Hospital accounting error adds up to $92 million

West suburban Edward-Elmhurst Health overestimated by $92 million how much patients and insurers owed the health system.

The three-hospital network, based in Naperville, discovered the accounting error this fall during a routine audit, when outside auditors recommended the health system dig deeper into accounts receivable. The revelation of such a large overstatement came just a few months after Edward-Elmhurst announced $50 million in cuts to rein in spending.

In an interview, Edward-Elmhurst CEO Mary Lou Mastro said collecting the $92 million wouldn’t have prevented the cuts, which includes employee layoffs. Like other hospitals nationwide, Edward-Elmhurst has financial pains that aren’t subsiding. Soaring drug costs. High amounts of bad debt from patients who can’t afford or won’t pay their bills.

“I think the positive news is that we have put in place this $50 million cost reduction, so, going forward, we’re on much better footing,” Mastro said.

She sought to reassure her employees in a Feb. 15 memo.

“We are financially solid,” the $1.36 billion health system is growing and it has earned high safety rating scores compared to other hospitals, Mastro wrote. The health system has 254 days of cash on hand, in other words how many days Edward-Elmhurst can pay its bills without making more money.

Still, the hospital network ended the 2017 fiscal year in June with a $15.2 million operating loss, nearly four times the $4 million loss in 2016, a new financial statement shows.

Before discovering the accounting error, Edward-Elmhurst reported a $1.7 million profit in 2017 and a $17.7 million profit in 2016.

Six months into the latest fiscal year, the financial picture has improved slightly. Edward-Elmhurst reported a $15 million loss as of Dec. 31.

The $92 million overestimation was as of June 30, and it accumulated over several years. About $33 million of it preceded 2012 (that’s as far as the system went back), before Edward and Elmhurst hospitals merged, Mastro said.

She traces the mistake to a few sources. For one, the health system didn’t fully understand rules built into its digital medical records platform that estimated the amount Edward-Elmhurst would collect. Managed care contracts with private insurers weren’t fully loaded into the digital platform, either, so the system didn’t correctly estimate how much it would collect.

Also, the hospital network historically provided free services, known as charity care, to people who didn’t have insurance. But as more patients bought health plans with deductibles they couldn’t afford to pay, Edward-Elmhurst applied its charity care policies to those people, too.

Edward-Elmhurst has resolved the accounting error. Adopting new accounting principles and procedures reduces the system’s operating income in the first six months of the current fiscal year by about $10.4 million.

Despite the financial woes, Mastro said the hospital network aims to bulk up in the fiercely competitive Chicago-area health care industry. Edward-Elmhurst is adding more patient beds, for example, and rebuilding a clinic in Elmhurst.

“We are moving forward,” Mastro said. “We are planning.”

Hospitalaccountingerroraddsupto$92millionoriginallyappearedinCrain’sChicagoBusiness.

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