Federal audit: St. Francis Hospital must pay $21.4 million and improve oversight

Ten months after revealing it could not account for nearly $30 million on its financial books, St. Francis Hospital has been told by the federal government that it must repay $21.4 million and make critical changes in the way it does business.

The 65-year-old hospital, located on Manchester Expressway in Columbus, received the news Thursday from the U.S. Department of Housing and Urban Development and the Office of Inspector General. A nearly six-month audit launched in January and completed in June found that St. Francis and its management did not comply with federal regulations and a regulatory agreement connected to the financing of its $252 million expansion and campus renovation completed in 2013.

Specifically, the audit report dated Sept. 3, 2015, which comes with St. Francis hoping to be purchased by Tennessee-based LifePoint Health, says the hospital "submitted inaccurate financial information, improperly disbursed mortgage proceeds, incurred an unauthorized liability, and subjected mortgage funds to bank sweeps."

Originally terming the $30 million financial hole an "accounting inaccuracy," St. Francis publicly disclosed last November that it had suspended Chief Financial Officer Matt Moore and that he had been "permanently relieved of his duties" on Nov. 14.

The fallout rippled through the organization, with then-President and Chief Executive Officer Robert Granger announcing just before last Thanksgiving that 80 jobs were being eliminated at the hospital, 65 of them filled positions. The hospital also began a series of discussions with potential buyers or investors. Granger himself then resigned in early March.

The audit report initiated by HUD and its Office of Hospital Facilities paints a picture of a Columbus hospital that severely lacked financial oversight. It said management failed to put in place "adequate controls," "internal controls" and "written policies and procedures" to make sure the hospital's $210 million mortgage insured by HUD was administered properly under federal regulatory requirements.

St. Francis Hospital sought HUD's assistance for the massive renovation and expansion of its campus, a project launched in October 2011, increasing its overall space from about 600,000 square feet to nearly 1 million square

feet. It included building two large structures -- clinical services and medical office towers -- with a new Heart Hospital and Women's Hospital. Although it offers an array of services, St. Francis is best known as the city's heart surgery center.

St. Francis Hospital Inc. applied for a Federal Housing Administration loan in June 2011, covering $210 million of cost, the report said. It fell under what is known as Section 242 of the National Housing Act, which helps hospitals across the nation finance projects affordably, while providing mortgage insurance. The goal is to improve and expand health care, with HUD itself boosting its general insurance fund.

HUD, the audit report said, was notified by St. Francis last Nov. 4 that it had found "accounting irregularities" on its books. It said hospital management later acknowledged publicly it had overstated revenues and understated expenses, thus were now losing money. In December, the Office of Housing Facilities requested a review of the Columbus hospital.

'Potential conflicts of interest'

Another finding in the audit report pointed to the hospital's board of trustees and its chairman, Richard "Bo" Bradley, saying some of the members had "potential conflicts of interest" because of their connections to Columbus Bank and Trust, a division of Columbus-based Synovus Financial Corp., with the hospital seeking a line of credit after the expansion to pay its bills.

The report said some of the board members either were employed or served on the bank's board of directors at the time. The bank-related problems included taking out a $15 million line of credit without HUD approval, with it being executed under St. Francis Hospital Foundation Inc., the report said.

While the foundation is not bound by the HUD mortgage requirements, that money was transferred to the hospital's operating account and listed as debt to the foundation. The audit also took issue with St. Francis "improperly" transferring $10.5 million in funds from the HUD-backed mortgage and collateral to its operating account, which is forbidden without HUD approval.

In turn, the report said, that allowed Columbus Bank and Trust to "sweep" more than $9.6 million in hospital funds from the account to repay a $13 million line of credit. As the transferred money from HUD entered the account, the bank would sweep it out -- usually the same day -- to pay the debt, which kept the hospital's operating account perilously low.

"As a result, $21.4 million in proceeds from the HUD-insured mortgage and HUD's collateralized properties were not disbursed properly and the multifamily insurance portfolio was subjected to increased risk," the audit report from Nikita Irons, regional inspector general for audit, found.

The report also noted that HUD "depended on inaccurate financial information" to approve an increase of $29.8 million in the mortgage it had insured for St. Francis Hospital.

That money, received by St. Francis in June 2014 and part of the original scope of the project approved by the agency, was for an obstetrics project the hospital had launched in 2013. Part of the St. Francis expansion was resuming baby deliveries at the hospital, a service it had stopped offering in 1981.

"The hospital misstated several financial statement accounts in 2012 and 2013, which concealed its true financial condition," according to the audit results, addressing the request for an additional $29.8 million. That included understating the hospital's operating loss and overstating the money flowing in from patient services.

Aside from repaying the $21.4 million in "improperly disbursed mortgage funds," the Inspector General report recommends that St. Francis Hospital "resolve" the apparent conflicts of interest related to its board of trustees and Columbus Bank and Trust. It also said controls and policies must be put in place to make certain "accurate and complete" financial reporting occurs and that it complies with federal regulations and HUD rules.

The report also urges the Departmental Enforcement Center to take appropriate administrative actions "against the responsible parties" for regulatory violations listed in the report.

It said HUD's Office of General Counsel for Program Enforcement also should pursue civil litigation, if needed, against "responsible parties." No timeline is laid out in the report for repayment of the $21.4 million or subsequent regulatory or civil actions that could take place.

Response from St. Francis

St. Francis Hospital issued a statement through spokeswoman Amy Adams late Friday in response to the audit report on the HUD loan, with it pointing out the $252 million expansion and renovation project "helped St. Francis provide for thousands more patients in the last three years."

The statement recounts the general findings in the Inspector General report, before noting the audit did not discover any problems with clinical care or quality of care being delivered to patients using the hospital.

The hospital insists it has been proactive in dealing with the financial and management issues.

"Many of the issues identified in this report had already been identified by St. Francis through our own voluntary review of our financial processes and related procedures," it said. "Moving forward, we will continue to be focused on ensuring that the recommendations of HUD reviewers are successfully implemented. We have already begun to address many of these recommendations."

St. Francis said its current management team, which includes interim CEO Kirk Wilson, who was hired in early April, "is working proactively to strengthen financial and accounting protocols, processes and procedures."

The hospital, in its statement, also said it believes strongly that its volunteer board of trustees "acted then and now in the best interest of our hospital and for health care in our community." It acknowledged a few board members have served on the boards of directors of banks while doing so with the hospital.

"None of them ever participated in or benefited from the loans at issue in the audit," the hospital said. "However, we can understand the perception of the conflict by HUD and will review and revise our governing rules that are already in place to avoid potential conflicts of interest, as necessary."

The hospital said it announced to its employees and physicians last week that it is launching an "Accountability Task Force," which will "review and evaluate some of our operations and communications processes and report directly to the board."

St. Francis has about 2,800 full- and part-time employees and 300 physicians, and as the financial trouble was unfolding last November, said it had an annual operating budget of just under $300 million.

In its statement issued Friday, the hospital mentioned LifePoint Health, a health-care company headquartered in Brentwood, Tenn., a Nashville suburb, as the possible lifeline it needs to put St. Francis on stable financial and operational footing. In late July, the Columbus hospital announced it had signed a letter of intent to be acquired by LifePoint, with follow-up discussions planned.

No timeline was mentioned for the possible sale of St. Francis Hospital to LifePoint.

"One key to the success is the potential partnership with LifePoint Health, which has its own best practice processes, as well as the ability to provide St. Francis with the long-term financial stability and the access to capital that our hospital requires," St. Francis said in its statement.

"LifePoint's expertise in managing complex financial and regulatory requirements will help us ensure compliance and allow us to maintain our focus on what we do best -- providing high quality care to the communities we serve."

Other legal hurdles remain for the Columbus hospital. It had been in discussions earlier this year with Atlanta-based Piedmont Healthcare concerning a possible sale. When that deal fell through, St. Francis turned its attention to Community Health Services, a health-care company based in Franklin, Tenn.

The parent company of Community Health Services, CHSPSC, in early August filed a federal lawsuit seeking to recover more than $5 million it spent on a "good-faith initial deposit" as part of that possible deal before it dissolved sometime in July.

CHSPSC charges that St. Francis Hospital "has intentionally hidden and lied about material facts regarding the hospital's problems," and it wants its $5 million-plus back.

St. Francis, in a statement last month through Adams as the lawsuit was filed, said it "will deny and rigorously defend itself against any public accusations by CHS."

-- Staff writer Chuck Williams contributed to this report.

St.Francis Hospital Timeline

• June 2011: St. Francis Hospital starts the application process with the U.S. Department of Housing and Urban Development to fund its $252 million expansion and renovation. HUD ends up backing $210 million of the project.

• October 2011: St. Francis breaks ground on the expansion, which includes two large office buildings and creation of a heart hospital and women’s hospital, the latter of which has the first baby delivery ward at the hospital since 1981.

• October 2013: Completion of the expansion is celebrated with a ceremony and a barbecue lunch in the parking lot of the Manchester Expressway hospital.

• November 2014: St. Francis reveals a $30 million shortfall, dismisses its chief financial officer, and announces it is cutting 80 jobs, 65 of them filled positions.

• December 2014: St. Francis says its management and board of trustees have decided to pursue a partnership with another health-care entity, in essence looking for a buyer.

• January 2015: St. Francis says it is in “exclusive” negotiations with Atlanta-based Piedmont Healthcare for a possible merger or buyout.

• January 2015: The Office of the Inspector General launches an audit of St. Francis Hospital for HUD, a process that will take nearly six months to complete.

• March 2015: St. Francis President and Chief Executive Officer Robert Granger, who has been at the helm of the Columbus hospital for 10 years, resigns. Taking over day-to-day operations temporarily is the hospital’s board of trustees Chairman Richard “Bo” Bradley.

• April 2015: St. Francis hires an interim CEO. It’s Kirk Wilson, former president and CEO of St. Joseph’s Healthcare in Atlanta.

• April 2015: After its talks with Piedmont Healthcare dissolve, St. Francis announces it has entered “exclusive” discussions with Franklin, Tenn.-based Community Health Systems for a possible acquisition of the Columbus hospital.

• July 2015: St. Francis announces its negotiations with Community Health Systems are over and that it has signed a letter of intent to be acquired by LifePoint Health, a Brentwood, Tenn., health care company.

• August 2015: Community Health Systems’ parent holding company, CHSPSC, files a federal lawsuit against St. Francis, saying it was misled about the local hospital’s financial condition and other issues. Community Health also says it wants the $5 million “good faith” money it gave St. Francis returned.

• September 2015: HUD makes public its findings from the audit of St. Francis, explaining the hospital submitted inaccurate financial information when seeking loan money, improperly disbursed mortgage proceeds, took on unauthorized new debt, and subjected mortgage funds to bank sweeps from its operating account, which is prohibited without HUD approval. The audit recommends repaying $21.4 million to the federal government; resolving relationship/board of director conflicts with its own board of trustees and lending institutions; and improving internal controls and starting policies and procedures to make certain accurate and complete reporting of financial information are in place to comply with federal regulations and HUD requirements. It also recommends other administrative actions and possible civil cases, if needed, against “responsible parties.”

Statement regarding HUD Audit Report on St. Francis

HUD's final results from St. Francis audit

This story was originally published September 5, 2015 at 11:05 PM with the headline "Federal audit: St. Francis Hospital must pay $21.4 million and improve oversight ."