El Paso Children’s Hospital accuses UMC of siphoning funds

The bankruptcy filing by El Paso Children’s Hospital details the hospital’s accusations that the Master Agreement between the hospital and University Medical Center (UMC) differed greatly from a 2007 Feasibility Study and accuses UMC of siphoning funds from Children’s.

Children’s filed for Chapter 11 bankruptcy protection on May 19.

“Since its inception, University Medical Center’s inflated cost and oppressive approach has not worked for EPCH,” Children’s CEO Mark Herbers said in an email to friends and supporters of the hospital on May 19.

The bankruptcy filing, called an “adversary” case, claims UMC knowingly set Children’s up in a way to exert control of its operations.

Around Feb. 10, 2012 – four days before Children’s opened its doors to patients – UMC presented plaintiff (Children’s) with several agreements that document and govern the relationship between UMC and the plaintiff, according to the bankruptcy filing.

“By design, the Agreements cover nearly every aspect of the Plaintiff’s operations. Consequently, termination of the Agreements would severely undermine, if not destroy, the Plaintiff’s ability to provide patient care,” the bankruptcy filing states.

“Many of the salient terms of the Agreements vary considerably from the structure contemplated by the 2007 Feasibility Study that paved way for approval of the Bonds, including i) assumptions that working capital loans would be repaid over a 5-year-period, instead of 18 months, resulting in severe undercapitalization in the startup phase of operations of the Plaintiff; ii) a portion of the property tax appropriations attributable to pediatrics (estimated at $3.9 million per annum in 2007 based on 2005 data) would be annually paid to the Plaintiff by UMC for relieving UMC of its obligations to provide care for the pediatric indigent population of El Paso County; and iii) the Plaintiff would benefit from the efficiencies created by its location on the campus of UMC and sharing services, which was not reflected in the Agreements,” the bankruptcy filing states. “The variances in the Agreements from the 2007 Feasibility Study operate to the Plaintiff’s detriment, but to UMC’s unearned benefit.”

In the bankruptcy filing, Children’s listed a partial chart of what it claims shows overcharge/underpay services provided by UMC to Children’s and the estimated cost of those services.

“The Services Chart is not exhaustive, but merely illustrative of the systematic siphoning of funds from the Plaintiff, contrary to the projections and assumptions of the 2007 Feasibility Study,” the bankruptcy filing states.

Children’s officials sought to remedy the overcharges and underpayments between UMC and Children’s, sending UMC notice on June 20, 2014 that Children’s was invoking two sections of the Master Agreement that material changes in healthcare funding required adjustment of the amounts due under the lease and the related agreements.

“UMC completely ignored the Plaintiff’s requests, preferring instead to carry a large account receivable on its books that masked its own core operating losses,” the bankruptcy filing states.

Children’s goes on to state in the filing that its “liquidity issues stem directly from UMC’s systemic and calculated practice of overcharging the Plaintiff in connection with the Agreements. UMC has had knowledge of the Plaintiff’s material operating losses and its lack of liquidity since at least 2013.”

Children’s states UMC proposed the lease to “take advantage of certain inter-governmental transfer funding (which did not materialize), not in compensation for its actual costs because the premises occupied by the Plaintiff was already funded through the taxpayer revenue bonds.”

Children’s is asking the bankruptcy court judge to temporarily restrain UMC from taking any action to terminate the Agreements, pending a hearing and ruling on the granting of a preliminary injunction.

Children’s also is asking the court to declare that UMC has no right to collect rental payments in connection with Children’s use of the hospital facility because Children’s has a right to use it rent free because of the bonds and that Children’s should be refunded of all rental payments made to UMC.

A UMC official told ABC-7 late Thursday afternoon that,” UMC vehemently disagrees with virtually all of the allegations presented in the El Paso Children’s Hospital adversary filing. UMC will address each of these points in its official response to the court.”

The first court hearing is set for Thursday in Austin.