$92 million accounting error delivers blow to Edward-Elmhurst Health’s bottom line

Feb. 20--In a whopper of an accounting misstep, Edward-Elmhurst Health overestimated by $92 million the revenue it expects to receive from insurance companies and patients, delivering an unexpected blow to its bottom line.

In an interview Tuesday, CEO Mary Lou Mastro said there will be no layoffs or service cuts to compensate for the money that the hospital planned to receive but won't. The company is aggressively addressing the issue so that it doesn't happen again, and its balance sheet remains strong, she said.

"It was a disappointing finding but we identified the problem, we worked rapidly to resolve it," Mastro said. "We have to keep on doing what we've been doing, which is focusing on our growth, which has been tremendous."

The west suburban hospital system discovered the error after its auditor, Ernst and Young, recommended it do an evaluation of its accounts receivable, which reflects money the hospital estimates it is owed by insurers and patients.

The analysis found accounting errors over multiple years had added up to an overestimation of $92 million as of the end of its last fiscal year June 30. Nearly half -- $42 million -- occurred before Edward and Elmhurst hospitals merged in 2013. The analysis was validated by independent auditing firm KPMG.

In a memo sent to staff last week delivering the news, Mastro said the error was caused by insufficient accounting procedures and a misunderstanding of the company's electronic medical records system that resulted in an overstatement of its estimates for its contracts. Managed care contracts were not fully loaded into the system so the terms of those contracts were not fully taken into account.

In addition, its processes did not fully account for shortfalls in its bad debt and charity care reserves.

"Health care reimbursement is incredibly complicated," Mastro said Tuesday. "Sometimes we're not paid for months and months so we have to make a lot of assumptions about how much we will be paid. Accounts receivable reflect hundreds of assumptions."

As a $1.4 billion company, small errors in those assumptions can add up to a lot of money, she said.

As a result of accounting changes the hospital system implemented to correct the errors, the hospital system's bottom line has taken a turn for the worse.

A $5 million operating loss originally estimated for the first half of the 2018 fiscal year, which ran July 1 to Dec, 31, 2017, is now a $15 million loss. And a $1.7 million operating income reported at the end of the last fiscal year has been adjusted to now show a $15 million loss.

Edward-Elmhurst announced a $50 million cost reduction plan in August, before it was aware of the accounting errors. As part of that plan, the health system, which owns Edward Hospital in Naperville, Elmhurst Hospital in Elmhurst and Linden Oaks Behavioral Health in Naperville, last year laid off 84 employees, eliminating 234 positions in all, mostly by not filling vacant spots. It had about 9,000 employees before the layoffs.

"We recognize that this will be a way of life in the health care industry," Mastro said. "We need to be looking at 3 to 5 percent cost reductions every year."

Edward-Elmhurst Health is facing the same financial pressures afflicting hospitals across Illinois and the country. In announcing the cost reductions last year, the system said the cutbacks were necessary because of increasing numbers of patients covered by Medicare and Medicaid, which it said do not cover the full costs of patient care. It said more patient bills are going unpaid, likely because of higher insurance copays and deductibles. It also pointed to increased charity care, fewer patients with private insurance, private insurance payments that fall short of medical inflation, and higher drug and medical supply costs.

Despite the challenges, Mastro emphasized that the hospital system's earnings, which were $76 million last year, remain strong. It has enough cash on hand to keep the hospital running for 254 days, she said in last week's staff memo.

But the error could cast a shadow on the hospital system.

"I think a misestimate of this scale reflects poorly on both the administration of the system and on its auditors, both of whom should have discovered these errors years ago," said Allan Baumgarten, an independent health care financial analyst.

He added the bond rating agencies might be concerned that they were basing their ratings on an incorrect statement of assets.

[email protected]

___

(c)2018 the Chicago Tribune

Visit the Chicago Tribune at www.chicagotribune.com

Distributed by Tribune Content Agency, LLC.