oversight

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)

                                                                             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