EPHC gets clean audit: Cash on hand needs improvement

Diana Jorgenson
Portola Editor

Discussion of Eastern Plumas Health Care's financial audit for 2008-09 occupied more than half of the Jan. 28 meeting of the board.

Jerrell Tucker of TCA Partners, who gave the presentation, began with an introduction to his Fresno firm, whose distinction is that it only audits hospitals.

The firm audits 28 districts in California, as well as numerous other hospitals throughout the western states, he told board members. Of the 28 districts, 19 of them are critical access hospitals, like EPHC.

Tucker said this was valuable for two reasons: "First, it gives us a unique perspective on hospitals- that's all we do, that's all we see year around, and second, with all the districts that we do, it gives us the ability to understand what issues districts like Eastern Plumas are facing."

This allowed the firm to "be a resource for our clients" as well.

Since this was the first audit performed at EPHC by the firm, which meant that it relied upon the prior year's information by another firm, TCA Partners gave EPHC a "qualified opinion."

The qualification arose because the financial standings of neither the hospital auxiliary nor the hospital foundation were included in the audit. The auxiliary, formerly a community organization, became a discrete part of EPHC under the board of directors in 2004. The EPHC Foundation was set up by the hospital to handle bequests and large donations. The auxiliary gives financial reports at each monthly meeting of the board.

"Next year, based on our findings, we're going to take out the 'qualified opinion' and put in a detailed explanation in the notes of the financial statement where we identify the component units-the auxiliary and the foundation-and we put in a summary of their financial information," he said.

In regard to the accuracy of the financial information, Tucker called his audit opinion "unqualified" and said that his firm had issued 12 or 13 qualified opinions to small districts this year, based on valid ongoing concerns as to whether they would survive another year. He was happy to say that EPHC was not at that point.

Small, rural, critical access hospitals were exempted from the 10 percent Medicare cuts enacted to help balance the state's budget. These cuts on top of a policy that already only reimbursed a portion of hospital costs were severely affecting other California hospitals.

Tucker said he found no material weaknesses in the accounting procedures and there were no findings to report. He congratulated Jeri Nelson, chief financial officer, and the accounting staff for their work.

There were only two audit adjustments totaling $62,000 in the report, one of which involved minor corrections in fixed assets due to depreciation. The largest adjustment was the cost report settlement, whereby MediCal determined the final amount it would pay toward the hospital's costs for its MediCal patients.

Final settlement reports are frequently received two or three years after the billing year. In the interim, Nelson must assess what the hospital is likely to receive, and by her own admission, she is cautious in her prediction. The yearly cost report comprised the bulk of the $62,000 adjustment and resulted in a positive change for the year 2008-09.

Tucker explained that audits used the most recent information at hand, including tentative settlement sums, until the final settlement is reached.

Chief Executive Officer Tom Hayes, whose employment contract was approved at that same board meeting, interjected that, in his previous experience, it was realistically five or six years before final settlements with Medicare and MediCal were reached.

A significant settlement can skew the figures, the auditor cautioned, so when that was the case, it was important to be aware of it.

Waiting for yearly cost reports from government agencies also slowed the audit process and made it less useful to boards in their decision making process. EPHC is already halfway through its fiscal year and it would be helpful to have these year-end reports much earlier.

Next year, Tucker hoped to implement an interim cost report in October, thereby completing the audit much earlier in the fall.

Finally, Tucker reported that there had been no disagreements with management.

"An auditor doesn't report on the quality of the operation and the results of operation and whether it had a good year or bad year," he said. "An auditor just looks at whether the numbers are accurate."

But, he felt that boards typically also wanted to hear from the auditor's experience and to know how they compared to other hospitals, so he not only explained the line items, he offered information regarding how other California districts were doing.

"A net operating loss of $416,000, not uncommon, and a net income of $186,000. Bottom line: if you're an under-25 bed, small rural hospital in the state of California and you've got a black bottom line, a positive bottom line, you're doing well. You're in the top third of small hospitals in the state," Tucker told the board.

Tucker then offered a three-year comparison of operating figures for EPHC. He found the total revenue even: $22,760,289 in 2009, $23,404,419 in the 2008 audit, and $20,722,173 in 2007.

District tax revenue increased during the three years: $526,324 in 2007, $681,499 in 2008, and $754,957 in the current audit.

Director Larry Fites commented, "Actually, we're lucky that our tax revenues are going up this year because there are some districts that aren't."

Tucker added that other districts had sunset clauses and timed tax periods. He related that one district down south was unable to get the two-thirds vote needed to reinstate that tax and lost $1 million in revenue.

In discussing the breakdown of revenue and expenses, Tucker credited the business office as being the most important part of a hospital's success and said that the EPHC staff did a good job. From his perspective, collecting revenue in a timely manner was key to survival.

He noted that in 2007, EPHC had lost $731,000, made $300,000 in 2008, and showed a net income of $186,000 in the 2009 audit, without a big swing in volume.

"It's got to be a better job of collecting what you have due to you," he said.

He found most of the ratios (percentage of labor costs, percentage of supplies, deductions from revenue, etc.) normal for a small, profitable hospital, and there was considerable discussion between the board, Hayes, and Tucker regarding the 50 percent deductions from contractual relationships (Medicare, MediCal and third-party payers) and including bad debt.

Tucker also found debt ratios suitable: "If you were in the bond market right now, they want your ratio to be 1.25 to 1.5...that's what lenders are looking for, so you're right there."

But when it came to cash flow, he shook his head, "I hate to sound negative, but one-day cash on hand..."

There were several staff and director murmurs while Tucker continued, with some humor, "We like to see 30 to 60 days, but I know you're working on that."

Hayes agreed, "I can clearly say that cash on hand is one of our biggest challenges and it's got to be one of the things that we improve over the next several years, because it's just very limiting to our ability to purchase equipment, to do new things, to do anything, quite frankly. So we absolutely have to improve cash on hand. It's a key financial indicator for us."

Tucker summed up his report: "You're doing a pretty good job of managing the hospital, you're moving in a good direction, but you definitely can't sit on your laurels."

The health care industry is so dynamic that indecision is a bad decision, he said.

Hayes asked if the firm could provide a list of best practices of critical access hospitals. He thought that if he could compare EPHC to how other rural hospitals were doing across the state, it could give the board a better understanding of the issues.

Tucker said that he could. Chairperson Gail McGrath thought it was also important that legislators be given the same information, to which Tucker replied that they were.

"Whether they read it or understand it..."

Hospitals are already working with a very small margin, he said.

Finances were not the only subject under discussion at the January meeting. The agenda included approval of the contract with CEO Tom Hayes, quality assurance discussions, physician recruitment updates and progress in forming a community advisory committee.

In conclusion, to bring the financial discussions into the current fiscal year, already half accomplished, Jeri Nelson reported EPHC was doing really well. The "soft," quiet winter it had experienced last winter was reversed this winter. The hospital was full and the Loyalton facility nearly at capacity. There had been 34 ambulance runs last week, which she called "phenomenal."

December financials showed an operating income loss of $74,205, but a net income of $79,870.

Nelson admitted the district ended December with income only because of the auxiliary's donation toward the next phase of electronic medical records, but was optimistic that if the district could continue the positive months it had been experiencing and end with a positive operating balance, it would be on its way to its goal of keeping tax revenues in reserve.

Year-to-day figures tally a net income for the 2009-10 fiscal year at $343,550.

Hayes enumerated the tasks and challenges facing the district and listed several areas that needed improvement, many of them old stories very familiar to the directors on the board of EPHC.

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