Audit agrees with Luis CEO: 'All systems in the hospital are either bruised or broken'

ST. CROIX - A federal audit of Luis Hospital found that significant operating losses, combined with the hospital's inability to control its own expenses, have "eroded the hospital's ability to pay for many of its critical services and now threatens its ability to meet community needs."

The audit, conducted by the U.S. Department of Interior Inspector General's Office, found the hospital had problems with inadequate billing and collection; ineffective debt management; noncompliance with requirements of the Centers for Medicare and Medicaid Services; significant growth in expenses without corresponding increases in revenue; and inadequate monitoring of payments.

"Current conditions confirm the present chief executive officer's recurring comments that 'all systems in the hospital are either bruised or broken,' " the audit states.

Luis CEO Jeff Nelson did not return messages left for him by The Daily News on Tuesday.

Luis Hospital has reported annual operating losses averaging $35 million from Fiscal Year 2005 through FY 2010, with the government giving the hospital an average of $26.7 million annually during the same time period to offset the losses, according to the audit.

Management of revenue

Auditors found that Luis Hospital struggles with managing its accounts receivable.

The hospital staff is responsible for collecting patient accounts covered by health insurance - typically the easiest accounts to collect - while the hospital contracts with two private companies to collect for services to uninsured patients, the report states.

Auditors who reviewed a sampling of 24 individual accounts valued at $1.8 million that the hospital was responsible for collecting found that the hospital's efforts were "neither timely nor rigorous" for half of the accounts.

They also found that even though the hospital has ongoing relationships with CIGNA and the Veteran's Administration as insurance providers for patients, the hospital did not always follow the pre-certification procedures they require to initiate insurance coverage. The procedure is for the hospital to make a phone call to CIGNA or the Veteran's Administration to notify them of the hospital's plan for treatment.

Auditors found occasions when skipping this step caused the hospital to lose money, including:

- A final bill of $229,860 for a patient discharged in August 2009. According to the report, the patient had been hospitalized for 261 days, but the Veteran's Administration only reimbursed $8,710 for the first 10 days and denied the rest because the hospital failed to pre-certify the patient.

- An instance in which CIGNA did not honor a $24,800 bill the hospital issued to a patient in January 2010, because the hospital failed to pre-certify the patient.

The audit also notes problems with internal service arrangements at the hospital.

It points to an example in which the hospital contracted with a company to analyze pathology specimens for private doctors using the hospital's laboratory, with the stipulation that the hospital get paid $25 for each specimen.

Auditors found that the hospital failed to implement checks and balances "to ensure accuracy and receipt of all revenues billed for services rendered."

They found instances when the company failed to submit statements for services rendered or corresponding payments, so hospital staff "had no idea how much the hospital should have received."

Auditors also found instances of the contractor submitting statements, but not payments. Based on the review, the company owes Luis Hospital at least $16,150, according to the audit.

The hospital had also let its rates become stagnant, by not reviewing its charges for five years to make sure they reflect current costs, according to the audit.

New rates were implemented in March 2012.

The report also notes that the hospital's failure to comply with requirements of the Centers for Medicare and Medicaid Services, or CMS, has jeopardized "what has been a reliable source of patient revenue."

More than 50 percent of the hospital's patient revenue is generated by patients covered by CMS.

To continue to be eligible for CMS funding, the hospital has implemented a three-year agreement to correct the problems.

Expenses

The audit blames the deterioration of Luis Hospital's financial position on the hospital's "inability to balance expenses against revenue."

"Although strapped for cash, JFLH has not exercised fiscal restraint," the report states.

The hospital owed vendors approximately $29 million as of December 2011, and in order to remain afloat, the hospital has been forced to adopt unconventional terms to manage the debt, the report states.

"It has accepted inflated costs for much-needed pharmaceuticals, as well as burdensome financing terms from vendors," the report states. "These terms have created a vicious cycle of deficit management that plunges JFLH deeper into debt."

The report notes that the hospital is sometimes forced to buy drugs from secondary vendors when its failure to pay strains its relationship with the primary vendor.

An in-house analysis the hospital did in April 2011 determined that the hospital potentially spent $75,000 more per month on pharmaceuticals when it purchased from secondary vendors instead of its primary vendor, according to the report. The audit also found that the hospital has struggled since then to buy at least 80 percent of its drugs from its primary vendor to reduce costs.

"Any fluctuation in JFLH's tenuous financial position, however, will force it back into inflated payments," the report states.

The history of making late payment has prompted vendors to subject the hospital to significant finance charges, according to the report.

The audit report also discusses debt the hospital has incurred because of a partnership agreement it entered into to establish and operate a spiral CAT scanner, MRI equipment and a diagnostic lab.

The report notes that the hospital agreed to pay the partner for all referrals, even though, historically, uninsured patient accounts are the hardest to collect.

"Because of this agreement, JFLH's debt to its partner has ballooned to $5 million since 2007," the report states, noting that the hospital had, at the close of the review, offered a settlement of $1 million. It was not clear from the report whether that offer was accepted.

The hospital also has failed to properly monitor its contracts to lessen the frequency of overpayments, pre-payments and unsupported payments, according to the audit.

The audit uncovered $2.1 million in employee loans; overpayments; payments made without valid agreements or supporting documentation; and payments made for services that never were received.

"Each instance could have been avoided" if the hospital had properly monitored the money it was spending, according to the report.

Among the issues noted in the audit report:

- The hospital distributed more than $211,000 in employee loans to serve as salary advances from 1999 to 2004 and again from 2010 to 2011. The loans went to new employees waiting for their first checks and tenured employees facing financial hardship.

The audit found that many loans were not repaid. Auditors notified the hospital about those who had not repaid their salary advances, and collection letters were issued a year ago. An outstanding balance of $116,800 remains, the report states.

The hospital has discontinued the practice of issuing employee loans and is working with its lawyer to collect the outstanding balance, according to the report.

- Auditors found $67,000 in overpayments to employees and contractors because no one reconciled outgoing payments with the contracts.

For example, according to the report, an employee who temporarily acted in an executive management position from October 2009 to December 2010 continued to receive the elevated compensation until August 2011, even though the position was filled by someone else in January 2011. The employee was overpaid by $35,700, which has not been repaid.

- Auditors found that the hospital made $68,690 in payments made without valid agreements and did not always obtain supporting documents from contractors to justify costs.

- One contractor received $12,865 in travel reimbursements even though he did not provide supporting documentation.

- In another case, hospital officials could not provide invoice statements for five of eight payments, which totaled $1.7 million, made to a pharmaceutical vendor.

The report made multiple recommendations for the hospital to stabilize its financial resources and address the management of expenses.

All of the recommendations are being implemented at the hospital and are in varying stages of completion.

- Contact Joy Blackburn at 714-9145 or email jblackburn@dailynews.vi.

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