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Emerson Hospital reviewing finances

Accounting error causes overstatement of results for 2006

Email|Print| Text size + By Jeffrey Krasner
Globe Staff / February 15, 2008

Emerson Hospital of Concord is conducting an investigation into an accounting error that caused it to overstate its 2006 financial results.

The hospital said it has hired a well-known healthcare turnaround firm "to perform a full organizational review" of the 177-bed suburban hospital. It has also enlisted an outside law firm to handle the probe.

The steps were disclosed in a statement to owners of Emerson Hospital's bonds. Such statements are posted in obscure repositories little-known outside the municipal finance industry. Emerson did not disclose the problems to donors or the community.

The disclosure comes as the hospital's finances appear to be deteriorating. It posted solid profit margins and surpluses in fiscal years 2004, 2005, and 2006. But in the nine months that ended last July, the hospital lost money providing healthcare and avoided losses only because of other income, such as profits on its investments.

Christine C. Schuster, Emerson's chief executive, declined to discuss the hospital's situation.

Bonnie Goldsmith, an Emerson spokeswoman, said in an e-mail, "We identified issues related to our financial accounting practices that would require us to restate prior financial results. We have been working closely with our auditors since that time and we now expect that this restatement will be limited to fiscal year 2006."

The hospital earned $5.1 million in fiscal year 2006, which ended Sept. 30, 2006. The hospital will still show a profit after adjustments resulting from the investigation, Goldsmith said in her e-mail, but will post a loss for fiscal year 2007.

The downturn in financial results has been dramatic. After earning $3.2 million from its healthcare operations in fiscal 2006, Emerson had an operating loss of $1.5 million for the first nine months of 2007. The loss comes even as Emerson boosted the number of inpatients it treated in fiscal 2007 to 9,311, a 1.3 percent increase compared with 2006.

Emerson has hired FTI Consulting Inc., a firm based in Baltimore with a large healthcare practice, to review its operations.

The hospital borrowed about $63 million in 2005 by selling bonds. The offering was made through the Massachusetts Health and Educational Facilities Authority, or HEFA, a quasi-public agency that assists nonprofit institutions in selling tax-exempt bonds to pay for building projects.

About $35 million from the August 2005 financing went to build surgery, maternity, and radiation treatment facilities. Those projects were started in 2006 and are expected to be completed this year. The rest of the money went to repay other bonds that had higher interest rates.

In the report to bondholders, Emerson said it didn't set aside enough money for bad debts, and also underestimated so-called contractual allowances - discounts and other adjustments to payments from insurance companies. Goldsmith said the formulas used to calculate such adjustments are "complex and challenging."

"We are conducting a thorough review of our accounting practices to prevent this situation from recurring in the future," she said.

Dana P. Diggins, the hospital's senior vice president for finance and administration during the $63 million financing, has since left the hospital. Last month, he became chief financial officer at Harrington Memorial Hospital in Southbridge. Diggins did not return calls seeking comment. Goldsmith declined to comment on his departure.

Investors who buy tax-free municipal bonds have a low tolerance for risk and typically seek investments that have a safe, predictable flow of interest payments and prompt repayment of principal. They are sensitive to changes that could lead to a default - a failure to make a payment on time - or a technical default, in which the borrower breaks one of the scores of rules, conditions, and obligations that make up the borrowing agreement.

Liam P. Sullivan, HEFA's vice president of marketing and public relations, said in an e-mail, "To our knowledge, Emerson Hospital is not in technical default on their bond issue. That will be confirmed with the receipt of the hospital's financials."

It is possible that a restatement of the hospital's financial statements could trigger a technical default; however, that won't be known until Emerson's audit, conducted by PricewaterhouseCoopers, is complete.

Another possible issue for the hospital is whether it has filed annual reports as required under the bond agreement. Standard & Poor's bond disclosure service - an online registry of documents filed by borrowers - shows Emerson hasn't made required filings. Neither the hospital nor HEFA would confirm whether the hospital was current with its filing obligations to borrowers.

Emerson's financial statements "are not past due at HEFA," Sullivan said.

Schuster, the chief executive of Emerson, also serves on the board of directors of HEFA. According to minutes of a July 12, 2005 board meeting, Schuster recused herself from discussion and a vote giving final approval to Emerson's $63 million borrowing.

HEFA highlighted the Emerson project in its 2006 annual report, noting, "Emerson Hospital's long relationship with HEFA enables ongoing improvements."

In the disclosure, Emerson sought to reassure its investors.

"Payments of principal and interest on the bonds are insured in accordance with the terms of the financial guaranty insurance policy issued by Radian Asset Assurance Inc.," it said.

Emerson added that it will inform investors about the audit in a conference call to be held "after the investigation is complete."

Separately, Emerson is late in filing financial information with the state's Division of Health Care Finance and Policy. The hospital received an extension to file its fiscal 2007 results by Feb. 10, but still hasn't complied.

"We have not yet received their financials, but are working closely with them to ensure that they submit accurate statements in a timely manner," said Jennifer Kritz, a spokeswoman for the division.

Jeffrey Krasner can be reached at krasner@globe.com.

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