FOR RELEASE:

Audit Details Severe Mismanagement at Westchester County Health Care Corp.

Inaccurate Budget Projections, Bad Management Decisions, Poor Financial Controls, Inadequate Accounting Systems All Contributed to $207 Million Loss Over Four Years
Deficits Persist, But Progress Being Made on Financial Operations Under New Management Team

Poor fiscal management and budgeting combined with a failure to control expenses and operate efficient accounting and reporting systems resulted in a documented $207 million operating loss from 2001 through 2004 for the Westchester County Health Care Corporation (WCHCC), according to an audit released today by New York State Comptroller Alan G. Hevesi. This does not include an additional projected loss of $60 million in 2005.

The audit covered transactions and reports from January 2002 through December 2004, under the Corporation’s former management team. Auditors found that monthly financial reports submitted to the County by WCHCC – which operates the Westchester Medical Center regional health care complex and related facilities – were so inaccurate that they prevented County officials from having an up-to-date and clear picture of the Corporation’s financial condition.

WCHCC went from a $2.6 million operating surplus in 2000 to a cumulative operating loss of $207 million by the end of 2004, and failed to address its structural budget deficit. During that time, Corporation officials:

• Presented overly optimistic fiscal projections. In 2003, officials projected a $14.48 million deficit; the actual deficit was nearly $81 million – $66.47 million (456%) more than predicted.
• Provided inaccurate financial reports. Throughout 2003, officials submitted required monthly reports to County officials that dramatically understated expenses and liabilities and, in some cases, did not comply with Generally Accepted Accounting Principles (GAAP). As a result, accurate financial information was not available until June, 2004, when year-end statements prepared by independent auditors were released.
• Made financially-damaging operational decisions. Ellenville Hospital in Ellenville, New York filed for bankruptcy in 1999, and the Corporation acquired the facility in 2000. The Hospital experienced $15 million in losses from 2001 to 2003. At the request of the StateDepartment of Health, WCHCC temporarily took over operation of St. Agnes Hospital in White Plains in 2003. This acquisition did not result in financial losses, but auditors questioned why the Corporation would take on additional managerial burdens when it was struggling to address serious financial problems in its existing operations.
• Failed to sufficiently fund a self-insurance subsidiary. WCHCC established an off-shore captive insurance company to reduce its liability insurance costs. The continued operation of the subsidiary was placed in jeopardy due to failure to ensure that required capital and surplus funds were maintained.
• Did not obtain documentation for reimbursement of consultant expenses. WCHCC paid consultants for nearly $1.9 million for expenses and other charges without back-up documentation.
• Lacked effective controls over credit card use. The Corporation had no effective internal controls over credit card use by Corporation executives, which led to the payment of nearly $112,000 in charges for restaurants, hotels, airfare, florists and other expenses that were not itemized or documented.
• Violated competitive bidding laws. WCHCC officials used credit cards to circumvent competitive bidding requirements.
• Maintained inadequate and non-integrated accounting and financial reporting systems. As a result, the same data had to be entered more than once, and information provided by the systems was often incomplete.

“As a vital health care provider and major employer, Westchester Medical Center is an important part of the community. But the Corporation’s combination of fiscal challenges, financial control weaknesses and accounting problems brought it close to the point of collapse,” Hevesi said. “We have seen some promising improvements over the past couple of years, but much more must be done.”

Financial Conditions Worsen Each Year, Some Signs of Improvements in Recent Years
WCHCC was established in 1997 to take over operations of the Westchester Medical Center in Valhalla and other facilities run by the County Department of Hospitals. The Corporation was financed by a $255.1 million bond issuance in 2000, and the County guaranteed much of WCHCC’s debt.

Auditors found that WCHCC budget projections were inaccurate every year since 2000. The Corporation has had an operating deficit for every year since 2001, for a total of $207 million in operating losses from 2001 to 2004. The deficits were far larger than predicted:

• In 2001, officials foresaw a $6.14 million surplus, but instead had a $9.67 million deficit.
• An expected surplus of $2.87 million in 2002 turned out to be a deficit of $60.84 million.
• The predicted deficit of $14.48 million for 2003 actually amounted to $80.95 million.
• Unaudited figures for 2004 show a deficit of $55.89 million, more than the $46.64 million predicted

In addition, the Corporation’s expected deficit for 2005 is $60.35 million.

Required monthly financial reports submitted during 2003 by WCHCC to the County were off by a total of at least $3.7 million per month, including the following discrepancies:

• Professional liability insurance expenses were underestimated by more than $1 million a month.
• The allowance to cover bad debt was reported at about $1 million per month, but was actually closer to $2 million per month.
• Workers compensation costs were understated by about $589,000 per month.
• Medical and lab supply expenses and salaries and fringe benefit costs were each understated by about $580,000 per month.

“During the time period covered by the audit, the County government was not receiving accurate monthly financial reports about the Corporation, so it was impossible for County officials to know exactly what was going on or determine how they might address the problem,” Hevesi said. “Reliable financial information only became available after a full year of the Corporation’s finances were reviewed by its outside auditor, when millions in deficits had already been incurred.”

State auditors’ review of 2004 finances, based on preliminary reports, showed a $12 million decrease in personal service costs and some improvements in procedures for accounts payable and receivables. However, auditors also found cost increases for employee fringe benefits, despite a reduction in staff, and for medical and lab supplies.

When WCHCC was established, the transition agreement between the County and the Corporation outlined financial goals that, if not met by the Corporation, allows the County to select consultants to review operations and recommend corrective actions. Failure to meet these goals led the State and County in 2004 to direct the Board to hire a consulting firm to oversee all daily operations of WCHCC.

The Corporation did take a number of actions recommended by consultants in 2003 and 2004, including renegotiating contracts with drug companies and medical suppliers, adopting new accounting software and revamping some accounting procedures. Revenues did increase in 2003 and 2004, but not enough to bring WCHCC’s budget into structural balance.

Auditors noted that, early in 2005, the WCHCC Board and the new consultant hired in 2004 developed a proposal to address the Corporation’s financial problems through management improvements, labor concessions and increased County, State and Federal funding. The State Legislature was also considering measures to provide increased funding, but to date has taken no action. In June 2005, the County refinanced tobacco settlement-backed bonds and will direct some of the proceeds to WCHCC.

Absence of Financial Controls Raises Questions Regarding Expenditures
From 2002 through 2004, five consulting firms were paid a total of $15 million by WCHCC to address financial and operational issues. Auditors found a total of nearly $1.9 million in expenditures by consultants that lacked proper or complete documentation:

• Stockamp & Associates (referred to in the audit as Consultant A) was engaged to revamp accounting processes. Auditors found $447,128 in reimbursements without proper documentation for airfare, lodging, meals, ground transportation and other expenses.
• Pitt Management (Consultant B) was hired to assess WCHCC’s overall strategic, operational and financial activities. Auditors found that the agreement with the consulting firm did not include details regarding the compensation rate for some specialized consultants. When the matter was brought to the attention of WCHCC officials, they re-negotiated a rate schedule for the specialized consultants. Auditors also found $51,376 in reimbursements without proper documentation for travel and other expenses.
• Casas, Benjamin & White, LLC (Consultant C) was hired to assist WCHCC with restructuring initiatives. Auditors found $155,480 in reimbursements without proper documentation for airfare, lodging, meals, ground transportation and other expenses.
• Cap Gemini Ernst & Young (Consultant D) provided facilitation to help WCHCC implement cost-saving measures. Auditors found $276,999 in expense reimbursements were paid based on estimated costs, rather than actual documented charges.
• Kirkland & Ellis (Consultant E) was a law firm hired in connection with restructuring efforts. Auditors found $954,051 in billings for attorneys and legal assistants without any information regarding dates, number of hours works and description of services rendered. Auditors also found $13,000 in expense reimbursements without proper documentation.

WCHCC had virtually no internal policies regarding the use of Corporation credit cards, and a lack of internal controls over the payment and audit of credit card bills. Auditors found $111,957 in charges between January 2002 and December 2003 that were not properly documented on cards used by 11 Corporation officials, including expenses for restaurants, hotels, airfare, ground transportation and florists. Charges by the former chief executive officer included $1,393 at a New York yacht club and $1,500 and $1,300 at local restaurants in October and November of 2003.

Top Corporation officials also used credit cards to pay a total of $254,920 in 2003 and 2004 for the transportation of human organs and personnel involved in organ transplants. Because WCHCC knew of the routine need for air transportation relating to transplants, auditors determined that the service should have been competitively bid and procured through a contract or contracts. Competitive bidding is required by State law for any contract that exceeds $20,000 in the fiscal year.

WCHCC operates the Westchester Medical Center – which offers advanced medical services including a burn unit, trauma center and organ transplant program – and provides other health care services in a seven-county area in the lower Hudson Valley. The Corporation had an annual budget in 2004 of $559.3 million. It is governed by a 15-member Board of Directors, eight of whom are appointed by the Governor and seven by the County Legislature with the approval of the County Executive.

In their response to the audit, Corporation officials generally agreed with auditors’ findings. The complete WCHCC response is included in the audit.

Click here for a copy of the audit report.

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