Children’s CEO responds to audits showing the hospital overspent

Audits from the El Paso Children’s Hospital show the hospital at one point exceeded revenue projections but also spent a lot more than it brought in.

In 2012, the hospital brought in $39 million in net patient revenue, much less than the $56 million projected in the feasibility study used to convince taxpayers to pay for the construction of the hospital in 2007. The hospital also spent less in 2012: $63 million compared to the $71 million projected.

Things really changed in 2013. The hospital actually made more money than expected. It made $84 milllion from patients compared to the $59 million that had been forecast. However, hospital also substantially exceeded its projected expenses. It spent $103 million, a whole lot more than the $74 million expected.

In 2014, the hospital’s revenue was close to its target: $61 million compared to the $62 million expected. Yet again, the expenses were higher than revenues: $99 million compared to $77 million forecasted in the study.

The audits show the hospital’s biggest expense is salaries and benefits, upwards of $30 million a year. County officials said in an interview on Wednesday the audits signal that the Children’s board may have grown the hospital too quickly.

“I love the institution and I love subspecialists and the capacity that they had but during difficult times you slow some of that down so that you can sustain yourself over the long haul,” said County Judge Veronica Escobar.

“Their expenses were way out of line,” said UMC Board Chair Steve DeGroat.

Friday Children’s CEP Herbers told ABC-7 high expenses are directly related to high patient volume.

Both Escobar and DeGroat said the County advised the board to slow the Children’s Hospital’s growth in order to keep up with revenue.

“The bottom line is UMC said slow down, let’s digest your current growth. And focus on are you breaking even are you making money,” said DeGroat.

“There were people and experts counseling them on their decision making and they chose to ignore that advice,” said Escobar.

But Herbers said that Children’s is not in a place to turn away patients.

“When the children show up, we’re here to treat them,” Herbers said. “That’s what a 501(c)(3), community, not-for profit hospital does. It’s what UMC does. When patients show up in the emergency room, they don’t say we don’t have enough staff to manage it. They call people in if necessary to manage the patient care. That’s why we’re here.”

The County Judge added the Children’s Hospital board chose not to work with UMC to get millions of dollars in medicaid supplemental funding, like other local hospitals do. And when Children’s filed for bankruptcy in may, “they again walked away from 12 million additional dollars in medicaid supplemental funding.”

The Children’s board has said the hospital’s finances really got hit because the state reimbursed it less for medicaid. Yet the audits show the hospital board chose to keep on spending more even after knowing it’d get less money from the state.

“It (the reduction in medicaid funding) was really harmful. But every organization goes through huge crisis. So you make adjustments. During those really difficult years at the County when our revenues fell through the floor, we made cuts and we had to make sacrifices for a few years and we recovered,” said Escobar.

Herbers responded that both hospitals agreed to renegotiate service contracts, including Medicaid reimbursements.

“Every service agreement has an 18 month reconciliation clause, recognizing that both UMC and El Paso Children’s hospital were launching into a whole new venture with a lot of uncertainties,” Herbers said. “Those things did occur and we did ask for that reconciliation and that has been the focus of discussion for the past year and a half. That’s been unfruitful.”

As for what Children’s owes UMC: the annual $15 million rent was included in the projected expenses in the 2007 feasibility study but its unclear how much of the service costs to UMC were. “If I’m Children’s maybe I saw ‘well that’s part of our problem. UMC was overcharging us and that’s why we had these high expenses.’ But yet again they could have at any point tried to renegotiate. Or they could have slowed down some of the growth,” said Escobar.

UMC is responsible for any upgrades, maintenance or future construction work at the Children’s Hospital building, hence the rent. “You have to pay for the maintenance and upkeep and depreciation. So the rent is really to provide for that. Otherwise you wake up 10, 15, 20 years down the road and you have a dilapidated building and dilapidated equipment and no money to replace it,” said DeGroat.

Herbers says Children’s currently pays 18 percent of UMC’s total rent, because Children’s takes up 18 percent of the hospitals campus. But Children’s is a new facility and far more efficient. Herbers says there’s no meters for measure gas, electricity, and water to determine how much Children’s is actually using. He believes it is less than 18 percent.

The audits for 2013 and 2014 show net patient revenues were above projections or right below. “This could have been successful,” said Escobar.

Herbers said Children’s is currently bringing in enough money to pay for services, drugs and cover its payroll. Legal fees associated with the bankruptcy are being paid on previously paid retainer fees. For Herbers services, Children’s is also paying Alix Partners $125,000 per month, which also comes from a retainer fund. Herbers acknowledges that fees for UMC services are building up, but he said no cash is going out. Children’s and Texas Tech have also worked on an agreement for the fees owed. Texas Tech is taking lesser payments from Children’s during this time.