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Westchester County Health Care Corporation
Report prepared by May 2005 |
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Acknowledgements Special thanks go to District Office staff of Assembly Member Amy R. Paulin including Nancy Fisher, Ellen Likovich, Susie Rush and Deborah Zipf. Thanks also to Martin Arrick, nonprofit analyst for hospitals, Standard and Poors; Peter Pucillo, Westchester County Commissioner of Finance; Karen Pasquale, Office of Government Relations for the County Executive; staff of the Assembly Ways and Means Committee; Gene Capello, Managing Director of Proxy Governance Inc. and former chairman of the Board of Westchester Medical Center; and Jo Brill, Director of State Studies for the Citizens Budget Commission and former member of the Board of Westchester Medical Center, who provided information contained in this Report. Information was also obtained through discussions with other members of the Board of Westchester County Health Care Corporation and members of the County Board of Legislators, and review of available operative documents pertaining to the corporation and news media accounts. Providing information does not mean an endorsement of the report’s findings. |
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Westchester County Health Care Corporation (WCHCC) is a public benefit corporation created by the spin-off in 1998 of Westchester County Medical Center (now known as Westchester Medical Center) and related assets from an enterprise fund of Westchester County. The Westchester Medical Center had been owned and operated by Westchester County since 1920 and is the only public hospital in Westchester County. Westchester Medical Center primarily serves the five-county area of Westchester, Orange, Rockland, Dutchess, and Putnam, and secondarily serves the counties of the Bronx, Ulster and Sullivan. Westchester Medical Center is the only tertiary care and academic medical facility in this area. In addition to offering the services of a prototypical public hospital, Westchester Medical Center maintains a Level I trauma center, a full-service 24-hour cardiac center, an organ transplant program, a Level IV neonatal intensive care unit, and a burn unit. It provides 24-hour Medevac helicopter service, and offers alcohol detoxification rehabilitation and psychiatry services. Seven years after the creation of WCHCC, Westchester Medical Center is on the brink of financial collapse. Key factors contributing to the Medical Center’s fiscal crisis include political influence on governance and management, an abrupt reduction in financial support from the County, a generally difficult healthcare environment, inadequate computer systems, inadequate reserves for malpractice and workers’ compensation claims, and the strain and distraction of operating Ellenville Community Hospital and St. Agnes Hospital and of servicing the debt from financing the construction of the Children’s Hospital. The purpose of this report is to review the factors contributing to the Medical Center’s fiscal crisis and the current proposals to save the Medical Center, and to make recommendations to advance this valuable institution. WCHCC was created with the objective that it operate the Westchester County Medical Center as a hospital for the benefit of the people of the County of Westchester and the State of New York. In furtherance of that objective, WCHCC was obligated to:
Regarding the financial obligations, under the original operative documents the County was obligated to provide financial support to WCHCC that included:
However in December 1998, at the urging of the newly elected County Executive Andrew Spano, who had been elected on a platform of cutting property taxes by 15%, the original operating agreement was amended and restated by a Transition Agreement. Under the Transition Agreement, the parties acknowledged that the County would reduce its "direct financial support of Westchester Medical Center in order to alleviate taxpayer burdens and minimize financial risk." Under this new agreement, the County replaced its obligation to make annual negotiated payments for services over the 20-year term of the original agreement with annual, fixed amounts beginning in 1999, declining each year and ending in 2005. In addition, the Transition Agreement modified WCHCC’s contractual obligations to indemnify the County from workers’ compensation liabilities and malpractice liabilities. In December 1999, the County eliminated all direct subsidies payable to WCHCC as stipulated by the Transition Agreement. Instead, the County prepaid, in a one lump-sum payment of approximately $47.7 million, its obligation to make fixed payments to WCHCC, by issuing tobacco securitization bonds. The payment was derived as follows:
Unfortunately, in its rush to minimize its own financial risk, the County strained the newly created corporation, increasing the longer term financial risk to the County and causing WCHCC to become more dependent on the County for survival. In addition to having to forego, within its first two years of operations, a continuous revenue stream, the Medical Center was required to repay a $15.7 million paper liability to the County and to pay for utilities and other services previously provided by the County. In formulating its long-term plans for the Westchester Medical Center, it would have been natural for management to assume the Medical Center would receive direct subsidies from the County for services the Medical Center rendered for the public benefit. When the County eliminated that certain and ongoing source of revenue while still requiring that services be rendered for the public benefit, the County placed undue pressure on management to find alternate sources of revenue in its nascent years of operations thereby setting the stage for the impending fiscal crisis. In order to protect the County from any poor management decisions at WCHCC, the Transition Agreement included a section that set out the procedures to be followed in the event that WCHCC failed to meet certain performance criteria. WCHCC did in fact fail to meet the criteria (as originally drafted) during the summer of 2002. The Transition Agreement further provided that, in this event, a consultant would be brought in and that WCHCC was obligated to follow the consultant’s recommendations. Additionally, the County had the right to monitor WCHCC’s compliance with the consultant’s recommendations. In December 2002, Pitts Management Associations, Inc. (Pitts) was hired by WCHCC on the County’s recommendation. Pitts issued its report and the WCHCC implemented its recommendations with a series of management initiatives and actions taken by two outside consulting firms, Cap Gemini and Casas, Benjamin & White. Relations between WCHCC and the County deteriorated due to the County’s displeasure with the fact that Pitts had n ot been retained to implement its previous recommendations. The County used its right under the Transition Agreement to monitor WCHCC’s compliance with the consultant’s recommendations and in April 2004 Pitts was brought back to manage the Medical Center. In two subsequent contractual agreements between WCHCC and Pitts, the monitoring concept took shape as an oversight committee, informally referred to as the Financial Improvement Committee (FIC). The membership of the FIC was to be drawn from the Medical Center Board and County policymakers but, in fact, the County selected the members. WCHCC tried but was unable to influence this choice. Pitts became contractually answerable to the FIC and the FIC has become the de facto governing body of the hospital. The FIC members are Richard Berman, Mitchell Hochberg, Dennis Mehiel, William Ryan, Lawrence Schwartz, Peter Pucillo, John Spicer and Renee Garrick. At present, the members of the Medical Center Board do not have access to meetings of the FIC. In early April 2005, County Executive Spano and County Legislators Ryan and Kaplowitz announced their plan to save the Medical Center through the refinancing of the tobacco securitization bonds issued in 1999 and an extension of the 0.125% sales tax in the Hudson Valley region with the tax revenue to be dedicated to the Medical Center. The refinancing proposal would provide an immediate cash infusion to the Medical Center of $27 million, together with approximately $4 million in annual payments for 25 years. This cash infusion may appear generous at first blush but it falls far short of the annual support required to address the long-term needs of the Medical Center. It should be noted that these proposed payments do not come close to the support given to the Medical Center by the County prior to 1999. The County Executive’s proposal to allocate a dedicated revenue source to the Medical Center by extending the 0.125% sales tax in the Hudson Valley region is under serious consideration by the State Legislature. Unfortunately, despite support from the Westchester Delegation, the sales tax proposal has not gained political support from most of the surrounding counties. In spite of the Medical Center’s current fiscal crisis and operational difficulties, it is imperative to sustain the ongoing operations of the Medical Center to assure that the people of Westchester County and the surrounding Hudson Valley region are provided with quality health and medical care for many years to come. Conclusions and Recommendations
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Westchester County Health Care Corporation (WCHCC)1 is a public benefit corporation created by the spin-off in 1998 of Westchester County Medical Center (now known as Westchester Medical Center) and related assets from an enterprise fund of Westchester County. The Westchester Medical Center had been owned and operated by Westchester County since 1920 and is the only public hospital in Westchester County. Westchester Medical Center primarily serves the five-county area of Westchester, Orange, Rockland, Dutchess, and Putnam, and secondarily serves the counties of the Bronx, Ulster and Sullivan.2 With the establishment of WCHCC, Westchester County sought to provide WCHCC with the flexibility to cope with a rapidly changing health care environment and enable it to become more competitive, while ensuring that WCHCC maintained the mission of Westchester Medical Center to provide quality health and medical care to persons in need, regardless of their ability to pay. In order to enable Westchester Medical Center to become a financially independent entity, Westchester County and WCHCC provided for a period of transition during which, among other things, Westchester County reduced its direct financial support of Westchester Medical Center to alleviate taxpayer burdens and minimize financial risk.3 As a result of numerous factors, seven years after the creation of WCHCC, Westchester Medical Center is on the brink of financial collapse.4 In April 2004, Pitts took over day-to-day operations of the hospital and proposed a turnaround plan to achieve $75 million in savings over 18 months.5 Over the last two years, about 500 employees have been laid off or their positions eliminated.6 Despite the efforts to meet the goals established under the Pitts turnaround plan, Westchester Medical Center reported a deficit of $11.4 million at the end of February 2005, and is expected to have an operating loss of $60 million this year.7 The cash loss will be closer to $80 million due to outstanding prior year obligations and capital needs.8 The Medical Center did not make its payment of $14.7 million to the state pension fund, due on February 1, 2005 until mid-April.9 Those familiar with the financial condition of the Medical Center consider it to be in crisis mode. Discussions planning for the closure of the Medical Center are being contemplated. In February 2005, the Medical Center called for the infusion of $100 million in annual revenue to survive. Under its "Operation Cure," the Medical Center proposed that the $100 million be obtained through contributions of $20 million each from Westchester County, New York State and the federal government, $20 million in concessions from the unions in 2005 and 2006, and $20 million in cost-savings measures, including obtaining additional Medicaid reimbursements through changing its designation to a specialty hospital. Alternatively, the rescue plan sought monies derived from the renewal of the 0.25% surcharge in state sales tax that is scheduled to expire on May 31, 2005. In early April 2005, County Executive Spano and County Legislators Ryan and Kaplowitz announced their plans to save the Medical Center by providing an immediate cash infusion of $27 million, together with approximately $4 million in annual payments for 25 years, through the refinancing of the tobacco securitization bonds issued in 1999 by a special-purpose subsidiary of WCHCC, Westchester Tobacco Asset Securitization Corp. (WTASC).10 The County Executive has requested that the State Legislature extend a 0.125 % sales tax in the Hudson Valley region and to allocate the funds to the Westchester Medical Center.11 |
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Westchester County and WCHCC entered into an Operating Agreement12 to effectuate the transfer, as of January 1, 1998, of the facilities and operations of Westchester County Medical Center to WCHCC, and to set forth the financial and operating relationship between Westchester County and WCHCC following the transfer and during the term of the Agreement.13 For purposes of this discussion, certain terms of the Operating Agreement, as thereafter restated and amended, are highlighted below.14 Under the Operating Agreement, Westchester County was required to pay to WCHCC (i) an initial amount of $30,640,302, and (ii) over the life of the Agreement, annual amounts negotiated by the parties for the cost of services identified by the County to be made available for residents of the County each year and to be provided by WCHCC (in this report referred to as subsidy payments).15 Pursuant to the Operating Agreement, the County transferred to WCHCC approximately $1.948 million from the County’s 6-j Worker’s Compensation Reserve Fund (6-j reserves).16 WCHCC assumed all liability for, and agreed to indemnify the County from and defend the County for, workers compensation liabilities where the disability or death from injury occurred or was alleged to occur during the period January 1, 1986 through December 31, 1997. The County also transferred to WCHCC the assets attributable to the operations of the Department of Hospitals in the County’s 6-n Liability and Casualty Reserve Fund (6-n reserves).17 WCHCC assumed all liability for, and agreed to indemnify (with certain exceptions) the County from and defend the County for, malpractice liabilities where the acts or omissions of the County occurred or were alleged to occur during the period January 1, 1986 through December 31, 1997. It should be noted that in connection with the legislation that created WCHCC, WCHCC was required to retain its civil service system of employees and was prohibited by law from laying off any officers or employees of Westchester County Medical Center within two years of the spinoff.18 Also, the hospital was considered undercapitalized – investment in infrastructure had been postponed for years as the hospital competed with other departments in the County’s capital planning process. At the urging of the newly elected County Executive Andrew Spano, who had been elected on a platform of cutting property taxes by 15%, the Operating Agreement was amended and restated by the Transition Agreement in December 1998 in which the parties acknowledged that the County would reduce its "direct financial support of Westchester Medical Center in order to alleviate taxpayer burdens and minimize financial risk."19 Under the Transition Agreement, the County replaced its obligation to make annual negotiated subsidy payments over the 20-year term of the original agreement with annual fixed, declining amounts beginning in 1999 and ending in 2005.20 In addition, the Transition Agreement modified WCHCC’s contractual obligations to indemnify the County from workers compensation liabilities and malpractice liabilities. Instead of WCHCC’s indemnity obligation being narrowed to acts that occurred during a limited time period, January 1, 1986 through December 31, 1997, WCHCC’s obligation was broadened to cover all workers compensation liabilities and malpractice liabilities that arose out of the properties, facilities, operations or employees of WCHCC or Westchester County Medical Center prior to January 1, 1998 (referred to respectively as 6-j cases and 6-n cases).21 The Transition Agreement reflected that an aggregate of approximately $54.485 million would be transferred to WCHCC from the 6-n reserves. In 2004 WCHCC advised the County that the 6-n reserves had been exhausted in payment of judgments/settlements related to a portion of the 6-n cases and that WCHCC did not have sufficient funds in its self-insurance fund to pay any liabilities relating to outstanding 6-n cases.22 Under the Transition Agreement, WCHCC took on an additional obligation not included in the Operating Agreement, to provide prisoner health care and beds for prisoners in Ward 29 at negotiated rates to be paid by the County or third party prisoner health care provider acting under agreement with the County.23 It should also be noted that a mechanism established under the Operating Agreement to provide oversight of policy and management by what appeared to be a committee of balanced interests was eliminated in the Transition Agreement.24 Tobacco Deal and the Elimination of Direct Subsidies The direct subsidies payable by Westchester County to WCHCC under the Transition Agreement were completely eliminated in December 1999 when the County prepaid, in one lump-sum payment25 of approximately $47.7 million, its obligation to make fixed payments to WCHCC. The payment was derived as follows:
The County funded its lump-sum payment by selling to WTASC for $89.4 million the County’s right to receive its portion of New York State’s allocable share of payments payable by participating cigarette manufacturers under a national settlement agreement.27 WTASC issued approximately $103.5 million in tobacco securitization bonds28 to fund its purchase of the County’s rights under the Master Settlement Agreement (MSA).29 In addition to paying to the County the net proceeds of sale of the Tobacco Bonds, WTASC provided the County with the right to receive all tobacco settlement residual payments.30,31 The Transition Agreement was amended in December 1999 by a First Amendment to reflect the County’s lump sum payment and WCHCC waived "all right to direct financial support from the County" under the Transition Agreement.32 Transition Agreement – Second Amendment The Transition Agreement was amended again in December 2003 by a Second Amendment33 pursuant to which the County agreed to relieve WCHCC of its obligation to pay from its own funds all liability and related defense costs with regard to certain 6-n cases set forth in the Second Amendment. WCHCC agreed to indemnify the County for the costs the County incurred related to these claims, including the judgment/settlement amounts, the County’s costs of issuing bonds to pay judgments/settlements and WCHCC’s related defense costs. For a chronology of certain key dates in the history of Westchester Medical Center, see Appendix. |
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FACTORS CONTRIBUTING TO THE FISCAL CRISIS Factors contributing to the Medical Center’s fiscal crisis include political influence on governance and management, an abrupt reduction in financial support from the County, a generally difficult healthcare environment, inadequate computer systems, inadequate reserves for malpractice and workers’ compensation claims, and the strain and distraction of operating Ellenville Community Hospital and St. Agnes Hospital and of servicing the debt from financing the construction of the Children’s Hospital. Changing Governance and Current County Control The agreements setting forth the terms and conditions of the spinoff of Westchester County Medical Center and the relationship of the parties thereafter, were negotiated by representatives of Westchester County Medical Center and its auditors, KPMG, and representatives of the County Budget and Finance Departments assisted by representatives of the Law Department, the Departments of Public Works and Planning, and the County’s bond counsel.34 Whether the negotiations were arms-length has been questioned35 by the County; it must be noted, however, that the County had a financial and political interest in the subsequent renegotiations. Following the spinoff, WCHCC was required by legislative act to be governed by 15 directors, eight of whom were to be appointed by the Governor and seven by the County Legislature subject to the approval of the County Executive. Six of the eight appointees of the Governor are based on input from the County: three directors are appointed from a recommendation submitted by the County Executive and three directors from a recommendation submitted by the County Legislature. Reappointment of these 13 directors depends, in part, on their following the directives of the County Administration. The recent reappointment process, by which three board members sought but were denied reappointment, was characterized by many as political and arbitrary.36 Accordingly, only two of the 15 directors37 are not County appointees or recommended by the County. As noted earlier, the mechanism established under the Operating Agreement to provide oversight of policy and management by what appeared to be a committee of balanced interests was eliminated in the Transition Agreement. However, the Transition Agreement included a section that set out the procedures to be followed in the event that WCHCC failed to meet certain performance criteria. This was meant to protect the County from any poor management decisions at WCHCC, which in fact failed to meet the criteria (as originally drafted) during the summer of 2002.38 The Transition Agreement further provided that, in this event, a consultant would be brought in and that WCHCC would be obligated to follow the consultant’s recommendations. Additionally, the County had the right to monitor WCHCC’s compliance with the consultant’s recommendations. In December 2002, Pitts was hired by WCHCC on the County’s recommendation. Pitts issued its report and the WCHCC implemented its recommendations with a series of management initiatives and actions taken by two outside consulting firms, Cap Gemini and Casas, Benjamin & White. Relations between WCHCC and the County deteriorated due to the County’s displeasure with the fact that Pitts had not been retained to implement its previous recommendations. The County used its right under the Transition Agreement to monitor WCHCC’s compliance with the consultant’s recommendations and in April 2004 Pitts was brought back to manage the hospital. In two subsequent contractual agreements between WCHCC and Pitts, the monitoring concept took shape as an oversight committee, informally referred to as the Financial Improvement Committee (FIC). The membership of the FIC was to be drawn from the Medical Center Board and County policymakers but, in fact, the County selected the members. WCHCC tried but was unable to influence this choice. Pitts became contractually answerable to the FIC and the FIC has become the de facto governing body of the Medical Center. The FIC members are Richard Berman, Mitchell Hochberg, Dennis Mehiel, William Ryan, Lawrence Schwartz, Peter Pucillo, John Spicer and Renee Garrick. At present, the members of the Medical Center’s Board do not have access to meetings of the FIC. Financial Dependence on the County The spinoff transaction was structured under the original operative documents and as amended, to obligate the County to provide financial support to WCHCC in a number of ways. For example, under the Operating Agreement, in addition to the annual payments to be made by Westchester County for identified services provided by Westchester Medical Center:
Under the Transition Agreement, the County modified the ways in which it would provide financial support to WCHCC:
The County has guaranteed the payment of principal and interest on certain revenue bonds issued by WCHCC:
In addition, the County issued:
As of December 31, 2003, WCHCC owed to the County on account of principal and interest payable in connection with such Serial Bonds an aggregate of $39.12 million.49 The County has also guaranteed WCHCC’s repayment obligations under $75 million in taxable commercial paper obtained through Goldman Sachs and under a line of credit available with the Bank of New York. On April 25, 2005, the County Board approved issuing an additional $4.5 million in bonds to pay malpractice liabilities. In addition to ensuring the County’s ongoing financial support of WCHCC, the original spinoff transaction was structured so that WCHCC would be dependent upon the County for certain services. Under a Lease Agreement,50 the County provided electricity and thermal energy, including steam, domestic and heating hot water, for which WCHCC reimbursed the County for its proportionate share of the County’s actual operating costs of providing such services.51 In addition, WCHCC reimbursed the County for the proportionate share of fire protection payments made to the Fire District.52 WCHCC maintained roads other than County roads and grounds; however, it is not clear whether WCHCC utilized the County’s services to maintain such roads and reimbursed the County for its costs.53 County’s Structural Financial Obligation From its creation, WCHCC did not appear to be a self-governing entity; its establishment as a public benefit corporation seemed more a function of form rather than substance. Despite the parties’ stated intentions that WCHCC be financially independent, by the structure and terms of the transaction the County nevertheless appeared to treat the corporation, financially and operationally, as a department of the County. In addition to providing WCHCC the means to obtain the County’s assistance in financing capital projects or obtaining working capital, the parties contemplated the County’s continued availability to bail out WCHCC to minimize the risk of WCHCC’s financial failure. For example, under the Transition Agreement, if at any time before December 31, 2007 WCHCC experiences a material adverse change in its financial condition not attributable to any negligent act or failure to act, the County must discuss in good faith with WCHCC an amendment to the Transition Agreement for the County to provide additional subsequent funding, and to increase the working capital amount for which the County is obligated to provide credit support under the Transition Agreement, in each case to the extent necessary for WCHCC to meet its most critical needs.54 Management and Political Influence WCHCC was created with the objective that it operate the Westchester County Medical Center as a hospital for the benefit of the people of the County of Westchester and the State of New York.55 In furtherance of that objective, WCHCC was obligated to, among other things:
Management was distracted in the early years of the Medical Center as it was compelled to renegotiate the original deal with the County twice between 1998 and 1999, first in connection with replacing the County’s obligation to make annual negotiated subsidy payments payable for an extended period of time, and in any event for at least 20 years,56 with annual fixed payments totaling $94 million payable for seven years, and second in connection with replacing the County’s seven-year obligation to pay $94 million with one lump-sum payment that, after discounting for present value, offsetting the paper liability of the Medical Center to the County and crediting what the County had already paid on its seven-year obligation, amounted to $47.7 million. Fundamental needs such as the lack of strong financial controls and inadequate computer systems were not addressed.57 Management of the Medical Center was forced to deal with the financial constraints wrought by the County’s stated desire to reduce the fiscal burden on the taxpayers to support the Medical Center. The County required WCHCC, within its first two years of operations, to repay a $15.7 million paper liability to the County and to forego receiving from the County a continuous revenue stream. In formulating its long-term plans for the Westchester Medical Center, it would have been natural for management to assume the Medical Center would receive direct subsidies from the County for services the Medical Center rendered for the public benefit. When the County eliminated that certain and ongoing source of revenue while still requiring that services be rendered for the public benefit, the County placed undue pressure on management to find alternate sources of revenue in its nascent years of operations. In its rush to minimize its own financial risk, the County strained the newly created corporation, increasing the long-term financial risk to the County and causing WCHCC to become more dependent on the County for survival. Compelled to search for new sources of revenue, management turned to enhancing its own facilities and expanding in order to better compete as a tertiary care hospital, a teaching hospital and a pediatrics facility. Competition for profitable market share patients became fierce. In November 2000, WCHCC issued $255.1 million in revenue bonds to finance construction of the Children’s Hospital and trauma center and to finance capital projects.58 One of the stated reasons for building the Children’s Hospital was to compete for patient beds. One month later, WCHCC acquired Ellenville Community Hospital (Ellenville), a 51-bed, bankrupt hospital in Ulster County. By November 2003, WCHCC’s entity formed to operate Ellenville filed for bankruptcy59. Notwithstanding its own financial crisis, in 2003 WCHCC also took over, at the request of the NYS Department of Health, for a six-month temporary operating period, the operations of St. Agnes Hospital, an acute care facility in White Plains.60 At the end of the temporary operating period, the Medical Center gave up its operation of St. Agnes, citing the high cost of operating the hospital for the long term.61 WCHCC Board members have stated that the acquisitions of Ellenville and, more significantly, St. Agnes diverted their attention from focusing on the core business of the Medical Center.62 Difficult Healthcare Environment WCHCC derives a substantial portion of its revenues from third-party payors under Medicare. Prior to 1997, reimbursement was based on the Prospective Payment System, which paid at a prospectively determined rate per discharge for inpatient acute services. Reimbursement from all other third-party payors for inpatient services was based on the New York State Prospective Hospital Reimbursement Methodology on a cost-per-discharge basis. Effective January 1, 1997, New York State adopted the New York Health Care Reform Act (HCRA),63 which allowed providers to negotiate commercial insurance inpatient rates of payment. As a result of the state deregulation allowing the negotiation of payment rates rather than relying on a state-established rate, insurers began squeezing the rates of payments to hospitals. In addition, in August 1997, the federal government adopted the Balanced Budget Act, which, among other things, reduced Medicare payment rates to hospitals. In addition, hospitals experienced skyrocketing expenses, particularly for medications, malpractice insurance and labor costs due to the shortage of nurses and technicians. Between 1998 and 2003, the Medical Center’s expenses for personnel, including fringe benefits, and lab supplies increased 34% while revenue from patients increased only 20%.64 Civil Service System – problem or asset? Management believes that because WCHCC was required to maintain its civil service structure for employees, it is severely restricted in its ability to create new jobs, eliminate positions or lay off employees. As an employer of civil service employees, the Medical Center must adhere to a number of rules, such as relocating an employee who has been removed from one department (even by reason of lack of necessity of the position) to another area in the Medical Center. From inception, management believes it has been burdened with the high cost structure of civil service, rendering it even more difficult for the Medical Center to compete with hospitals without civil service employees and therefore lower cost structures.65 In addition, as a civil service employer, WCHCC is required to make contributions to the state pension system. As stated above, WCHCC did not make this year’s required payment of $14.7 million on time. Civil service hospital employees are also generally provided generous fringe benefits as compared to employees of non-civil service hospitals.66 It is worth noting that WCHCC provides Other Postemployment Benefits (OPEB) that provide basic medical and hospitalization plan coverage to eligible retirees.67 Individual coverage is provided at no cost, and family coverage may be obtained at a cost of 20% of the difference between the premium equivalent cost of family and individual coverage. At the end of 2003, WCHCC’s cost of providing OPEB was $3.24 million, as compared to $63,000 at the end of 1998.68 Assumption of Malpractice and Workers’ Compensation Claims without Adequate Reserves As renegotiated under the Transition Agreement, WCHCC agreed to be responsible for all claims for malpractice liabilities arising out of the operation of the Medical Center prior to January 1, 1998, whether commenced before or after that date. The $54.485 million transferred to WCHCC from the 6-n reserves was expected by the parties to fund these malpractice liabilities; however, the cost of the malpractice liabilities must have been substantially underestimated and, as stated above, the reserves have been exhausted. In November 2003, the reported estimated deficit in the 6-n fund was $33 million. Similarly, the 6-j reserves were inadequate to fund the workers compensation liabilities.69 |
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CURRENT PROPOSAL TO SAVE THE MEDICAL CENTER Based on the County Press Release,70 the County will ask WTASC to refinance the $103.5 million Tobacco Bonds in a new aggregate amount of approximately $174 million (the Refinanced Debt Amount). The Refinanced Debt Amount is based on the original principal amount of $103.5 million with accreted interest thereon in accordance with the terms of the Indenture (the Original Debt Service), plus such additional amount, which when added to the Original Debt Service will equal an amount held by the Indenture Trustee that is sufficient to accrue and pay interest on the Refinanced Debt Amount and to retire the bonds in the Refinanced Debt Amount as they become due under the indenture governing the refinanced Tobacco Bonds.71 It is our understanding that the refinancing contemplates that the refinanced Tobacco Bonds will be retired in 10 to15 years, as compared to 20 to 30 years under the current terms of the Indenture.72 As a result of the refinancing, the County has advised that it will pay to the Medical Center $27 million by obtaining the release of monies held in the Trapping Account under the Indenture. The amount available for release is projected to be $27 million at the end of April 2005. We do not have sufficient information to determine how the amount was calculated;73 however, we can describe generally the flow of funds under the Indenture and specifically the mechanism by which funds are held in and released from the Trapping Account. Under the Indenture, WTASC pledged in their entirety the TSRs74 to the Indenture Trustee for payment by the Indenture Trustee to the bondholders on the Tobacco Bonds. Accordingly, the TSRs are paid by the MSA escrow agent, who receives the TSRs from the tobacco manufacturers, directly to the Indenture Trustee. The Indenture Trustee deposits the TSRs (together with investment earnings on amounts on deposit in certain accounts established under the Indenture) into various accounts such as the Debt Service Account, the Liquidity Reserve Account and the Trapping Account, in the order set forth under the Indenture. Following the application of amounts in the various accounts to the payment of expenses, debt service and as otherwise specified under the Indenture, the Indenture Trustee pays any remaining amount to the County as beneficial owner of the Residual Trust.75 Funds must be deposited into the Trapping Account when any of five Trapping Events occur.76 We have been advised that two Trapping Events have occurred which have required the deposit of funds into the Trapping Account: (i) a Downgrade Trapping Event, because R. J. Reynolds (RJR), an OPM77 with a market share (defined in the MSA) of 7% or more was rated below "Baa3" by Moody’s or "BBB-" by Standard and Poors; and (ii) an NPM Trapping Event, because the aggregate market share of Non-Participating Manufacturers (those companies that did not become parties to the MSA, or NPMs) exceeded 7% in a calendar year preceding the required deposit of funds. Upon the occurrence of a Downgrade Trapping Event, 25% of the aggregate principal obligation of outstanding Tobacco Bonds must be deposited in the Trapping Account until one year after the end of a Downgrade Trapping Event. Upon the occurrence of an NPM Trapping Event, the lesser of (1) 6% of the aggregate principal obligation of outstanding Tobacco Bonds for each full percentage point by which the aggregate market share of the NPMs exceeds 7%, and (2) 65% of the Accreted Value of the Tobacco Bonds, must be deposited in the Trapping Account until one year after the NPM Trapping Event ceases to be in effect. We might conclude, then, that the projected $27 million contemplated to be released under the County’s proposal for refinancing represents the aggregate amount held in the Trapping Account by reason of the occurrence of the two Trapping Events. It is unknown whether the Trapping Events have ended or ceased to be in effect or if not, when they might end or cease to be in effect,78 in which case the trapped funds would be released in accordance with the terms of the Indenture. If the Trapping Events have not ended or ceased to be in effect, it is not known how the refinancing will be structured and whether a Trapping Account will be required to be maintained. As part of the refinancing, the County also expects to make annual payments to the Medical Center of about $4 million, projected to grow over the life of the refinanced bonds, totaling $240 million.79 Without a review of the terms of the refinancing or the bases for the projections, we are unable to determine how the $4 million amount was calculated or how that amount could grow to $240 million over the life of the bonds, which we are told is 10 to 15 years. Further information will be needed to understand the mechanism by which the annual payments will be made, particularly in light of the statement in the County Press Release that the County expects to make the annual payments for the next 25 years. We may surmise that the annual $4 million-plus revenue stream contemplated by the County represents the excess TSRs after payment of expenses, debt service and reserves that the County would receive as the beneficial owner of the Residual Trust, and that the County would direct to the Medical Center. We have been advised, however, that the Residual Trust will be eliminated in the refinancing. It is our understanding that the TSRs will not be securitized in their entirety, as was the case with the original Tobacco Bond financing, but to the extent of 75% to 80%. In that event, 75% to 80% of the TSRs will be pledged to the new Indenture Trustee to make required payments on the bonds. We are told that the remaining 20% to 25% of the TSRs will flow directly to the County and the County will direct the monies to the Medical Center by the County issuing bonds on behalf of WCHCC or by providing operating funds to WCHCC.80 Additional information is needed to understand how the transaction will be structured to achieve this result and the rationale for directing the monies through the County. According to the County Press Release, the County intends "to allow the medical center to access these funds for its capital improvements," revealing another instance in which the County will have control over the use of funds for the Medical Center. Presumably in consideration for the County’s expected payments to the Medical Center under the refinancing, the County will ask WCHCC to relinquish its option on 40 acres of land owned by the County on the Valhalla campus.81 We do not have the details regarding this option and do not know what impact, if any, the giving up of the option will have on WCHCC or the Medical Center. It should also be determined whether WCHCC has any financial obligations with respect to the option and whether such obligations will be terminated upon the termination of the option. The state sales tax currently is 4.25%, but the 0.25% surcharge imposed in 2003 is scheduled to expire on May 31, 2005.82 As part of this year’s state budget, state legislators agreed to implement a 0.125% sales tax to fund the MTA’s capital program in those areas that are served by the Metropolitan Transportation Authority (MTA Region83), resulting in a 4.125% sales tax for the MTA Region effective June 1, 2005. County Executive Spano earlier this month called for state legislators to implement an additional 0.125% sales tax in the 7-county region served by Westchester Medical Center.84 All of the proceeds from such additional 0.125% sales tax in Westchester County would be directed to the Medical Center. For the Hudson Valley counties outside Westchester County, County Executive Spano proposes that the sales tax proceeds be split 50/50 so that 1/16 of the revenue or 0.0625% sales tax revenue would be retained by those counties for their public hospitals and nursing homes, and the remaining 0.0625% sales tax revenue would be directed to the Medical Center. It has been alternatively suggested by some legislators from outside Westchester County, however, that any payment counties make to the support the Medical Center should be based on the percentage of the Medical Center’s patients that come from their county and/or the uninsured from that county.85 |
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CONCLUSION AND RECOMMENDATIONS
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| APPENDIX – CHRONOLOGY | ||
| 1977 | Grasslands Hospital is renamed Westchester County Medical Center. | |
| 1993 | Westchester County Medical Center and the Ruth Taylor Institute (together, "WCMC") is designated an enterprise fund, operated by Westchester County through its Department of Hospitals. | |
| Jan. 1997 | NYS legislation is enacted to authorize the creation of WCHCC (Article 10-C, Title I is added to NY Public Authorities Law). | |
| Jan. 1998 | The facilities and operations of WCMC (which include Westchester Institute for Human Development and the Psychiatric Institute) are transferred to WCHCC as of January 1, 1998 pursuant to the Operating Agreement. WCMC changes its name to Westchester Medical Center; the Department of Hospitals ceases to exist as a department of Westchester County. The County agrees to pay for public benefit services in negotiated amounts for the life of the agreement. | |
| Dec. 1998 | The Operating Agreement is amended and restated as of January 1, 1998 pursuant to an Amended and Restated Agreement dated December 30, 1998 (Transition Agreement). Westchester County agrees to make annual payments aggregating $94 million through the end of 2005. | |
| Dec. 1999 | WTASC purchases the rights of Westchester County to receive revenue under a national settlement with tobacco companies by issuing $103.5 million in Tobacco Bonds. Westchester County and WCHCC enter into a First Amendment to the Transition Agreement, dated as of December 21, 1999 under which Westchester County makes one lump sum payment to WCHCC in full payment of its annual payments through 2005 under the Transition Agreement. | |
| Nov. 2000 | WCHCC issues $255.1 million in revenue bonds to, among other things, finance construction of a new children’s hospital, refinance outstanding debt to Westchester County and finance routine capital projects. | |
| Dec. 2000 | WCHCC acquires Ellenville Community Hospital. | |
| Dec. 2001 | WCHCC reports first operating loss of $15 million for fiscal year 2001. | |
| Dec. 2002 | Pitts is hired to evaluate how to make improvements. | |
| Apr. 2003 | WCHCC takes over operations at St. Agnes Hospital. | |
| Dec. 2003 | Second Amendment to the Transition Agreement dated as of December 1, 2003.86 Westchester County relieves WCHCC of its obligation to pay from its own funds all liability and related defense costs of certain 6-n cases; WCHCC must indemnify Westchester County for the County’s costs related to those claims, including settlement/judgment amounts and WCHCC’s defense costs. | |
| Apr. 2004 | Pitts takes over day-to-day operations of Westchester Medical Center. | |
| Feb. 2005 | WCHCC fails to make scheduled payment to state pension fund. | |
| Mar. 2005 | Standard & Poor’s downgrades its rating on WCHCC’s $113 million in senior lien debt to B. | |
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1. WCHCC includes: (i) Westchester Medical Center, a tertiary care and academic medical facility; in addition to offering the services of a prototypical public hospital, Westchester Medical Center maintains a Level I trauma center, a full-service 24-hour cardiac center, an organ transplant program, a Level IV neonatal intensive care unit, and a burn unit, as well as provides a Medevac helicopter, and alcohol detoxification rehabilitation and psychiatry services; (ii) Taylor Care Center, a nursing facility; (iii) WMC New York Inc., owner of a Bermuda captive insurance company; and (iv) Westchester-Ellenville Hospital, Inc., operator of Ellenville Community Hospital, which filed for Chapter 11 bankruptcy protection in 2003. 2. According to 2003 data from the Statewide Planning and Research Cooperative System (SPARCS), Westchester Medical Center had 23,845 patient stays drawing patients from 40 counties and the 5 boroughs of New York City. Nearly 3.5% of patients come from out of state. Westchester County accounts for 57% or 13,590 of the patients; the other counties that send a significant number of patients to the Medical Center are:
3. See Transition Agreement between The County of Westchester and WCHCC dated December 30, 1998 (Transition Agreement). 4. At the end of fiscal year 2001, WCHCC reported an operating loss of approximately $15 million. See Consolidated Financial Statements of WCHCC and Subsidiaries, December 31, 2001 and 2000. In the summer of 2002, WCHCC failed to meet required financial ratios and in December 2002, Pitts Management Associates (Pitts) was brought in to analyze and make recommendations for improvement (see note 38 below). WCHCC reported operating losses of $60M in 2002 and $83M in 2003. See Basic Financial Statements of WCHCC (Including Its Blended Component Units), December 31, 2003 and 2002. It is anticipated that WCHCC will report a loss of $60 million for 2004. See "Med Center misses payment" by Melissa Klein, The Journal News, February 10, 2005. 5. Although Pitts issued recommendations for improvement, WCHCC’s management retained two outside consulting firms, Cap Gemini and Casas, Benjamin & White, to implement the recommendations. Pitts was brought back to take over operations in April 2004 by virtue of the County’s right to monitor WCHCC’s compliance with the original recommendations of Pitts. As of February this year, Pitts reported that the Medical Center had achieved approximately $27 million in cuts or new revenue, with substantial savings resulting from the elimination of positions. See Special Report on Westchester Medical Center, by Melissa Klein, The Journal News, November 14, 2004. 6. From March 2003 to April 2005. See "Hospital sales tax is DOA without regional support, legislators warn" by Glenn Blain and Melissa Klein, The Journal News, April 8, 2005. This number was reaffirmed in a meeting held April 26, 2005 for state legislators by WCHCC management. 7. See note 6 above. 8. At a meeting hosted by WCHCC management for state legislators on April 26, 2005, it was revealed that as part of the cash loss, $16.8 million was needed for previous cash needs and $10 million was needed for minor capital improvements. 9. The Medical Center still owes $228,000 in interest that accrued after the February 1 due date. See "Medical Center bailout still possible" by Glenn Blain, The Journal News, April 19, 2005. 10. See the County’s News Release dated April 6, 2005 (County Press Release). 11. See "Current Proposal" in this report for a description of the proposed allocation of sales tax revenue. 12. Operating Agreement, dated December 8, 1997, between Westchester County and WCHCC (Operating Agreement). 13. The Operating Agreement provided for an initial term of ten years beginning January 1, 1998, with an automatic first renewal term of ten years based on modified terms negotiated by the parties or determined by arbitration. The Operating Agreement also provided that either party could terminate the Agreement for cause upon six months notice subject to the breaching party’s right to cure. 14. It is beyond the scope of this report to summarize all of the pertinent provisions of the documents that implemented the spinoff and the subsequent amendments to those documents. 15. The level of funding agreed to by the parties (or determined by arbitration in the event the parties did not agree), was to be submitted to the County Board of Legislators (County Board) in the County’s operating budget for the following year. If the County Board appropriated the full amount of funding, WCHCC was obligated to provide the identified services; if the full amount was not appropriated, WCHCC could diminish or discontinue the services. For the year ended December 31, 1997, the County made a contribution of approximately $25.75 million to the Westchester County Medical Center, which we presume was the subsidy payment for 1997. See Statements of Operations for Westchester County Medical Center, Years Ended December 31, 1997 and 1996. 16. The County maintained a Worker’s Compensation Reserve Fund pursuant to §6-j of the NY General Municipal Law (6-j fund) for claims for disability or death from accidental injury arising out of and in the course of employment (workers compensation liabilities). The amount of $1.948M represented the assets attributable to the operations of the Department of Hospitals in the 6-j fund. See Section 11.0 of the Operating Agreement. 17. The County maintained a self-insured retention fund pursuant to §6-n of the NY General Municipal Law for claims arising out of the acts or omissions of the County, its officers, employees, agents and contractors (malpractice liabilities). The copy of our Operating Agreement left blank the amount to be transferred from the 6-n fund. See Section 12.1 of the Operating Agreement. 18. See §3304 of the NY Public Authorities Law. 19. See Transition Agreement, last Whereas clause. The renegotiation of the Operating Agreement was reportedly undertaken at the urging of County Executive Spano, who succeeded Andrew O’Rourke in 1998. See note 5 above. 20. An aggregate of $94 million was payable as follows: $26M for calendar year 1999; $20M for calendar year 2000; $16M for calendar year 2001; $11M for calendar year 2002; $9M for calendar year 2003; $8M for calendar year 2004; and $4M for calendar year 2005. See Section 4.1 of the Transition Agreement. The Transition Agreement also eliminated the automatic 10-year renewal of the original agreement. 21. See Sections 11.0 and 12.0 of the Transition Agreement. 22. Despite WCHCC’s contractual obligation to indemnify the County against malpractice liabilities, since the County is a named defendant in these 6-n cases, the County has the ultimate liability to pay the claims if WCHCC cannot discharge its contractual obligations. The County is authorized by law to issue bonds for judgments and settlements related to its liabilities for 6-n cases and related defense costs, and in 2003 the County Board authorized the County to issue bonds in the amount of $4.5 million to satisfy certain 6-n claims. See "Transition Agreement" in the Official Statement (see note 86 below). On April 25, 2005, the County Board authorized an additional $4.5 million to satisfy 6-n claims. 23. See Section 21.0 of the Transition Agreement. 24. The Oversight Committee was comprised of four representatives from the County (the County Executive, the County Commissioner of Health, the Chair of the County Board and the Chair of the Committee on Health of the County Board), and four representatives of WCHCC (the President, the CFO and the Chair of the Governing Board of WCHCC, and the Medical Director of Westchester Medical Center). The Committee was responsible for reviewing and making recommendations regarding, among other things, new or expanded patient care programs, the proposed discontinuance of any patient care program, the quality of services provided by both WCHCC and the County, and WCHCC’s capital requirements. It was intended that the Committee "elicit the free flow of information," enhance the working relationship of the parties and provide for "the efficient operation and continued development of WCHCC as a first class tertiary care teaching hospital serving the needs of the people" of the County and the surrounding region. See Section 16.2 of the Operating Agreement. It is not known whether the Oversight Committee met during WCHCC’s first year of operations or why it was subsequently eliminated. 25. Although the County made a lump sum payment, WCHCC was required to amortize the amount of $89.4 million over the seven years (or approximately $12.771 million each year beginning in 1999 and ending in 2005) that payments would have been made under the Transition Agreement. 26. The amount of the net liability of WCHCC to the County is the amount by which the amounts advanced from the County’s General Fund on behalf of Westchester County Medical Center when it was an enterprise fund to pay charges and liabilities incurred in the operations of Westchester County Medical Center prior to January 1, 1998, exceed the amount of revenue received from such operations, as decreased by the amount of accounts receivable collected by WCHCC for the period January 1, 1998 through October 31, 1998, and increased by the amount of accounts payable by the County during that same period. To the extent the amount was greater than 0, WCHCC was to issue to the County a short-term interest-free note, maturing not later than 12/31/99. See Section 10.2 of the Transition Agreement. The amount of net liability has varied: it was reported to be $19.963M under the Transition Agreement, $18.8M under the First Amendment, and $15.7M in the Special Report (see note 5 above). The aggregate of amounts advanced from the County’s General Fund on behalf of Westchester County Medical Center prior to the spinoff has been reported to be approximately $60M. Edward Stolzenberg, who ran the Medical Center both while it was an enterprise fund under the County and after it was spun off, has publicly stated that the $60M was in reality the value of the County’s long-term investment in the hospital before it was spun off; it was a paper liability that never would have been repaid if the Medical Center had remained a part of the County. (See note 5 above.) Many believed that at the time the spinoff was contemplated, County Executive Andrew O’Rourke did not intend WCHCC to repay the liability. 27. Master Settlement Agreement (MSA) entered into on November 23, 1998 among the attorneys general of 46 states, including New York, and U.S. territories, and the then four largest U.S. tobacco manufacturers (Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company, referred to as Original Participating Manufacturers or OPMs) and such other tobacco companies as subsequently became parties to the MSA. The MSA will provide the settling states with approximately $206 billion over the next 25 years with additional payments in perpetuity. The County’s allocable share of tobacco settlement revenues (TSRs) is approximately 0.2458%, which is 1.926% of New York State’s 12.76% share. 28. $103.5M aggregate principal amount of Tobacco Settlement Asset-Backed Bonds, Series 1999 (Tobacco Bonds). The Tobacco Bonds are secured by the pledge of all of WTASC’s assets, including the TSRs and all reserves and accounts established under the Indenture pursuant to which the Tobacco Bonds were issued. 29. See note 27 above. 30. WCHCC transferred to the County a 100% beneficial ownership interest in WTASC Residual Trust, the assets of which consist primarily of a Residual Certificate issued by WTASC which entitles the Residual Trust – the County – to the excess of the TSRs received by WTASC over debt service, expenses and required reserves and accounts with respect to the Tobacco Bonds. 31. The WCHCC Board members report that they were expected to openly support the County’s tobacco securitization project in exchange for a commitment from the County Administration to guarantee the financing for the construction of a new Children’s Hospital. WCHCC issued $255.1 million in revenue bonds in November 2000 for such construction. 32. First Amendment to the Transition Agreement dated as of December 21, 1999 between Westchester County and WCHCC (First Amendment), section 4. 33. Second Amendment to the Transition Agreement dated as of December 1, 2003 between the County and WCHCC (Second Amendment). Although we do not have a copy of the Second Amendment, it is described in "Transition Agreement" in the County’s Official Statement (see note 86 below).
34. See letter dated September 10, 1997 from County Executive O’Rourke to the County Board
summarizing the terms of the Operating Agreement and the Lease Agreement. |
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