
- To ensure that the district can demonstrate that its decisions for selecting contractors are justified and are in the best interest of the district’s residents, by April 2019 the district should establish formal procedures designed to ensure that it follows a rigorous and appropriate evaluation and contract awarding process.
- To ensure that the district pays only reasonable and appropriate contract administrative costs, before the district signs any future management contract, it should prepare estimates of the costs for all proposed contract terms related to compensation.
- To ensure that it complies with state law, by April 2019 the district should update its policy related to conflicts of interest to include procedures requiring the district to obtain and maintain copies of all designated individuals’ statements of economic interests at the medical center.
- To ensure that the district recovers funds inappropriately used to pay for work outside the district, it should immediately take steps to seek reimbursement from HCCA for payments the district made to HCCA for time the former CFO and other employees spent working at Inyo.
Increasing Costs, Decreasing Revenues
The district’s costs increased thanks, at least in part, to HCCA’s management fee, the costs of the labor HCCA provided the district, alongside Germany’s salary and travel reimbursements.
Patient revenue and income from supplemental funds both dropped while the district incurred those costs; additionally, HCCA failed to collect funds from patients who sought the hospital’s services, likely in part because the company was in arrears to its billing partner.
Germany’s salary rose from $39,000 monthly as interim CFO to $46,8000 monthly as permanent CFO in February 2015. It subsequently rose in January 2016 to $56,800 monthly — or $681,600 annually — but no contract amendments or board documentation accompanied that change.
Germany, who lives in Arizona, also received $249,000 in travel reimbursements from the district between August 2014 and June 2017, the report found.
Additionally, there was no evidence of a cost-benefit analysis before the board voted to hire HCCA; Kumar, interviewed by auditors, found the fee to be reasonable in comparison to the district’s former losses of $1m per month.
A “history of accounting errors” prevented the office from verifying the accuracy of the provided financials, the office said, pointing to “$6.5 million in errors related to the district’s fiscal year 2014–15 financial statements” and a statement from the district’s interim financial controller that the district is still correcting past errors.
HCCA also lost out on multiple opportunities for supplemental funds when it failed to transfer $2.8m to the California Department of Healthcare Services in order to make up to an additional $2.8m in a transfer arrangement with the state.
While the district also made strides in California’s PRIME program — touted in a 2016 presentation to the Healthcare Financial Management Association — it missed out on additional opportunities to maximize those funds, too.
“According to the interim CFO, the PRIME program grants lost for the period from October 2016 to September 2017 totaled $2.5 million. The district filed an appeal with Health Care Services in March 2018, requesting that it reconsider the district’s termination from the PRIME program; however, according to the interim CFO, it has not received a response from Health Care Services,” the report reads.
Those changes meant that HCCA left multiple vendors unpaid, as prior Voice reporting has shown. From June to October of 2017, accounts payable spiked from $19.6m to $31m.
“According to the current laboratory operations manager, medical center department heads were meeting daily with the chief nursing officer in August 2017 to inform her of the supplies and services each department needed to maintain the ability to function, as many vendors were placing credit holds because of a lack of payment,” one section states. “He stated that the chief nursing officer took the requests for payments to vendors to the CFO, but in most cases he denied the requests.”
The controversial replacement — or “disassociation” — of the hospital’s Medical Executive Committee in 2016 led to a drop in doctors who practiced at the hospital and a drop in patients, the auditor’s office found.
HCCA officials had often stated the decrease in patients was due to the “disgruntled” former MEC members who had left the hospital; the auditor’s office found that 30 doctors had either resigned from or simply stopped practicing at Tulare between June 30, 2015 and June 30, 2016.
In January 2017, the company stated in a Letter to the Editor that many of the ousted doctors “openly boycotted the hospital and […] openly stated their goal of seeing the hospital close,” and in June 2017, the company further stated members of the former MEC were “tyrants” and that once HCCA came in, “these same doctors realized that the days of simply switching the administration when it did not yield to their selfish demands were over, they changed tactics” to “filing complaints against the hospital in addition to an alleged boycott.”
The district did not effectively monitor its spending of bond funds, the report found.
While it had processes in place that required approval of invoices and auditor reviews, there were weaknesses that allowed certain unreasonable or non-allowed uses of bond funds.
In one example, HCCA used bond proceeds to pay out a $12,500 severance payment to the district’s director of construction; in another, over $500 in bond funds were used to reimburse a consultant for meal costs, though those costs were not outlined in the contract.
In cases before HCCA came on board, the district used $48,000 towards a software maintenance agreement for existing medical equipment and $450 to reimburse a consultant for meal costs.
The auditor’s office also found that the Bond Oversight Committee was stymied in its mission to ensure bond expenditures were made in a proper manner.
While it received reports from staff regarding the progress of the tower project, it did not receive the details of how bond funds were expended until 2013, when the district had already expended $73m of bond proceeds.
The auditor provided the following recommendations:
- To ensure that it uses bond proceeds for allowable purposes and improves its consistency and accountability in processing payments from bond proceeds, by April 2019 the district should formalize and document policies and procedures for verifying that it uses bond proceeds for allowable purposes and for approving expenditures paid from general obligation bond proceeds.
- To ensure that it maintains adequate oversight of expenditures from any future bond proceeds, by April 2019 the district should establish a formal policy to include, as part of the charter for any future bond oversight committee, a requirement that the committee review bond expenditures quarterly at a minimum. The policy should also require the committee to report the results of its reviews to the board quarterly.
- To ensure that any future bond oversight committee meets specified reporting requirements, by April 2019 the district should establish a written process to periodically monitor committee compliance with reporting requirements.
- To increase the effectiveness of its monitoring to ensure that bond proceeds are used only for the purposes that the voters intended, by April 2019 the district should establish and follow a written process to document the steps it will take to address findings and recommendations identified in any future external audits of the bond proceeds.
- To ensure that it can demonstrate that invoices it pays are for contracted services, by April 2019 the district should update its contract management policy to include a requirement to retain a copy of all contracts similar to the State’s requirement of seven years.