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Tulare Local Healthcare District Past Poor Decisions Contributed to the Closure of the Medical Center, and Licensing Issues May Delay Its Reopening Report Number: 2018-102

Chapter 1

POOR DECISIONS BY THE DISTRICT’S PREVIOUS BOARD MEMBERS HAMPERED OVERSIGHT AND CONTRIBUTED TO FINANCIAL DIFFICULTIES AT THE MEDICAL CENTER, RESULTING IN ITS CLOSURE

Chapter Summary

The decision of previous district board members in December 2013 to award an affiliate partner management contract to HCCA to manage the district’s medical center contributed to serious financial difficulties, which led to bankruptcy and the closing of the medical center. According to existing documentation, this decision was neither justified nor in the best interest of the district or the community. Further, the contract and subsequent amendment with HCCA limited the board’s ability to oversee the medical center’s operations and finances adequately because they contained provisions restricting direct access to the medical center and its data systems. Previous board members also voted to replace the medical center’s MEC, an act that had lasting consequences, including a significant decline in the number of its physicians, which led to, at least in part, its decrease in patient service revenue. Other key factors contributing to the decline in patient service revenue included a drop in patient volume and a decline in supplemental funds.² Further, professional fees and labor expenses increased, mainly because of the compensation terms in the contract with HCCA. As revenues decreased, the district struggled to pay its vendors, resulting in some of its vendors canceling services with the district. The previous board’s decisions and the deteriorating financial condition during the last 16 months of its operations—July 2016 to October 2017—under HCCA’s management resulted in the district filing bankruptcy and the closing of the medical center. Figure 1 shows a timeline of key relevant events discussed in this report.

Figure 1
Timeline of Key Relevant Events

Source: Board meeting minutes; district’s contract with HCCA; various legal documents concerning the district’s filing for bankruptcy.

Existing Documentation Does Not Demonstrate Justification for the Board’s Choice of HCCA

Although previous members of the district’s board voted unanimously in 2013 to select HCCA to manage the medical center, documentation from the district’s consulting firm that reviewed the proposals received indicates that HCCA was not the most qualified choice. As discussed in the Introduction, the district engaged a consulting firm to assist it in developing and issuing the RFP seeking an affiliate partner and to advise the district in evaluating strategic partnership options, which included reviewing the proposals. The district could not provide copies of the proposals received from the prospective affiliate partners, and the consulting firm was able to provide only two of the proposals. The consulting firm completed an evaluation summary, dated in early December 2013, comparing the prospective affiliate partners and including a scorecard.³ Table 2 shows the consulting firm’s scorecard for the prospective affiliate partners.

Table 2
The Consulting Firm’s Scorecard of Affiliate Partner Proposals Did Not Support the Selection of HCCA

	PROPOSALS RECEIVED
CRITERIA	ADVENTIST HEALTH	ALECTO HEALTHCARE SERVICES, LLC*	BRIDGEWATER HEALTHCARE GROUP*	COMMUNITY MEDICAL CENTERS	HCCA†	STRATEGIC GLOBAL MANAGEMENT, INC.*
Financial strength	Strong	Unknown	Unknown	Strong	Unknown	Strong
Position in marketplace	Strong	Weak	Weak	Strong	Unknown	Moderate
Company history and experience	Strong	Moderate	Moderate	Strong	Unknown	Strong
Executive experience	Unknown	Strong	Strong	Strong	Unknown	Strong
Willingness to provide capital	Moderate	Moderate	Moderate	Weak	Unknown	Moderate
Commitment to continue hospital services	Strong	Strong	Strong	Strong	Unknown	Strong
Strategic advantages	Strong	Unknown	Moderate	Strong	Unknown	Unknown
Opportunity to provide corporate synergy	Strong	Moderate	Unknown	Strong	Unknown	Unknown

The scorecard shows that HCCA was scored as “unknown” for all of the criteria categories in the consulting firm’s evaluation summary. Each of the prospective affiliates, including HCCA, made public presentations to the board in November or December 2013.⁴ Our examination of the board meeting minutes documenting the oral presentations with corresponding PowerPoint slides did not find a level of detail that would enable the board to determine which candidate was the most qualified. For example, the RFP requested that each of the prospective affiliates state its commitment to providing the district with capital or a line of credit upon entering into a management contract. The consulting firm’s evaluation contained detailed information regarding each affiliate’s willingness to provide capital, but no details were identified for HCCA. The presentations to the board also did not contain these details, and the meeting minutes did not reflect that HCCA was willing to provide capital.

We expected the board to have considered carefully the analysis of the written proposals and the scorecard from its consulting firm as well as the presentations when it made its selection of the best affiliate partner. The meeting minutes do reflect that one board member raised concerns regarding the two prospective affiliates that the consulting firm rated as the strongest. She stated that she did not believe it was right to align with a religious institution because the medical center was a government entity. She also expressed concern that the consulting firm reviewing the proposals had not identified that one affiliate had questionable legal charges, and she indicated her support for choosing HCCA. The minutes do not reflect any further discussion among the board members about those concerns.

Despite the consulting firm’s analysis and scorecard of the prospective affiliates, as shown in Table 2, in December 2013 the board’s two-member subcommittee assigned to work with the consulting firm in reviewing the proposals recommended that the board award the management contract to HCCA, and the board unanimously voted to do so. The former board chair, who was on that subcommittee, told us that the board members did not review the written proposals and that, from her perspective, the consulting firm did not provide a lot of information on the proposals. However, she confirmed that the consulting firm had provided the scorecard on the proposals. Further, she stated that as a newly elected board member in 2013, 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 also stated that she and the other subcommittee member discussed whom to recommend as the affiliate, but they did not provide any written or verbal analysis to the board to support their recommendation of HCCA. The board meeting minutes state the chair’s desire to have a facility where physicians would not be ridiculed for bringing patients to the medical center and to complete the tower, and that she believed the only candidate that would accomplish those two goals was HCCA.

When we spoke to the former board vice chair about why he voted to select HCCA, he stated that HCCA gave the best presentation and was the most honest. He also stated that the district was losing approximately $1 million a month and was on the brink of bankruptcy; therefore, he believed there was no other choice. Another former board member echoed this same sense of urgency over the need to make a decision to address the district’s deteriorating financial position. The board selected HCCA even though the consulting firm’s written analysis indicated that HCCA was not the most qualified. In addition, the board did not prepare an alternate analysis showing that its selection aligned with the intent of the RFP. Therefore, the board did not demonstrate that its decision to select HCCA met its goals and intent of aligning with an affiliate partner, nor that its decision was in the best interest of the district and the community that it serves. In fact, in response to the subcommittee’s decision to recommend HCCA, the consulting firm resigned from further work in advising the district, stating that the subcommittee had chosen to disregard its advice in carrying out the selection process.

The Previous Board Members Approved Contract Terms That Did Not Adequately Protect the District’s Interests

The contract with HCCA and a subsequent amendment, both approved by the previous board, limited the board’s ability to oversee the medical center’s operations and finances adequately. State law specifies that a hospital board is responsible for operating its health care facilities in a way that best serves the public health interests of its community. However, the restrictive provisions in the contract prevented the previous board from fulfilling this responsibility. The contract specified that district representatives could not access the medical center, its clinics, and other facilities without prior arrangement with HCCA. The district also could not access data systems used in connection with the operations of the medical center unless specifically authorized by HCCA in each instance.

When we spoke about these contract terms with former board members, the chair and two other former board members stated that HCCA never denied them access to the hospital facilities. According to the former board chair, the requirement for approval to access the facilities was for HCCA’s protection, a precaution to prevent future board members from potentially disrupting hospital operations. She also stated that she never asked for direct access to review the medical center’s financial records, but that she did receive basic financial statements, profit and loss statements, and reports on patient volume. Further, she stated there was no reason to doubt the financial statements as they were audited annually and she believes it was not the board’s place to perform a detailed review of the financial records unless something was amiss.

Nonetheless, these contract provisions hampered the current board. The current chair stated that while he did not attempt to enter the medical center to access its data systems, HCCA was not responsive to some of the board’s requests for data. In particular, he stated that in January 2017 the board requested data from the medical center’s accounting records, and although HCCA initially indicated that it would provide those reports at the February 2017 board meeting, from his perspective, it was later unresponsive to that request. Board agenda materials for a special meeting in September 2017 included correspondence between the legal counsels of the district and HCCA regarding a request for detailed financial information related to the medical center’s financial performance. The correspondence shows a disagreement about the level of detail HCCA needed to provide. HCCA’s counsel claimed that the list of requested items was burdensome because of the number of items requested and because some information requested went back two to four years. He further explained that it would cause great expense to HCCA to provide the information and would interfere with HCCA’s ability to operate the medical center. However, the district’s counsel claimed that the information requested was necessary for the board to be able to make informed decisions. Board meeting minutes do not indicate whether HCCA fully complied with the board’s requests for information before the board terminated HCCA’s management contract in October 2017.

As previously stated, the board has a statutory responsibility to operate its health care facilities in a way that best serves the public health interests of the community, and the board members hold office as a public trust created in the interest and for the benefit of district residents. The fact that HCCA could deny the board information that it thought it needed to govern the district, points out the inappropriate nature of the contract terms, which hindered the board from fulfilling its legal responsibility to operate its health care facilities in a way that best served the interests of the community. The current board chair further stated that HCCA management ordered him off the premises when he entered the medical center to post notices announcing the board’s suspension of the medical center’s license.

The contract also contained provisions that made HCCA the exclusive employer of the medical center’s staff and required the district to “lease” the employees from HCCA at a cost of 130 percent of the employees’ salaries or other base compensation. Financial records indicate that HCCA recorded a portion of the 30 percent as a “compensation premium” after deducting the costs of benefits, taxes, and other expenses. For fiscal year 2014–15, the premium was $1.7 million, and for fiscal year 2015–16 it was $2.5 million. This premium was in addition to HCCA’s annual management fee of $2.7 million, a considerable amount, given that the district’s operating income was more than the annual management fee in just two of the five fiscal years leading up to the contract with HCCA—$4.2 million in fiscal year 2009–10 and $5.5 million in fiscal year 2010–11. The district had a net loss in the two fiscal years that immediately preceded the start of the contract.

We question how the board members could have found the costs associated with these contract terms reasonable. Adding such a significant cost to the medical center’s already slim margins further contributed to the financial strain of the medical center. The former board chair could not explain why she agreed to the contract provisions transferring the district’s employees to HCCA, 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 January 2016, two years after it began managing operations at the medical center, HCCA entered into a contract with Southern Inyo Healthcare District (Inyo) to manage its medical center. However, as Table 3 shows, HCCA’s contract with Inyo did not contain contract terms as restrictive as those with the Tulare district.

Table 3
Key Terms in HCCA’s Contracts With the District Were More Restrictive Than Those for Inyo

	DISTRICT	INYO
Number of licensed beds	112	39
Contract duration	2014–2017	2016–2017
Key terms
Healthcare district oversight	District representatives restricted from entering the medical center, its clinics, and other sites without prior arrangement with HCCA. The district shall also not access data systems utilized in connection with the operations of the medical center, unless specifically authorized by HCCA in each instance.	No restrictions as to when or where Inyo representatives may enter medical center facilities or access data systems.
Employment agreement	District transitioned its employees to HCCA; HCCA is the exclusive employer of the employees and leased them to the district. The district cannot solicit for employment any leased employee for a period of two years after the term of the contract. The district pays HCCA 130 percent of each leased employee’s salary or other base compensation, excluding items such as benefits, insurance, and taxes.	Employees remained employees of Inyo.
Healthcare district oversight	District representatives cannot disclose any negative information or make any disparaging statements regarding HCCA. (No such provision prevents HCCA from speaking negatively about district representatives.)	Inyo representatives cannot disclose any negative information or make any disparaging statements regarding HCCA, and the same prohibitions apply to HCCA representatives regarding Inyo.

Source: HCCA's contracts with the district and Inyo.

The Board Members Removed the Medical Center’s MEC in January 2016 Without First Discussing Their Concerns

The previous board’s decision to replace the medical center’s MEC has had lasting repercussions. We spoke with two of the former board members who voted to replace the MEC to understand their reasons for doing so. The former board chair stated that several individuals, including HCCA’s CEO, told her that a representative from Public Health’s team that conducted the 2016 inspection had stated that the medical center would be closed unless the board took action to replace the MEC. Another former board member we spoke with stated that HCCA management told her that CMS was going to stop allowing Medicare and Medi-Cal patients to seek care at the medical center because of many things that the MEC was not doing or was not doing properly.

Our review of the January 2016 Public Health inspection report of the medical center, its May 2016 reinspection report, and a February 2016 letter from CMS, which receives inspection reports from Public Health, showed deficiencies, including some related to the duties of the MEC, such as not ensuring that medical staff were regularly evaluated, and not having a means to ensure that medical staff were professionally qualified for the positions to which they were appointed and for the privileges they were granted. However, none of these documents specified that the medical center had to replace its MEC. Instead, the letter specifies that the medical center must address the deficiencies identified to avoid termination of its Medicare provider agreement. We asked the former board chair whether she had talked with the MEC about the inspection concerns and she said she had not, and that the MEC had been uncooperative and had refused to meet with her in the past. She also understood that the board was responsible for mitigating the deficiencies and did not want the medical center to close. The former board chair explained that a group of doctors, including a former vice chair, came to the January 2016 board meeting and agreed to be the new MEC, so the board voted to replace the MEC with this second group of doctors.

It is clear from the Public Health inspection report that there were issues involving medical staff that the board needed to address. It is also evident from our discussions with the two former board members that each did not want the medical center to close and that they believed the situation was urgent and required action. However, it is not clear that replacing the MEC was the only option. We also question why the board took action to replace the MEC before it received any official correspondence from CMS or Public Health. The earliest letter from CMS provided to us by the district notifying the hospital that it was out of compliance because of issues concerning the MEC was dated February 2, 2016, five business days after the board voted to replace the MEC. We also expected the board to have discussed with the MEC the serious concerns from CMS before it took such a significant action, but we did not see evidence of any efforts to do so. Had the board waited until it received CMS’s official letter notifying it of the report findings, it could have better considered its response.

The first consequence of the MEC replacement was the departure of a significant number of the medical staff. According to the district’s chief nursing officer, when the MEC was replaced, many physicians either did not renew their privileges to practice in the medical center or resigned from it. The district provided a summary document showing a decline from 79 active physicians on June 30, 2015, to 49 on June 30, 2016—roughly six months after the board replaced the MEC. The medical center’s drop in patient service revenue, which we discuss further in the next section, was due in part to the reduced number of physicians. However, available internal reports show that patient volume had already been declining for several years. Specifically, the average daily patient census dropped from 61 patients in fiscal year 2010–11 to 40 patients in fiscal year 2013–14. Although the average census was 41 per day in fiscal year 2015–16, it fell to 37 in fiscal year 2016–17, a decline on average of four per day. The average daily census dropped to 25 for July to October 2017, when the district suspended its license. The second consequence of the MEC replacement was litigation. In February 2016, members of the former medical staff, including the replaced MEC, filed a lawsuit alleging that the board had violated the medical staff’s right to self-governance, and it requested the reinstatement of the original MEC and the original medical staff bylaws.

Several Factors Contributed to Declining Revenue and Increasing Costs During HCCA’s Management of the Medical Center

The deteriorating financial condition after fiscal year 2015–16 resulted in the district filing bankruptcy and closing the medical center. One key factor was the drop in patient volume, resulting in lower patient revenue. Others included a decrease in supplemental funds; increased administrative costs because of HCCA’s management fee, and its CFO’s salary and his expense reimbursements; and an increase in the cost of purchased labor—salaries and wages and benefits for HCCA employees.

When we reviewed the available financial records for the last 16 months of the district’s operations, multiple factors prevented us from determining whether these financial records are accurate. The district has a history of accounting errors related to financial reporting, including $6.5 million in errors related to the district’s fiscal year 2014–15 financial statements. Further, the fiscal year 2015–16 financial audit report also noted findings related to the district’s financial reporting, including its processes for identifying and adjusting accounting errors. When we followed up with the district’s interim controller regarding discrepancies we identified in our preliminary analysis of the district’s accounting records, she stated that the district is continuing to correct errors. Compounding the difficulty in understanding this chain of events is the fact that the district’s financial statements for the last 16 months of the medical center’s operations remain unaudited, as the district cannot presently afford to hire independent financial auditors and sufficient internal financial staff to prepare for and perform an audit. As a result, we present the available unaudited operating revenue and expenditure information for the last full fiscal year of operations only as an indicator of overall trends in revenue and expenditures.

Our review of the district’s audited financial statements for fiscal years 2012–13 through 2015–16 and available financial information for fiscal year 2016–17 showed that operating revenue and income initially rose in fiscal year 2014–15, the first full fiscal year after HCCA began managing the medical center. Then, between fiscal years 2014–15 and 2015–16, operating expenditures increased more than revenues, as shown in Figure 2. Finally, the financial position of the medical center declined after fiscal year 2015–16 and resulted in the district filing bankruptcy in September 2017.

Figure 2
The Medical Center’s Operating Income Initially Improved Under HCCA, Until Expenditures Increased More Than Revenues

Historically, patient visits drove revenue for the medical center, and that revenue, along with supplemental funds, accounted for 90 percent or more of the medical center’s operating revenue, according to audited financial statements for fiscal years 2012–13 through 2015–16. Using earlier audited financial statements and other available financial records, we identified two categories of operating revenue that had significant changes leading to the decline in the medical center’s financial situation: patient service revenue and supplemental funds within revenue. Patient service revenue increased in fiscal year 2014–15 before declining in fiscal year 2015–16, while revenue from supplemental funds rose in both fiscal years. Available financial statements indicate that both had declined by June 2017, as shown in Figure 3. Although total patient service revenue and supplemental funds were slightly higher in fiscal year 2015–16, increases in operating expenditures outpaced operating revenue growth beginning in that fiscal year, as shown in Figure 2, reducing the improvements seen in fiscal year 2014–15.

Figure 3
Patient Service Revenue and Supplemental Funds Fluctuated Under HCCA

The medical center saw a drop in patient volume and subsequent patient service revenue during the last two fiscal years. The audited financial statements for fiscal year 2015–16 show that net patient service revenue—which consists of both charges associated with patient visits and supplemental funds—remained relatively flat between fiscal years 2014–15 and 2015–16, decreasing by only $225,000. The decrease was small overall because increases in supplemental funding offset lower service volumes and the subsequent lower patient revenue. Specifically, patient service revenue fell from $65.1 million in fiscal year 2014–15 to $60.6 million in fiscal year 2015–16, and available financial records indicate that it continued to decline in fiscal year 2016–17. Supplemental funds accounted for between 13 percent and 20 percent of the medical center’s operating revenue in fiscal years 2013–14 through 2015–16. In fiscal year 2016–17, supplemental funds revenue decreased slightly, falling below the amount received in fiscal year 2014–15.

Although revenue from supplemental funds increased through fiscal year 2015–16 as shown in Figure 3, the district under HCCA management lost several opportunities to receive additional supplemental funds from the Department of Health Care Services (Health Care Services). The interim CFO explained that agreements with Health Care Services required the district to advance funds to Health Care Services for rate increases. Health Care Services would then seek federal funding for the rate increases covered by the agreements, and would return to the district up to twice the amount of the advance. The two agreements covered capitation rate increases for two health plans for fiscal years 2015–16 and 2016–17.⁵ However, according to an email from the former controller to Health Care Services, the district was unable to provide $2.8 million as required by the transfer agreements because it lacked the funds, and thus it missed out on up to an additional $2.8 million in supplemental funds, less administrative costs. As a result, Health Care Services rescinded the two agreements.

Another potential source of supplemental funds was California’s Public Hospital Redesign and Incentives in Medi-Cal program (PRIME program), which is administered by Health Care Services to improve the delivery of care through California’s safety net hospitals—those that serve a higher share of patients covered by Medi‑Cal and the uninsured. The PRIME program spans from January 1, 2016, to June 30, 2020, and provides incentive payments for quality improvement, which concerns maximizing health care value. Similar to the Health Care Services agreements, participants must advance the State’s share of financing, and then the federal government matches the funds and returns them to the State. Participants receive a return of twice the amount of the advanced funds. The district received $2.3 million from the PRIME program during fiscal year 2015–16. However, Health Care Services informed the district in March 2018 that its participation in the PRIME program was terminated as of October 2017 because of the closure of the medical center. Health Care Services also noted that the district was ineligible for funds from the program for fiscal year 2016–17 because it submitted a required report that had been due September 30, 2017, on January 17, 2018, six weeks after the 60-day extended time period. 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.

Operating expenditures increased while HCCA was managing the medical center, beginning in fiscal year 2013–14. The medical center’s operating expenditures included costs for supplies and services to operate the hospital plus the salaries and benefits of staff working at the hospital, which accounted for between 41 percent and 47 percent of its operating expenditures each year. Our review of these expenditures identified two categories that contributed substantially to the increase: professional fees, such as fees for physicians; legal and consulting services; and purchased labor—the cost for payroll and benefits for the employees leased from HCCA per the contract—as shown in Figure 4.

Figure 4
Professional Fees and Purchased Labor Initially Declined Before Rising Under HCCA

HCCA’s management fee contributed to the increase in professional fees for the medical center. The district’s 15-year contract with HCCA, effective in May 2014, required the district to pay HCCA a monthly fee of $225,000 for management services, a total of $2.7 million per year.⁶ The contract also specified that HCCA would provide a CEO as a part of its performance under the agreement, but the contract did not specify any other positions that HCCA would provide, such as the CFO, as we discuss in more detail later. We did not see any evidence that the district conducted a cost-benefit analysis of the impact of the costs associated with these contract terms. When we discussed the management fee with some of the former board members who had approved the contract, the former vice chair stated that he believed that the management fee was reasonable given that the district was losing more than $1 million per month. However, we expected the district to have conducted a cost-benefit analysis before approving a costly long-term contract and to have considered whether the medical center could reasonably sustain the increased costs of the management fee. Such analysis would have been of particular importance given the operating losses the district had sustained in the two fiscal years before it entered into the agreement with HCCA, as shown in Figure 5.

Figure 5
HCCA Did Not Sustain Its Initial Improvement of the Financial Performance of the Medical Center

Purchased labor costs increased while HCCA managed the medical center. Purchased labor includes salaries and wages and benefits, which were a part of the employee lease payment. As discussed previously, under its contract with the district, HCCA became the exclusive employer of the medical center personnel and leased the employees to the district at 130 percent of employee salaries and wages, excluding benefits and certain costs (referred to here as the employee lease payment).⁷

HCCA became the exclusive employer of the medical center’s employees in November 2014. The medical center’s accounting records show that HCCA recorded a compensation premium, which we define here, in fiscal year 2014–15 of $1.7 million and in fiscal year 2015–16 of $2.5 million. This premium was included in the purchased labor category of the financial statements. As discussed earlier, multiple factors prevented us from determining whether the financial records from the last 16 months of operation are accurate, and thus it is unclear what HCCA recorded as its compensation premium during the last 16 months of operations.

Another factor contributing to the increase in purchased labor was an increase in salaries and wages and benefits, although it is not clear, based on the financial statements, which of the two categories increased. Before HCCA began managing the medical center, financial statements prepared for the district presented salaries and wages as a component separate from benefits. However, after district employees became HCCA employees in November 2014, salaries and wages and benefits were shown in one category, purchased labor, along with the compensation premium. Thus, it is not clear whether both salaries and wages and benefits increased, or if one category increased more than the other.

The district and HCCA also contracted for a CFO, further increasing the district’s costs. As mentioned previously, the district’s monthly management fee of $225,000, or $2.7 million per year, evidently did not include CFO services. As a result, following the resignation in July 2014 of the district’s then-CFO, the district entered into a six-month contract with an independent contractor to serve as the interim CFO. The district agreed to pay him $39,000 monthly, or $468,000 annually, plus travel expenses of up to $8,000 per month because he lived in Arizona. In February 2015, HCCA entered into a subsequent contract with the same contractor to serve as the CFO and chief operating officer for the medical center. The contract specified a monthly rate of $46,800 for his services, or $561,600 annually, plus up to $8,000 per month in travel expenditures. The amount invoiced by the CFO monthly and paid by the district rose to $56,800 in January 2016, or $681,600 annually, but we did not find any documentation of a contract amendment associated with the January change, nor any documentation showing that the district’s board was aware of this increase. As shown in Figure 6, the salary paid to the CFO was significantly higher than both the national average and the amount the district had paid the medical center’s former CFO. Further, available documentation shows that the CFO’s travel reimbursement claims totaled $249,000 for August 2014 through June 2017. Again, we expected the district to have considered the impact of these high costs before approving the agreement, and we saw no evidence that the district performed a cost-benefit analysis. Without a cost-benefit analysis to determine whether the costs it would incur are reasonable, the district could not ensure that it was spending its funds prudently.

Figure 6
The CFO’s Salary Exceeded Both the National Average and the Previous CFO’s Salary

Declining Cash Flow Led to Reduced Payments to Vendors

In addition to the declining revenue and increasing expenditures discussed earlier, two other factors contributed to a decrease in cash at the medical center. According to a district information technology consultant, the district, under HCCA’s management, failed to pay certain billing services vendors for several months. He also stated that the district converted to another electronic health record (EHR) system. Because of discrepancies in the available financial records for the last 16 months of operations, as mentioned earlier, we are able to determine only in general terms how these events affected the operations of the medical center.

Under HCCA management, the district contracted with a vendor in April 2015 to perform emergency department billing and coding services for the medical center, processes necessary to receive payment for services provided in that department. However, according to a letter from the vendor’s legal counsel in February 2017, the district stopped providing billing information to the vendor in October 2016, and the vendor discontinued services to the district two months later because it did not receive payment of nearly $274,000. As discussed later in this section, the lack of payment to these and other vendors continues to cause operational and legal difficulties for the district.

After the first billing vendor discontinued services, the district entered into a billing services agreement in April 2017 with a second vendor to perform billing and coding services for the emergency department. However, a letter from the second vendor in August 2017 shows that the district also did not pay that vendor for its services.

The district also experienced a decrease in cash following the implementation of a new EHR system between July and October 2016. According to the former controller, the implementation caused a decrease in cash receipts for the first couple of months due to delays in billing, and while cash receipts eventually increased, they did not return to the level before the conversion. According to an April 2017 presentation by a district vendor providing revenue cycle services to the medical center, average cash after the implementation of the new EHR system was $1 million less per month, with a shortfall between implementation and April 2017 of approximately $6 million.⁸ As discussed previously, the discrepancies in the available financial records for the last 16 months of operation make it difficult to determine precisely how the lack of payment to these vendors and the EHR system conversion affected the operations of the medical center and whether the money owed as recorded by the district is accurate. However, it is clear that the amount of cash available to the medical center dropped significantly during the last 16 months of operation, and its failure to pay the billing vendors and the EHR system conversion were likely contributing factors.

The medical center’s cash balance rose from June 2014 to June 2015 under HCCA but then fell considerably by June 2016, as shown in Figure 7. Further, bank statements provided by the district show that the medical center had $2.3 million in cash as of June 2017 but only $144,000 four months later. This decrease in cash significantly hindered the medical center’s ability to pay for supplies, staff, and other operating expenses. Accounts receivable (money due to the district) increased from June 2014 to June 2017, before the district’s interim controller adjusted the balance to $6.5 million in October 2017, based on historical collection rates. In January 2018, the district contracted with a billing and collection services vendor, which has collected $5.5 million to date.

Figure 7
Under HCCA Management, Cash Was Depleted While Net Patient Accounts Receivable Increased

The medical center struggled as well with bills that it owed. Available unaudited financial statements show that the accounts payable balance rose from $19.6 million in June 2017 to $31 million in October 2017, which resulted in vendors placing credit holds with the medical center. Accounting staff provided accounting records from 2017 showing that comments documented which vendors were complaining about lack of payment and making demands for payment, and that the amounts available for payment were often prioritized to complaining vendors. 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. 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. In a September 2017 letter to the district’s legal counsel, HCCA stated that the district was completely out of cash, that many vendors were threatening to cease providing goods and services, and that there was insufficient cash to fund payroll.

The District Did Not Follow State Conflict-of-Interest Laws Requiring Disclosure Forms

The Political Reform Act of 1974 requires that each local government agency, such as the district, adopt a conflict‑of‑interest code. The act seeks to bar public officials from using their positions to influence government actions in which they may have a financial interest and establishes several requirements related to conflicts of interest. For example, it requires those holding certain positions to disclose their reportable economic interests both annually and when assuming or leaving office. The principles related to conflicts of interest as outlined in the district’s 2014 policy manual specify that all persons holding designated positions must file statements of economic interests each year. The policy identifies, among others, the board members, CEO, CFO, and consultants acting on the district’s behalf.

The district did not ensure that designated individuals consistently filed statements of economic interests. Specifically, the district could not provide an annual statement of economic interests for one board member for 2014, and was also unable to provide four leaving‑office statements—one for 2016 and three for 2017—that the exiting board members were required to file. When designated individuals from the district do not file statements of economic interests, the public has no assurance that potential conflicts are identified and that those designated individuals are not making or influencing decisions that could benefit them financially.

Additionally, the district could not provide the statements of economic interests for the individuals who functioned as its CEO and CFO for 2014 through 2017. Although state law requires that these forms be available for public inspection, the district’s conflict‑of‑interest policy does not identify how it will maintain the forms to ensure that they are available for such an inspection. When we asked for the CEO’s and CFO’s statements of economic interests, the district could not provide these for any HCCA staff, stating that HCCA could have taken the forms with it when the district terminated its contract. We attempted to contact HCCA to request these statements, but our attempts were unsuccessful. Further, although the district’s interim CEO should have submitted his assuming-office statement in December 2017, he did not do so until August 2018. Without having a policy and procedures to ensure that it obtains the forms and maintains them as required, the district cannot demonstrate that it has appropriately considered potential conflicts of interest and it cannot provide the statements for public inspection when requested.

HCCA also may have misappropriated public funds when it inappropriately used district funds to pay some of the medical center’s employees to work at Inyo’s medical center, which HCCA also managed. The district’s interim controller performed an analysis using payroll and accounting data for hourly employees and conducted interviews with staff to estimate the percentage of time salaried staff spent at Inyo. She estimated that between January 2016 and November 2017, 31 individuals paid with district funds worked nearly 4,500 hours at Inyo, with roughly 1,200 of those hours attributed to the CFO.

While other district staff may have been able to perform work outside the district—as long as that work was not paid for with district funds—the CFO should have been working full time on the district’s activities. According to HCCA’s February 2015 contract with the individual who was serving as the CFO and chief operating officer at the district, he was to devote his time, attention, and efforts as needed to properly render the services and perform the duties required within the district’s contract, but in no event were those services to be less than full time. Further, HCCA’s job description lists numerous responsibilities, such as developing, coordinating, and administering medical center policies on finance; assisting in day‑to‑day operational decision making; directing the financial management functions; interpreting financial and statistical trends, as well as projecting capital and operating financial needs; and regularly attending district board meetings. These duties would be difficult, if not impossible, to adequately fulfill without working full time at the district’s medical center. Nevertheless, meeting minutes from Inyo’s board of directors reveal that this individual was the chief restructuring officer at Inyo in 2016 and attended a number of board meetings in person. We question how he could have effectively fulfilled his duties as the district’s CFO while simultaneously holding a high‑level management position at another district.

The interim controller estimated that the value of employee time misdirected from the district was substantial. Based on her 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. 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.

Recommendations

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.

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Footnotes

² Supplemental funds are funds available from state programs to offset low reimbursement rates for Medi-Cal patient services. Go back to text

³ In 2015 another firm acquired the assets of this consulting firm. The successor firm stated that the employees who worked directly with the district during the firm’s engagement were no longer employed at the firm. The successor firm also indicated that it had provided us with all documents in its possession regarding the original firm’s 2013 engagement with the district. Go back to text

⁴ The board meeting minutes reflect that one of the public presentations to the board included two parties: Community Medical Centers and Strategic Global Management. Go back to text

⁵ A capitation rate is a fixed amount of money per patient per unit of time paid in advance to a physician for the delivery of health care services. Go back to text

⁶ The district signed an initial, short-term contract with HCCA that was effective January 2014. Before the conclusion of the initial contract, the district decided to enter into a 15-year contract with HCCA in May 2014. Go back to text

⁷ The employee lease payment is equal to 130 percent of salary or other base compensation, excluding, without limitation, costs such as employment benefits, taxes, retirement, and workers’ compensation premiums. Go back to text

⁸ The revenue cycle consists of all administrative and clinical functions that contribute to the capture, management, and collection of patient service revenue. Go back to text

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