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After $92M Error, Edward-Elmhurst CEO Urges Others to Audit Accounts Receivable

News  |  By Steven Porter  
   February 22, 2018

The system implemented accounting reforms to avoid overestimating its revenue moving forward.

Edward-Elmhurst Health, an integrated system based in Naperville, Illinois, went public this week with sour news: The three-hospital nonprofit system discovered a $92 million accounting error.

Accounts receivable had been overstated for a number of reasons over the course of six years, making it appear as though Edward-Elmhurst was poised to collect more revenue than it should reasonably expect. Upon discovering the problem late last fall, the system hired an independent auditor and began implementing a few accounting changes.

President and CEO Mary Lou Mastro, MS, RN, FACHE, who is scheduled to speak about the accounting changes with investors on a conference call Thursday afternoon, says leaders at other hospitals and health systems across the country should take another look at their books to make sure they’re not falling into the same predicament.

“Given the complexities of healthcare reimbursement and the incredible number of assumptions that go into calculating accounts receivable, I would recommend that anyone do a valuation of their accounts receivable, as we did, which included what’s called a ‘cash waterfall analysis,’” Mastro tells HealthLeaders Media.

That analysis revealed Edward Hospital and Elmhurst Hospital had each contributed to the problem before they merged to form Edward-Elmhurst Health in 2013. About $42 million of the error accumulated prior to the merger.

The system’s financial statements for fiscal years 2016 and 2017 will be restated to reflect a reduction in expected revenue, and the changes will lower the system’s operating income for the first half of fiscal year 2018 by $10.4 million, from negative $5 million to negative $15 million.

Even so, Mastro says the forthcoming savings from a $50 million cost-cutting initiative the system already implemented will keep the books balanced.

“We’ve identified the problem. We have worked rapidly to put corrective actions in place, and we’re confident that moving forward we will have reliable financial statements,” she says.

“We are a strong organization. We have a strong cash position and certainly have a solid market share, and we’re growing in our market, so going forward we’re very optimistic about the future and that we will be profitable or break even this year.”

Three major causes

Mastro cites three major variables in the equation that gave leadership too-rosy a picture of the system’s expected revenue: contractual allowances, charity care, and bad debt.

First, contractual allowances—which Mastro describes as “the difference between what we bill and what we actually get paid”—can vary drastically depending on the payer. It can be quite difficult, therefore, to account accurately for every negotiated discount, she says.

Second, the need for charity care, which systems provide to patients who cannot afford to pay, has begun to crop up in unexpected populations, Mastro says.

“Traditionally, we’ve always thought of charity care as people who don’t have insurance, and really what we’ve found in the last couple, three years is that we have so many insured patients with high-deductible plans,” she says.

Patients have been drawn to cheaper insurance options with deductibles as high as $5,000 to $10,000; when a major accident or illness strikes, the patients are often unable to pay, Mastro says.

“So part of our charity care now includes people who have insurance. That’s another factor that has sort of played into this.”

Third, about one-third of the miscalculation, or $30.4 million, was attributed to bad debt, “which is what people should pay but don’t,” Mastro says.

“We had historically calculated our bad debt write-offs based on what our historical experience has been, and I think what we’re finding is we really don’t collect much after 365 days,” Mastro says.

Moving forward, Edward-Elmhurst Health will zero out all accounts receivable older than one year. The system will still attempt to collect what it’s owed, but for accounting purposes, it will not include these unpaid bills in its tally of anticipated revenue.

Search for CFO underway

Vincent Pryor was executive vice president and CFO for Edward-Elmhurst following the merger, but he took a new job as senior vice president and CFO for Silver Cross Hospital late last summer.

Pryor and Silver Cross could not be reached for comment.

Edward-Elmhurst’s vice president for finance, Jeff Friant, CPA, stepped in as interim CFO. But the system is still conducting a search for Pryor’s permanent successor, a system spokesperson said.

Mastro has more than three decades of hospital work experience, including several years as president and CEO of Elmhurst Memorial Healthcare, but she took her current post just last year, following the retirement of former CEO Pam Davis.

The system notified Pryor of the accounting error before going public, but the former CFO is not considered to have done anything wrong, Mastro says.

“We’re focused on what we need to do going forward.”

Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.

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