Q & A: Mark Herbers

After a tough year, things seem to be looking up for El Paso Children’s Hospital, despite the departure of two CEOs and a soaring debt to University Medical Center of more than $90 million.

Months of difficult negotiations with county-operated UMC have resulted in a tentative agreement under which Children’s, a non-profit, would effectively become a subsidiary of UMC as soon as the end of this month. 

The best news since Children’s opening in 2012 came out of a surprise hospital accreditation visit last month by a Joint Commission team. That could be big trouble for a hospital in turmoil.

But after the commission’s surveyors spent three days going over Children’s from top to bottom, two of them met with hospital executives, medical personnel and board members for the standard exit interview – and announced that their coming report will be the “best we have ever issued.”

“In my 30 years being around hospitals and around Joint Commission surveys, I have never heard a surveyor make those kinds of comments,” said Children’s interim CEO Mark Herbers. 

“I don’t think anyone would have envisioned that you would get this kind of a survey result after three years, especially since the last survey had 27 findings, the one before that had 47,” he said. “Now, we have zero.”

Board chair Rosemary Castillo was there and confirmed the surveyors said “in front of everybody” that Children’s is the best they’ve seen.

“We will provide the best care available to any child in the city once they come through the doors, and that is what they saw,” Castillo said.

The commission’s final report will be released later this month or next.

Castillo stands to lose her seat on the Children’s board under the new agreement with UMC, along with the rest of the current members. They’ll be replaced by members appointed by El Paso County commissioners and UMC.

The Joint Commission visit couldn’t have come at a better time for a hospital that had many wondering if it could, or should survive.

Children’s will make it, Herbers said, if it has community support. But the hospital lacks one thing that successful children’s hospitals have. 

“This is probably the first children’s hospital I’ve been involved in that was not formed and built from major philanthropic donations,” Herbers said.

What Children’s had, however, that other children’s hospitals typically don’t was tax-supported bonds to finance its construction. 

The hospital’s first CEO, Larry Duncan, was forced out and replaced by the CFO, Ray Dziesinski, who made it until last August.

The board appointed Herbers, 61, as interim CEO in February. A turn-around specialist on contract, Herbers has also been involved in hospital closings, including El Paso’s Hotel Dieu in the late 1980s. What he is doing at Children’s, he has done at one hospital after another. The hospital would not say what he’s being paid.

“I have been asked to stay at every engagement I’ve been on, and I have not,” he said. “But every engagement has its own feel and flavor, and if I’m doing well, I stay until they no longer need me.

“Here, I suspect the new board will want to select its own CEO, but that may take a while.”

Herbers had a lot to say when he met with El Paso Inc. There were some surprises when he explained why Children’s got into financial trouble after it opened its doors, how that will be fixed and why the hospital’s prospects will improve if the negotiated deal with UMC holds.

Q: You became the interim CEO of Children’s Hospital in February. Is this a position you might seek on a full-time basis?

Well, that really isn’t up to me. I am employed by Alex Partners, an independent financial consultancy firm that does a lot of this restructuring work in a lot of different industries. Health care is the one I spend all my time on. Alex Partners can’t recruit people away from El Paso Children’s, and El Paso Children’s can’t recruit our people.

Q: Do Alex Partners specialize in hospitals?

I do, but the firm is a larger process place in a lot of different industries.

Q: What has Children’s needed in terms of adjusting its operation and what will it need to operate without debt going forward?

Children’s is only three years old. Valentine’s Day marked its third year of full operation. It’s not a mature organization yet in the sense of a very identifiable culture that is sustainable – processes, controls, governance, leadership, etc.

Children’s was an outgrowth of an initiative by University Medical Center and the citizens who voted it in. The dream became alive and here it is. Now, it’s basically time to reset, because many of the assumptions that went into the formation of this facility never came to fruition. The operating plan didn’t change with the changes of those key assumptions until now. 

So now we’re resetting, if you will. I like to refer to it as a do-over because we get a chance to do it over.   

Q: Are you confident that Children’s can make it, despite its financial circumstances?

Oh, absolutely. If it doesn’t, it will be because the community doesn’t support it. This is probably the first children’s hospital I’ve been involved in that was not formed and built from major philanthropic donations. Most children’s hospitals receive a huge infusion and endowment and capital contribution of millions of dollars to get started. 

This was started with tax revenues for the building. But the rest of it is now dependent on its own operations. When you look at the financial structures of children’s hospitals, if you strip away philanthropy and you strip away research, every one of them will have operating losses.

Q: Is the University Medical Center Foundation becoming part of a new fundraising effort to put philanthropic support in place for Children’s?

I believe so, and the reason I say that is children’s hospitals are very easy to raise money for in the sense that any child who has a health issue tugs at your heart strings. And, anyone who has the wherewithal to give back, to make generous contributions in a meaningful way, finds a children’s hospital an easy place to give money to. In many communities, the children’s hospital is the darling charity of the community.

Q: Did El Paso miss the boat by not establishing a foundation dedicated to Children’s? 

I can’t say whether we missed the boat or not. Walking into the hospital, you see the plates (donation plaques) on the floor. I don’t know how significant the fundraising was for that was. But there’s clearly some general support for the hospital. Mature children’s hospitals rely heavily upon philanthropic community support.

The UMC Foundation has been sending contributions and support to the hospital in the range of $3 million to $5 million per year, which is significant. Now relative to our age, is there greater potential? Probably. I don’t know the El Paso community well enough to know. With Texas Tech being here and UMC and the growth that is happening in the city, you have all of the foundational elements of a growing community. With that comes the need for special children’s services that are at a very acute level.

Q: How is Children’s occupancy rate doing? 

We have 120 beds in this current facility and on any given day, our in-patient census is between 70 and 80. So, that is bumping up against the 75 percent range. 

Q: Through all of Children’s financial difficulties, has there been any reduction of patient services and have any of the sub-specialist physicians who were recruited here left because of the problems?

I’m not aware of any. It may have happened, but I’m only aware of the most recent two months and the stories I’ve heard.

Q: How would you characterize what happened to Children’s financially? The hospital was losing money from the day it opened. El Pasoans found out 14 months later or so that the debt was huge and getting bigger and that no one seemed able to do anything about it. 

Well, the Monday morning quarterbacking is much easier to do now than it was at the time. Fundamentally, the financial plan that was built in 2007 and 2008 by outside consultants had a whole host of assumptions. Key among them were the reimbursement system at the time for Medicaid in the state of Texas, plus the special funding that was available in Texas for children’s hospitals. 

There was a cost-based reimbursement methodology in Texas in 2007. But all of that changed in 2010. It went away from cost-based to a value-based system and a prospective payment system. Also, the special programs for children’s hospitals changed. 

Q: What was the result of that?

In essence, $16 million to $25 million dollars per year in the initial plan never materialized because the basic assumption used, which was reasonable at the time, didn’t come to pass.

Q: El Pasoans were told that there was an unexpected change in the way the state handled reimbursements for stand-alone children’s hospitals in Texas. You say it happened in 2010, three years after the election to approve $120 million in hospital bonds. It’s never really been explained. Would you tell us a little more about what happened and what the financial impact was?

It’s not a simple thing to explain because of the regulatory environment and the complexities of some of the concepts and exactly what did change. But nothing in the financial plan and implementation of the hospital changed from the original plan.

I can’t tell you why the financial planning didn’t change. I don’t know why, and I’m not here to speak to that. All I know is that the building started, and in the rush to open the hospital and get the services going, the initial plans were followed without the underpinnings of the reimbursements to support it. 

Q: How much of Children’s patient load has private health insurance, Medicaid and self-paying? And how much is unreimbursed? 

The cost report we last filed indicated in excess of $20 million in uncompensated care. We have about 15- to 20-percent commercial payment patients who have some form of commercial insurance like Blue Cross, John Hancock, United Healthcare, etc. 

Medicaid is the largest side of our population, and it’s probably in the 60 percent range. With those paying out of pocket, we do fairly well on our self-paid collections as a percentage of the total business. But those that don’t qualify for Medicaid are probably in the 10- to 15-percent range. 

The true charity expense for those who have no resources whatsoever is fairly small – 5 to 6 percent maybe.

Q: UMC and Children’s are in the midst of a 45-day due diligence period during which UMC and its financial consultant are looking into Children’s books. Would you explain that?

It’s more than financial. The mediated terms called for closing of the transaction by April 30. The mediated terms were for a not-for-profit organization that no one owns. The company exists and is controlled by a community board. UMC is going to be the sole corporate member of the El Paso Children’s Hospital. 

El Paso Children’s continues to exist as a freestanding, 501(c)(3) tax-exempt organization, and it now has a sponsor with certain reserved powers. They’re very standard: the right to select and remove board members, the right to approve the annual operating budget, the right to make changes to the by-laws and so on.

Q: Under the new agreement, UMC is to write off $40 million of $90 million in Children’s debt. What has changed to keep the hospital’s debt from piling up again, as it has since the hospital opened?

The terms of the services agreements between UMC and Children’s Hospital will be rewritten and the intercompany charge will change.

Q: The $40 million in Children’s debt that UMC is to write off has been described as soft costs. What are they, and how will they be reduced in the future?

I’m precluded from going into any details. We are all held under strict confidentiality. But the cost structure will change. The services being offered will be at UMC’s cost to Children’s. Prior to that, they were at-cost defined in a different way. I can’t get into any of that, but it will come clear at some point.

Q: How much rent was Children’s paying UMC for the use of the five floors Children’s occupies in the nine-floor building? And what will the rent be going forward?

The rent was based upon the fair market value assessments of two independent appraisers done in 2010 or in 2011. I can’t answer the second question because it has not been determined yet.

Q: It was a fair-market arrangement, meaning cost plus?

How much a special-use hospital occupying this much space in this community would be expected to pay per square foot rental.

Q: So the rent Children’s was paying was at a commercial level. Will that significantly change?

I don’t know. The agreements haven’t been struck.

Q: UMC is to become ‘the sole corporate member’ of Children’s Hospital. What exactly does that mean?

Organizationally, they’ve become the parent to the subsidiary – just as El Paso First’s sole corporate member is UMC and just as the foundation, whose sole corporate member is UMC.

Q: Would you anticipate a time when Children’s is able to step out of that arrangement to become an independent, self-supporting hospital? 

There’s nothing to preclude that, but there’s no certainty that would happen. 

Q: When is the new contract in which UMC and Children’s agree to terms, including the turnover, going to be finalized?

Well, the mediation terms called for April 30. If you’ve bought and sold a house, you know that you signed a contract to buy a house, and then you have closing. In between, you do the inspection. 

The closing may or may not happen on the 30th. It can change by agreement of both parties. But right now, we are on target to make the April 30 timeline. 

Q: Where is Texas Tech in all of this? Dr. Jose Manuel de la Rosa, the former regional dean and now provost and vice president for academic affairs, said last year that there are significant expenses Children’s should be paying, particularly physician salaries, that Tech has been absorbing. Will they get paid? Will UMC? 

They have been a very friendly vendor to us, and we have not paid all of the bills timely. UMC is aware of the relationship as part of this due diligence process. I don’t see a problem in their getting paid. It may take a little bit longer, but they will get paid. UMC will get paid. 

Q: Where will that money come from?

The volumes at the hospital are growing. There are certain other reimbursements available to a children’s hospital that’s been in existence three full years. Come October, we will hit that first three-year mark. Even though we’ve been in business since February 2012, we won’t have three full fiscal operating years until Sept. 30. 

Then, there’s special funding available from the state for freestanding children’s hospitals in business for three or more years.

Q: What will that mean for Children’s?

We won’t know exactly what it is, but the estimates are in the range of $6 million to $8 million per year.

Email El Paso Inc. reporter David Crowder at dcrowder@elpasoinc.com or call (915) 534-4422, ext. 122 and (915) 630-6622.