ABC-7 Xtra: Children’s Bankruptcy

>>> live where news comes first, this is “abc-7 xtra. >>> good evening. i’m maria garcia. welcome to “abc-7 xtra. tonight, we’re talking about one of the most important institutions in our community who is saving the lives of children, but in jeopardy of shutting down. it’s been a year of downward spiraling for the now bankrupt el paso children’s hospital. and for the first time during its often tumultuous negotiations with umc, we’re hearing it’s a real possibility umc may allow children’s to shut down. this past week, the cash-strapped children’s hospital filed its restructuring plan to bankruptcy judge christopher mott. it includes two options: find a partner other than umc to infuse money into children’s or accept umc’s prior offer to take over. with some conditions. but just this past week, i also learned umc may no longer want to take over children’s, because it looks children’s may be a huge liability to taxpayers in risk of owing tens of millions of dollars to the federal government. joing us tonight: county commissioner david stout, and former bankruptcy attorney and trustee andy krafsur. you can e-mail us your comments and questions now to abc7xtra@kvia.com. call us at 915-496-1775. or tweet me at @mariagabc7. we did invite the children’s hospital representatives, urged them to be here at this program today but they said they would not accommodate our request. before our discussion, let’s get a recap of this week’s developments. >> children’s may have lost their only savior through this. >> umc now saying it’s possible it will withdraw its prior offer to take over children’s. because children’s may owe the federal government between $22 and $66 million, depending on potential penalties for saying it paid nearly $30 million in rent to umc when it really didn’t. >> it would be impossible for umc to assume a $66 million debt. >> i asked children’s ceo mark herbers why it inaccurately reported to the feds children’s paid millions to umc. >> our cost reports are filed consistent with medicaid guidelines, which matches our audit report. >> umc now sending children’s a new offer, allowing it time to find a partner if it will pause litigation while it does that. >> if we have a third-party strategic partner infuse new money and pay off the creditors in full. >> herbers says confidentiality agreements don’t allow children’s to disclose who the potential partner would be, but children’s wants the option to leave their current building if they do find a partner. >> taxpayers paid for it and taxpayers don’t get any money back from the money that they owe and they want to leave the premises and leave the taxpayers with this shell of a building there. >> the question now: what happens if children’s can’t find another partner and umc withdraws its offer to take it over? >> the children’s hospital would have to close its doors and umc would probably open up a pediatric wing. >> joining us now are county commissioner david stout and andy krafsur, a former bankruptcy trustee and attorney. thank you so much for joining us. >> thank you. >> commissioner stout, umc sent children’s what appears to be its final offer this week. you are asking them to give the u. a reply by the end of day monday. is this an ultimatum? >> it’s the last step that we’re willing to take. it’s one last try at this. from the very beginning, we’ve been fighting to keep this hospital open since before i was on the courts. in the past you know umc gave children’s two forbearances. last year, gone to the table to negotiate many times, three or four times since i’ve been here, and i think this is the last — the last that we can do. >> so what happens if you don’t hear from children’s or they don’t accept that offer by end of day tomorrow? >> then we will continue with the litigation and we’re very, you know, positive that we will be successful in the litigation. i think that the judge has shown some of his hand already when it comes to the way that he’s thinking with some of the decisions that he’s made in the past — >> successful you mean in recovering the $106 million? >> i don’t know if we’re going to recover the money because there’s not any money there. but at least we will have an answer as to what will happen with the children’s hospital going into the future. >> okay. so umc saying it’s possible children’s hospital may owe the federal government anywhere between 22 and $66 million, depending on potential penalties for reporting unpaid rent in the amount of about $27 million to the feds. so does this make them a liability to taxpayers? andy? what’s your take on this? >> potentially. certainly, it’s possible for umc if it has a valid lien to foreclose its lien and basically start a new hospital. you know, obviously, if it continues, you know, under the auspices of children’s hospital with the current provider number, that liability would have to be dealt with. frankly, that liability is going to have to be dealt with in any event. but from my perspective, the taxpayers of el paso county should not be responsible for it. >> okay. we did speak to children’s ceo on thursday, he gave us an interview and i specifically was trying to wrap my head around the penalties and why children’s reported to the federal government that it paid $27 million in rent to umc when it really didn’t. and so we were having a conversation, i was trying to understand it. let’s listen to an excerpt from that. it’s a little bit long but i think it’s important to understand this conversation. let’s hear that. >> our consultants, our legal counsel, and our experts reviewing the same set of materials, we believe that the outcome of any significant recovery to that magnitude, any material amount is not probable and not estimable. that’s what i said. >> so why did children’s report $27 million in costs as rent to umc when that had not been paid? >> well, we are required to file our medicare cost reports which includes medicare data using generally accepted accounting principles. so our cost to report filings has to match our annual audit report, consistent with generally anticipated accounting principles. we have never argued about the lease other than the fact that the amount is just not palatable and we have to restructure it. that’s what we have been trying to do. so our cost reports are filed consistent with the medicare guideline, consistent, which matches our audit report and that’s the answer to your question. it’s not — we recognize the expense, we’ve approved the expense until we’ve recorded as such. >> but i’m sorry. so how did you accrue — you’ve accrued the expense but you reported it — >> as an allowable cost consistent with generally accepted accounting principles. >> but you reported it as something you paid out that you didn’t pay. >> you reported it as an operating expense and we also reported the accrued liability. the debt if you will. >> all right, so that’s children’s ceo saying he did not believe that the children’s hospital opened itself up for liability when it reported these $27 million of unpaid rent, saying that, you know, their experts, their legal counsel think that they essentially did the right thing by reporting this. >> i think that we’ve found out from the hhsc themselves, from the commissioner, through senator rodriguez who has reached out to him, that there are issues and, you know, it could be in the millions of dollars. so i’m not sure — i’m not an accountant but, you know, i would rather trust what the hhsc, which is the agency that is going to be doing these audits, and is right now doing these audits, i trust them much more than i would any consultant that children’s has. >> okay. >> discretion is the better part of valor here. if you’re in commissioner stout’s position or the umc’s position and you’re looking at at the possibility to have to assume this liability, you need to take the most conservative approach possible. i have a potential solution here. maybe his attorneys are giving this advice can provide an anindemnity if they feel there’s no problem. >> on the phone, what’s your comment or question? >> why was umc hospital built in the first place? it was built by people who knew better. those who voted for the hospital should be the only ones to pay for it. >> okay, let’s go to juan on the east side. what’s your comment or your question? >> we’re on the hook for several million dollars. we have a white elephant to show for it, thanks to escobar and her commissioners court of jesters, el paso’s about to pay millions of dollars and have an empty white elephant building. >> okay. so clearly from the beginning, there’s been distrust from the children’s hospital towards the county. i want to read an e-mail from iliana. she’s saying i don’t believe anything your guests have to say tonight. the county commissioners and the umc should put a real number on the debt. they shouldn’t charge rent on a building that the taxpayer built. it doesn’t matter that they held a gun to their head and made them sign for the lease. why don’t we have a say? 18 months later, cleaned them out by taking $30 million that should have been paid over five years. so again, there’s this argument that the children’s hospital board essentially didn’t have a choice and were somehow bullied by umc to agree to these conditions that made the children’s hospital just not cost effective, not efficient. >> that doesn’t make sense to me because umc had a very profitable pediatric wing before they began on this endeavor with the hospital. it doesn’t make sense to me why he would want to, you know, build up a children’s hospital just to break it back down into a pediatric wing again. and as for the viewers’ comment, you can’t blame this all on one person either or one group. escobar has done a great job, in my opinion. she’s been very attentive to what’s been going on. very informed about what’s going on. and, you know, this is all the commissioners court. we’ve made it a point to be at all the hearings. we’ve made it a point to get involved. have our own lawyer and we’re trying to protect the taxpayer here. this hospital has been run into the ground. and we’re doing the best that we can, we’re doing all that we can. we’ve reached out to the senator, we’ve reached out to the congressman to try to see if we can figure out what that number is sooner rather than later so that we know what we’re getting into if we end up deciding to take over the hospital. >> children’s hospital officials say that it’s not that the hospital was run into the ground. it’s that $10 million a year in rent was just too much for this children’s hospital and even though they signed on it, and it’s pretty clear from the bankruptcy hearings that some of them didn’t do their research. they said i wasn’t the numbers guy. so it’s clear that there’s some responsibility there. but in their eyes, umc was the big brother. umc were the experts in this and they were following that guide. >> and i understand when you’re a member of the board, it’s your job to make the decision and they made this decision. it was with lawyers, it was negotiated over time. they signed for it. if they were not willing to pay that amount back then, then they should have not signed the agreement. i know that they said the hospital may have had to wait to be open for a certain amount of time if they didn’t sign the agreements but i guarantee you that would have been a lot better if they would have waited than what we’re knowing through right now. >> umc pays rent to itself as well for depreciation in case there’s any renovation or huge maintenance in the future but umc pays itself rent about $6.6 million a year. children’s pays umc rent about $10 million a year. so children’s pays a lot more for rent for a smaller space than umc, which for a lot of people in the children’s side disproves that umc has been overcharging. >> i don’t know if you can say that they’ve been overcharging. they agreed to. they both went out and did a fair market assessment. they both came back. they agreed on a meeting point between the two numbers that each side came back with and both sides agreed to it. you know, whether, you know, it can be renegotiated, that remains to be seen. maybe it can be renegotiated. but, you know, i think the judge also was very clear and that lease and that rent and that amount was what they agreed to and what they have to pay now through the rest of the process. he agreed with that, as well. >> andy? >> the lease is really not the issue here. i mean, forget the lease. the children’s hospital is not operating profitably and has not since the beginning. even in bankruptcy it’s losing close to $2 million a month without regard to the lease. i mean, to me, the lease is nothing but a red herring. the real issue is at the end of the day, instead of taking the time to try to solve its operational issues and getting the profitability, the children’s hospital has decided to engage in sort of a scorched earth litigation policy to go after umc with the rearview mirror look and that’s the problem. and that never works, particularly in a bankruptcy case where it’s all about cooperation, it’s not about fighting. >> and there is evidence from the audits that we’ve obtained from children’s hospital that there was a year or two, i think it was — which — it was 2011, when they exceeded expectations for their revenue. escobar tweeting us, el paso children’s hospital blames the rent but don’t forget they haven’t ever paid the rent. john riley tweeting at us why don’t we throw out the existing board and replace it with one that county commissioners choose? the el paso children’s hospital board drove this hospital into the ground. we’re going to talk about that when we come back. you’re watching “abc-7 xtra. we still have a lot to get to. stay with us. remember you can call us at (916)496-1775, tweet me at @mariagabc7 ab >>> welcome back to “abc- xtra.” we’re talking about the future of the children’s hospital tonight. andy, one of the arguments from the children’s hospital was that the rent was never really rent at all, that there was this — this agreement that wasn’t written down but was verbally agreed upon that the rent was sort of a scheme for umc to get medical reimbursements from the federal government and that money would somehow — some of that would end up back with the children’s hospital but that money never materialized and that’s why children’s essentially didn’t pay rent. >> you know, that’s just a really dangerous path to go down and to my way of thinking, children’s has actually created a big problem by raising that as an issue when they themselves sought to get the very funds that they claim were part of a scheme reimbursed from the federal government. so frankly, that’s why we’re having this issue right now. so you know, again, the lease to me is not the issue. the real issue is you’ve got to be able to operate profitably. i’m certain that, you know, if the only issue was the lease, we wouldn’t be here. this issue would have been resolved. >> they’re speaking to more than one potential strategic partner and that it all hinges on how much moving forward the children’s hospital will be able to lower their rent to umc. that the strategic partner is specifically waiting to see, okay? we can handle this much in rent, we can handle that much. umc willing to negotiate the rent moving forward? >> i think there’s willingness to negotiate the rent. it’s not going to be a dollar. at least i will not vote for a dollar. i don’t know about anybody else but, you know, there’s an issue with the rent as well that the county cannot give any public assets and we need to make sure that when the lease is renegotiated, that that’s not an issue, because that could get us into big legal trouble. >> i mean, if you were to charge a dollar like they’re saying that umc can charge the children’s hospital, then it would be essentially taxpayers that would have to pay for future renovations to the hospital. >> right. >> through debt. >> exactly. >> okay. let’s go to carlos on the west side. what’s your comment or your question? >> my question and comment is there are many other successful children’s hospitals. i come from one in the central valley, valley’s children’s hospital that are successful. we obviously have had tremendous problems here in this community. my question to the gentleman and to the abc representative there is what do you think are the major points that caused this issue? lack of transparency in putting the organization together? what is your opinion as to what is the problem because we all understand the facts but what is your opinion as to what brought this major crisis to the forefront. >> and you know that’s actually a really great question because we’ve been reporting on this over and over again and it seems like we explain the rent issue and what’s it for and how children’s agreed to it and it was presented to the public in 2007 but we get so many questions from people saying what is the root cause? i still don’t understand it. i still don’t quite get it. >> i think, you know, there’s many factors that played into it. you know, when the hospital opened there was kind of a perfect storm. funding changed, the formulas for funding changed within the state. they started — instead of doing cost space, they looked at what you did the year before and children’s didn’t have a year before to look at so they missed out on 30 and $40 million in their first two years. >> but that’s when you tighten your belt. that’s when you tighten your belt. the board chairman said on the record that he told the children’s board hey, you didn’t get that money, maybe you shouldn’t invest in this equipment, maybe you shouldn’t go for the super high salaries for now. >> there was some mismanagement. they probably grew too quickly. you know, there are many factors, many factors but i mean, they’ve gone through four ceos in the last year, as well. that doesn’t bode well but i think that we need to keep focusing on moving forward. we need to keep looking at how we can get the children’s out of this hole that it’s in and, you know, we’ve always wanted to work together with children’s hospital. it’s been so difficult. it’s been so difficult. >> part of the problem is that the children’s board is essentially insulated. they don’t report to anybody. and so when this was originally set up, that was an independent board without any sort of supervision. it doesn’t — >> they’ve lost almost half of their board. >> and the other frustration is i tried to get get on that board and i’ve been stonewalled and there’s a lot of community leaders that would like to get on the children’s hospital’s board to help out and there’s no opportunity for that. that’s a frustration candidly. >> okay. let’s go to some tweets and e-mails. listen up says as a wonderful idea it was to have our children’s hospital and relief to parents, el paso cannot sustain the hospital. and an e-mail from lisa says forget the loss of tax dollars. the impact this will have on our community is detrimental to every citizen seeking quality healthcare. it’s so secret it’s tough to recruit good doctors to come to el paso, and it’s no secret our good doctors have a waiting list to see new patients and you have the ones that are here for the medicaid and patients and patients are just a number to them. most who seek quality healthcare including children’s travel to houston or phoenix. this mess will make it even harder to bring experienced good doctors, i can’t stress that enough. how could something that was going to help improve medical care for children go so wrong? and, you know, on thursday when i went to go interview children’s, they took me on a pretty short tour of the hospital. and as a mom, i want to have a children’s hospital there. you’re a father. you know, you want to have those pediatric subspecialists. you know, heaven forbid something serious were to happen to my son, i want to take him to those subspecialists. so the question now is what happens to the children and the patient care going forward? we’ve heard time and time again from pediatric subspecialists that the reason that they came to the children’s hospital, the reason they worked there is because it’s a stand-alone independent children’s hospital and that if it’s going to be a wing of a general hospital, they wouldn’t want to work in a place like that. >> and that’s exactly why we sent out this last offer to allow them to go out and produce that third party that, you know, their knight in shining armor to come in and dig them out of this hole because to me, it doesn’t matter who digs the hospital out of the hole. to me, it matters the hospital being here okay. that’s what matters to me and if they have somebody that they can bring in, that can do this, then by all means, and that’s why we sent this last offer to them telling them okay you say you have somebody, produce that group and let’s get this done. let’s keep this going. >> it’s been over a year, though, of saying that we’re trying to find someone. >> the judge has said this before. this is kind of like deja vu. this happened last year around this time, too. they said okay umc, let us go out and find a strategic partner, a third party to come in and it didn’t work out then. union to god that they do have somebody and we can work something out with them. >> andy? >> i think, you know everyone’s talking about this doomsday at the children’s hospital. the facility is built okay. the doctors are already here. you know, umc runs a good operation. when mr. valenti came in 2003, the facility was in as bad a shape and over the last 10 years it’s become a profitable entity. >> right now, children’s hospital — the shift will go from children being the main priority to not being the priority at all but just being part of the operation of a big organization. >> well, we don’t have a crystal ball. and the children’s hospital or the new entity is going to have a separate board and a separate ceo from what i understand. so listen, let’s not just, you know, say there’s going to be this horrible doomsday scenario here. again, the facility is beautiful, it’s built. the doctors are here. those who are unhappy can leave. that happens. you can’t keep people here in any event. >> okay. >> but the bottom line is we have a chance and i think that it’s far more important for people to look forward and solve the problems instead of look back and say we’re going to have a disaster. >> we have to take a break really quick. the tweets before we go, judge escobar tweeting umc offered reduced rent going back over a year ago via mediation. why haven’t we been able to vote on the hospital decision? and also tweeting el paso taxpayers voted for the hospital with taxes and still paying for the hospital through their taxes which means that my understanding is we own it. we’ll address that in just a bit. stay with us. you’re watching “abc-7 xtra. tweet me at @mariagabc7, write to call me at (916)496-1775 >>> welcome back to “abc- xtra.” we have an e-mail from mr. mendez saying what a shame it would be to lose this hospital. everyone from the e.r. to discharge were very professional, competent and compassionate. why can’t children’s find another investor? that’s what they’ve been trying to do for over a year now. i understand the financial issue. isn’t there another hospital out of town that might be interested? after all, it is the only children’s hospital in the region. that is the hope for everyone here and look there’s no doubt about the patient care, the level of patient care. nobody is arguing that it’s a bad hospital. the patient care, i think, there’s a consensus that it’s great. that the services the children are receiving there is great. let’s go to manny on the east side on the phone. what’s your comment or your question? >> we should just let the taxpayers vote on this and decide who keeps what. we paid for both hospitals. umc wants to take it over and the commissioners don’t know what they’re doing with this. just let the taxpayers decide and umc has never had much success with the pediatric unit. thank you. >> thank you very much. similar to what john tweeted at us, why haven’t we been able to vote on the hospital decision? the children’s hospital board is a private board and that’s the way it was billed to taxpayers in 2007. can you elaborate on their questions? >> well, yeah, and so the children’s hospital is a private entity so the public can no longer decide what happens to that entity, and right now, it’s in the hands of the judge. he is actually the only person that will have a decision as to what happens unless we’re able to come to a negotiation within the next couple of days. >> and this from manny, no one has yet explained why the taxpayers built the hospital without being told that umc would charge rent to the children’s hospital. can your guests explain? judge escobar promoted the building of children’s hospital so she should explain. she has been on the show and has explained this. >> i think the rent was always contemplated. >> well, it was in the feasibility study in 2007 when it was presented to the public it was in the feasibility study. >> if you go back to commissioners court meetings, there were meetings where the rent was spoken of and where they talked about how much it was going to be. so i mean, it was done in a public setting, as well. >> and i would note significantly higher than ultimately, it turned out to be. >> the feasibility study contemplated a higher rent than what it is now. >> michael tweeting this shouldn’t be about money, but the children. save it at all costs. >> that’s a really good point, and i think that that’s really the issue of the children’s hospital people, that they feel that it doesn’t matter that it costs a bunch of money. it’s an investment that the community needs to make and they just have to bite the bullet. and i understand that but — >> but the problem with that is that they run the risk of closing it. >> right. and i think what they want is they want to continue to let umc just continue to pay the bill and let them continue to be independent and this is the problem. and you’ve got, you know, healthcare concerns meeting up against just, you know, financial issues and again, our focus really needs to be on getting that children’s hospital at least to break even and not losing, you know, $120 million or so without regard to the $120 million bond and at a certain point, you just can’t afford it anymore, you know. i would like to live in a great massive house but if i can’t afford it, i can’t live in the big massive house anymore. i’ve got to downsize. >> there’s estimates that children’s hospital will run out of money by the end of the year. they said this week if a strategic partner could infuse money into the children’s hospital then it’s a possibility that they could pay their creditors in full. what are the chances of a white knight coming along and paying umc $106 million or, however, the debt gets restructured by bankruptcy? >> well, here’s the challenge. first of all, it’s a not-for-profit entity right now so it has to be a not-for-profit entity that comes and in buys it. and this is because of the way the bond is set up. so — >> they could buy the bond out. >> theoretically. >> but why would they do that? i mean, if your dallas children ‘s, you’re concerned about your own community. you’re not looking to el paso to help out their mission. and that’s why i really don’t think that there’s a white knight out there. this is a local problem. it’s a community problem. it’s a problem that we have to solve as a community. and that’s only going to happen if, you know, all the stakeholders in the community are engaged. >> okay. if children’s does close though there’s a possibility that creditors, the biggest creditor, umc, would get paid very little if anything of what it’s owed or what umc claims it’s owed, maybe 3 cents cents per dollar of what it’s owed so out of the $106 million we’re talking a few million if that. so i mean — >> we’re not expecting to get the $100 million back. i think that’s definitely not something that we’ve even tried to negotiate. we realized that children’s does not have much left. >> that’s an investment in a new hospital and that’s the way you need to look at it, commissioner i’m afraid. >> okay well, we’ve run out of time. thank you so much for joining us. and for the sake of the children and our community, i think we are all hoping for a positive outcome. thank you so much. thank you, commissioner. we appreciate it and again, we did ask someone from the children’s hospital either from the board or from the administration to come on this program but they said they could not accommodate our request. thank you so much for joining us. we hope you found this informative. >>> visit us on the web at