New management of Nyack (N.Y.) Hospital tried to revive the not-for-profit hospital's reputation with its bond investors last week as it released two years' worth of restated financial results and disclosed new litigation stemming from faulty accounting.
In the latest example of alleged financial malfeasance in the not-for-profit hospital sector, Nyack officials said they plan any day now to file a $50 million lawsuit against former auditor KPMG accusing the Big Five accounting firm of failing to advise the hospital's board on the facility's true financial position during a costly nurses' strike in 1999 and 2000.
In February, the 332-bed hospital publicly warned that its net assets had been overstated by millions of dollars after KPMG abruptly terminated a relationship with the hospital (Feb. 18, p. 2).
Meanwhile last week, publicly traded e-commerce firm Neoforma said last week that it might have to restate its financial results (See story, p. 26).
In financial disclosures, the hospital said it has already filed a suit in U.S. District Court in New York against Denver-based U.S. Nursing Corp., which provided temporary staffing during the strike. The suit claims the company overcharged for its services by millions of dollars. Since last year the hospital has been embroiled in litigation with former Chief Financial Officer Eric Broder, who it said hid the extraordinary cost of employing temporary nurses. Broder since has become an employee of Fastaff, a U.S. Nursing subsidiary.
The hospital also revealed that it's facing a class-action lawsuit filed on behalf of bondholders and has been subpoenaed by the Securities and Exchange Commission in regard to its financial disclosures.
In a 90-minute investor conference call last week, Chief Executive Officer David Freed and CFO Stephen Majetich described turnaround efforts and assured bondholders the hospital remains viable, though starved for capital.
The hospital released new balance sheets for 1999 and 2000 showing dramatically reduced net assets (See chart below), and audited results for 2001 prepared by its new accountant, Ernst & Young. As a result of weak financial ratios for 2001, the hospital is in technical default on its bonds.
Despite operational improvements, the hospital is falling short of its stated goal to produce a modest operating profit this year. For the first five months, it posted an operating loss of $295,687, with operating revenue of $54.3 million.
"I'm nowhere ready to declare a victory," Freed told investors. He said the hospital is seeking "capital partners" to invest in new services, but the facility is not for sale.
Although it isn't factored into projections, the hospital could get a windfall from its lawsuits.
The fact that the hospital's board was not made aware of financial losses sooner prevented it from taking corrective action, Majetich said. "We have a laundry list of items that have hurt us in the past and will continue to hurt us in the future. We're not going to be able to borrow for many years," he said.
In a written statement issued last week to Modern Healthcare, KPMG said it had no reason to believe that the 1999 and 2000 financial statements were incorrect when they were presented to the board. KPMG said it "relied on the professional judgment of the management" to prepare the statements. Specifically, it said that estimates of patient revenue "were and continue to be the hospital's own responsibility."
"KPMG stands behind the work it performed and will defend it vigorously," according to the statement, which was attributed to KPMG spokesman Bob Zietlinger.
U.S. Nursing directed a request for comment to its attorney, who did not return messages last week. Broder sued the hospital in Rockland County, N.Y., court in March 2001, claiming the hospital owed him money under a consulting contract.
The hospital countersued, claiming its former CFO not only lied to the board about the cost of temporary staffing during the six-month strike, telling the board $3 million vs. the actual cost of $19 million, but also engaged in a "remarkable pattern of deceit, breach of duty and outright theft." In court documents, the hospital claims Broder misled KPMG auditors about the hospital's finances, allowed U.S. Nursing to be overpaid and enriched himself with frequent flier miles by charging nursing expenses to his personal credit card, among other things.
Despite the litigation against former management and auditors, fingers are also being pointed at the hospital's board.
Craig Kornett, an analyst with Fitch Ratings, which lowered the hospital's bonds to junk status last year, said, "In this case it's pretty apparent. The board didn't have proper oversight."
A spokesman for the New York State Nurses Association, which represented the striking nurses, called it "odd" that the hospital's board could claim ignorance about the true cost of the temporary nurses. "We were saying all along this has to be costing an enormous amount of money," said the spokeswoman, Anne Schott.
Freed said the board has been "rejuvenated," with a new committee structure focused on oversight and strategy and new advisory members to bring outside expertise on some committees. A third of its 21 members have been replaced since early 2001, he said.