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Saturday, Sep 28 2013 10:00 PM

CALIFORNIAN INVESTIGATION: County leaders long smelled smoke in KMC's finances, missed cause of fire

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    By Casey Christie / The Californian

    Kern Medical Center.

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BY JAMES BURGER Californian staff writer jburger@bakersfield.com

For most of the past decade, the people entrusted with control of Kern Medical Center's finances have mismanaged the massive, complicated flow of cash through the hospital.

It's hardly been a secret.

The problem has been detailed over the last seven years in 22 audits, many compliance reports, a string of public meetings and multiple news stories.

But a Californian investigation has determined that nobody put those individual pieces of information together and identified the county hospital's underlying fiscal problem.

Until now, that is.

One result: other county services will be cut so hospital finances can be righted.

KMC is a critical link in the local health safety net and the only trauma center between Fresno and Los Angeles. Now the county will have to discover how big a burden the hospital truly is to Kern.

STRING OF FAILURES

Audits showed that KMC's chronic money problems ranged from handling of petty cash to a patient billing system riddled with bad data to an inmate care program where staff overcalculated what the hospital was owed in a single year by $6 million.

Some of those problems, the public learned this month, were repeated in the management of complex state and federal programs that reimburse public hospitals for treating Medi-Cal and uninsured patients.

But this time the cost of the mistakes is a gut-wrenching $64 million. (The county's 2013-2014 budget totals $2.6 billion).

Supervisors responded by axing KMC CEO Paul Hensler and handing control of KMC finances to new Chief Financial Officer Sandra Martin and management consultant Toyon Associates Inc., the firm that uncovered the mistakes.

County officials note that none of the 22 audits point specifically to the problem with state reimbursements.

Hensler said this past week in a new interview that many of the audits focused tightly on specific hospital programs and none seemed to indicate a large-scale, drastic problem existed.

"Tremendous amounts of money weren't leaking out," he said.

But Hensler admits the work done by the hospital's fiscal leaders, whom he was responsible for managing, wasn't good.

"There wasn't very good accounting," he said. "Some of (the problem) was our systems couldn't handle (the work). Some of it was personnel."

AUDITS HIGHLIGHT FINANCIAL CONCERNS

Viewed in hindsight, annual audits of KMC books by the Brown-Armstrong accountancy firm between 2007 and 2011 and 17 audits of KMC programs by county auditors paint a troubling picture of systematic mismanagement.

For example, an audit covering the 2008-09 fiscal year showed KMC staff failed to keep good track of how much money patients owed the hospital and failed to bill for that money.

KMC financial managers wrote off $78 million in debt and sent the accounts to collections without informing the Kern County Board of Supervisors as they were required to do, that audit stated.

It was noticed.

"At some point we own our problems. We the county own this," Supervisor Mike Maggard told then-KMC Chief Financial Officer Fred Plane in response to the audit. "We have the responsibility -- as do you and as does Mr. Hensler -- ... to deal with this because of the very, very large exposure the taxpayers have to financial issues at KMC."

There also was a March 15, 2011, audit of the 2009-2010 finances of the inmate medical care program that revealed KMC staff recorded $6 million of dollars more in "receivables" -- money the hospital expected to be paid -- than the hospital was owed.

"It was a surprise that we had some costs that should have not gone in there," Plane told supervisors that day in 2011.

What supervisors didn't know that day was that Plane's staff had been making the same mistake -- overestimating the amount of money Kern Medical Center would be paid for services -- with state and federal Medi-Cal reimbursement programs since 2005.

That $64 million error wasn't discovered until this month -- more than two years later.

LEADERS SMELL SMOKE, MISS FIRE

In 2012 -- a year before this month's revelations -- county auditors and administrators started to question why the county's general fund loan to Kern Medical Center had begun to grow.

They asked the right questions and found troubling information.

But they weren't able to find the problems festering inside KMC's financial system.

The Brown-Armstrong accounting firm, in its July 2012 audit of the fiscal year ending in June 2011, said that KMC's loan to the general fund had decreased from $58.2 million in 2010 to $33.7 million.

But by February 2012, hospital CEO Hensler was asking supervisors to increase the $70 million cap on the hospital's loan to $75 million.

County Administrative Office analyst Elsa Martinez thought she saw a troubling trend in how KMC was accounting for expected state and federal payments for Medi-Cal and indigent care.

She asked Kern County Audit Chief Dominic Brown to dig into the issue.

On April 5, 2012, he gave her the results of his work -- a controversial 23rd audit. This one never made it to the Kern County Board of Supervisors.

It confirmed that actual revenues from the state had not met the expectations set by KMC staff for years and that, despite that fact, the amount of money KMC was estimating it would receive from state reimbursement programs was increasing dramatically.

But it also reported that the basic revenues and expenditures on KMC's books seemed to balance.

Those books were polished reports prepared by KMC fiscal staff.

Martinez said the audit was nearly useless, telling her something she already knew -- the trend looked bad.

"I got a report that said, 'Yes Elsa, you're right,'" she said.

But someone reading between the lines of that report, Brown said, would have seen an immediate need to throw out KMC's books and start looking at raw financial data.

"We were unable to ensure that all (state and federal) funds received had been properly applied to the appropriate accounts receiveable account without reviewing the individual documentation for each individual (electronic record of deposit)," the report states.

Brown said it's not his job to tell county departments how to run their organizations.

Nancy Lawson, assistant county administrative officer for budget and finance, said Brown's report didn't have much that her office could use.

Martinez said she went back to Brown and asked him whether the receivables were good or bad. He set up a meeting with the two auditors who prepared the report, both Brown and Martinez said.

But Martinez said the two auditors disagreed with each other about what the report showed.

With only a vague trend and no formal recommendations, Martinez said, there wasn't much she could do.

"I cannot go to Paul and tell him how to run his business," she said. "It's management's responsibility to detect problems and fix problems."

Lawson said she handed the report to her boss, County Administrative Officer John Nilon. It was never given to county supervisors.

Brown said, in hindsight, he should have taken the report to the board.

But after recently learning of the report's existence, Supervisor Maggard, an accountant, said he agrees with Martinez that the document didn't really point out the problem.

DIGGING FOR ANSWERS

Hensler said he never saw the April 2012 audit and only recently learned it had been done. But he said the fact there is disagreement about what it showed is not surprising.

"It does show how extremely complicated this is, even for CPAs," he said.

The reimbursement situation, he said, came onto his radar in late 2012 and early 2013.

Until then, Hensler said, the reasons he was given by his fiscal staff for Kern Medical Center's extreme cash-flow problems -- that the state was simply very late in sending money owed to KMC -- made sense.

The books balanced.

Hensler said the tone changed when Houshang Abd was hired to be Kern Medical Center's CFO on Jan. 7.

"He started digging. He started asking questions," Hensler said.

They began to get a sense that something was wrong and, Hensler said, "early in the year we put the controller on a work plan."

"I kept on going to Paul and saying I'm finding more and more problems," Abd said.

The receivables were the biggest problem, he said, but there were chronic problems with many other programs from charges for supplies to physician billing.

As the year progressed, it became clear, Hensler said, that the explanations for why the general fund loan balance was growing had stopped making sense.

Abd said he was becoming more and more frustrated by the situation.

"I was hitting my head against the rock," he said. " I was not making any progress."

At that point, Abd said, he asked for outside help, first from the California Association of Public Hospitals and then from Toyon.

"When the loan balance wasn't behaving the way we were told it would, that is the point that we brought Toyon in," Hensler agreed.

But Abd resigned, frustrated, after his idea of a KMC fiscal committee got a cold shoulder.

Toyon -- which was under contract to do other work for KMC -- did send consultants to KMC for a three-day visit.

But Hensler said they had trouble doing anything because they couldn't get good, timely information from KMC Controller Bob Bainbridge.

"He was obviously in their way," Hensler said. "I put Bob on administrative leave." (Bainbridge couldn't be reached for comment for this story).

After that it was just a matter of Toyon digging through the numbers and finding the problem.

ACCOUNTABLE

On Sept. 9, Kern County supervisors fired Hensler after Toyon released the results of its preliminary investigation.

Hensler pointed the finger at his financial team. But he acknowledged that, as the CEO of the hospital, he was ultimately responsible.

"I really feel sorry for Paul," Abd said. "He had the ultimate responsibility. But a CEO without a good CFO...Paul has not had a real CFO for a long time."

Hensler, county auditors, compliance officers and the Board of Supervisors relied on the work of that fiscal team to make decisions about the hospital's finances.

None of them figured out they couldn't trust that work.

Now supervisors, county managers and KMC's new fiscal team are trying to clean up the mess -- starting by cutting $6.5 million in services from other county agencies -- and answer one of the county's biggest mysteries:

What does it actually cost to run Kern Medical Center?

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