So what happened to the Hospital? | Eastern North Carolina Now

     Publisher's Note: We do very much appreciate this fine article on the BRHS debacle from our friends at the Beaufort Observer. It is the opinion of this publisher that their continued, complete reporting and analysis of this controversial issue is unparalleled in scope.

If it is in such bad financial condition, why would UHS (or anyone) want it? We think we now know.

    Is there a silver lining?

    University Health Systems of Eastern Carolina (UHS) has reduced its offer to take over Beaufort Regional Health Systems (BRHS). The Beaufort County Commissioners are considering the revised offer after the Hospital board apparently accepted the offer but is still going to try to negotiate a better deal with UHS. That is not expected to be very fruitful in that UHS now has no competition in bidding for the takeover.

    UHS based its revised offer on the most recent external audit that was done by Larson Allen, which also works for UHS as their auditor. Larson Allen restated the previous audit numbers, increasing the "loss" by an estimated $5.7 million. In addition, it restated the depreciation/amortization by $1,021,743 in the 2009 audit. The $5.7 million restatement in the 2010 audit was comprised of $4,143,000 to Accounts Receivable (what the Hospital is owed) and to depreciation of $1,532,639.

    All of these adjustments are based on "accrual accounting." That method of accounting records a transaction as a receivable when a bill is generated to an entity that owes the Hospital money. When an obligation is created by issuing a purchase order, for example, it is recorded as a "payable." When capital expenditures are made for equipment, the value of the equipment increases the assets of the organization and is then depreciated over time, in large part to reflect the replacement cost. But depreciation is not necessarily an expense that a check is written for. Then, in addition, receivables that are not collected are carried for a period of time on the books and then written off as bad debts. That, too, is not an actual expenditure of cash but is reflected in the financial statements as having the effect of a loss.

    But these "restatements" that are being ascribed by some as "losses" are actually computed estimates. They are recognized as such in the audit (see Page 15 ). Thus, when Larson Allen says that uncollectable accounts receivable (AR) were increased, it is an estimate they generated. How much will ultimately be collected in the form of cash or revenue remains to be seen.

    You can review the 2010 audit by clicking here.

    It should be noted here that the Beaufort Observer asked Steve Stang, the head of the Larson Allen team working on this project, to explain to us the method that was used to calculate the restatement of ARs but he refused to do so.

    We have been told by a knowledgeable expert in accounting that typically such computations are based on historical trends. Thus, if UHS ends up collecting more than BRHS has been collecting, it garners a windfall. That is highly likely in that it would appear that BRHS has not been particularly successful in collecting its ARs.

    But relative to the justification UHS is using to revise its offer (the $11.7 million "loss") we would point out that on Page 13 of their audit, Larson Allen computes the net cash loss for 2010 from operations to be $713,797. Given all this, we asked our accounting expert to assess the audit report from a cash basis. That method of accounting looks at the financial health of an operation by focusing on actual revenue and actual expenditures over time. We used five years, because the audits available go back to 2006.

    You can review the revenue and expenditures over the last five years by clicking here.

    Some interesting facts are revealed in this analysis. Some of them are:

    1. When cash revenue began to decline, expenses were not reduced proportionately.

    2. The biggest increase has been in "Purchased services" which went from $3.9 million in 2006 to $9.6             million in 2010. We have been told that this is primarily for expenditures made to health care            providers who are not employees but operate under contracts with the Hospital.

    3. The second biggest increase in expenditures came in "Physician fees/salaries." In 2006 these expenses            were $3.9 million. In 2010 there were $9 million. The big jump came in 2007 when a number of            doctors' practices were acquired by the Hospital.

    The accounting system used does not provide for tracking the revenues and expenditures of individual practices. But what is obvious is the the overwhelming increase in expenses came in payments to doctors and other providers.

    4. Interestingly, salaries and benefits for employees in the last few years have remained fairly stable as            have "Supplies" and "Other expenses" have actually declined.

    Commentary

    Applying a common-sense approach to these numbers, it seems obvious to us that something changed in 2007. And that something was the takeover of a number of local doctors' practices by the hospital. After that happened the greatest increase in expenses came from physician salaries/fees and contracted services.

    We think this raises serious questions about exactly "what the problem is with the Hospital" and we are suspicious that it is actually not with the hospital but with the practices. Since 2008 the problem has not been with the hospital payroll, the largest single expense, or with supplies, which is the second largest expense item.

    We find it astounding that the management and board of the Health System in 2007 acquired dozens of practices without apparently knowing what the impact of those acquisitions would be on the hospital's bottom line (i.e., which ones were operating efficiently and which were not). But it is even more astounding to us that once acquired no system was set up to track the financial operation of individual practices.

    We believe at the "end of the proverbial day" that what happened to put the Health System in bad shape was simply poor management and oversight that did not properly account for the impact of acquiring all of these practices in recent years. We suspect some of those acquisitions made good business sense. But we also suspect that some did not. And we suspect that while some could have made sense, the lack of data, information and oversight meant that appropriate adjustments were not made.

    So it would appear that this is what happened to our hospital.

    Moreover, we suspect UHS knows this and we will predict that the focus of their attention when they take over will be on the individual practices. They will dump or turnaround those that are bleeding money and they will have a cash cow on their hands that they acquired for a pittance; without even having to compete to submit the best offer.
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Beaufort County Government's General Meeting Agenda: Monday, April 4, 2011 Regional Health System, Government, Governing Beaufort County County board supports State's efforts to lift charter-school cap

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