This article has been updated with the final audit report, available at the end of the article. It has also been updated with responses from HCCA, provided to the auditors, for each of the audit company’s findings.
An overdue audit of the Tulare Local Healthcare District was presented to the district’s Board of Directors at its regularly scheduled board meeting.
A draft version provided to the Voice showed that while the District’s operating revenues, net position, and total assets increased, auditors also found that the district understated its 2015 net position by approximately $6m and misstated its 2016 net position by approximately $3m, both of which were corrected.
The audit, originally due December 31, was delayed due to the choice of a new auditing company, according to hospital officials.
Dr. Benny Benzeevi, CEO of Healthcare Conglomerate Associates (HCCA) the company which runs Tulare Regional Medical Center (TRMC) under contract, announced at the same meeting that the California Department of Public Health had accepted the hospital’s response to a February report finding the hospital at fault for removing its former medical staff.
The Audit
Eide Bailly, an accounting firm headquartered in Fargo, N.D., was retained by HCCA to provide an audit of the district’s finances for the year ending June 30, 2016.
Kevin Smith, from the firm’s Boise location, represented the company in presenting the audit findings to the board.
“We’re a national firm, a regional firm,” Smith said. “We have 29 offices in 13 states, and our biggest industry that we practice in is healthcare.”
Smith discussed the audit process with the board and provided comparisons to the hospital’s position in the prior year, alongside comparisons with other hospitals.
The hospital’s net position increased by $16.3m, Smith told the board, and its total operating revenues increased to $80.2m, a 2% increase upon last year. For the year, the hospital had an operating margin of 3.1% as well, Smith said.
Dr. Parmod Kumar, a long-time board member currently up for recall, had praise for the report — and for HCCA’s leadership.
“It’s a great report,” Dr. Parmod Kumar, a long-time board member, said. “I love some of your comments that you made, made me very comfortable.”
View note“The current assets increased by $2.3m, and the margin is important in a hospital — this is the operating margin, and we have been not making any money before HCCA came in on the operating margins,” Kumar said. “Never did. For twelve years. Until they came in and now every year we have an operating margin, without the property taxes. And that is huge: 3.1 percent.”
Kevin Northcraft, one of two recently elected board members, asked that any action on the report be delayed until the following meeting so that the public would be able to comment. Copies of the draft or final copy were not published by the hospital online or provided at the meeting.
Of the five on the board, only Northcraft, Mike Jamaica, and Linda Wilbourn were likely to have received a copy of the report before the meeting began. Jamaica and Wilbourn received copies on Tuesday at the district’s finance committee meeting. Northcraft said he received a copy on Tuesday night.
“I move that this matter be tabled to our next meeting to allow the opportunity for the public to see it on our website and be able to submit questions, so that they are thoroughly familiar with the financial operations of their public hospital,” Northcraft told Wilbourn. Jamaica seconded.
The motion failed with Wilbourn, Kumar, and Richard Torrez voting against, Northcraft and Jamaica in favor.
The board then voted to approve the report along 3-2 lines — Kumar, Wilbourn, and Torrez in favor, Northcraft and Jamaica against.
The audit report marks the third independent verification of HCCA’s turnaround of the hospital, officials told the Voice.
Revising 2015’s Net Position
The firm left multiple criticisms of the district’s accounting processes.
The first mentioned in the report, stated as a material weakness, was a series of misstatements in the district’s prior year financial statements.
“[T]he District identified misstates related to the 2015 financial statements. The District restated its previously issued financial statements to appropriately reflect the June 30, 2015 net position,” the report states.
View noteThe June 30, 2015 report from Armanino Consulting stated the district’s net position at $76,151,047.
The Eide Bailly report stated that the restatements to that figure — the restatement of bond issuance costs as an expense (-$264,223), ‘recognition of accrued property taxes’ (+$9,418,651), an HCCA payable adjustment (-$1,729,421) and an HCCA payroll adjustment (-$927,695) — resulted in a new, restated net position of $82,648,359.
The restatement resulted in a total increase of $6,497,312.
Smith explained two of the adjustments to the board during his presentation.
“The pronouncement, or the standard that was in place two years ago, had not been implemented, and so we had to go back to the prior year and adjust the beginning net position,” Smith said of the adjustment that expensed bond issuance costs.
“The other one was related to property tax,” Smith said. “Any time the property tax is levied, it is basically agreed that you will receive that once it has been levied, so you have access to that at some point.”
View noteHospital officials responded in the final copy of the report that they relied upon the judgment of their auditor on the treatment of tax revenues — and admitted that there were weaknesses in accounting for HCCA payroll costs, citing the unprecedented arrangement between the hospital and the company as a challenge.
“This area was not neglected by any means; with no precedent, model, or template for carrying out the accounting, it proved challenging to understand and plan for appropriate accounting procedures,” the response stated.
“Significant Deficiency”
While the report praised HCCA’s work with the district, stating that the “…economic future of the District can also expect to be bolstered by HCCA’s continuing operational and managerial expertise…” and that the company has “…steadily led the District in improving the finances and operations.”
Smith did state that HCCA had responded to each of the firm’s comments and that he was pleased with the company’s work.
“They have responded to every one of the comments, and we’re satisfied with their comments,” Smith said, “They are working very diligently, very hard, they take them very serious — to correct them going forward.”
The report found one “significant deficiency” and multiple “material weaknesses” in the hospital’s financial reporting.
The significant deficiency referred to a total of $289,000 in passed-on adjustments.
View note“As auditors, we identified significant transactions and account balances that, though incorrect, were not of of a material threshold requiring recording of the entries,” the report reads. “However, we note that this is indicative of the pervasive adjustments noted throughout our auditing procedures.”
HCCA’s response to the auditors was that there was insufficient staffing to perform the work. Finance staff were redirected “for hundreds of hours during 2016” due to Public Records Act requests and requests from legal counsel for analyses.
“We will take steps to ensure material account balances are reconciled in 2017,” the response states.
Material Weaknesses
The first material weakness regards internal control of financial reporting.
“The District does not have an internal control system designed to provide for the preparation of the financial statements and related footnotes being audited in accordance with Generally Accepted Accounting Principles,” the report states. “Management relied on the auditing firm to report financial data in accordance with GAAP.”
According to the Financial Accounting Foundation, reporting financial statements in accordance with generally accepted accounting principles “establishes greater accountability and transparency between a government and its citizens, legislative and oversight bodies, investors, and creditors.”
View noteThe hospital states that there is a process in place to handle such requirements, but that an organization of TRMC’s size has no internal audit department “that can keep abreast of GAAP and other pronouncements.”
They also state that their prior audit firms, Armanino and TCA Partners, “did not present comments or conclusions to the effect of EB’s comments.”
“As 2016 is the first year audited by EB, we incurred a number of first year surprises in audit expectations,” the response continues. “Procedural updates have since been incorporated into 2017 preparation practices.”
Another material weakness report states that hospital management did not have processes to “properly reconcile account balances in the general ledger and to adjust the balances to the proper amount,” requiring transaction reclassifications and adjustments.
View noteThe end result was a decrease of the hospital’s 2016 net position of approximately $3m.
Hospital officials gave the same explanation to this as they did to the auditor’s “significant deficiency” finding — that finance staff were redirected for hundreds of hours on Public Records Act requests and analyses requested by legal counsel.
The firm’s report on the third weakness found stated that “an effective process was not in place to identify potential and actual errors in accounting activity. Additionally, the management structure of the District lacked appropriate organization to provide timely and proper support for audit requests.”
The report also states that auditors experienced difficulty in “…obtaining appropriate support for our requests throughout the audit process. Additionally, the support provided was often incorrect or incomplete, and ultimately required adjustment, which resulted in material changes to the financial statements.”
View noteDuring his remarks to the board, Smith did not mention any incomplete or inaccurate documents.
“We had some delays initially of getting the information, but once we started the process – we come out here in early September,” Smith said, “and then kind of start that process again in January to get that data and start verifying those amounts, we want to let you know that we received excellent cooperation.”
View noteHCCA’s response to the comments stated that the difficulties auditors experienced were due to a “convergence of obligations” in the company’s finance department — essentially a perfect storm: a conversion to a new Electronic Medical Record system, new accounting software system, and audits from both Medicare and MediCal.
“It was an unfortunate occurrence that deprived EB staff of adequate responsiveness of hospital staff,” the response reads. “Hospital staffing was not adequate to provide sufficient advance reconciliation of a number of general ledger accounts, and we have taken measures to bolster staffing in 2017.”
Tower Update
Alan Germany, Chief Financial Officer for HCCA, gave an update on construction of the beleaguered tower project.
The building’s shell, “increment one,” had been signed off by the California Office of Statewide Health Planning and Development, Germany said during his presentation.
The second increment of construction — focusing on interior improvements — is currently in progress, Germany told the board and audience.
After the presentation, Northcraft inquired about the possibility of opening use of the tower in stages instead of waiting for its construction to be completed.
“That’s certainly an option, but it’s certainly not an ideal option. First, it adds tremendously to the cost when you build a building partially instead of fully,” Benzeevi said. “Second, having a large emergency department without having the capacity to have the services that go along with it won’t really serve the optimum goal.”
Later in the meeting, Benzeevi also briefly discussed the bond financing search.
“The first step in that is to get a feasibility study which will confirm by an outside entity that the projections we have for the hospital’s ability to pay back that loan are accurate,” Benzeevi said, “and that is what is happening at present.”
CDPH “Fully Accepting” MEC Disassociation
Benzeevi reported to the board that complaints to the California Department of Public Health (CDPH) leading to a February report which claimed the hospital had violated its bylaws in removing the former medical executive committee and medical staff, have been closed in the hospital’s favor.
“In April 19, 2017, CDPH responded fully accepting TRMC’s actions and closing the case,” Benzeevi said. “An election, the first major one in over seven years, will be held next month to elect MEC officers.”
The election would be the first since the new medical executive committee and medical staff were installed by the board.
Members of the old medical staff that previously had the ability to vote for MEC officers had that ability rescinded when the new medical staff was installed, according to testimony by multiple doctors in a court case surrounding the move to remove the former staff.
His statements largely restated the hospital’s position as laid out during the first part of the court case, which is ongoing, claiming that the prior medical staff was deficient in its duties and that the board was forced to act decisively after a scathing report from the California Department of Public Health, acting on behalf of the federal Centers for Medicaid and Medicare Services, to keep the hospital open.
The April 19 communication that Benzeevi referred to was not made available to the public during the meeting, nor was it made available on the hospital’s website.
Pointed Exchanges
Northcraft asked Benzeevi if any of the reports he cited — including the April 19 letter — were made available to the board or the public.
“All reports from both agencies are publicly available,” Benzeevi said. “They’re all available on the agencies’ websites.”
“I hope you’re right — that that information is available — because I’ve not seen your response to the recent report, that you didn’t provide us, that indicated this board’s action [to disassociate from the prior MEC] put the lives of our patients in danger,” Northcraft said.
His statements refer to the February report which stated that the ouster “…resulted in potential for disruption of critical patient care systems overseen by a medical staff, thereby putting patients at risk for errors and adverse events.”
After Northcraft finished his remarks, Kumar responded by defending the decision to disassociate from the old medical staff in favor of the current medical staff. Kumar emerged as a key figure in the creation of the new medical staff through testimony in the trial.
“He was wrong last month on the board meeting, he is wrong today,” Kumar said of Northcraft.
“We were led to that disastrous [January Centers for Medicare and Medicaid Services] report, because the medical staff did not act in the proper way, and the board let them have its independence, because that’s what the board believed was the law,” Kumar said. “It’s no fault of the board. [The] board must remain respectful.”
Kumar claimed that Northcraft and Jamaica had, in fact, acted irresponsibly in voting against medical staff recommendations at the prior board meeting.
“What I will suggest to you is this, talk to your colleagues who support you, they’re your friends, they need to bring the patients to the hospital,” Kumar said.
“I’d like to just comment on that, if I could,” Northcraft said.
“No, you’ve had your time,” Wilbourn responded.
Some members of the audience responded with jeers to the suggestion that Northcraft would be cut off. Others said he’d had more than enough.
“He’s dominated the whole meeting — are you people serious?” asked Teresa Berbereia, a Tulare nurse in attendance at the meeting.
Wilbourn relented and Northcraft was allowed to respond.
“Our mission is not to make money, our mission is to provide services,” Northcraft said. “We are not doing that currently, because the doctors were insulted and their privileges were removed.”
Benzeevi responded that no doctors lost their privileges to practice at Tulare Regional Medical Center.
The Voice currently has requests in with CDPH and TRMC for copies of communications relating to the February CDPH report and the April 19 letter. When these are available, the article will be updated and the documents added to our “In Depth: TRMC” page.
