Our audit of the district and its oversight of the medical center and HCCA highlighted the following:
- » The high cost of HCCA’s services and decline in patient volume and resulting drop in patient revenue contributed to the closure of the medical center.
- » Available documentation fails to support the previous board's decision to select HCCA in 2013 to manage the medical center.
- It was advised not to choose HCCA.
- HCCA’s management contract limited the board’s ability to adequately monitor the operations and finances of the medical center and cost $2.7 million a year for management services and an additional $2.5 million in compensation in fiscal year 2015–16.
- » Patient service revenue decreased after the previous board replaced the medical center’s medical executive committee.
- Many physicians left the medical center.
- » Cash decreased when the district stopped paying its billing vendors and collecting on services billed.
- » Although the district is planning to reopen the medical center in mid-October 2018, it is unclear whether it can.
- The interim management consultant has not included some costs in its budget.
- Work remains for the district to meet all licensing requirements in federal and state regulations.
Results in Brief
After the September 2017 bankruptcy filing by the Tulare Local Healthcare District (district) and the district’s subsequent decision to suspend its medical center license, the Tulare Regional Medical Center (medical center) closed its doors, having served as one of the region’s acute care hospitals for more than 60 years. The October 2017 closure followed a nearly four-year period during which the district had contracted the medical center’s operational management to an affiliate partner, Healthcare Conglomerate Associates (HCCA). Among the factors contributing to the medical center’s closure were the high cost of HCCA’s services and a decline in patient volume and resulting drop in patient revenue, caused at least in part by a decision by the district’s previous board of directors (previous board) to replace the committee overseeing the medical center’s medical staff.
Moreover, available documentation does not demonstrate that the previous board acted in the best interest of the district and the community it serves when it selected HCCA in 2013 to manage the medical center. According to existing documentation, the board unanimously voted to choose HCCA despite the advice of the consulting firm it had engaged to assist in the selection process and evidence that HCCA might not be the most qualified management partner. Furthermore, HCCA’s management contract contained some terms that created obstacles to the medical center’s future success, including provisions that limited the board’s ability to adequately monitor the operations and finances of the medical center. Other expensive and unfavorable contract provisions included HCCA’s monthly management services fee of $225,000—or $2.7 million a year—and a provision under which HCCA became the exclusive employer of the medical center personnel, an arrangement that required the district to lease employees from HCCA at a cost of 130 percent of their salaries and wages. This contract term resulted in HCCA earning an additional $2.5 million in compensation in fiscal year 2015–16.
In addition to these unfavorable contract provisions, the medical center experienced a decline in operating revenue under HCCA. Although the reliability of the financial records for the final 16 months of HCCA’s operation of the medical center is poor, it is clear that patient service revenue decreased over this period. This decline was due, at least in part, to the previous board’s decision to replace the medical center’s medical executive committee (MEC). The MEC governed the medical staff and was responsible for monitoring and supervising the medical staff’s compliance with generally accepted medical standards and for ensuring the accountability of the medical staff to the district’s board. After the previous board removed the MEC, many physicians chose not to renew their privileges or resigned from the medical center, according to the medical center’s chief nursing officer. This reduction in the number of physicians available to provide services explains, at least in part, the subsequent drop in patient volume and patient revenue. The board’s decision to replace the MEC also resulted in a February 2016 lawsuit against the board, alleging that the board had violated the medical staff’s right to self-governance.
The district’s cash also decreased during the final 16 months of HCCA’s operation because of the district’s failure to pay its billing vendors and to collect on services billed. Available financial records show that the district’s accounts payable balance increased by more than $11 million between June and October 2017, resulting in vendors placing holds on the medical center accounts, and district staff explained that the nonpayment impeded some departments’ ability to obtain necessary medical supplies and services for operation. Finally, in a September 2017 letter to the district’s legal counsel, HCCA announced that the district was completely out of cash.
Despite all of the issues that led to the closure of the medical center, the district is planning to reopen the center in mid-October 2018. Its new board of directors has contracted with an interim management consultant to work toward the reopening, and after the bankruptcy court approved transactions facilitating affiliation with a new partner in August 2018, the district signed a management services agreement with its new affiliate partner (new manager) in early September 2018 to manage the medical center. Nevertheless, the district faces licensing issues that make it unclear whether the medical center will be able to reopen as currently scheduled.
Even though the new manager is providing the district with a $10 million line of credit to assist with reopening expenses, the interim management consultant has not included in its budget for reopening the payment of pre-petition debt—costs incurred before the district filed for bankruptcy. Without budgeting for costs to reestablish relationships with vendors from which it needs to obtain required supplies and services, the district risks delaying the reopening of the medical center.
The district also faces licensing issues. Specifically, although the district has made progress in meeting licensing requirements in federal and state regulations, more work remains. In addition, the temporary suspension of its license expires in October 2018, and the district risks incurring additional costs required to meet current building standards if it lets the license expire and then has to apply for a new license. When a health care facility chooses to suspend its license with the California Department of Public Health, as the district’s medical center did in late 2017, it has the ability to request an extension of the license suspension, but the district has not done so. If the temporary suspension expires, the additional costs of meeting current building standards could further compromise the district’s ability to reopen the medical center as planned.1
Finally, the district could have been more effective in its oversight of its use of bond proceeds. Although the district established a bond oversight committee to oversee its spending of proceeds from $85 million in general obligation bonds to fund the expansion of the medical center, it did not have the committee review key information necessary to allow the committee to do its job effectively. The district also had four external audits of its bond expenditures, three of which identified that the district had spent some bond proceeds for unallowable purposes. However, the district did not address all of the findings and recommendations that its external bond auditors made in those audits.
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 and documents 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 the district is able to reopen by mid-October 2018, it should continue to address the necessary licensing requirements.
To ensure that it uses bond proceeds for allowable purposes, 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 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 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.
1 Shortly before our report was to be published, we learned that the district had requested an extension of its license suspension on September 7, 2018. Public Health approved the district’s request on September 19, 2018. Refer to comment 8 for additional detail. Go back to text