oversight

        Hidden Lake Management LLC,
                St. Louis, MO
                            Section 232 Program




Office of Audit, Region 7              Audit Report Number: 2015-KC-1004
Kansas City, KS                                              June 30, 2015
To:            Roger Lewis, Director, Office of Residential Care Facilities, HP
               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       The Operator Generally Complied With Its Executed Regulatory Agreement and
               HUD Requirements But Did Not Properly Establish Its Management Agent and
               Management Agreement


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of the Hidden Lake Care Center operator.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
913-551-5870.
                    Audit Report Number: 2015-KC-1004
                    Date: June 30, 2015

                    The Operator Generally Complied With Its Executed Regulatory Agreement
                    and HUD Requirements But Did Not Properly Establish Its Management
                    Agent and Management Agreement



Highlights

What We Audited and Why
We selected the Hidden Lake Care Center for review based on a news article entitled “Poorly
Rated Nursing Homes Got HUD Guaranteed Mortgages Anyway,” published by the Center for
Public Integrity. The article stated that 240 facilities in 38 States and Washington, DC, received
U.S. Department of Housing and Urban Development (HUD)-backed mortgages worth nearly $2
billion a month after receiving a low, one-star rating from the Federal Government, and Hidden
Lake Care Center was one of the nursing homes identified. The audit objective was to determine
whether the Hidden Lake Care Center operator complied with its executed regulatory agreement
and HUD requirements.

What We Found
The Hidden Lake Care Center operator generally complied with its executed regulatory
agreement and HUD requirements. The operator made its lease payments, met HUD’s liability
insurance requirements, had no unresolved State or Federal inspection deficiencies, and
maintained the project in good condition. However, it did not properly establish its management
agent and management agreement. It did not receive prior approval from HUD for its
management agent and agreement as required. Also, the management agreements did not
contain a required provision. The management agent and management agreement deficiency
occurred because the operator was not aware of HUD’s guidance regarding management agents
and management agreements.

What We Recommend
We recommend that HUD (1) require the operator to place the required provision in the
management agreement and submit the required management agent and management agreement
documentation to HUD for approval and (2) ensure that the operator receives training on
management agents and management agreements.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: The Operator Generally Complied With Its Executed Regulatory
         Agreement and HUD Requirements But Did Not Properly Establish Its
         Management Agent and Management Agreement ........................................................ 5

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................8

Appendix ...................................................................................................................9
         A. Auditee Comments ...................................................................................................... 9




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Background and Objective
Hidden Lake Care Center is a healthcare project consisting of a 112-bed skilled nursing facility,
48-bed residential care facility, and 48 independent living units located in Raytown, MO. In
August 2012, the U.S. Department of Housing and Urban Development (HUD) insured the
Hidden Lake Care Center’s mortgage in the amount of more than $10.3 million under Section
232 of the National Housing Act. Section 232 is a Federal Housing Administration-insured loan
product that covers housing for the frail elderly and those in need of supportive services.
Residential healthcare facilities, such as nursing homes, assisted living facilities, and board and
care facilities, are examples of this type of housing. Section 232 may be used to finance the
purchase, refinance, new construction, or substantial rehabilitation of a project. Hidden Lake
Care Center’s owner is a limited liability company (LLC) in Ohio. Hidden Lake Management,
LLC, based in St. Louis, MO, is the Hidden Lake Care Center operator.

Before our audit, we found Hidden Lake Care Center received a low, one-star rating on the
Medicare.gov nursing home compare website. This rating was based on health inspections,
staffing, and various quality measures. Although we selected Hidden Lake Care Center due to
this rating, we later learned the one-star rating didn't indicate it was a substandard property.

On August 1, 2012, the owner entered into a lease agreement with the operator to lease Hidden
Lake Care Center. On that date, the operator entered into a nursing home regulatory agreement
with HUD. On September 1, 2012, the operator entered into a management agreement with
another LLC (management agent) to manage Hidden Lake Care Center. In July 2014, the
operator replaced the original management agreement when it entered into a home office
agreement, along with other nursing home licensees, with the same management agent. Many
duties were the same between the two agreements, including instituting standards and procedures
for admitting patients and collecting payments from patients or third parties; the evaluation of the
performance of all departments; advising or assisting in designing public relations programs; and
providing accounting, billing, and collection services.

According to the final rule for the Section 232 Healthcare Facility Insurance Program –
Strengthening Accountability and Regulatory Revisions, dated September 7, 2012, HUD must
approve the management agent and management agreement before a management agent is
retained. However, this guidance was not effective before the first management agreement was
executed on September 1, 2012. Also, 24 CFR (Code of Federal Regulations) 232.1011 states
that the management agent, each initial management agreement with that agent, and any
amendments to management agent agreements deemed material must be acceptable to HUD and
approved in writing. However, this regulation was not published until 2013.

The Section 232 Handbook, Section II, Production, paragraph 8.3, states that a management
agent must be approved by the Office of Residential Care Facilities before participation and the
management agreement must be approved by HUD before execution. In addition, the Section
232 Handbook, Part III, Asset Management, paragraph 8.3, states that the typical duties of


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management agents may include but not be limited to such things as personnel administration,
resident admissions, marketing, billing, collections, accounting services, etc. The Section 232
Handbook was issued in May 2014 and became effective in September 2014.

Our objective was to determine whether the Hidden Lake Care Center operator complied with its
executed regulatory agreement and HUD requirements.




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Results of Audit

Finding: The Operator Generally Complied With Its Executed
Regulatory Agreement and HUD Requirements But Did Not
Properly Establish Its Management Agent and Management
Agreement
The Hidden Lake Care Center operator generally complied with its executed regulatory
agreement and HUD requirements. The operator made its lease payments, met HUD’s liability
insurance requirements, had no unresolved State or Federal inspection deficiencies, and
maintained the project in good condition. However, it did not properly establish its management
agent and management agreement. The management agent and management agreement
deficiency occurred because the operator was not aware of HUD’s guidance regarding
management agents and management agreements.

The Operator Generally Complied With Its Regulatory Agreement and HUD
Requirements
For our audit period, the operator made its monthly payments to the owner as required in the
regulatory and lease agreements. The Section 232 Handbook, Section II, Production, chapter 14,
appendix 14.1, requires an operator to meet HUD’s requirements for professional liability
insurance. The operator met the required limits of $1 million per occurrence, a $3 million
aggregate limit, and no deductible limits in the annual policies. Also, the project’s health
surveys and fire inspection reports did not include unresolved State or Federal inspection
deficiencies that would put the project’s licensing or funding at risk.

According to the regulatory agreement, the operator should maintain the project in good repair
and condition. In addition, the operator should not remodel, reconstruct, or demolish any part of
the project. The project has seven separate buildings, with two buildings devoted to skilled care,
one devoted to residential care, and four devoted to independent living. We inspected the seven
buildings and determined that the buildings and the surrounding areas were well maintained.
Also, there was no remodeling or reconstruction in progress or recently completed.

The Operator Did Not Properly Establish Its Management Agent and Agreement
The operator did not receive prior approval from HUD for its management agent and agreement
as required in 24 CFR 232.1011 and the Section 232 Handbook. The Integrated Real Estate
Management System did not list a management agent for the project. Also, the Office of
Healthcare Programs staff was unaware that the operator had a management agent.

According to the regulatory agreement’s lean rider, the operator must not enter into a
management agreement involving the project unless it contains a provision that in the event of
default under the operator or the owner regulatory agreement, the management agreement will be



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subject to termination without penalty upon written request of the commissioner (HUD).
However, the management agreements did not contain this provision.

The Operator Was Not Aware of HUD’s Guidance Regarding Management Agents and
Management Agreements
During our audit, the operator indicated that it was not aware of HUD’s guidance regarding
management agents and management agreements. In addition, the operator indicated it had
received no training on management agents and management agreements.

Recommendations
We recommend that the Director of the Office of Residential Care Facilities

       1A.    Require the operator to place the required provision in the management agreement
              and submit the required management agent and management agreement
              documentation to HUD for approval.

       1B.    Ensure that the operator receives training on management agents and management
              agreements.




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Scope and Methodology
Our review generally covered the period September 1, 2012, through January 31, 2015. We
conducted fieldwork from March through April 2015 at the Hidden Lake Care Center operator’s
offices located at 6 City Place Drive, Saint Louis, MO.

To accomplished our objective, we

      Interviewed the HUD Office of Healthcare Programs staff;
      Interviewed Hidden Lake Care Center’s owner, operator, and management agent staff;
      Reviewed the Code of Federal Regulations and HUD handbooks;
      Reviewed the regulatory agreements for Hidden Lake Care Center’s operator and owner;
      Analyzed Hidden Lake Care Center’s operating, lease, management agent, and home
       office agreements;
      Identified key sections in Hidden Lake Care Center’s management and home office
       agreements between the operator and the management agent and compared the
       management agent’s services in the two agreements;
      Reviewed the Hidden Lake Care Center operator’s monthly rental payments and the
       associated documentation for our audit period;
      Reviewed Hidden Lake Care Center’s health survey and fire inspection reports,
       professional liability insurance documents, accounting records, bank statements, rental
       payment invoices, management agent fees, and financial statements;
      Reviewed Integrated Real Estate Management System data; and
      Visited Hidden Lake Care Center to verify whether the property was maintained in good
       repair and condition.

We used Hidden Lake Care Center’s accounting records to determine whether they complied
with the executed regulatory agreement and HUD requirements. Those accounting records
included details of the auditee’s lease payments, comprised of monthly rent, property taxes,
liability insurance, and reserves for replacement. We reviewed all of the operator lease payments
from September 2012 through January 2015. We determined that the records were sufficiently
reliable for use as our primary support in meeting our objective. Also, we obtained data from the
Integrated Real Estate Management System. We relied on the data from this system for
background information only.

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
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




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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 compliance with the regulatory agreement and Section 232 regulations.
We assessed the relevant controls identified above.
A deficiency in internal control 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.
We evaluated internal controls related to the audit objective in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal control structure as a whole.
Accordingly, we do not express an opinion on the effectiveness of the Hidden Lake Care Center
operator’s internal control.
Separate Communication of Minor Deficiencies
We reported minor deficiencies to the auditee in a separate management memorandum.




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Appendix

Appendix A
                                     Auditee Comments


The auditee elected not to provide written comments.




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