“This deal is bad for the hospital and bad for County taxpayers. The new independent hospital authority started out burdened with a large debt that wasn’t used to improve its operations, with no new revenues to pay the debt and no business plan to improve its self-sufficiency. The County is still financially responsible for a money-losing hospital over which it now has little control. All this to solve a short-term cash crunch for the County,” Hevesi said. “This is a lose-lose deal for axpayers and for the people who rely on the medical center for essential health care.

“The County forced the hospital to borrow and took the proceeds to pay for the County’s operating expenses. In other words the County used one-time debt proceeds to pay for its own continuing operating costs. That’s irresponsible,” Hevesi said. “Similar deals were done with public hospitals in Nassau and Westchester, but it seems Erie officials did not learn from the mistakes made in those transactions.”

The audit found that:

· In January 2004, a public hospital that was losing significant amounts of money as a part of County government was converted into an independent entity, Erie County Medical Center Corporation(ECMCC), with no new revenue or operational plan to make it self-sufficient.

· Instead, the deal imposed additional debt costs on the hospital, though the borrowed money was not used to improve the hospital’s operations. The hospital now has $101 million in long-term debt, up from $22 million when it was part of County government.

· Paying off that $101 million in debt will cost $214 million in principal and interest over 30 years.

· Erie County could have transferred the hospital’s assets for free, but instead used the deal to borrow funds to pay for it sown operations at a time when it was running out of cash. Using long-term debt to pay for this year’s operating costs violates the most basic principle of responsible government finance.

· Because the Medical Center issued the debt, County government created the false impression that its debt is lower, even though the County is obligated to repay the debt.

· The County’s actual aid to the Medical Center will be overstated, because a substantial portion of that aid will go to repay the debt. If there were no debt, the Medical Center could use those funds to improve its operations or provide additional services.

· There is no indication that Erie County learned from the earlier mistakes made when Westchester and Nassau Counties transferred their medical centers to public authorities, but did not develop business plans.

· ECMCC has been slow to develop and implement a business plan, which the experience in Nassau and Westchester demonstrates is essential to ensuring the success of the Medical Center. ECMCC’s bylaws require it to have both a business plan and a five-year strategic plan.

· The Medical Center needs a business plan, including a five-year strategy, so it can use the County’s subsidy to implement reforms, improve its operations and eventually reduce the subsidy and achieve the goal of increased self-sufficiency.

· The formation of ECMCC has been under serious consideration since at least December 2001 and was approved in July 2003.County and Medical Center officials should have developed at least a preliminary business plan before ECMCC was created so that reforms could begin to be implemented immediately when it took over the Medical Center. For example, even if the Medical Center could not begin to negotiate with private partners until it was independent, it could have identified potential partners and developed a strategy for negotiating with them.

· No business plan was submitted to auditors until yesterday, almost nine months after ECMCC was created. It is impossible to do a thorough analysis based solely on a power-point presentation. However, it is a one-year plan. Officials have still not prepared the five-year plan required by ECMCC bylaws.

· Erie County is still obligated to subsidize ECMCC regardless of its performance. The County must cover the Medical Center’s losses and pay the debt service. The County has also promised to provide capital funds. In 2004, for example, the County operating subsidy is $24 million. According to the one-year plan, the County subsidy will increase slightly in 2005.

· In exchange for one-time cash flow through borrowing, the County, which is still financially responsible for the Medical Center, gave up management control. The Governor appoints the majority of the new board. And if ECMCC fails, the hospital reverts back to the County.

Erie County Medical Center had operated as a department of Erie County for many years. It includes a general hospital, which has the only adult trauma and burn treatment centers in the area, several clinics and a 586-bed nursing home. It serves as a safety net, providing care to low-income and indigent patients. Like almost all public hospitals that serve the poor and uninsured, the Medical Center loses money. From 1998 through 2003, the Medical Center received $119 million in subsidies from Erie County. It projects 2005 spending of $299 million.

ECMCC officials rejected almost all the findings of the audit.

· Medical Center officials claim that the deal reduced the hospital’s debt because the borrowing was used to eliminate the hospital’s $53.7 million in short-term debt and $22 million in long-term debt.

The claim is false. The OSC audit found that the $53.7 million was not a true debt of the Medical Center. The Medical Center was part of the County, which paid for the difference between wha the Medical Center spent and what it took in. Most years the County would appropriate less than the Medical Center actually needed. When the County made up the difference, it would call that additional amount a “loan,” even though it was no different than the other funds the County was providing. Calling this payment a “loan” allowed the County to create an “asset” on its books, the “loan” to the Medical Center. Over the years, that“ loan” grew to $53.7 million. But this is no more a true loan than if the County had to make up shortfalls in its parks department. What’s more, the County was using this gimmick to turn what was really an expense, part of the cost of operating its hospital, into a phony asset, the “loan” to the Medical Center.

The $22 million was debt associated with the Medical Center, which the County was required by law to retire when it sold the assets. If the County wanted to put the new ECMCC in the strongest possible position, it would have just forgiven the “loan,” retired the small amount of debt, and let the new hospital agency start out with no debt. However, the County was running short of cash. So instead, it forced ECMCC to buy itself. Taxpayers, who had already paid to build and maintain the Medical Center, are now paying for it again. The factis that the actual debt of the Medical Center went from $22 million to$101 million.

· To prove the deal left the Medical Center with less debt, ECMCC officials claim liabilities declined from $144 million before the takeover to $121 million afterwards.

This claim is classic misdirection. These are irrelevant numbers that have nothing to do with debt. When the Medical Center was transferred from the County to a new separate agency, its balance sheet was completely restructured and not all assets and liabilities were transferred to the new entity. While liabilities went down $20 million, assets declined by $53 million. None of that has anything to do with the amount of debt, which climbed from $22 million to $101 million.

· ECMCC officials state that the Comptroller’ Office had approved both the short-term debt issued when ECMCC was setup in January 2004 and the long-term debt issued in August 2004. ECMCC officials suggest that because OSC approved the debt, it therefore approved the creation of ECMCC.

That is false. The State Legislature and the Governor created ECMCC with the support of County officials. The State Comptroller had no role in approving the plan. The Comptroller’s Office only role is to rule on technical issues related to the terms and conditions of the sale of notes and bonds, such as whether they were priced properly and whether fees were appropriate. In fact, in January, February and May2004 when asked to review the note and bond deals, the Comptroller’s Office did raise questions about the soundness of the deal and the lack of a business plan. Indeed, when OSC requested a business plan in May 2004, ECMCC officials temporarily withdrew their request for approval of the bond deal. It was because of those concerns that OSC decided to audit ECMCC. The audit began in May 2004, before the bond deal was approved.

· ECMCC officials state they do have a business plan, which was passed by its board on October 28, 2004. They acknowledge a number of senior management changes that delayed the development of a business plan.

ECMCC officials have not provided any valid reason for the failure to create a business plan before the corporation was created. Creating an independent hospital has been under discussion since at least December 2001 and it was authorized in July 2003. Since the stated goal was to maintain an essential health service while reducing taxpayer subsidies, a plan to achieve that goal was also critical. The fact that the Medical Center could not begin to implement a plan until after ECMCC was created does not justify its failure to develop a plan.

The audit has five recommendations. ECMCC officials should:

· Complete a detailed business plan and five-year strategy as required by ECMCC bylaws.

· Explore whether equity partnerships can enhance financial operations and learn from Nassau and Westchester medical centers’ experiences.

· If partnerships make sense, identify potential partners and develop a strategy for negotiating deals.

· Develop plans to reduce costs without harming health care and study the experience in Nassau and Westchester in attempting to reduce costs.

· Erie County officials should carefully monitor ECMCC financial operations and be prepared to continue to provide a significant financial subsidy.

Click here for a copy of the auditor go to www.osc.state.ny.us. On to Newly Independent Erie County MedicalCente rMeans Taxpayers Will Pay $214 Million for Hospital They Already Owned

Fiscal Gimmick Eased County Cash Crunch, But Hospital Left With No Plan to Improve its Operations

Taxpayers will pay $214 million in principal and interest for Erie County Medical Center (ECMC), a public hospital they already owned, because when Erie County officials set up the money-losing hospital as an independent public agency they unnecessarily loaded it with debt, according to an audit issued today by State Comptroller Alan G. Hevesi. County officials claimedthe goal was to make the hospital more self-sufficient, but they used the debt to solve the County’s 2004 cash shortage and left the new hospital with no plans to improve its operations.