Issue Date April 26, 2011 Audit Report Number 2011-FW-0002 TO: Roger E. Miller Deputy Assistant Secretary, Office of Healthcare Programs, HI //signed// FROM: Gerald R. Kirkland Regional Inspector General for Audit, Fort Worth Region, 6AGA SUBJECT: The Office of Healthcare Programs Could Increase Its Controls To More Effectively Monitor the Section 232 Program HIGHLIGHTS What We Audited and Why We audited the U. S. Department of Housing and Urban Development’s (HUD) Section 232 program as part of the Office of Inspector General’s (OIG) goal of contributing to the improvement of HUD’s execution and accountability of fiscal responsibilities. Our objective was to determine whether HUD had implemented adequate controls to properly monitor Section 232-insured mortgages. 1 What We Found HUD’s Office of Healthcare Programs had taken steps to strengthen the Section 232 program by implementing new monitoring controls. However, additional steps can be taken to strengthen the controls which were sometimes inconsistent or vague, and ensure punch lists are followed. Further, the Office of Healthcare Programs could place a higher priority on enforcing regulatory issues. By 1 We reviewed the controls that the Office of Healthcare Programs implemented over active mortgages. We did not review any controls that it implemented over the underwriting process for new mortgages. increasing these controls, it will more effectively monitor the program and be aware of ongoing regulatory violations, which increase the likelihood of undetected program fraud, waste, and abuse at its at-risk properties. 2 What We Recommend We recommend that the Deputy Assistant Secretary, Office of Healthcare Programs, develop and implement additional policies and procedures to strengthen controls and detect, correct, and prevent regulatory violations. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided a draft report to HUD on March 14, 2011, with a request for written comments by March 28, 2011. We held an exit conference with the Office of Healthcare Programs on March 22, 2011. It requested an extension to provide comments and we agreed to extend the date to March 31, 2011. The Office of Healthcare Programs provided its written comments on March 31, 2011, which generally agreed with our recommendations. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 2 HUD’s portfolio of Section 232 properties on December 31, 2010, included 658 properties that it classified as potentially troubled, with mortgage balances totaling more than $4 billion, and 153 properties that it classified as troubled, with mortgage balances totaling more than $900 million. 2 TABLE OF CONTENTS Background and Objective 4 Results of Audit Finding: The Office of Healthcare Programs Could Increase its Controls to 6 More Effectively Monitor the Section 232 Program Scope and Methodology 13 Internal Controls 14 Follow-up on Prior Audits 15 Appendixes A. Schedule of Questioned Costs 16 B. Auditee Comments and OIG’s Evaluation 17 3 BACKGROUND AND OBJECTIVE In 1959, pursuant to Section 232 of the National Housing Act, Congress established the U. S. Department of Housing and Urban Development’s (HUD’s) Section 232 program. The Section 232 program provides Federal Housing Administration (FHA)-insured mortgage loans to facilitate the construction and substantial rehabilitation of nursing homes, intermediate care facilities, board and care homes, and assisted living facilities. There are several regulating methods for these healthcare facilities. For example, the Department of Health and Human Services and the Centers for Medicare and Medicaid regulate skilled nursing facilities and intermediate care facilities, while individual States regulate assisted living facilities and board and care facilities with licensing requirements and other laws. HUD regulates Section 232-insured properties with a regulatory agreement. On July 31, 2002, Office of Inspector General (OIG) report 2002-KC-0002 reported that HUD did not have adequate controls in place to identify all nursing home regulatory agreement violations. In response to the audit report, HUD created the Office of Healthcare Programs in 2008 to administer the Section 232 program and the Section 242 program (mortgage insurance for hospitals). The Office of Healthcare Programs assumed responsibility for implementing the recommendations set forth in the audit report. The Office of Healthcare Programs submitted a management decision to OIG and reported several newly implemented controls including (1) standard operating procedures and checklists for all major asset management activities for use by lenders, owners, and HUD personnel; (2) riders 3 to the regulatory agreement used on all closings after December 2008; (3) analysis of lessee annual cost reports submitted to Medicare/Medicaid; (4) a new regulatory agreement, which was in the development phase; (5) enhanced monitoring efforts; and (6) stronger underwriting policies. OIG concurred with the management decision. In December 2010, HUD’s Section 232 portfolio included 2,390 mortgages valued at more than $16 billion with unpaid principal balances totaling more than $15 billion. This portfolio included 811 properties that HUD classified as troubled or potentially troubled, with mortgage balances totaling more than $5 billion. 3 A rider is an amendment to the standard regulatory agreement language. 4 Troubled status by loan balance on December 31, 2010 Troubled: 153 loans, $938 million Potentially troubled: 658 loans, $4.28 billion Not troubled: 1,579 loans, $9.83 billion. Our objective was to determine whether HUD had implemented adequate controls to properly monitor Section 232-insured mortgages. 5 RESULTS OF AUDIT Finding: The Office of Healthcare Programs Could Increase Its Controls To More Effectively Monitor the Section 232 Program After its establishment in 2008, HUD’s Office of Healthcare Programs took steps to strengthen the Section 232 program by implementing new monitoring controls. However, opportunities exist to increase controls where they were inconsistent, vague, and weak, and where some of them were not followed. If the Office of Healthcare Programs strengthens its controls, it will be able to more effectively monitor the program. Further, the Office of Healthcare Programs could place a higher priority on enforcing regulatory issues to increase the likelihood of detecting program fraud, waste, and abuse at its at-risk properties. 4 The Office of Healthcare Programs Implemented New Controls The Office of Healthcare Programs took steps to strengthen controls over Section 232-insured properties. For example, it • Developed and implemented a rider to the regulatory agreements, which had been used on all newly FHA-insured loans since December 2008, and was developing new regulatory agreements that incorporated the rider provisions for future loans; • Hired employees that had experience working in the health care industry; • Developed and implemented internal “punch lists” 5 for staff to use when reviewing the performance of Section 232 properties; and • Developed a comprehensive macro-analysis to help it assess the properties’ financial risk. 4 We reviewed the financial records for two properties classified as troubled and identified $756,833 in transactions that appear to violate the regulatory agreement. 5 The punch lists provide directive guidance to staff for properties that do not submit audited financial statements, properties that fail a Real Estate Assessment Center inspection, troubled properties, etc. 6 The Punch Lists Could be Strengthened The Office of Healthcare Programs implemented its new controls largely through the use of punch lists. However, the punch lists could be improved by eliminating conflicting instructions to staff, by strengthening known weaknesses, and by adding steps to detect potential regulatory agreement violations and correct identified violations. 6 Opportunities exist to make the punch lists more consistent. For example, when a property owner/operator requested to withdraw funds from the project’s reserve for replacement account to make the mortgage payment, the “potentially troubled” punch list directed staff to consult with the Turnaround Team 7 and consider designating the project as troubled. The “not troubled” punch list instructed staff to designate the project as troubled immediately upon the event of such request without consultation or consideration. Treating a not troubled project more aggressively than a potentially troubled project does not allow the program staff to effectively address serious issues in the potentially troubled portfolio. Bringing the punch lists into agreement will allow the Office of Healthcare Programs to more effectively monitor its entire portfolio. The punch lists can be more specific. The punch list for “not troubled” properties required staff to periodically (1) contact the property operator to determine the current census 8 and (2) review State surveys, Star ratings, 9 media sources, and HUD system flags. However, the punch list did not specify how often staff was to perform these activities. Further, the punch list stated that properties with serious mortgage delinquencies should be moved to troubled status, while a “not serious” delinquency should only be considered to be moved to potentially troubled. These punch lists could be strengthened by providing specific criteria to differentiate a serious delinquency from a not serious delinquency. The Office of Healthcare Programs could ensure more consistent monitoring by adding more specificity in its punch lists. 6 Regulations at 24 CFR (Code of Federal Regulations) 232.1 states, “The requirements set forth in 24 CFR part 200, subpart A, apply to multifamily project mortgages insured under section 232 of the National Housing Act (12 U.S.C. [United States Code] 1715w) as amended.” Section 200.105(a) states, “As long as the Commissioner is the insurer of the mortgage, the Commissioner shall regulate the mortgagor by means of a regulatory agreement providing terms, conditions and standards established by the Commissioner.” 7 The Turnaround Team is comprised of one-third of the asset management staff at the Office of Healthcare Programs and was established to work out problems with the troubled properties. 8 Census means occupancy, and a low census is an early indicator of cash flow problems. A low census was one of the key reasons for the cash flow problems at four of the five properties reviewed. 9 Star ratings represent the 5-Star Quality Rating System on the Centers for Medicare and Medicaid Services “Nursing Home Compare” Internet site. The system was created to help consumers, their families, and caregivers compare nursing homes. Ratings are taken from health inspections, staffing, and quality measures. Forty-four percent of the Section 232 portfolio was rated below average by the rating system. 7 We also identified areas where the punch lists could be strengthened by including steps for detecting potential regulatory violations or correcting known violations. The following areas are currently not addressed by punch lists and present additional opportunity for an increase in the ability for the Office of Healthcare Programs to effectively monitor its properties. • Punch lists could include specific steps that advise staff to review the audited financial statement notes for potential regulatory violations. The Real Estate Assessment Center reviewed compliance deficiencies that were identified by HUD’s automated analysis of the audited financial statements. The deficiencies were then referred to HUD’s Departmental Enforcement Center or the Office of Healthcare Programs. Without specific steps to follow, the referrals to the Office of Healthcare Programs will not be treated consistently by staff. • Punch lists did not provide guidance for correcting violations. This could allow for violations to not be addressed consistently or at all by staff. • New riders to the regulatory agreement required lessees of Section 232 properties to submit financial statements to HUD. Lessees submitted them directly to Office of Healthcare Program staff. According to staff members, a punch list is currently being developed. • The punch list for “troubled” properties identified specific steps for staff to follow when evaluating defaults. However, there were no directives to staff regarding steps to take if they identified a regulatory violation (i.e., no mention of referrals to OIG or the Departmental Enforcement Center). By adding specific directives, staff would consistently comply with HUD’s requirements and would be required to address all regulatory violations. • Troubled project files should show a complete list of actions taken by staff to address the project’s troubled status. The “troubled” punch list did not require staff to document the steps that they followed. Without documentation, the Office of Healthcare Programs management cannot review their staff’s actions or evaluate the effectiveness of its policies. • Staff monitored reviews and inspections from other regulatory agencies for skilled nursing home facilities and intermediate care facilities. Controls can be strengthened over assisted living facilities and board and care facilities if the Office of Healthcare Programs also required the same for these project types. Further, the punch lists could include instructions or other guidance for referring indications of fraud, waste, or abuse to OIG. 8 Improved Processes Were Not Always implemented The Office of Healthcare Programs developed a comprehensive macro-analysis to help it assess properties’ financial risk. According to the “not troubled” punch list, the Office of Healthcare Programs performed the macro-analysis quarterly. However, according to both staff and documentation, it did not perform the analysis quarterly. Staff members stated that they performed the macro-analysis semiannually rather than quarterly. Further, in July 2010, the Office of Healthcare Programs provided us its most current macro-analysis report, which was dated September 2009, nearly a year earlier. Failure to utilize this tool limited the Office of Healthcare Programs’ ability to detect in a timely manner projects that may have recently become a financial risk and needed additional monitoring. Also, the punch list for troubled properties identified specific steps for staff to follow in evaluating defaulted loans. 10 The steps included contacting the lender, owner, and operator to determine the cause of the default, possible remedies, and whether the default was due to operator mismanagement. Next, Office of Healthcare Programs staff and the lender were to consider engaging consultants, implementing a management improvement and operating plan, operator replacement, or sale of the property. For four of the five properties reviewed, Office of Healthcare Program staff did not follow the punch list steps and only contacted the lender and/or owner. By not taking the additional steps, staff may not be taking the necessary steps to bring these properties out of troubled status. Enforcement of Regulatory Agreement Terms Should Be a Higher Priority Placing regulatory enforcement as a higher priority is not only required under Federal regulations, but will also contribute to a lower risk of defaults. The Office of Healthcare Programs adopted a “no claims” goal, with an emphasis on claims reduction and customer service rather than on what it considered minor enforcement issues, 11 reasoning that the key to minimizing loss was to keep properties operating. The staff stated that HUD’s previous losses in the Section 232 program were the result of weak operators. Staff further stated that owners would continue to pay the mortgage as long as they met the applicable State 10 HUD defines a default as the inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when no payment has been made 30 days after the due date. Once in default, the lender can exercise legal rights defined in the contract to begin foreclosure proceedings. 11 According to the Director of Asset Management and Lender Relations, minor enforcement issues are small dollar regulatory violations such as early surplus cash distributions, excessive fees to contractors, etc. 9 regulatory requirements because owners were primarily focused on those State requirements. The Office of Healthcare Programs could better comply with Federal requirements by consistently enforcing the terms, conditions, and standards in regulatory agreements. The Code of Federal Regulations requires HUD to regulate its Section 232 program with a regulatory agreement (see footnote 6). Further, Office of Management and Budget (OMB) Circular A-123 identifies management control standards applicable to anyone responsible for managing Federal programs or Federal funds. 12 The management control standards include (1) compliance with law (i.e., all program operations, obligations, and costs must comply with applicable law and regulations) and (2) reasonable assurance and safeguards (i.e., management controls must provide reasonable assurance that assets are safeguarded against waste, loss, unauthorized use, and misappropriation). Therefore, the Office of Healthcare Programs could place regulatory enforcement at a higher priority in order to better comply with the Code of Federal Regulations and OMB Circular A-123. The Office of Healthcare Programs Was Unaware of Regulatory Violations Because the Office of Healthcare Programs placed regulatory enforcement at a low priority, it was unaware of important ongoing regulatory violations in its at-risk portfolio. Examples included a defunct property in Illinois and significant unsupported expenditures totaling $756,833 at properties in Texas and Florida. The Office of Healthcare Programs was unaware of ongoing regulatory violations at one Illinois property 13 until the State of Illinois revoked the property’s operating license. The property was current on its mortgage, so the Office of Healthcare Programs was not aware of regulatory violations and did not know that a recent Real Estate Assessment Center physical inspection revealed exigent health and safety issues 14 or that the Centers for Medicare and Medicaid had rated the property “very below average” at its last inspection. In an effort to be proactive, the Office of Healthcare Programs responded by adding steps to its punch list to monitor State inspections and Centers for Medicare and Medicaid ratings. Had staff been aware of the issues identified by CMS, they may have been able to address the issues prior to the property’s failure. A financial record review of one property in Texas 15 for the period between October 2008 and September 2010 revealed potential ineligible transfers of 12 Chapter II, “Standards” 13 FHA loan number 07122046. 14 The regulatory agreement requires the owner to maintain the property in good repair and condition. 15 FHA loan number 11322036, designated troubled in January 2010. 10 $139,750, unapproved owner salaries of $100,391, unsupported payments of $85,706 to a contracted accountant, and unsupported payments of $44,424 to a management agent. 1617 Office of Healthcare Programs staff had been in contact with the operator regarding the property’s troubled status and concluded that project management officials “…knew what they were doing.” However, the Office of Healthcare Programs was not aware of the regulatory violations at the property. Further, the owner’s audited financial statements submitted to the Real Estate Assessment Center did not disclose any of these issues. Therefore, the issues were not detected by the Real Estate Assessment Center. The Office of Healthcare Programs could improve its controls by requiring monthly cost reports for troubled properties and reviewing those cost reports to determine if regulatory violations contributed to the properties’ financial conditions. The following table summarizes the ineligible and unsupported costs in the Texas property’s financial records. FHA loan number 11322036 questioned costs Unsupported costs Transfers to affiliates $139,750 Unapproved salary payments to president of 100,391 the owner entity Contract accounting fees 85,706 Management agent reimbursements 44,424 Total $370,271 A financial review of a Florida 18 property for January 2009 through September 2010 revealed potential ineligible transfers of $183,454, unauthorized owner distributions of $101,451, ineligible owner health insurance payments of $65,886, and unsupported payments of $8,477 and $27,294 for or on behalf of the owner and other entities that may have been affiliated with the owner, respectively (see footnotes 16 and 17) 19 Office of Healthcare Programs staff members initially stated that they reviewed the financial statements, and while the project experienced expense control issues, there were no indications of unauthorized distributions. When we identified the questioned expenses, staff members contradicted their earlier statement when they informed us that they did not rely on the financial statements because they were not in the HUD format. Based on this contradiction, we concluded that staff members either did not review the financial statements sufficiently to identify the regulatory violations, or did not have the training to identify them. The Office of Healthcare Programs should 16 We did not review the supporting documentation for any of these transactions. Therefore, they are classified as unsupported in this report. 17 The regulatory agreement requires that the project’s funds be used only for the purposes of the project and expenditures are reasonable and necessary for the operation of the project. Further, the agreement prohibits payments to the mortgagor, its officers, directors, or stockholders without written approval from HUD. 18 FHA loan number 06622026, designated troubled in December 2009. 19 The regulatory agreement requires that funds be withdrawn only for expenses of the project and for surplus cash distributions. 11 implement steps in its punch lists to detect and correct regulatory violations, and provide training to staff to read cost reports and detect regulatory violations. The following table summarizes unsupported costs in the Florida property’s financial records. FHA loan number 06622026 questioned costs Unsupported costs Transfers to another property 20 $183,454 Unauthorized owner distributions 101,451 Payments for the owner’s health insurance 65,886 Payments for and on behalf of the owner 8,477 Payments to possible affiliates 27,294 Total $386,562 Conclusion HUD’s Office of Healthcare Programs took significant steps to strengthen the Section 232 program by implementing new monitoring controls. However, further opportunities exist to increase monitoring efforts, ensure consistency and ensure regulatory violations are identified and addressed. Recommendations We recommend that the Deputy Assistant Secretary, Office of Healthcare Programs, 1A. Correct the inconsistencies in the punch lists, and clarify the vague language to ensure consistent reviews by staff. 1B. Develop controls and oversight procedures to ensure the macro-analysis is performed quarterly and punch lists are followed and implemented consistently by staff. 1C. Implement policies and procedures to detect, correct, and prevent regulatory violations, including establishing thresholds for making referrals to DEC and OIG when violations are suspected or identified, and requiring and reviewing monthly cost reports from troubled properties. 1D. Provide training to staff for reviewing monthly cost reports and detecting regulatory violations. 1E. Review the $756,833 in unsupported costs at the two properties identified in this report, determine their validity, and take appropriate action. 20 This property has the same owner, is located in Illinois, and is not insured by FHA. 12 SCOPE AND METHODOLOGY To accomplish our objective, we • Reviewed background information for the Office of Healthcare Programs including portfolio data; • Reviewed HUD regulations, OMB circulars, regulatory agreements, and riders to the regulatory agreements; • Interviewed Office of Healthcare Programs staff, FHA risk management staff, and Real Estate Assessment Center staff; • Obtained an understanding of applicable internal controls; • Reviewed procedures taken by the Office of Healthcare Programs for five properties with relatively large unpaid mortgage balances representing significant risk to the insurance fund; • Reviewed financial records and interviewed owners of two of the five properties that presented significant indications of potential regulatory violations; and • Toured one property. We conducted the audit between July 2010 and February 2011 at the HUD San Antonio office and HUD headquarters in Washington, D.C. We also toured one property in Fort Worth, TX. At the beginning of our review, the Office of Healthcare Programs had 2,404 insured mortgages with 290,099 units totaling more than $16.5 billion. The unpaid principal balance of those mortgages totaled more than $15.3 billion. Within the portfolio, the Office of Healthcare Programs classified 636 mortgages as potentially troubled, with mortgage balances totaling more than $4 billion, and 179 mortgages as troubled, with mortgage balances totaling more than $1 billion. We did not test the portfolio data because we used the data only for informational and background purposes. We compared actions taken by the Office of Healthcare Programs for five troubled properties with relatively large unpaid mortgage balances, representing significant risk to the insurance fund, to the procedures described in the troubled punch list. Two of the five properties reviewed presented significant indications of regulatory violations. We performed a limited review of the general ledgers and cash disbursements for the two properties and conducted an onsite visit to one of the properties. We did not assess the reliability of the financial records for the two properties reviewed because they were not the subject of the audit. We only reviewed the financial records to identify specific instances of regulatory violations. Therefore, we do not assert that the financial records reviewed were accurate. Further, we did not review the supporting documentation for the questioned costs in this report. As a result, we classified them as unsupported. The Office of Healthcare Programs should verify the questioned costs, and take appropriate action. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 13 INTERNAL CONTROLS Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objective: • Controls over the effectiveness and efficiency of operations. • Controls over compliance with applicable laws and regulations. We assessed the relevant controls identified above. A deficiency in internal controls exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, the reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws and regulations on a timely basis. Significant Deficiency Based on our review, we believe that the following item is a significant deficiency: • Controls over applicable laws and regulations should be increased to more effectively monitor the Section 232 program (finding 1). 14 FOLLOW-UP ON PRIOR AUDITS Nationwide Survey of HUD’s Office of Housing Section 232 Nursing Home Program, 2002-KC-0002 In HUD OIG report number 2002-KC-0002, “Nationwide Survey of HUD’s Office of Housing Section 232 Nursing Home Program,” dated July 31, 2002, HUD OIG determined that HUD did not have adequate controls in place to ensure that all nursing home regulatory agreement violations were identified. Significant control weaknesses occurred because past management did not properly assess and identify risks or design and implement proper controls to protect HUD’s interests in its nursing home portfolio. While HUD’s internal program data contained evidence of regulatory agreement violations; HUD did not have adequate controls in place to ensure that all violations were identified. In addition, the nursing home annual audited financial statements submitted to the Real Estate Assessment Center contained many examples of regulatory agreement violations; however, the system did not include audited financial statements for leased nursing homes. During the survey, the Office of Housing initiated actions to identify and correct program control weaknesses. However, it did not create a timetable for implementing the proposed corrective actions. OIG commended the Office of Housing for its efforts and recommended that specific timeframes be established for implementing corrective actions. HUD created the Office of Healthcare Programs on July 1, 2008, when it gave the Office of Healthcare Programs the responsibility for managing Section 232 properties. As a result, the Office of Healthcare Programs assumed responsibility for implementing the recommendations set forth in the audit report. The Office of Healthcare Programs submitted a management decision to OIG and reported several newly implemented controls including (1) standard operating procedures and checklists for all major asset management activities for use by lenders, owners, and HUD personnel; (2) riders to the regulatory agreement used on all closings after December 2008; (3) analysis of lessee annual cost reports submitted to Medicare/Medicaid; (4) a new regulatory agreement, which was in the development phase; (5) enhanced monitoring efforts; and (6) stronger underwriting policies. The Office of Healthcare Programs also agreed to codify its new policies and procedures into corresponding handbooks and initiate rulemaking procedures to clarify the use of operator accounts. The Office of Healthcare Programs anticipated fully completing all OIG recommendations by August 2011. OIG concurred with the management decision. 15 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Unsupported 1/ number 1E $756,833 1/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures. 16 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 17 18 19 Comment 2 Comment 3 20 Comment 4 Comment 5 Comment 6 21 Comment 7 22 Comment 8 23 Comment 9 24 25 26 27 EXHIBIT A 28 29 30 EXHIBIT B 31 32 OIG Evaluation of Auditee Comments Comment 1 The Office of Healthcare Programs concurred with the finding but requested that we reword the Internal Controls section of the report to be more consistent with the language in the finding. We agreed and revised the the Internal Controls section as appropriate. Comment 2 The Office of Healthcare Programs agreed that its punch lists could be strengthened and committed to strengthening them by ensuring it continuously improves them to be more consistent and specific. We agreed and did not make changes to the report regarding recommendation 1A. Comment 3 The Office of Healthcare Programs stated that the correction of regulatory violations are most often pursued by the Financial Assessment Specialist Team and that its latest punch list addresses detecting potential regulatory violations and correcting them. The OIG has not reviewed the latest punch list and does not express an opinion on it. However, the OIG also notes that staff other than the Financial Assessment Specialist Team review troubled properties when evaluating defaults and determining the cause of the troubled status. Therefore, the other punch lists should include guidance for correcting regulatory violations. Comment 4 The Office of Healthcare Programs stated that its potentially troubled punch list will only require staff to review operator financial statements when indicators suggest the property is at substantial financial risk. OIG disagreed because operator financial statements could sometimes be a sole source of indicators that a property is at substantial financial risk. Lessees submit these financial statements directly to the Office of Healthcare Programs. Therefore, if the Office of Healthcare Program’s staff do not conduct at least a cursory review of each financial statement, the indicators may be missed. We did not revise the report based on the comments. Comment 5 The Office of Healthcare Programs stated that its Financial Assessment Specialist Team may make referrals to the Departmental Enforcement Center or OIG under its punch list at Exhibit B, and its Turnaround Team has worked with the Departmental Enforcement Center to develop a referral punch list that covers troubled properties. OIG does not disagree but notes that while Exhibit B directs referrals to the Departmental Enforcement Center, it does not mention referrals to OIG. We did not revise the report based on the comments. Comment 6 The Office of Healthcare Programs stated that it intends to conduct a full macro-analysis annually based on yearly filed financial information from HUD and the Centers for Medicare and Medicaid instead of quarterly. OIG does not believe that an annual macro-analysis will provide timely information in all cases. Different properties will have different fiscal years causing an annual macro-analysis to provide up-to-date information for some properties and old information for other properties. For example, if the Office of Healthcare Programs conducts a full macro-analysis each year in September, it would include up-to-date information for properties with fiscal years ending in September of that year, but would not include up-to-date information for properties with fiscal years ending in December of the prior year. The Office of Healthcare Programs could consider separating the macro-analysis 33 into four quarterly segments with each segment focusing only on the projects whose fiscal years end during that segment. We did not make changes to the report regarding recommendation 1B. Comment 7 The Office of Healthcare Programs disagreed with the OIG’s conclusion that its regulatory enforcement was low, and therefore, not in compliance with Federal regulations. The Office of Healthcare Programs provided statistics showing that it had made 54 referrals to the Departmental Enforcement Center from January 2009 through June 2010. We did not test the statistics and do not have an opinion on their accuracy. However, we made appropriate changes to the report to indicate that the OHP could better enforce the regulatory agreements to better comply with Federal regulations. Comment 8 The Office of Healthcare Programs stated that it acted immediately and aggressively when it learned of the State regulatory compliance issues. Further, the Office of Healthcare Programs has acquired a new system called TSI Dashboard which may more timely indicate risk to facilities. Finally, the Office of Healthcare Programs stated that acquiring TSI Dashboard is an example of its new emphasis on this type of violation. We have not evaluated TSI Dashboard and do not have an opinion on whether it will help the Office of Healthcare Programs to recognize State regulatory compliance issues in the future. Comment 9 The Office of Healthcare Programs stated that it was aware of potential financial violations of the regulatory agreement, but cannot take enforcement action until it receives the 2008 audited financial statements. The OIG respectfully disagrees. Even though the financial statements were not audited, they clearly identified regulatory violations. The Office of Healthcare Programs should utilize all sources of information for indicators of problems at its troubled properties, and research the indicators when appropriate to determine their validity. The OIG contacted the owner, who admitted that the more egregious regulatory violations identified in the report were occurring. In addition, the 2008 audited financial statements did not cover the review period (January 2009 through September 2010); therefore, will not address recommendation 1E. 34
The Office of Healthcare Programs Could Increase Its Controls To More Effectively Monitor the Section 232 Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-26.
Below is a raw (and likely hideous) rendition of the original report. (PDF)