Kaleida Health

Finding 2024-001 Program Name: Disaster Grants – Public Assistance (Presidentially Declared Disasters) Federal Department/Agency: U.S. Department of Homeland Security, Federal Emergency Management Agency Assistance Listing Number: 97.036 Federal Award Year: January 1, 2024 December 31, 2024 Grant Number and Years: 694036 (COVID 19 Temporary Agency Nurses 1 1 21 to 7 1 22) Compliance Requirements: Activities Allowed or Unallowed/Allowable Costs/Cost Principles Criteria In accordance with the Federal Emergency Management Agency (FEMA) Public Assistance Program and Policy Guide, Version 2.1, Chapter 2, costs are not eligible for reimbursement if the applicant received funding from another source (e.g., patient revenue or insurance) for the same work funded by FEMA. FEMA refers to this as a duplication of benefits. On February 15, 2023, FEMA issued a memorandum titled Hypothetical Reasonable Applicant Methods, which outlines the basic elements for estimating duplication of benefits within net patient service revenue. The Department of Homeland Security (DHS) also engaged the RAND Corporation’s Homeland Security Research Division, through the Homeland Security Operational Analysis Center (HSOAC), to assist with the administration of disaster grants to health care providers related to COVID 19. In December 2024, HSOAC published Methods of Assessing Duplication of Benefits with Patient Care Revenue, as applied by FEMA to Health Care Provider’s Public Assistance Claims During the COVID 19 Emergency. This publication describes FEMA’s Standard Method for estimating duplication of benefits, as well as alternative methodologies, and states that applicants using an alternative methodology are expected to document the methodology and calculations used. Condition and Context On October 3, 2024, FEMA obligated Project #726840 for $21.3 million and, on July 2, 2024, FEMA obligated Project #694036 for $28.3 million. During 2024, a total of $87.1 million of Public Assistance projects were obligated by FEMA. Prior to filing all FEMA Public Assistance claims, Kaleida performed a detailed analysis to determine eligible project costs. The costs for substantially all projects primarily related to temporary agency nurse labor incurred during portions of 2021, 2022, and 2023. To determine eligible project costs, Kaleida utilized an alternative methodology to estimate potential duplication of benefits with patient care revenue, relying on guidance from HSOAC, other FEMA guidance, and coordination with FEMA and the New York State Division of Homeland Security and Emergency Services. Consistent with HSOAC guidance, Kaleida documented the alternative methodology and related calculations in memoranda submitted with each project application. The alternative methodology documentation for Kaleida’s FEMA projects was reviewed by Kaleida’s Chief Financial Officer. In November 2024, HSOAC issued an Applicant Review Memo indicating that they had evaluated the claimed costs for potential duplication of benefits by applying FEMA’s Standard Method and recommended approximately $23.4 million of reductions, for Project #726840. The Standard Method uses an applicant’s base year revenue and expense data to establish a cost ceiling that is compared to claimed project costs to prevent duplication of benefits. In July 2025, FEMA issued its own Applicant Review Memo, which also identified potential duplication of benefits by applying the Standard Method to reassess previously obligated costs. However, FEMA found no duplication of benefits for Project #726840, contrary to HSOAC’s Applicant Review Memo. Instead, FEMA identified Project #694036 as having a high likelihood of duplication of benefits and recommended a $5.0 million reduction, of previously obligated costs for Project #694036. Kaleida asserts that it properly applied an allowable alternative methodology consistent with FEMA guidance. Specifically, for Project #694036, Kaleida’s methodology compared temporary agency nurse rates to full time nurse wages and benefits funded by patient care revenue in order to isolate incremental labor costs attributable to the COVID 19 emergency. Management also stated its methodology and supporting calculations were reviewed with New York State Division of Homeland Security and Emergency Services and FEMA personnel periodically from approximately March 2023 through the project obligation date, and the project was later closed in May 2025, all of which was prior to the FEMA Applicant Review in July 2025. In September 2025, Kaleida filed a formal appeal of FEMA’s recommended $5.0 million reduction for Project #694036. As of the date of this report, the appeal remains unresolved; therefore, the amount of questioned costs cannot be determined. Questioned costs Cannot be determined. Statistical Sample Not applicable Repeat Finding A similar finding was not reported in the prior year audit. Recommendation We recommend Kaleida continue to work with FEMA through the designated appeal process.

Criteria PRF recipients that received one or more payments exceeding $10,000 in the aggregate during a Payment Received Period are required to report on several required data elements as part of the post payment reporting process. Reporting must be completed and submitted to HRSA the reporting dates specified by HRSA. Additionally, Title 45 U.S. Code of Federal Regulations Part 75 (45 CFR 75), Uniform Administrative Requirements, Cost Principles, and Audit Requirements for HHS Awards, section Title 45 U.S. Code of Federal Regulations Part 75 (45 CFR 75), Uniform Administrative Requirements, Cost Principles, and Audit Requirements for HHS Awards, section 03(a) states the non Federal entity must establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in ?Standards for Internal Control in the Federal Government? issued by the Comptroller General of the United States or the ?Internal Control Integrated Framework?, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Condition Found, Including Perspective There were 17 submissions to HRSA on a consolidated basis during the period of audit. We selected 3 such submissions for testing, or which there was 1 instance it was prepared incorrectly. The condition found results from a misinterpretation of the PRF Reporting Period 2 submission. In completing the PRF Reporting Period 2, the HRSA website automatically populated PRF Reporting Period 1 expenses into the HRSA Reporting Period 2 portal. Management interpreted this to mean that unreimbursed COVID expenses are to be reported on a cumulative basis in the PRF Reporting Period 2 and therefore overstated unreimbursed expenses by $2,231,540. The HRSA reporting portal then automatically calculates remaining amounts of lost revenue eligible for reimbursement, which was also overstated by $2,231,540. Cause There were 17 submissions to HRSA on a consolidated basis during the period of audit. We selected 3 such submissions for testing, or which there was 1 instance it was prepared incorrectly. The condition found results from a misinterpretation of the PRF Reporting Period 2 submission. In completing the PRF Reporting Period 2, the HRSA website automatically populated PRF Reporting Period 1 expenses into the HRSA Reporting Period 2 portal. Management interpreted this to mean that unreimbursed COVID expenses are to be reported on a cumulative basis in the PRF Reporting Period 2 and therefore overstated unreimbursed expenses by $2,231,540. The HRSA reporting portal then automatically calculates remaining amounts of lost revenue eligible for reimbursement, which was also overstated by $2,231,540. Possible Asserted Effect Failure to ensure accuracy of amounts reported as ?Other Provider Relief Fund Expenses? may result in HRSA relying on incomplete or inaccurate information associated to the System?s utilization of PRF funds. Questioned Costs Not determinable. Statistical Sampling The sample was not intended to be, and was not, a statistically valid sample. Repeat Finding No Recommendation While adequate controls did capture expenses accurately and in accordance with HRSA guidance ? the finding is a result of the recording of such accurate expenses into the reporting portal. We recommend Kaleida Health enhance its internal controls over PRF reporting to ensure each of the data elements reported to HRSA are consistent with HRSA?s instructions, and are accurate and result in amounts consistent with its underlying records. Views of Responsible Officials In preparing the PRF Reporting Period 2 submission, Kaleida Health management took the following measures to ensure accurate and complete reporting for both expense and revenue elements of the submission: ? Accumulated and organized the expenses for the Period 2 submission as to eligibility and whether reimbursed by other sources. This alone is complex when considered with other sources of reimbursement. ? Thoroughly reviewed and examined instructions and guides provided by HRSA. Attempts to contact HRSA for clarification to key questions was unsuccessful. While representatives could be reached, no definitive guidance was available. ? Reviewed our interpretation on required reporting with a national consulting firm and Hospital Associations in New York State ? no alternative suggestion was provided. ? Participated in webinars provided by HRSA and others ? this matter was not clarified. ? Pre populated HRSA provided Excel worksheets with data as encouraged by HRSA ? no additional instructions were provided. ? Contacted the HRSA Help line on multiple occasions to attempt to confirm our interpretation and approach ? no clarification was provided. ? Numerous internal meetings were held to discuss the submission approach relating to expenses. In retrospect, Kaleida Health handled an ambiguous and complex process proactively and exhausted every available avenue of relevant guidance and information to record amounts accurately. Since this report submission was unprecedented, there was no historical data to rely upon to validate the accuracy of our final assumptions and interpretations of HRSA rules. The root cause of the condition asserted is that the HRSA Reporting Portal was designed to allow for the inclusion of expenses for Period 1, and the related Portal instructions and guide failed to directly or adequately address how to report Period 2 when an entity had Period 1 expenses. Simply, the `error? was not in the accumulation of its eligible expenses as is clear from the detailed support provided and available (by Kaleida Health), but rather in the manner of recording of such expenses into the reporting portal. These expenses were clearly supported in meticulous line item detail for each quarter beginning in Q1 2020 and ending in Q4 2021, as provided to the auditors. It should be noted that because HRSA placed priority on the recording of PRF expenses in its own instructions, Kaleida Health presumed that the Period 1 fields (noted initially as zeroes) needed to be re populated ? Kaleida?s treatment of expenses was consistent with how lost revenue was recorded in the portal. In addition, to do otherwise in the absence of affirmative and clear guidance, Kaleida did not want to risk an understatement of expenses given the priority HRSA had placed on expenses in its guidance. In summary, Kaleida Health believes it complied with both the spirit and the substance of reporting requirements provided by HRSA. The final outcome of the matter described above does not result in any payback of Cares Act grant dollars, nor does it result in any penalties. While the reporting of the information as described above created a technical deficiency for audit purposes, the underlying financial impact to Kaleida is in fact a non event. In completing the reporting within the portal, Period 2 obviously represented the first period in which additional expenses and/or lost revenue needed to be added. In evaluating the risk associated with its decision to record such amounts for Period 1 within the portal given the lack of clarity in the instructions, Kaleida Health also considered the relative impact and materiality of such a decision. Kaleida Health received payments of more than $86 million from HRSA through June 30, 2021, which is the amount Kaleida Health was required to support with eligible expenses or lost revenue through December 31 2021. The overstatement of expenses was $2,231,540 as noted above, while lost revenue totaled more than $129 million. The result of overstating expenses and understating lost revenue has zero net effect on supporting the payments received from HRSA. To further emphasize the point, when Kaleida Health?s auditors notified Kaleida management of this potential overstatement during their audit, Kaleida Health attempted on multiple occasions to remediate this through the advice and counsel of HRSA representatives and others. HRSA representatives indicated that there was currently no means or mechanism within the portal to amend or correct a prior reporting period (no negative figures can be entered). In summary, Kaleida Health accepts the interpretation and finding from its auditors with the context provided above and will attempt to accurately state expenses in future periods (pending a systematic solution from HRSA for restatement of prior period expense overstatements). As a matter of principle, however, the assertion that Kaleida Health lacked adequate internal controls does not fully consider the steps taken by Kaleida Health to report on its submission accurately, the ambiguity of the guidance provided, nor the lack of systematic controls within the portal reporting system. It is clear Kaleida Health intended to report accurately, and in fact did capture expenses accurately and in accordance with HRSA guidance ? the condition noted is a result of the recording of such accurate expenses into a reporting portal. Had Kaleida Health not been required to report in Period 1 (determined only based on the timing of the funding received), the condition would not have occurred.