Hospital executives throughout the country face serious consequences if hospital internal controls over construction projects are deficient. However, widespread irregularities and deficiencies persist, exposing hospitals and their senior executives to significant risks.
The intensely regulated environment in which hospitals operate magnifies the potential adverse consequences facing hospitals and executives that permit deficient construction practices, as underscored by the ongoing arrests and convictions of contractors involved in construction projects around the country.
This article uses the New York regulatory environment as an example. No matter the state in which hospitals operate, the problems are nationwide. Speaking to wasteful hospital practices especially relating to Medicaid that deplete tax dollars, the Attorneys General of Florida, Pennsylvania, California and Texas have made clear “every single dollar we recover benefits…taxpayers.”
Reoccurring deficiencies typically arise when a hospital's facilities management department controls construction. The deficiencies, tied to use of in house facilities managers to oversee construction, undermine effective hospital construction policies, and they include: (a) failure to adopt lists of approved trade contractors; (b) absence of fair bidding processes; (c) lack of credible bids; (d) absence of required documentation for the project, including failure to have signed contracts; (e) failure to follow adequate procedures for invoice payment, authorization to pay for additional work beyond the originally contracted for scope of work (known as "change orders"), signoffs and lien waivers; and (f) absence of insurance certificates and proof of insurance. As an outgrowth of such lapses, kickbacks and other illegal practices become more prevalent when hospital facilities personnel directly oversee construction projects. In today's regulatory environment, hospitals must not let good business practice slide for the sake of maintaining through the in house facilities management of construction projects the typical "special arrangements with contractors" that inure to the benefit of the facilities department and its senior personnel, and put hospitals at considerable risk. These deficiencies affect virtually all institutions that charge in-house facilities personnel with responsibility for directly overseeing construction projects.
Construction projects, whether run through the facilities departments or independent contractors are also regularly completed well beyond the agreed-upon contract period, which often results in substantial claims against the hospital for delays.
Senior hospital construction personnel may claim to embrace construction cost certainty. In practice, however, cost overruns — sometimes running as high as 140 percent or more — can plague projects, in part because hospital executives believe the state won’t crack down or that wealthy benefactors will simply step forward and make up the difference.
Hospital construction routinely fails to adequately address state and federal regulatory requirements. In New York, for example, hospital facilities managers often disregard filing Certificates of Need required by the state to proceed with construction, or amending them when aware — or when construction managers should be aware — of cost overruns and related construction problems impacting the cost of construction. N.Y. Comp. Codes R.
& Regs. Title 10, § 710.1 (c)(1) - (5)(2010).
Hospitals are at risk
In some states, such as New York, construction cost overruns can result in reduced Medicaid reimbursement rates because cost overruns are viewed as inefficient and potentially fraudulent. At the same time, cost overruns may expose hospitals to huge claims by the state's Attorney General as part of various clawback programs. The New York Federal-State Health Reform Partnership (F-SHRP), for example, is a partnership between the Federal government and New York State that aims to reform and restructure hospital expense practices by freeing up state funds to invest in these reforms.
New York’s Office of the Medicaid Inspector General implements the F-SHRP responsibility for hospitals. N.Y. Pub. Health Law § 32(6) (McKinney 2010) OMIG is also empowered to seek recoupment of overpayments to hospitals and other medical facilities if audits uncover evidence that the facility is operated in a manner inconsistent with its approved CON. OMIG can also impose penalties on non-compliant healthcare providers, and is empowered to “develop protocols to facilitate the efficient self-disclosure and collection of overpayments and monitor such collections, including those that are self-disclosed by providers.”
In 2008, OMIG released a comprehensive and ambitious Medicaid work plan that reviewed OMIG’s efforts to investigate Medicaid fraud. Through OMIG, the Bureau of Investigations and Enforcement investigates individuals, facilities or entities where false claims are submitted to obtain program funds.
New York governors in recent years have made clear that OMIG will aggressively pursue hospital mismanagement across the state to "claw back" huge sums paid to hospitals that fail to control spending waste. In December 2008, former Governor David Paterson announced $551 million in Medicaid recoveries under the F-SHRP program, through the State’s Medicaid Inspector General, James G. Sheehan.
Construction cost certainty with internal controls deters investigations
To minimize hospital construction cost overruns and delays, hospitals must establish an effective system of internal controls and cost certainty. The author identifies six key principles that are the hallmarks of effective and proactive control system design:
First, fraud deterrence and eradication is the foremost concern in designing internal controls. Step one requires ranking fraud risks based on their likelihood and impact. The hospital must design formal guidance and directives regarding authorization, approval, and review of change orders and any new increases in project scope. Similarly, to help prevent fraud, the institution must develop formal processes to investigate overhead costs, reimbursable expenses, and other budget deviations.
Second, senior hospital management and project managers must establish formal lines of communications. This will facilitate the flow of important, project-related information and will help decrease chances of cost overruns.
Third, establishing formal processes to evaluate the effectiveness of a control system is an integral part of establishing such a system. The evaluation process should include detailed and regular project risk assessments designed to identify actionable weaknesses in the control system. It should also maximize transparency in the actions of both hospital management and project coordinators.
Fourth, internal controls should be enacted that ensure full and proper disclosure of a project’s impact on the financial condition of the hospital. As part of these controls, the institution must constantly monitor whether the construction team is maintaining appropriate insurance coverage and whether the hospital is properly protected as an additional insured.
Fifth, a sound control; system must includes measures that ensure strict regulatory compliance. An important first step in improving compliance would involve defining the roles and responsibilities of project managers and third-party advisers and consultants.
Finally, it is critical to establish controls by tapping the services of a qualified and informed intermediary for the hospitals to manage the projects, including control claims for change order work and associated payments, both of which commonly increase project cost. Controls must clearly identify who has the authority to justify and approve change order work that increases the project budget. Controls must also effectively ensure that every requisition payment reflects work actually completed, that payments are made in full to subcontractors, and that funds are not diverted from the project to pay for unrelated expenses associated with other projects involving the general contractor or other project staff. Cost-related control must include monitoring whether lien waivers for subcontractors and general contractors/construction managers are properly prepared and executed to protect the hospital, and utilized as a condition to payment. Finally, procedures must be instituted that require the hospital to secure all required sign-offs and other closing-out documentation for the project.
In today’s electrified regulatory and enforcement environment, the best way that hospital executives can avoid the substantial financial and legal risks identified in this article is to take advantage of the services of specially trained professionals and their forensic teams.
Henry H. Korn, Esq. is a partner with LePatner & Associates, a New York City-based construction law firm serving corporate, institutional, commercial and real estate owners and developers.
The intensely regulated environment in which hospitals operate magnifies the potential adverse consequences facing hospitals and executives that permit deficient construction practices, as underscored by the ongoing arrests and convictions of contractors involved in construction projects around the country.
This article uses the New York regulatory environment as an example. No matter the state in which hospitals operate, the problems are nationwide. Speaking to wasteful hospital practices especially relating to Medicaid that deplete tax dollars, the Attorneys General of Florida, Pennsylvania, California and Texas have made clear “every single dollar we recover benefits…taxpayers.”
Reoccurring deficiencies typically arise when a hospital's facilities management department controls construction. The deficiencies, tied to use of in house facilities managers to oversee construction, undermine effective hospital construction policies, and they include: (a) failure to adopt lists of approved trade contractors; (b) absence of fair bidding processes; (c) lack of credible bids; (d) absence of required documentation for the project, including failure to have signed contracts; (e) failure to follow adequate procedures for invoice payment, authorization to pay for additional work beyond the originally contracted for scope of work (known as "change orders"), signoffs and lien waivers; and (f) absence of insurance certificates and proof of insurance. As an outgrowth of such lapses, kickbacks and other illegal practices become more prevalent when hospital facilities personnel directly oversee construction projects. In today's regulatory environment, hospitals must not let good business practice slide for the sake of maintaining through the in house facilities management of construction projects the typical "special arrangements with contractors" that inure to the benefit of the facilities department and its senior personnel, and put hospitals at considerable risk. These deficiencies affect virtually all institutions that charge in-house facilities personnel with responsibility for directly overseeing construction projects.
Construction projects, whether run through the facilities departments or independent contractors are also regularly completed well beyond the agreed-upon contract period, which often results in substantial claims against the hospital for delays.
Senior hospital construction personnel may claim to embrace construction cost certainty. In practice, however, cost overruns — sometimes running as high as 140 percent or more — can plague projects, in part because hospital executives believe the state won’t crack down or that wealthy benefactors will simply step forward and make up the difference.
Hospital construction routinely fails to adequately address state and federal regulatory requirements. In New York, for example, hospital facilities managers often disregard filing Certificates of Need required by the state to proceed with construction, or amending them when aware — or when construction managers should be aware — of cost overruns and related construction problems impacting the cost of construction. N.Y. Comp. Codes R.
& Regs. Title 10, § 710.1 (c)(1) - (5)(2010).
Hospitals are at risk
In some states, such as New York, construction cost overruns can result in reduced Medicaid reimbursement rates because cost overruns are viewed as inefficient and potentially fraudulent. At the same time, cost overruns may expose hospitals to huge claims by the state's Attorney General as part of various clawback programs. The New York Federal-State Health Reform Partnership (F-SHRP), for example, is a partnership between the Federal government and New York State that aims to reform and restructure hospital expense practices by freeing up state funds to invest in these reforms.
New York’s Office of the Medicaid Inspector General implements the F-SHRP responsibility for hospitals. N.Y. Pub. Health Law § 32(6) (McKinney 2010) OMIG is also empowered to seek recoupment of overpayments to hospitals and other medical facilities if audits uncover evidence that the facility is operated in a manner inconsistent with its approved CON. OMIG can also impose penalties on non-compliant healthcare providers, and is empowered to “develop protocols to facilitate the efficient self-disclosure and collection of overpayments and monitor such collections, including those that are self-disclosed by providers.”
In 2008, OMIG released a comprehensive and ambitious Medicaid work plan that reviewed OMIG’s efforts to investigate Medicaid fraud. Through OMIG, the Bureau of Investigations and Enforcement investigates individuals, facilities or entities where false claims are submitted to obtain program funds.
New York governors in recent years have made clear that OMIG will aggressively pursue hospital mismanagement across the state to "claw back" huge sums paid to hospitals that fail to control spending waste. In December 2008, former Governor David Paterson announced $551 million in Medicaid recoveries under the F-SHRP program, through the State’s Medicaid Inspector General, James G. Sheehan.
Construction cost certainty with internal controls deters investigations
To minimize hospital construction cost overruns and delays, hospitals must establish an effective system of internal controls and cost certainty. The author identifies six key principles that are the hallmarks of effective and proactive control system design:
First, fraud deterrence and eradication is the foremost concern in designing internal controls. Step one requires ranking fraud risks based on their likelihood and impact. The hospital must design formal guidance and directives regarding authorization, approval, and review of change orders and any new increases in project scope. Similarly, to help prevent fraud, the institution must develop formal processes to investigate overhead costs, reimbursable expenses, and other budget deviations.
Second, senior hospital management and project managers must establish formal lines of communications. This will facilitate the flow of important, project-related information and will help decrease chances of cost overruns.
Third, establishing formal processes to evaluate the effectiveness of a control system is an integral part of establishing such a system. The evaluation process should include detailed and regular project risk assessments designed to identify actionable weaknesses in the control system. It should also maximize transparency in the actions of both hospital management and project coordinators.
Fourth, internal controls should be enacted that ensure full and proper disclosure of a project’s impact on the financial condition of the hospital. As part of these controls, the institution must constantly monitor whether the construction team is maintaining appropriate insurance coverage and whether the hospital is properly protected as an additional insured.
Fifth, a sound control; system must includes measures that ensure strict regulatory compliance. An important first step in improving compliance would involve defining the roles and responsibilities of project managers and third-party advisers and consultants.
Finally, it is critical to establish controls by tapping the services of a qualified and informed intermediary for the hospitals to manage the projects, including control claims for change order work and associated payments, both of which commonly increase project cost. Controls must clearly identify who has the authority to justify and approve change order work that increases the project budget. Controls must also effectively ensure that every requisition payment reflects work actually completed, that payments are made in full to subcontractors, and that funds are not diverted from the project to pay for unrelated expenses associated with other projects involving the general contractor or other project staff. Cost-related control must include monitoring whether lien waivers for subcontractors and general contractors/construction managers are properly prepared and executed to protect the hospital, and utilized as a condition to payment. Finally, procedures must be instituted that require the hospital to secure all required sign-offs and other closing-out documentation for the project.
In today’s electrified regulatory and enforcement environment, the best way that hospital executives can avoid the substantial financial and legal risks identified in this article is to take advantage of the services of specially trained professionals and their forensic teams.
Henry H. Korn, Esq. is a partner with LePatner & Associates, a New York City-based construction law firm serving corporate, institutional, commercial and real estate owners and developers.