HOSPITAL: Facing The Dollar Gap

While an aura of uncertainty persists in and around Southampton Hospital following the announcement of a $49 million shortfall over three years, its new top executive, Thomas B. Doolan, promised this week that its financial "mess . . . will absolutely never happen again."

The final audit of Southampton Hospital's books through 1997, which its new chief financial officer, Steven Haas, is reviewing with K.P.M.G. Peat Marwick, the hospital's auditors since May, is expected to be made public within two weeks, Mr. Doolan said, and an internal review of this year's operations through July should be complete by the end of next week.

What is being called a confluence of unfortunate financial developments, coupled with administrative mismanagement, is being blamed for the unprecedented estimated loss which R. Peter Sullivan 3d, the hospital's new board president, announced last month.

Accounting Overhaul

While the board of directors called "massive mismanagement" a principal cause of the crisis, its members repeatedly ruled out intentional wrongdoing.

In less than a month, new administrators at the 90-year-old community hospital said, they had virtually overhauled its accounting procedures and hired a comptroller, a new position, to reconcile its accounts monthly - something they said had not been a regular practice.

"It was a snowball going downhill," said Mr. Haas, also the C.F.O. at Eastern Long Island Hospital. "We are trying to stop it from rolling and putting safeguards in place."

"Patient accounting is not rocket science," Mr. Haas added. "You just have to work hard."

Inaccuracies Assessed

The former chief executive officer, Dr. John J. Ferry Jr., who resigned in August after the extent of the financial losses began to come to light, claimed the hospital had operated in the black since January when roughly 100 staff layoffs and other cost-cutting measures were implemented.

He also had provided a 1996 annual report, prepared by Deloitte and Touche, the hospital's longtime former auditors, that showed an operating profit that has now been reversed. No one at Deloitte and Touche would answer questions about why this had occurred.

Mr. Doolan confirmed this week that the 1998 figures provided earlier were not accurate. He said that once this year's figures were in, and a recovery plan completed, he would send them to several lending institutions.

Hope For Mortgage

The hospital board hopes to help fill its coffers in various ways. One is by getting a mortgage on its main building, now free and clear and valued, he said, at $38 million. This is close to the hospital's cash deficit, after $10 million in non-cash liabilities is deducted from the $49 million figure.

Such long-term financing would replace the hospital's short-term debts, and increase its cash flow, a critical issue.

Another plan of action has to do with reductions in the hospital staff. At least for now, that is only occurring by attrition. According to Richard Byers, an executive vice president, the number of full-time positions is down by fewer than a dozen since red ink necessitated the January layoffs, putting the total - highest for any South Fork employer - between 655 and 660.

The hospital is retraining a number of employees as their positions are eliminated, administrators said. Additional layoffs are "not a welcome alternative," and not planned at this point, but "they may occur. We will take a measured look," Mr. Doolan said.

Several hospital employees said they were uncomfortable speaking publicly about the situation, worried that their jobs could be at risk.

The January staff layoffs and other internal cost-cutting measures, plus holdups in a four-year, highly publicized buildup of new satellite offices, were designed to save about $5 million a year.

Vendors Waiting

"Time is our enemy right now - there are still vendors to be paid," Mr. Doolan explained. "This can't be fixed in two days."

Mr. Byers said negotiations were under way with all the hospital's vendors - several of whom are owed balances "in the six figures." He said most are working with the hospital to resolve their balances over the long term.

The revenue picture is also affected by the fact that admissions to Southampton Hospital are down by nearly 50 from projected estimates. At $5,000 to $10,000 a patient, Mr. Byers estimated loss of income from that decline at about $450,000 for the year. Hospitals, generally, have had fewer admissions in response to pressure from managed care companies which view outpatient treatment as more cost effective.

Staff Concerns

This month marks a full year since Dr. Allen Ott, an obstetrician-gynecologist who heads the hospital's medical staff, concluded that "something was wrong" with its financial health. Dr. Ott told The Star this week that he learned of "a different [financial] problem" each month for several months leading up to October 1997.

By January 1998, the medical staff decided to form its own committee of about 10 members to "try to answer why some of these problems had occurred," he said.

Dr. Ott said the problems the medical staff reported ran the gamut from "short supplies of drugs and sutures" because of "credit holds with vendors," to concerns about cutbacks in nursing care, which he stressed, though, were still "within industry standards."

On Retainer

But when "none of us could read the numbers," Dr. Ott said the committee hired an attorney, Al Lambert of the Manhattan law firm of Lifshutz Polland, who in turn retained Jay Horowitz and Company, a Great Neck accountant, to review the hospital's books.

Both firms are still on retainer with the medical staff, and, though they are not actively investigating the hospital now, neither Mr. Lambert nor Mr. Horowitz would comment this week.

The drains on hospital monies that Dr. Ferry cited in what has by now become a familiar litany, include cutbacks in reimbursements by Medicare, the Federal insurer for the elderly, declining admissions, reduced and delayed payments by managed care insurance companies whose contracts were deregulated in January 1997, and glitches in a computer system installed in 1996.

Huge Mistake

What Dr. Ferry's litany did not include, however, were huge miscalculations in third-party reimbursement allowances, and computer errors crediting the hospital's receivables with several times what, in reality, would be forthcoming.

In addition to Dr. Ferry, the hospital's longtime chief financial officer, Joseph A. Zwolak, resigned in August.

"The majority of rural hospitals . . . are in trouble because of Medicare cuts alone," Carol Schadelbauer, a spokeswoman, said this week. "In some places that has had a major impact, changing the face of who they are," with several cutting back to provide vital services, such as emergency care, only.

To survive, she said, a hospital's "systems have to be constantly looked at."

Faulty Practices

According to Mr. Haas, "confusion" in Southampton's financial records was compounded by the fact that "for periods of time those accounts receivable balances were not reconciled patient by patient."

During the past month, Mr. Haas said, "we have been reconciling every single account." He also said most billing had been brought back in house from outside factoring contractors, a practice, he said, that "makes billing 100 times more complicated" than it should be.

Factoring companies pay a hospital a portion of what is owed, then attempt to collect the full fee. The hospital must repay the amount of money the factoring company has advanced for all of the fees the company does not collect. This apparently caused another large miscalculation of estimated revenues in the hospital's budgets.

Accreditation

Mr. Haas estimated that even "if things go well, it will take from 12 to 18 months" before the hospital hits "smooth sailing."

Meanwhile, Dr. Ott, who meets weekly with Mr. Doolan, stressed that the financial problems have posed "no danger to the patients."

Besides straightening out its books over the next several months, the hospital will have an opportunity to confirm the quality of its care, when it is evaluated by the Joint Commission on Accreditation of Healthcare Organizations. Joint Commission accreditation is generally recognized as proof that a hospital has attained certain performance standards, and is used to meet Medicare certification and, in some cases, licensing requirements.

The Chicago organization, which evaluates nearly 11,000 of the nation's hospitals and home health agencies, gave its stamp of approval to Southampton Hospital in 1995, and will return to review its medical operations in December.

SUSAN ROSENBAUM