oversight

Newport News General Hospital Section 242 Hospital Program Newport News, Virginia

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-12-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                      Issue Date

                                                                           December 9, 1996
                                                                      Audit Case Number

                                                                           97-PH-212-1002




TO:            John Sepulveda, Director, Hospital Mortgage Insurance Staff, H


FROM:          Edward F. Momorella, District Inspector General for Audit,
                Mid-Atlantic, 3AGA

SUBJECT:       Newport News General Hospital
               Section 242 Hospital Program
               Newport News, Virginia


As requested by your staff, we audited the operations of Whittaker Memorial Hospital Association
Inc. (mortgagor) doing business as Newport News General Hospital (hospital). The purpose of the
audit was to determine whether the mortgagor and Healthcare Affiliates of Virginia Inc. (agent)
operated the hospital according to the terms and conditions of the Regulatory Agreement and
applicable HUD directives. The report contains one finding. Based on our tests, we determined that
the mortgagor and agent did not properly manage the hospital's financial operations. As a result,
HUD's and the hospital's interests were not adequately protected.

Within 60 days, please give us, for each recommendation made in this report, a status report on: (1)
the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why action is considered unnecessary. Also, please furnish us copies of any correspondence or
directives issued because of the audit.

If you have any questions, please contact Irving I. Guss, Assistant District Inspector General for
Audit, at (215) 656-3401.
Management Memorandum




97-PH-212-1002          Page ii
Executive Summary
We audited Newport News General Hospital to determine whether the mortgagor and agent operated
the hospital in accordance with the Regulatory Agreement and applicable HUD directives.



                                    Based on our tests, the mortgagor's former Board of Trustees
 Hospital financial
                                    did not properly oversee hospital management and maintain
 operations improperly
                                    adequate controls over hospital operations as required. The
 managed
                                    mortgagor and agent paid ineligible and unsupported expenses
                                    totaling $768,874 and $682,714, respectively, from hospital
                                    funds. The former Board of Trustees were either unaware of
                                    restrictions on operating expenses or considered costs
                                    reasonable in order to retain the services of a skilled
                                    management agent. As a result, the hospital was deprived of
                                    funds needed to meet financial obligations.

                                    We recommend that the current Board of Trustees take
                                    appropriate action to recover the ineligible costs, and provide
                                    justification for the unsupported costs.

                                    During the audit the draft finding issues were discussed with
                                    hospital officials. The draft finding was provided to a
                                    designated hospital representative, and no written response
                                    was received. We discussed the draft finding with the
                                    Executive Committee of the current Board of Trustees at an
                                    exit conference on November 21, 1996. The committee
                                    agreed with our presentation.




                                             Page iii                                  97-PH-212-1002
Executive Summary




97-PH-212-1002      Page iv
Table of Contents

Management Memorandum                                              i


Executive Summary                                                 iii


Introduction                                                       1


Finding

          Ineligible And Unsupported Costs Were Paid
          From Hospital Funds                                      3


Internal Controls                                                  9


Follow Up On Prior Audits                                        11


Appendices

    A     Schedule of Ineligible and
          Unsupported Costs                                      13

    B     Distribution                                           15


Abbreviations

    HUD Department of Housing and Urban Development

    OIG      Office of Inspector General


                               Page v                  97-PH-212-1002
Table of Contents




97-PH-212-1002      Page vi
Introduction
Newport News General Hospital is a 126-bed community hospital located at 5100 Marshall Avenue,
Newport News, Virginia. On October 25, 1983, the hospital received a Section 242 HUD insured
mortgage of $13,269,700. On November 6, 1990, the hospital filed for bankruptcy. The hospital's
original mortgage had been in financial default from the period of November 1990 to October 1995.
Under a confirmed plan of reorganization, the hospital executed a Deed of Trust Note with HUD in
the amount of $4,000,000. The first payment under the new note was due on October 1, 1995. HUD
is the mortgagee and payments have been current since October 1995.

On June 1, 1993 the hospital entered into a management agreement with Healthcare Affiliates of
Virginia, Inc. to operate and manage the hospital. As compensation for the management services to
be rendered the hospital agreed to pay a management fee of $360,000 per year payable in equal
monthly installments. Joseph F. Johnson, Jr. is the Chief Executive Officer of the agent. In
November 1995 the agent's services were terminated.

William Batts, III is the chairman of the current Board of Trustees. The hospital's financial books and
records are maintained at 5100 Marshall Avenue, Newport News, Virginia.




                                       The primary objective of the audit was to determine whether
 Audit Objectives
                                       the mortgagor and agent operated the hospital in accordance
                                       with the Regulatory Agreement and applicable HUD
                                       directives. Specific audit objectives were to determine
                                       whether disbursements from operating funds were for hospital
                                       related expenses.

                                       We reviewed available hospital's books and records. We
 Audit Scope
                                       interviewed responsible hospital staff and directors, the former
                                       Board of Trustees, and the former management agent
                                       concerning hospital disbursements.

                                       Audit work was performed between June 1996 and November
 Audit Period
                                       1996 and covered activities from January 1992 to December
                                       1995.

                                       We conducted the audit in accordance with generally accepted
                                       government auditing standards.




                                                 Page 1                                    97-PH-212-1002
Introduction




97-PH-212-1002   Page 2
                                                                                            Finding




   Ineligible And Unsupported Costs Were Paid
               From Hospital Funds
The mortgagor and agent paid ineligible and unsupported costs from hospital operating funds
contrary to the Regulatory Agreement. Ineligible and unsupported disbursements totaled $768,874
and $682,714 respectively, as shown on Appendix A. The former Board of Trustees were either
unaware of restrictions on operating expenses or considered costs reasonable in order to retain the
services of a skilled management agent. As a result, funds were expended unnecessarily and
improperly accounted for, to the detriment of effective hospital operations.



                                      A. Ineligible Costs

                                      The hospital's mortgage was in default during the period in
                                      which Healthcare Affiliates acted as the management agent.
                                      Audited financial statements were not available to determine
                                      the financial condition of the hospital during this period.
                                      During the period of January 1, 1992 through December 31,
                                      1995 ineligible costs paid from hospital operating funds
                                      included the following:

                                      1. Board Member Compensation

                                      Paragraph (4) (d) of the Regulatory Agreement states the
                                      mortgagor: "shall not without the prior written approval of
                                      the Secretary: Pay any compensation or make any distribution
                                      of income or other assets to any of its officers, directors or
                                      stockholders;"

                                      Article III, Section 3. of the Corporate By-Laws state: "A
                                      person shall be disqualified from membership in the
                                      corporation who is employed by the corporation or derives
                                      income from the use of its facilities."

                                      Three members of the former Board of Trustees received
 Board members
                                      compensation from the hospital during their tenure. From
 improperly compensated
                                      1992 through 1995 board members received compensation for
                                      services rendered totaling $542,880. Board members were
                                      either unaware of the restriction or considered their
                                      compensation acceptable since the practice was longstanding.


                                               Page 3                                   97-PH-212-1002
Finding



                            2. Consultant Contracts

                            Paragraph 9.5 of the Management Agreement states: "...it is
                            agreed that Manager shall not engage any such consultants
                            without first obtaining the approval of the Board."

                            On June 1, 1993, an individual representing himself as the
                            President of Healthcare Affiliates, signed the Management
                            Agreement with the hospital. On September 20, 1993, the
                            same individual subsequently executed a retainer agreement
                            with the hospital as a consultant. Under this agreement the
                            individual received compensation totaling $151,394.

                            The representative stated he was not an officer of Healthcare
                            Affiliates nor did he receive payments from Healthcare
                            Affiliates. He signed the management agreement on behalf of
                            the corporation because he was the only representative of
                            Healthcare Affiliates in Newport News when the agreement
                            was drawn up.

                            On September 1, 1993, another individual, representing
                            himself as an associate of Johnson & Associates, Inc. also
                            executed a retainer agreement between himself and the
                            hospital. Johnson & Associates is an identity of interest
                            company of the management agent, Healthcare Affiliates.
                            Total compensation paid under this agreement was $43,100.

                            Board members were either unaware of the execution of these
 Consultants paid without
                            contracts or reluctant to question their eligibility. Approval
 board approval
                            of these contracts was not documented in the board minutes.

                            3. Unauthorized Loans

                            Paragraph (4) (b) of the Regulatory Agreement, states the
                            mortgagor: "shall not without the prior written approval of
                            the Secretary: Assign, transfer, dispose of, or encumber any
                            personal property of the project, including rents, and shall not
                            disburse or pay out any funds except for usual operating
                            expenses and necessary repairs; ..."

                            The management agent processed two promissory notes from
 Agent made improper
                            hospital funds totaling $31,500.     Both loans remain
 loans
                            outstanding. The Board of Trustees were unaware of these
                            loans.


97-PH-212-1002                       Page 4
                                                                                Finding



                        B. Unsupported Costs

                        During the period of June 1, 1993 through November 1995
                        unsupported costs paid from hospital operating funds included
                        the following:

                        1. Management Fees

                        Paragraph 6 of the Management Agreement states: "Manager
                        shall defer management fees if agreed upon operating goals
                        are not met... Operating goals, at a minimum, shall include the
                        Hospital achieving a positive net operating income and a
                        positive cash flow on a monthly basis for the management fee
                        to be paid."

                        During the period of November 3, 1993 through October 24,
Payment of management
                        1995, Healthcare Affiliates received management fees totaling
fees questionable
                        $470,000. Review of periodic financial statements available
                        for the same period disclosed the hospital generated positive
                        net operating income for four reporting periods. However,
                        the hospital's current accounting staff questions the validity of
                        these financial statements. Additionally no audited statements
                        are available to confirm the financial history of the hospital.

                        According to the former chairman, the Board of Trustees had
                        considered deferment of management fees to Healthcare
                        Affiliates. However, it was decided, that realistically, the
                        hospital could not retain anyone without compensation.
                        Therefore, despite the restriction imposed by the management
                        agreement, Healthcare Affiliates received uninterrupted
                        management fees.

                        2. Other Disbursements

                        Paragraph (9) (a) of the Regulatory Agreement states:
                        "Income and other funds of the project shall be expended only
                        for the purposes of the project and in connection with the
                        mortgaged property."

                        Documentation was not available to confirm that the following
                        expenses were related to or necessary for hospital operations:

                        •   American Express - hotel and meal expenses totaling
                            $861.


                                 Page 5                                     97-PH-212-1002
Finding




                 •   Management Agent President - travel, entertainment, and
                     administrative expenses totaling $13,811.

                 •   AT&T - cellular long distance telephone calls by the Chief
                     Executive Officer totaling $804.

                 •   Director of Clinical Services - relocation, travel, year end
                     bonus, and miscellaneous expenses totaling $14,091.

                 •   Cellular One - cellular telephone bill totaling $750.

                 •   Compusa - Laptop computer, which the Management
                     Agent President retained upon his departure, totaling
                     $2,200.

                 •   Days Inn - local hotel room charges for the Chief
                     Executive Officer, a consultant and others totaling $3,375.

                 •   Featherstone Apts - temporary housing for the Chief
                     Financial Officer totaling $17,058.

                 •   The Harbours - temporary housing for the Director of
                     Clinical Services totaling $3,600

                 •   Chief Operating Officer - travel, year end bonus, living and
                     miscellaneous expenses totaling $22,417.

                 •   Healthcare Affiliates - travel, telephone,and miscellaneous
                     expenses totaling $22,367.

                 •   Potential employee - lodging in New Orleans totaling $316

                 •   Chief Executive Officer - hotel and airline reimbursement,
                     and administrative expenses totaling $3,306.

                 •   Kiln Creek Country Club - country club dues and
                     entertainment expenses totaling $11,124.

                 •   Minolta Leasing Services - copying machine located at
                     another office of the management agent but leased to the
                     hospital totaling $5,807.




97-PH-212-1002            Page 6
                                                                           Finding



                  •     Oakwood Corporate Housing - housing expense for the
                        Chief Executive Officer totaling $11,615.

                  •     Radisson Hotel - local restaurant expense totaling $484.

                  •     Director of Marketing - living allowances, moving and
                        miscellaneous expenses totaling $2,683.

                  •     Uniglobe Hampton Roads Travel - travel for hospital
                        employees and employees of Healthcare Affiliates totaling
                        $64,326. Travel included reimbursement for frequent trips
                        home by the Chief Financial Officer, the Director of
                        Clinical Services, and family members.

                  •     Consultant - retainer fee and express mail expense totaling
                        $8,414.

                  •     Consultant - service agreement and miscellaneous
                        expenses totaling $3,305.

                  In summary, the former Board of Trustees stated that overall
                  they were aware of and approved the expenditures made by
                  Healthcare Affiliates. The Board felt the expenditures were
                  necessary to: 1) recruit and retain quality staff; and 2) generate
                  new revenue sources for the hospital.
                  In our opinion the management agent and former Board of
                  Trustees ignored HUD Regulatory Agreement requirements
                  and HUD financial requirements in administering the financial
                  operations of the hospital. Although the hospital was
                  experiencing serious financial problems, the former Board of
                  Trustees approved the disbursal of hospital funds to pay costs
                  not directly related to operations. As a result, the hospital was
                  deprived of $1,451,588 of needed operating revenue.


Recommendations   We recommend the Board of Trustees:

                  1A.      Recover and repay to the hospital operating account
                           $768,874 improperly paid from operating funds.

                  1B.      Develop and provide reliable historic financial data to
                           support the payment of management fees totaling
                           $470,000, or recover and repay the hospital operating
                           account for all or any portion not supported.


                             Page 7                                    97-PH-212-1002
Finding



                 1C.   Provide documentation supporting the propriety of
                       other unsupported disbursements totaling $212,714 or
                       recover and repay the hospital operating account for
                       all or any portion not supported.




97-PH-212-1002          Page 8
Internal Controls
In planning and performing our audit, we considered internal controls of the management of Newport
News General Hospital to determine our auditing procedures and not to provide assurance on internal
controls. Internal controls is the process by which an entity obtains reasonable assurance as to
achievement of specified objectives. Internal control consists of interrelated components, including
integrity, ethical values, competence, and the control environment which includes establishing
objectives, risk assessment, information systems, control procedures, communication, managing
change, and monitoring.




                                      We assessed the following internal controls which were
 Internal controls assessed
                                      relevant to our audit objectives:

                                      •   Cash disbursements

                                      •   Board of Trustees oversight

                                      A significant weakness exists if internal controls does not give
 Assessment results
                                      reasonable assurance that the entity's goals and objectives are
                                      met; that resource use is consistent with laws, regulations, and
                                      policies; that resources are safeguarded against waste, loss and
                                      misuse; and that reliable data are obtained, maintained, and
                                      fairly disclosed in reports. Based on our review, significant
                                      internal control weakness's covering cash disbursements and
                                      Board of Trustees oversight is described in the finding in this
                                      report.




                                               Page 9                                    97-PH-212-1002
Internal Controls




97-PH-212-1002      Page 10
Follow Up On Prior Audits
This is the first OIG audit of the hospital.




                                               Page 11   97-PH-212-1002
Follow Up On Prior Audits




97-PH-212-1002              Page 12
                                                                                          Appendix A

Schedule of Ineligible and
Unsupported Costs
                                               Ineligible 1/   Unsupported 2/

Compensation to board members       $542,880
Consultant contracts                 194,494
Unauthorized loans               31,500
Management fees                                $470,000
Inadequately documented disbursements
                                     212,714
                              $768,874       $682,714

Total Costs                                               $1,451,588


1/   Ineligible  costs     are       clearly     not      allowed      by    law,     contract,       or
     HUD policies or regulation.

2/  Unsupported           costs      do        not      clearly        violate       policies        or
    regulations, but warrant being contested      for various reasons, such as the lack of satisfactory
documentation to support             eligibility and HUD approval.




                                                Page 13                                    97-PH-212-1002
Appendix A




97-PH-212-1002   Page 14
                                                                                  Appendix B

Distribution
Secretary's Representative, Mid-Atlantic, 3AS
Director, Multifamily Division, Virginia State Office, 3FHM
Internal Control & Audit Resolution Staff, 3AFI
Manager, Virginia State Office, 3FS
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Audit Liaison Officer, Housing, HF (Room 5132)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Participation & Compliance Division, HSLP (Room 9164)
Director, Division of Housing Finance Analysis, REF (Room 8204)
Chief Financial Officer, F (Room 10164)
Deputy Chief Financial Officer for Operations, FO (Room 10164)
Director, Hospital Mortgage Insurance Staff, H (Room 9224)
Assistant Director in charge, US GAO, 820 1st St. NE Union Plaza, Bldg.2, Suite 150,
 Washington, DC 20002, Attn: Mr. Cliff Fowler
Assistant Inspector General for Health Care Financing Audits, 1 E Nine Oaks
 Meadows Bldg, 6340 Security Blvd., Baltimore, MD 21207
Chairman, Board of Trustees, Newport News General Hospital, 5100 Marshall Avenue,
 Newport News, VA 23605




                                            Page 15                                97-PH-212-1002