HealthFirst Bluegrass pre-selected developer Ted J. Mims as project manager for its $11.7 million clinic construction project and created a conflict of interest that could jeopardize the federal grant for construction, according to a state audit released Thursday.
HealthFirst also has cash-flow problems that threaten its financial viability, according to State Auditor Adam Edelen.
The audit began in May at the request of Lexington Mayor Jim Gray and amid concerns about construction of a clinic at 496 Southland Drive.
Mims' attorney, Richard Getty, called the complaints about the hiring process and the idea that there is a conflict of interest "ludicrous."
Sign Up and Save
Get six months of free digital access to the Lexington Herald-Leader
According to the audit, the HealthFirst building committee and executive director William North pre-selected Mims and then made sure that the criteria used to score candidates would favor their chosen candidate. There does not appear to have been any consideration of the cost for the project management service or any interviews conducted with other candidates to determine whether they were more qualified, according to the report.
Gray said that by ignoring other candidates, HealthFirst was "playing too close to the foul line."
Mims has a conflict of interest because he owns 10 percent of the property and is the landlord, according to the report.
Mims' partnership with developer Ted McDonald makes it "improbable that he could remove any personal consideration when making decisions as property manager," Edelen said.
Edelen said that in hiring Mims, the board acted in a "slapdash manner."
"The moral of this story is that you have to follow the process or the rules no matter how inconvenient or time-consuming that might be," he said. "There is good reason that Scripture tells us you can't serve two masters."
The findings of pre-selection and conflict of interest could cause HealthFirst to lose $120,000 of the construction grant, which equals the amount paid to Mims so far. It also could put the entire grant in jeopardy, Gray said.
The report recommends that HealthFirst reconsider contracting with Mims. It also recommends that HealthFirst discuss with the Health Resources Service Administration, the federal agency overseeing the grant, whether the hiring process should be repeated, this time following policy and regulatory requirements. Gray said he also will contact federal authorities about the findings of the audit.
Getty said his client, Mims, was rightly hired because of his knowledge and experience. There was no fault in HealthFirst's reaching out to him to submit his application for the job. He said the project manager contract includes a provision that Mims serve the best interest of HealthFirst, and the HealthFirst board knew he was part-owner of the land. "I don't see anything untoward there at all," he said.
Getty said the audit serves no purpose other than to potentially stall the project further. He said the HealthFirst board is pleased with the work Mims has done.
Auditors also questioned the financial stability of HealthFirst because of late payments from Medicaid and aggressive revenue projections. Edelen said health care agencies across the state face similar problems with Medicaid. He said federal rules recommend that health centers maintain at least a month's worth of cash reserves, but cash-flow projections do not indicate that this is feasible for HealthFirst.
This could jeopardize the organization's viability because it has limited options to acquire financial assistance if it runs out of money.
The HealthFirst board, Edelen said, "has to get a better handle on its finances." The audit cited concerns about estimates of how much money the clinic will make treating patients. HealthFirst predicted that net patient revenue would increase by 38 percent in 2013 without the opening of the Southland Drive clinic. The audit said an estimate of a 9 percent increase is more appropriate.
As chairman of the Board of Health, Scott White serves on a joint committee between HealthFirst and the board, which represents the Lexington Fayette County Health Department. The two groups work in tandem and share local health tax dollars. He said he is concerned about the hiring process but more worried about the financial problems.
"That's what keeps me up at night," he said. To help with those problems, he said, HealthFirst should consider adding board members from professional financial backgrounds. He also said HealthFirst and the board need to continue to work closely together.
The majority of HealthFirst's patients are poor, and many have no health insurance, so their options for health care are limited.
Both Gray and Edelen said it's important that the clinic be built.
Construction on the clinic has not begun but is tentatively scheduled to begin in October, and the opening of the clinic is scheduled for next summer. The original deadline for completion was this summer.
In response to the audit, HealthFirst board chairman Thomas Lester and building committee chairman Tom Burich wrote a letter that said the examination "led the auditors to conclude that, beyond minor and potential findings identified by your team, there are no concerns or issues that resulted in any improprieties."
North, Burich and Lester, who all attended the press conference, declined to comment on the report or remarks by Edelen and Gray.
Findings and recommendationsof the auditor's report
■ Hiring process: The report said developer Ted J. Mims was chosen for the project before the advertisement seeking applicants for the project manager position was written. Once the ad was created the criteria for scoring the candidate seemed to "highly favor" Mims' selection.
Recommendations: HealthFirst should review the hiring process and consult with the Health Resources Service Administration to see whether the process affects the grant. HealthFirst should consider repeating the hiring process.
■ Conflict of interest: HealthFirst, according to the audit, was aware Mims had a 10 percent interest in the clinic property at 496 Southland Drive. Even with a minority interest, his potential financial gain was significant, the report said. That position as landowner and landlord created a conflict for Mims, the report said.
Recommendations: HealthFirst should consult with the Health Resources Service Administration to see whether the conflict of interest impacts the grant. HealthFirst should reconsider Mims' hiring because of the conflict of interest.
■ Parking: The yet-unsigned lease between HealthFirst and Mims and his partner Ted McDonald requires HealthFirst share some clinic parking with an adjacent property to be developed by the partners, the report said. HealthFirst would pay for the maintenance of the shared parking spaces. This agreement seems to violate federal guidelines that require money to be spent only in support of the clinic, the report said. It also appears to make HealthFirst fall short of the 200 spaces required by the federal government.
Recommendations: HealthFirst should make sure all parking spaces are for the sole use of the clinic. The signed lease should provide the 200 required spaces and follow all other federal guidelines related to the grant.
■ Cash flow: HealthFirst has significant cash flow problem, according to the report. For example, cash remaining at the end of August is projected to be $131,478. On Dec. 31, 2012, $925,246 in cash was available, the report said.
Two key factors are $1.1 million in Medicaid payments which have been billed but not paid and aggressive projections of the increase in patient revenue during 2013. According to the report, HealthFirst had projected a 38 percent increase in patient revenue. A 9 percent increase is likely, the report said.
Recommendations: The HealthFirst Board and the board of the Lexington-Fayette County Health Department should receive regular updates on Medicaid, revenues and cash flow projections through a joint committee with representatives from both boards. HealthFirst should develop a contingency plan for how to pay its monthly financial obligations to the health department if money runs short.
Revenue projections should be more conservative. Once HealthFirst has a more stable financial picture, a senior finance officer should be hired to provide focused attention to day-to-day finances.