The $35 Million Problem

The hospital’s true financial condition finally came out at a Special Meeting of the hospital board on 3/21/18. WhidbeyHealth is seeking a $20M USDA Rural Health Loan, so it was forced to hold a public meeting as part of that application process. 

Our brand-spankin’ new CEO Ron Telles was then the CFO. He first explained that because “operating income began a hard downward fall in 2009. The following five years (2010-14) all ended in a deficit of operating income over expenses. The result according to Telles, was “the hospital was primarily focused on covering daily operations, choosing to defer long-term facility maintenance to a future date.”

As of early 2018, Telles related that the “deferred maintenance needs that have accrued over the years, with an estimated total cost of approximately 35 Million dollars. Currently, the District has about 9 Million dollars in the bank and is unable to finance the long-term maintenance needs using its capital.”

Oh by the way, how often have you seen hospital construction projects come in at or under budget? With each passing year, the costs of these projects must be going up by millions of dollars.

In the increasingly unlikely event that WH were to get the full $20M loan, it would only cover about half of these deferred needs. And of course it would have to re-paid with interest, which is currently 4.25% on such loans.

If the loan does not go through, Telles said the other two ways these deferrals could be financed is through Revenue Bonds or Limited Tax General Obligation Bonds (LTGO). These are far less preferable than a USDA loan, which features a lower interest rate and one which can be locked down, it can be prepaid at any time, and it needs no debt to reserve. We’ll address the matter of bonds further in due course.

How badly needed are these deferred projects? By the CFO’s own admission, about $20M of the deferred needs “are mandatory to become compliant with current state regulations.” Then CEO Forbes also acknowledged that “the focus is on the electrical panel and HVAC at this time,’ and that “These systems are very outdated and out of code.” So, WH has been knowingly operating in violation of various state codes for some time, and there is no timetable for when the facility might get back up to code.

We saw where this can lead, as the hospital pharmacy had to be shut down in early 2018 due to such violations. It took almost a year for a new code-compliant facility to be built and opened – at a cost of $3.8 million. And for almost a year when WH had no pharmacy, they had to buy cancer-fighting compounds from others, at an extra cost of $300,000 per month. We’ll have more to say about the pharmacy debacle soon.

If that USDA loan doesn’t go through, Telles admitted that the District would have to “drastically reduce costs somehow, and go out to a local bank. This would significantly drive up the interest rates, but the hospital has to get this work done.”

You’d think this daunting financial dilemma would be the focus of every board meeting. Not so. It’s rarely been referred to in the dozen or more board meetings that have since occurred.

While WH operates with known code violations, maintenance needs go unattended, and the USDA loan application sits in limbo, our board members have buried their heads in the sand.