LRGHEALTHCARENon-Profit

Finding 2021-001: Quarterly Financial and Statistical Reports Submissions Federal Agency: U.S. Department of Housing and Urban Development Award Name: Federal Housing Administration Mortgage Insurance Program, Section 242 Program Year: 2015 ALN: 14.128 Compliance: Reporting Finding Type: Significant deficiency in compliance Criteria: Financial and statistical reports shall be submitted to Account Executive in the Office of Insured Health Care Facilities (OIHCF) at HUD within 40 days of the close of the period. Reports shall be submitted monthly during the construction period, and thereafter on a quarterly basis. As the construction period has ended, HGRL is required to submit on a quarterly basis under the Regulatory Agreement for Section 242 Nonprofit Hospitals within 40 days of the close of the quarter. Condition: HGRL was unable to provide documentation to verify the submission of the December 31, 2020 and June 30, 2021 quarterly financial and statistical reports to the Account Executive in the OIHCF at HUD within 40 days of the close of the quarter. Context: The December 31, 2020 and June 30, 2021 quarterly financial and statistical reports may not have been submitted timely to HUD. Effect: HGRL (formerly LRGHealthcare and Subsidiary) was not in compliance with the Regulatory Agreement for Section 242 Nonprofit Hospitals. Cause: HGRL was unable to provide documentation to verify the submission of the December 31, 2020 and June 30, 2021 quarterly financial and statistical reports within 40 days of the close of the quarter to HUD. Recommendation: In the future, HGRL (formerly LRGHealthcare and Subsidiary) should retain documentation of their historical quarterly financial and statistical reports within 40 days of the close of the quarter to HUD. Views of responsible parties: Management acknowledges the finding.

Finding 2021-002: Audited Financial Statements and Uniform Guidance Submissions Federal Agency: U.S. Department of Housing and Urban Development Award Name: Federal Housing Administration Mortgage Insurance Program, Section 242 Program Year: 2015 ALN: 14.128 Compliance: Reporting Finding Type: Significant deficiency in compliance Criteria: Under the Regulatory Agreement for Section 242 Nonprofit Hospitals, board certified financial statements shall be submitted within 120 days of the close of the fiscal year if annual audited financial statements have not yet been submitted. Additionally, annual audited financial statements and management letter from a Certified Public Accountant in accordance with the Uniform Guidance (Circular A-133) audit requirements must be completed and filed within nine months of the close of the year. Condition: HGRL was unable to provide documentation to verify the submission of the September 30, 2021 board certified financial statements within 120 days of the close of the fiscal year. Additionally, the September 30, 2021 annual audited financial statements and management letter from a Certified Public Accountant in accordance with the Uniform Guidance (Circular A-133) audit requirements were not completed within nine months of the close of the year. Context: The September 30, 2021 board certified financial statements may not have been submitted timely to HUD. The September 30, 2021 annual audited financial statements and management letter from a Certified Public Accountant in accordance with the Uniform Guidance (Circular A-133) audit requirements were not completed within nine months of the close of the year. Effect: HGRL was not in compliance with the Regulatory Agreement for Section 242 Nonprofit Hospitals. Cause: HGRL was unable to provide documentation to verify the submission of the September 30, 2021 board certified financial statements within 120 days of the close of the year. HGRL did not complete the September 30, 2021 annual audited financial statements and management letter from a Certified Public Accountant in accordance with the Uniform Guidance (Circular A-133) audit requirements within nine months of the close of the year. Recommendation: In the future, HGRL should retain documentation of their historical submission of the September 30, 2021 board certified financial statements within 120 days of the close of the year and complete its annual audited financial statements and management letter from a Certified Public Accountant in accordance with the Uniform Guidance (Circular A-133) audit requirements within nine months of the close of the year. Views of responsible parties: Management acknowledges the finding.

Finding 2021-003: Mortgage Reserve Funding Federal Agency: U.S. Department of Housing and Urban Development Award Name: Federal Housing Administration Mortgage Insurance Program, Section 242 Program Year: 2015 ALN: 14.128 Compliance: Special Tests and Provisions Finding Type: Significant deficiency in compliance Criteria: Under the Mortgage Reserve Fund (MRF) agreement, HGRL was required to have $15,650,808 in the MRF as of September 30, 2021. Condition: HGRL did not have adequate funding in the MRF as of September 30, 2021. Context: As of September 30, 2021, HGRL had $11,822,025 in the MRF, which is below the required amount as of September 30, 2021. Effect: HGRL was not in compliance with the Mortgage Reserve Fund agreement as of September 30, 2021. Cause: Due to HGRL's current bankruptcy status, it had inadequate assets to meet the MRF requirement. Recommendation: Given HGRL's current bankruptcy status, this requirement will no longer be applicable in the future. Views of responsible parties: Management acknowledges the finding.

Malpractice Liabilities and Use of an Actuary Criteria: The Hospitals are insured against malpractice claims through a multi-provider captive insurance company. The Hospitals are also required to have a liability for estimated incurred but not reported (IBNR) claims. Other hospitals in a similar situation use the services of a third party actuary to value this liability. Condition: Management currently internally estimates the liability for IBNR claims. Context: The deficiency identified above creates a risk to the accuracy of the Hospitals' financial reporting function. Effect: The current conditions noted above within the Hospitals' processes could result in misstatement of financial statements. Cause: There is a lack of understanding of the potential estimated IBNR liability. Recommendation: The Hospitals should engage an actuary to perform an analysis over insurance, particularly the IBNR component of the medical malpractice liability, to determine the appropriate level of required reserves. Views of responsible parties: The multi-provider captive insurance company engages its own actuary, which produces reports segregated by provider such that management believes a reasonable estimate of IBNR may be determined. Given the amount of the estimated liability, management believes hiring an additional actuary for LRGHealthcare to be unnecessarily burdensome.

Annual Budget Submission Criteria: An annual budget including, at a minimum, income and expense statements, FTEs and utilization statistics is required to be submitted by the Hospitals to the U.S. Department of Housing and Urban Development (HUD) under the Regulatory Agreement for Section 242 Nonprofit Hospitals within 30 days following the start of the fiscal year. Condition: The Hospitals did not submit their fiscal year 2020 budget to HUD within 30 days following the start of the fiscal year; although, the Hospitals did ultimately submit their fiscal year 2020 budget to HUD. Context: The fiscal year 2020 budget was not submitted timely to HUD. This is a repeat finding (Finding 2019-105). Effect: The Hospitals were not in compliance with the Regulatory Agreement for Section 242 Nonprofit Hospitals. Cause: The fiscal year 2020 budget was not approved by the Hospitals' Board of Directors until after the 30 day requirement had passed, therefore the Hospitals were unable to submit the fiscal year 2020 budget to HUD within the 30 days after the start of the fiscal year requirement. Recommendation: In the future, the Hospitals should submit their annual budgets within 30 days following the start of the fiscal year. Views of responsible parties: Management acknowledges the finding and began submitting annual budgets timely, beginning with fiscal year 2021 budget. Management acknowledged the finding and submitted fiscal year 2021 budget timely.

Payroll Rate of Pay Changes Criteria: Throughout 2019, the Payroll Manager had the responsibility to review pay rate changes each pay period, but also has the ability to change an employee pay rate when given authorization. Condition: Better segregation of duties will enhance controls to detect any such errors and irregularities, and provide for much greater safeguarding of assets. Context: The deficiency identified above creates a risk to the Hospitals' internal control and financial reporting function. Effect: The current conditions noted above within the Hospitals' internal controls could result in fraud or misstatement of financial statements, or misuse or misreporting of federal award funding. Cause: There is a lack of segregation of duties or oversight. Recommendation: The person reviewing the pay changes should not have access to change the pay rates as well. Views of responsible parties: Segregation of duties in a small hospital setting is often challenging due to the limited number of employees within a given functional area. Such is true in this instance. At LRGHealthcare, all authorized pay rate changes affecting employees are input to PeopleSoft by employees of the Human Resources Department (HRD), with the notable exception of pay rate changes affecting HRD employees. Pay rate changes for HRD employees are input by the Payroll Manager, resulting in the situation described above. Mitigating controls include management oversight and review of the biweekly payroll reports and amounts paid/processed, as well as management oversight and review of the monthly departmental and/or facility financial reports.

Net Asset Accounting, Funds with Restrictions, Monitoring and Recordkeeping Criteria: The Hospitals have certain investments and hold assets whose use is limited or restricted. Tracking of investment activity and monitoring compliance with the underlying restrictions of board designated investments and other gifts received with restrictions from donors is an important accounting responsibility. The grantors of these underlying funds established restrictions for fund use for certain projects and/or programs. Accordingly, these contributions were recorded as a separate restricted class of net assets on the Hospitals' financial statements to which associated activity should be monitored. Historically, the Hospitals reported in the notes to the consolidated financial statements that the Board of Trustees had designated a portion of the Hospitals' net assets without donor restriction to provide for charity care ("Nighswander Fund") with a balance of $5,316,075. Condition: During the year under audit, management did not allocate certain gains and losses to these net asset funds, recorded as activity in restricted accounts, then subsequently releasing investment gains without donor restrictions when it can be proven that restrictions have been satisfied. Given the Hospitals are in a net deficit balance for their net assets without donor restrictions in 2019, this Board of Trustees designation is unable to be satisfied. Context: The deficiency identified above creates a risk to the Hospitals' internal control and financial reporting function. Effect: The current conditions noted above within the Hospitals' internal controls could result in fraud or misstatement of financial statements, or misuse or misreporting of federal award funding. Cause: There is a lack of historical information. Recommendation: Management should continue to track all restricted net asset activity and reconcile balances on an ongoing basis. We recommend that the Hospitals should allocate and account for investment gains to ensure they are used appropriately in accordance with restrictions. Additionally, management should determine the appropriate amount of Board Designated net assets, if any, to be reported in the consolidated financial statements and designate those as such in the general ledger. Views of responsible parties: Management will allocate and account for investment gains to ensure they are used appropriately in accordance with restrictions. To this end, management has engaged legal counsel to aid in the development of a suitable investment policy whereby such funds will be invested and managed appropriately. Management will consult its Board to determine the appropriate amount of Board Designated net assets, if any, to be reported in the consolidated financial statements and designate those as such in the general ledger.

Malpractice Liabilities and Use of an Actuary Criteria: The Hospitals are insured against malpractice claims through a multi-provider captive insurance company. The Hospitals are also required to have a liability for estimated incurred but not reported (IBNR) claims. Other hospitals in a similar situation use the services of a third party actuary to value this liability. Condition: Management currently internally estimates the liability for IBNR claims. Context: The deficiency identified above creates a risk to the accuracy of the Hospitals' financial reporting function. Effect: The current conditions noted above within the Hospitals' processes could result in misstatement of financial statements. Cause: There is a lack of understanding of the potential estimated IBNR liability. Recommendation: The Hospitals should engage an actuary to perform an analysis over insurance, particularly the IBNR component of the medical malpractice liability, to determine the appropriate level of required reserves. Views of responsible parties: The multi-provider captive insurance company engages its own actuary, which produces reports segregated by provider such that management believes a reasonable estimate of IBNR may be determined. Given the amount of the estimated liability, management believes hiring an additional actuary for LRGHealthcare to be unnecessarily burdensome.

Estimated Medicaid Enhancement Tax & Disproportionate Share Revenue Criteria: The Hospitals' Medicaid Enhancement Tax (MET) liability and Disproportionate Share Revenue (DSH) receivable as of September 30, 2018 was estimated incorrectly resulting in a passed adjusting journal entry to adjust opening equity, as the Hospitals had overestimated both the MET expense and DSH revenue. Condition: The Hospitals had used the prior year actual payments to estimate their MET liability and actual receipts to estimate their DSH receivable. Context: The deficiency identified above creates a risk to the Hospitals' internal control and financial reporting function. Effect: The current conditions noted above within the Hospitals' internal controls could result in fraud or misstatement of financial statements. Cause: There is a lack of analysis and oversight. Recommendation: Management should calculate the MET liability based on known patient service revenue figures to come up with a proper estimate of the incurred liability at period end, and calculate the DSH receivable based on known and current facts and circumstances. Views of responsible parties: Management will estimate the MET liability based on the known patient service revenue at period end and estimate the DSH receivable based on the facts and circumstances known and current at the time the estimate is prepared.

Annual Budget Submission Criteria: An annual budget, including at a minimum, income and expense statements, FTE's and utilization statistics are required to be submitted by the Hospitals to the U.S. Department of Housing and Urban Development (HUD) under the Regulatory Agreement for Section 242 Nonprofit Hospitals within 30 days following the start of the fiscal year. Condition: The Hospitals did not submit their fiscal year 2020 budget to HUD within 30 days following the start of the fiscal year. Although, the Hospitals did ultimately submit their fiscal year 2020 budget to HUD. Context: The fiscal year 2020 budget was not submitted timely to HUD. Effect: The Hospitals were not in compliance with the Regulatory Agreement for Section 242 Nonprofit Hospitals. Cause: The fiscal year 2020 budget was not approved by the Hospitals' Board of Directors until after the 30 day requirement had passed, therefore the Hospitals were unable to submit the fiscal year 2020 budget to HUD within the 30 day after the start of the fiscal year requirement. Recommendation: In the future, the Hospitals should submit their annual budgets within 30 days following the start of the fiscal year. Views of responsible parties: Management acknowledges the finding and will submit annual budgets timely in the future.

Quarterly Financial & Statistical Reports Submissions Criteria: Financial and statistical reports shall be submitted to Account Executive in the Office of Insured Health Care Facilities (OIHCF) at HUD within 40 days of the close of the period. Reports shall be submitted monthly during the construction period, and thereafter on a quarterly basis. As the construction period has ended, the Hospitals are required to submit on a quarterly basis under the Regulatory Agreement for Section 242 Nonprofit Hospitals within 40 days of the close of the quarter. Condition: The Hospitals did not submit the December 31, 2018 and June 30, 2019 quarterly financial and statistical reports to the Account Executive in the OIHCF at HUD within 40 days of the close of the quarter. Although, the Hospitals did ultimately submit the December 31, 2018 and June 30, 2019 quarterly financial and statistical reports. Context: The December 31, 2018 and June 30, 2019 quarterly financial and statistical reports were not submitted timely to HUD. Effect: The Hospitals were not in compliance with the Regulatory Agreement for Section 242 Nonprofit Hospitals. Cause: The Hospitals mistakenly forgot to submit the December 31, 2018 and June 30, 2019 quarterly financial and statistical reports within 40 days of the close of the quarter to HUD. Recommendation: In the future, the Hospitals should submit their quarterly financial and statistical reports within 40 days of the close of the quarter to HUD. Views of responsible parties: Management acknowledges the finding and will submit quarterly financial and statistical reports in the future.

Seeking HUD Approval Criteria: Under the Regulatory Agreement for Section 242 Nonprofit Hospitals, the Hospitals are required to seek HUD's approval for: - Remodeling, reconstructing, or demolishing any part of the mortgaged property or subtraction from any real or personal property of the project, - Contracts for supervisory or managerial services, - Leasing out all or part of the project, - Distribution of Assets, under certain circumstances, - The addition of new Corporations and Subsidiaries; Mergers and Affiliations with other entities; and loan guarantees for other entities, - Additional indebtedness (long term, short term, capital leases, etc.), under certain circumstances, and - Interest rate swaps Condition: The Hospitals did not seek and obtain HUD's approval to enter into a two-year promissory note dated February 21, 2019 for the purchase of property in the amount of $238,000. Context: Under the Regulatory Agreement for Section 242 Nonprofit Hospitals, the Hospitals are required to seek HUD's approval to enter into any additional indebtedness. Effect: The Hospitals were not in compliance with the Regulatory Agreement for Section 242 Nonprofit Hospitals. Cause: The Hospitals mistakenly forgot to seek and obtain written approval by HUD prior to entering into the promissory note. Recommendation: In the future, the Hospitals should seek and obtain written approval by HUD for any conditions that fall under the requirements in the Regulatory Agreement for Section 242 Nonprofit Hospitals. Views of responsible parties: Management acknowledges the finding and will seek HUD's approval to enter into any future additional indebtedness, including submitting for retrospective approval of this transaction.

GSA_MIGRATION

GSA_MIGRATION

GSA_MIGRATION

GSA_MIGRATION