A previously profitable, rural county hospital with approximately $55 million in net patient revenues initiated a suit against a national hospital management company to recover damages resulting from the management company’s gross negligence. Under the management company, the hospital’s financial condition had dramatically deteriorated to the point that it was ultimately required to seek protection from its creditors and file for bankruptcy. As a result, the hospital lost key physician practices and market share to a nearby competitor. HMP was engaged to document the management company’s gross negligence and to determine the precise amount of operating profits lost as a direct result of the management company’s failure to perform.
Issues
- The alleged gross negligence took place over an eight-year period; detailed financial records and models for that period had to be reconstructed
- The effects of the market shift and patient migration due to the alleged management malpractice had to be quantified
- The marginal cost and revenues that would have been associated with the lost volume also needed to be determined
- The hospital had been engaging in very poor revenue cycle management
- Improper accounting for patient revenues had been alleged
- There were significant corporate compliance issues associated with physician contracting
- The political sensitivity of litigation conducted by a public hospital had to be considered
Approach
- Using HMP Metrics™, HMP built a database of inpatient admissions for the entire state for the relevant eight-year period
- Using this database, HMP was able to determine actual patient admission patterns by hospital and DRG
- Each physician on staff whose admitting patterns were documented to have changed during the relevant period was interviewed by an HMP Managing Director with extensive experience as a hospital CEO to confirm the specific reasons for the change in referral patterns, which were then documented
- HMP developed a statistical model to establish the mathematical relationship between individual physician’s inpatient utilization and outpatient utilization
- A HMP’s Hospital Operating Model was used to model financial performance for a ten-year period; the model was loaded with the hospital’s actual general ledger and payroll data for the period, and all data was reconciled to the Hospital’s audited financial statements
- The documented lost inpatient and outpatient volumes by payor were input into HMP’s Hospital Operating Model to determine an accurate assessment of lost net patient revenue, marginal cost, and marginal profit for the relevant ten-year historical period
- A ten-year Cash Realization Study was prepared using 100% of all patient bills by payor and matching 100% of patient cash receipts for the bills in question; in total, more than 2,000,000 separate transactions were analyzed
- All business relationships with and payments to physicians were reviewed for compliance with applicable statutes and regulations
Results
- We were able to document multiple instances of gross negligence, including alleged corporate compliance problems, material and repeated accounting irregularities, apparent bond fraud, and frequent false communications by the management company or its employees to the hospital’s board of directors
- The client secured an eight figure settlement in compensation for lost operating profits