Citizens Medical Center’s financial health declines

April 15--Seven years ago, Citizens Medical Center had $106 million cash in reserve.

"That was their high point. Then they stayed at $104 million for a long time," Victoria County Treasurer Sean Kennedy said.

But a turbulent series of events caused the amount of cash in the reserve fund to dwindle to $44 million. The hospital transitioned through four chief executive officers in the past five years.

The hospital recently announced a voluntary early retirement program that would allow 97 hospital employees to retire at age 63. This program is one of several ways administrators are hoping to offset recent losses and keep the hospital's finances from flatlining.

Kennedy said he thinks the hospital has been fiscally responsible and points to the early retirement program as a way the officials are taking action.

According to the income statement for February, the hospital made a monthly profit of $1.6 million but still noted a fiscal year loss of $7.2 million.

Dr. Tanya Seiler, an OB-GYN, said stabilizing the hospital's finances has been a top concern since she was appointed to the hospital board in 2014.

"Every member of the board is very concerned about what our bottom line is and what we can do to get back into the black again," she said. "We're trying to control costs but at the same time trying to provide the same quality of care that we always have."

Kennedy, who has been in office since 2006, receives weekly accounts payable reports from the hospital. He has noticed the figure in the county-owned hospital's accounts have dipped.

"Their lawsuits is what took a lot of their funding," he said. "Not just the lawsuits but their legal fees as well."

When problems started

The first suit was filed in 2010 by three former cardiologists who claimed racketeering, conspiracy and racial discrimination after their privileges at the hospital were revoked. Citizens paid the doctors $8 million as part of a settlement in 2012.

In the second suit, the same doctors claimed Citizens violated the False Claims Act, Anti-Kickback Act and Stark Act by paying bonuses and above-market salaries to ER physicians in exchange for patient referrals.

In 2015, Citizens agreed to pay the federal government $21.75 million, of which the U.S. will then pay $5.98 million to the three doctors -- Dakshesh-Kumar Parikh, Harish Chandna and Ajay Gaalla. The hospital agreed to also pay the doctors' attorneys $1.8 million as part of the settlement.

The two lawsuit settlements and fees cost the hospital $36.6 million, according to Chief Financial Officer Duane Woods, who was hired in 2016. Citizens admitted no fault in the agreements, and officials say they went this route to avoid an even costlier legal battle.

The lawsuits were filed under the administration of David Brown, who ran the hospital for 31 years until he retired. On his way out, Brown suggested promoting his chief financial officer, Stephen Thames, to CEO.

But tensions grew between staff members and Thames.

As detailed in an independent annual audit, Thames purchased Regional Medical Laboratories, or RML, for $6.8 million and its assets for $735,000. This purchase and others were criticized by staff.

After physicians held a vote of no confidence and several threatened to leave the hospital, Thames entered into a mutual separation agreement with the board in April 2015. He stepped down but continued to collect his annual salary of $475,000 until his contract ended Dec. 31, 2017.

An interim CEO led the hospital for seven months after Thames left.

Dr. Jeff Ackerman focused on trying to restore relationships with jilted medical staff, but he also sold RML for only $1.1 million, or a loss of $6 million. The clinical lab was purchased in installments by the son of the original owner, Dr. Leonard Gietz.

From the beginning

Citizens Memorial Hospital was built on donated land with a $2 million bond issue approved by taxpayers. The highest authority in the hospital's organizational chart is the Commissioners Court, which has final approval of all bills and appropriations, according to a special section in the Victoria Advocate published Dec. 2, 1956 -- the day before the hospital first opened.

County commissioners are responsible for appointing six community members to serve on the hospital's Board of Managers. Currently, nine serve on the board.

In 2012, the board hired a consultant to study the future of Citizens. The firm looked at whether the hospital could continue as a stand-alone hospital or should affiliate with a larger medical institution.

A similar strategic planning session happened in 1982 when the hospital became affiliated with Methodist Hospital Health Care System Inc.

Under the almost eight-year affiliation, Methodist managed the hospital and helped Citizens with higher collections in Medicare and Medicaid cases, according to Advocate archives.

In January 1985, the hospital changed its name to Citizens Medical Center.

Citizens is now a 338-bed acute care hospital with more than 1,200 employees. The hospital received a top score from the Centers for Medicare and Medicaid Services and is voted Best Hospital each year by Advocate readers.

Cost of growing

The hospital has invested a lot of money during the past few years in its infrastructure, board member Seiler said.

Mike Olson, hired as chief executive officer of Citizens in November 2015, said he has tried to balance the need for equipment and technology updates and expansion with less revenue and cash.

In January 2017, Olson announced the possibility of partnering with MD Anderson Cancer Center. The hospital has been working with MD Anderson for more than a year to meet specific criteria.

Part of this effort meant purchasing a $3.5 million linear accelerator -- one of two machines used for specialized radiation treatments for cancer patients. Olson said this was possible because M.G. and Lillie A. Johnson Foundation Inc. donated $1.75 million for the equipment.

"But you know, that's a critical piece of equipment in taking care of cancer patients and keeping them local in our community," he said.

Olson said he encourages residents to receive medical care in Victoria rather than travel out of town for the same services available at Citizens.

The hospital is also planning a $10 million emergency department expansion. The department, which operates 24/7, had not seen a major renovation in 20 years.

"It's an investment into the future," Olson said. "We'll be able to spread those costs over many, many years, so it becomes much more affordable for us to manage that kind of expenditure."

Outside forces

Hospital officials point to financial pressures affecting all hospitals, which in recent years has caused many rural hospitals to vanish.

"I mean, there's a lot going on that's beyond our control as well," Seiler said.

John Hawkins, senior vice president of advocacy and public policy with the Texas Hospital Association, said the biggest impacts are cuts and underpayments from the federal government's insurance programs.

"I think over time, there has been reduced payment to providers," Hawkins said. He's heard of the Centers for Medicare and Medicaid Services penalizing hospitals for readmissions and hospital-acquired infections.

Texas hospitals are still hurting because the state did not expand Medicaid, leaving 1.4 million adults without coverage.

"A lot of times that just equals more charity care or bad debt for hospitals," he said.

Citizens Medical Center does not have outstanding debt; however, it has seen increases in what's spent on charity care.

In 2016, Citizens spent $5.2 million on charity care and the next year shelled out $6.9 million to pay for the indigent and uninsured.

Seiler said uninsured patients make up a large percentage of its total patients. Providing this service is often expensive because patients without coverage tend to delay care until they end up in the emergency room.

Hawkins, who hasn't seen Citizens' financial statements, said generally rural or lower-volume hospitals also struggle with overhead costs.

"The standard of care is you will always have the best technology, so there's the challenge of keeping up with that and making sure you can offset the costs," he said.

CFO Woods said quick changes in the industry make it harder to plan: "We have to wonder if we have six months of clarity in what reimbursements are going to look like and what the future holds."

For example, the old nursing home reimbursement program was highly profitable until the state switched to a new program in September 2016 called Quality Incentive Payment Program -- causing a negative impact of $7 million, or a 40 percent reduction in one year. Hurricane Harvey, he said, was another blow to the budget.

Woods said the hospital spent almost $6.6 million on substantial repairs after the hurricane. Most of the elevators, the boilers and parts of the roof needed to be replaced. Building A on the campus was shut down for months of repairs. Tenants are just now moving back into the building.

Insurance did not pay for all losses, and administrators are hoping to tap into the Federal Emergency Management Agency for financial assistance.

Citizens also experienced a decline in elective surgeries after Harvey, which amounts to less revenue for the hospital.

Victoria County Judge Ben Zeller said other issues impacting the hospital include changing regulation and the ever-increasing demographic of people who don't pay their medical bills.

"Clearly there are some positive things we're working on, but certainly the financial trend needs to be turned around," he said. "The goal is that we return to profitability."

Zeller said Citizens has always been the "crown jewel" of the community with a long history of being a successfully run institution and employer while providing excellent care.

"It's our goal to keep that legacy going," he said.

Hope for healing

Despite declining cash reserves, county leadership said becoming a taxing hospital district is not being considered.

The county-owned hospital can issue tax-exempt bonds, but does not rely on residents to pay property taxes to the hospital.

Citizens has never collected property taxes from residents and is one of few in the state that can still operate this way.

According to the Texas Hospital Association, only seven of the 130 government-owned hospitals in Texas do not collect property taxes from residents.

Becoming a taxing entity is not the direction the board wants to take the hospital in, Olson said.

The CEO said he plans to continue tightening the operating budget by making the hospital's staff leaner, and some positions will be cut by attrition and shifting responsibilities within departments. He also wants to look for opportunities to grow revenue by working on relationships with local physicians.

He said he is optimistic about the hospital's future, but he stressed the need for public support.

"The way I look at it, this is the hospital that belongs to the community and to the citizens here," Olson said. "We have a stewardship to maintain that and to provide as high quality care as we can at an affordable rate and cost."

Laura Garcia reports on health and nonprofits for the Victoria Advocate. She may be reached at [email protected] or 361-580-6585.

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