Kern County supervisors fired Kern Medical Center CEO Paul Hensler Monday evening after a meeting in which they learned more troubling information about the public hospital’s tangled finances.
"The Board has lost confidence in Paul Hensler's ability to continue managing Kern Medical Center," Board of Supervisors Chairman Mike Maggard said in an email statement. "Accordingly, the Board has terminated Mr. Hensler's contract immediately and he is dismissed immediately."
County Administrative Officer John Nilon said the most troublesome revelation at the board’s more than four-hour-long meeting was that the hospital has over-budgeted by about $1.6 million a month for the current fiscal year. KMC staff reported that the hospital will run an estimated $9.6 million beyond budget from July to December alone.
Nilon said the board will initially focus on making cuts at KMC but it may not free up enough cash soon enough. He said the county could take money out of reserves, but supervisors may also have to reopen the budget to cover the shortfall.
“All those things that we made headway with in the budget — (extending) library hours, all that sort of stuff — may be on the table,” Nilon said. “The board is going to have some real tough decisions to make with regard to what do we now reduce.”
After his dismissal, Hensler did not return a reporter’s phone call.
On top of the immediate budget problem, board members also learned that a review of the hospital's receivables from various programs going back to fiscal year 2006 came up about $64 million short of projections.
About $27.5 million of that is what the hospital has probably been overpaid by the state based on the hospital’s actual costs, said KMC’s CFO Sandra Martin, who has been with the hospital less than two months.
Public hospitals have to project what they will owe the state or vice versa for programs, and it is not uncommon for those projections to not add up when they are finally settled, Martin said.
“The big difference is that usually hospitals will set up a reserve, anticipating that they might owe something back, and this hospital did not do that,” Martin said.
When the state might ask for that money back — and in what increments — is unknown, Nilon and Martin said.
The hospital also came up $36 million short in revenue it anticipated it would receive from fiscal year 2006 to 2013.
“You have a receivable that’s not going to materialize and a payable that you do have to pay back, you add them together, and so the adjustment to our net income — if we were going to book all these corrections through June 30, (2013) — we would have a $64 million impact,” Martin said.
In digging into KMC’s finances, it also became clear that revenues were overstated for the current fiscal year’s budget, Martin said. Between fiscal years 2012 and 2013, there was about $27 million in revenue “that was recognized and reported to (the board), but will never materialize and turn into cash,” the CFO said.
This explains why the hospital’s loan from the county’s general fund has continued to grow — reaching more than $90 million last month — while there was not cash flowing back into the hospital to repay it, Martin said.
Nancy Kaatz of consulting firm Toyon Associates, Inc. told supervisors KMC’s situation is not typical of a public hospital.
“Most of the public hospitals are on top of this, looking at this constantly and have reserves on their books,” she said. “This, it’s a significant swing, it’s a significant surprise.”
Going forward, Kaatz and Martin said the hospital needs staff well versed in public hospital financing to help correct the problems.
“It’s complex stuff and there’s not a lot of people...that are trained in that,” Kaatz said. “But at the same time that it’s complex, it’s not rocket science.”
Hensler said he didn’t believe any deliberate manipulating led to the problems.
"I think it was just poor oversight by finance and a bit of laziness in going back and doing what normally would be done to reconcile those amounts,” Hensler said when Kern County Supervisor Mick Gleason asked why the hospital failed to update its funding models to better calculate how much the hospital would be paid back by the state.
Hensler said now that the problems have been identified, he has confidence that with Toyon and Martin the hospital can get on top of the problems. He said an audit firm that specializes in healthcare could help.
"This is a huge part of the balance sheet and we should've had better accounting oversight of it both internally and externally," he said.
Maggard questioned how the situation got so bad.
"Who is responsible?" Maggard asked. "Is there a department, is there a person, is there a process? What is there that we need to correct so that this can never be replicated?"
Hensler said ultimately, he was the responsible one and he had spent a lot of time trying to think of how he could have rooted out the issues sooner.
Kaatz said staff members are still going through the hospital's other accounts and it will likely take at least three months to finish. They have to reconstruct records as they go.
Martin cautioned that the hospital will have to make cuts wisely because cutting certain services indiscriminately may jeopardize reimbursement the hospital receives.
As the board adjourned to closed session, Martin also warned that the numbers are not set in stone.
“I’ve only been here 45 days and we’re working feverishly on trying to identify all the issues,” Martin said.
“The only thing I can stand on is that we will always be candid and forthright and transparent.”
Maggard said supervisors have not yet planned who will lead the hospital with Hensler gone.