Ferreting out the Admin Expenses

[Marguerite Harkness]

If I am a small business, my overhead expenses will be low compared to a similar business that is 500 times as big. If they were to allocate a portion of their overhead to me, and tell me that's how much my overhead ought to be, I would say - no way. A smaller business can run with smaller-scale expenses and overhead.

Same with a hospital. A hospital with 1100 employees does not have the same overhead needs as a hospital with 10,000 employees.

The Clinic tries to justify their high allocation of shared services:
"Apart from economies of scale, consolidating these services also helps with:
Standardization and consistency
Increased efficiencies."

Really? What efficiencies? What is efficient if your income is $125 million and this admin expense is $25 million?

If I were an accountant (which I am) and I were trying to charge as much administrative expense as possible to my subsidiaries, this is what I would include in the Cleveland Clinic's boilerplate categories:

"Shared Administrative Services (about 77% of $25 million or about $19 million)"
Information Technology: All computer staff (salary and full benefits), equipment, wi-fi, cables, fiberoptic networks including at main campus and elsewhere (even if not in place at Lakewood); the floor space that all of this takes; the heat and light and light bulbs; monthly network fees; all IT infrastructure being built in Avon or other facilities, Twinsburg, Brunswick, or other. All research departments (salary and benefits and space) in the basement of Main Campus.
Marketing: All Public Relations staff (salary and full benefits), floor space used by department; heat, electricity, light bulbs, maintenance, all news releases, Economic Impact Study (even though there obviously is NO marketing expense spent to build up Lakewood Hospital); travel for Dr. Cosgrove and/or NY Times reporter for feature article
Supply Chain: Full cost of Purchasing and Accounts Payable departments staff (salary and full benefits), the floor space these departments take, utilities, heat, electricity, maintenance to change light bulbs. Take all quantity-price breaks at main campus, charge the subsidiaries full price for all purchases of hard equipment, supplies, pharmaceuticals.
Legal: Full cost of in-house legal department, salary, benefits, floor space (even if they're fighting Save Lakewood Hospital); utilities, heat, electricity; all outsourced legal and retainers (including rewrite of Definitive Agreement even if it gets rejected); allocated wages, taxes, benefits and retirement contributions of legal staff for every meeting they attend at Lakewood City Council or LHA board meetings or anything remotely connected to Lakewood.
HR: Full cost of HR department, salary, benefits, floor space, utilities; severance pay of people terminated from other divisions; preparation of employee manuals whether in-house or outsourced; training of employees so they don't allow other employees to talk about closure of Lakewood Hospital with anyone (staff or otherwise)
Executive Team: Really? Allocate part of all high-paid chief honchos' enormous wages, payroll taxes and luxurious benefits, company cars and drivers, part of the depreciation of the entire space of their luxurious office suites, utilities. Include all staff who are not charged out by medical procedure. Be sure to include everybody you can.
Revenue Cycle: Entire staff of in-house or outsourced Accounts Receivable, salary, benefits, floor space, utilities. Legal fees for collection attorneys firm. Computer system for billing. (If this were allocated based on the number of invoices sent, per hospital, it might be OK.)
Internal Audit: Entire staff of internal audit accountants and managers, salary, benefits, floor space, utilities.
Regional Administration: Executives, support staff, salary, benefits, floor space for everybody working on projects to oversee Cuyahoga County and expand into Lorain County, Medina County, Summit County and others. (Even though this entire category obviously does not support Lakewood in any way.) I would allocate a part of all the "common area" at Main Campus and others, the huge wide open hallways with high ceilings and high utility bills.
Finance: Executive and accounting staff, salary, benefits, floor space, utilities. Cost of EY audits and other consulting fees. Be sure to include any accounting work this group does to prepare intercompany allocations of administrative expense, it is probably substantial.

"Transfers/Chargebacks" (about 17% of $25 million or about $4 million)
This would be mostly for clinical services that Cleveland Clinic staffs at Lakewood Hospital - anesthesia coverage, house staff coverage, etc. This amount may be reasonable, it is about $4 million on top of about $60 million salary. They say "the cost of these services varies by size/scope of the program offered at the respective sites." On the surface, sounds reasonable.

"Other" (about 7% of $25 million or $2 million)
Consulting Fees (is Subsidium's $500,000 in here, or did LHA pay it directly?)
Legal Fees (Any fees directly related to Lakewood? to moving business out of Lakewood and to Fairview or Avon? In-house legal department, Mr. Meehan attending meetings at Lakewood City Council or other? Salary, benefits, travel, mileage, other?
Special Projects (Does Avon count as a "special project"?
Travel expenses (Dubai? Executives traveling to places that have no connection with Lakewood?)
Dues and Licenses (country clubs? dues or overall licenses for Clinic that cover services not provided at Lakewood?)

And for good measure, I would be sure to add a factor of maybe 10% to cover anything that I had missed. (Parking lots, floor sweepers, maintenance of fancy outside fountains, etc.)

Does this seem reasonable to you?? For a small hospital that doesn't need multi-million-dollar executives to run it, that doesn't need the huge infrastructure of a behemoth like Cleveland Clinic?

Wouldn't we be better off without them?

For far less than $2 million a month, we surely could fill all of our needs from the list above.

[Alex Belisle]

One of my Facebook friends who is the Head of Business Excellence - Middle East, Turkey and Africa for Takeda Pharmaceuticals wrote the following to me in regard to Lakewood Hospital:

"This caught my attention since I am studying hospital management. My knee-jerk reaction is, when will hospitals manage with fiscal diligence as a priority? Not-for-profit does not mean it's OK to sink! Read the work of Chassin: There are tools for robust process improvement that can and must be used to cut cost and optimize revenues AND improve clinical quality."

[Bill Call]

Excellent work Marguerite!

As I recall, one year the admin expenses were about $15 million and two years later the admin expenses were about $22 million. Has anyone been able to find out what answer the Clinic gave when the Hospital Board questioned that substantial increase?

Did the Board and the City approve of those admin expenses? When and how?

In its first proposal to the City Metro said that it broke even at Medicare reimbursement rates. It that is true then Lakewood Hospital would be able to make a substantial profit if it was run by Metro.

[Brian Essi]

There is no question that the Admin Expenses charged to Lakewood Hospital are extremely high. As of April 8, 2015, Mayor Summers (who has been a trustee for many years) was still unable to explain the admin expenses and he was frustrated that the Clinic "our partner is not being very transparent" even to him on the Admin Fee issue. One LHA trustee told me that the Clinic employees running Lakewood argue with the downtown Clinic folks over the allocation. You can guess who wins that battle. Lakewood is definitely the loser. The Clinic has never lost money on Lakewood Hospital and they have little incentive to cut the admin fees charged to Lakewood. Ernst & Young
also audits the Clinic so they don't have an incentive to dig too deep on the issue when the can just get management representation letter from LHA and the Clinic (likely signed by Clinic employees on both sides of the transaction. As for LHA trustees--they are unpaid volunteers and it seems even if they asked tough questions, they would be treated like City Council was when the Clinic big wigs just evaded the questions. Several trustees were afraid to speak with me without assurances that I would not use their names. Now the lawyers have instructed them not to speak with me at all! What kind of a "charity" treats its trustees and employees that way? What are they afraid of and what are they hiding?
BTW It is absolutely clear that the Clinic is not as efficient as Metro.

[Marguerite Harkness]

That admin fee makes Lakewood, Cleveland Clinic's Cash Cow. Such a deal! Clinic pays $1 million in annual rent, then turns around and charges us $24 million for their downtown overhead, executives, consulting, legal, etc. Woohoo! Lucky for them! THAT's why Lakewood runs a loss - IF it runs a loss. It's entirely due to Clinic's machinations and magic math.
That's like, you rent your Lakewood house to a tenant for $10,000, he's renting it for his kid, and he owns a Bratenahl mansion. He charges you $250,000 for grass-cutting, which is the amount he pays his landscape architect to re-landscape his Bratenahl mansion. Such a deal!

[cameron karslake]

With friends like the CCF running OUR asset into the ground, you don't need enemies!

[Kate McCarthy]

Did you notice that in CCF's motion to dismiss they actually use the "Fees CCF charged to LHA for the provision of administrative services (e.g., human resources, billing and collections, accounting, etc.) increased. (Id. ¶¶ 29-32, 34.)" as one of the justifications for abandoning the "vision for tomorrow" and putting in place the decanting plan?

I think city council should sue LHA for negligence in their oversight of the hospital.

[Peter Grossetti]

I think city council should sue LHA for negligence in their oversight of the hospital.

Since I believe two city council members sit on LHA board, can they really sue themselves?!?!

[marklingm]

I think city council should sue LHA for negligence in their oversight of the hospital.

Since I believe two city council members sit on LHA board, can they really sue themselves?!?!

I guess it would just be Summers, Bullock, and MLM.