Postmortem
Lessons from the Brooklyn CareWorks Autopsy

by Fred Scaglione

DEAD:  At age 100, Brooklyn CareWorks, previously known as Brooklyn Psychiatric Centers, a provider of community mental health services including clinics and school-based programs.   Preliminary autopsy results indicate multiple causes of death, including:

•     Anemia of the Government Funding Sources;

•     Reimbursement Collection Disfunction;

•     Undiagnosed Cancerous Liabilities;

•     Paralysis of the Municipal Contracting System;

•     Underdevelopment of the Philanthropic Fundraising Muscles; 

•     Swelling of the Union Collective Bargaining Agreements; and

•     Optimistically Delusional Dementia of the Corporate Governance and Executive Leadership Functions.

Each of these maladies is potentially life-threatening; when combined they are almost invariably fatal.

Although Brooklyn CareWorks is still technically alive as a legal entity, its soul left the corporate body on in July when the U.S. Bankruptcy Court approved a motion to transfer assets associated with its major programmatic activities – five mental health clinics  -- to new providers. 

***

Tragedy may be too strong a word.  It is safe to say, however, that the demise of Brooklyn CareWorks, after a full century of providing services to poor and near-poor residents of Kings County, is sad. 

It also is -- or certainly should be – a whole series of object lessons for other small and mid-sized nonprofits which provide human services under contracts with City and State agencies.  Government policy makers designing new programs and reimbursement mechanisms -- and who are interested in the actual provision of high quality services -- should also take notice.

First a quick note. This is not a story about an organization that provided shoddy services. 

“They ran some really first class programs and they served some very needy populations,” says Philip Saperia, Executive Director of the Coalition of Behavioral Health Agencies. “They were in some of the hardest to serve neighborhoods of the city, like East New York and Bushwick.  So the fact that they couldn’t make it financially was problematic to consumers and to the system at large.

Nevertheless, Brooklyn CareWorks was sick – very sick – and had been for quite some time.  In 1999, the year Pamela Straker arrived as CEO – the agency had a negative net asset balance – a measure of whether it had more assets than liabilities – of $101,195.   Over the next six years, it would post total losses of $3.9 million -- $203,000 in 2000, $927,000 in 2002; $1.3 million in 2003, $644,000 in 2004 and $730,000 in 2005.   It was a steady stream of red ink which amounted to a lot of money, particularly for an agency whose average revenues during the period were just $7.2 million.   By the end of its fiscal year 2005, Brooklyn CareWorks would have a net asset value of minus $4 million. 

How did it happen?  Straker describes a series of negative surprises which struck almost as soon as she arrived.  Some were accounting related and relatively minor -- a correction in the agency’s bookkeeping to reflect accrued vacation leave for staff.  Others were accounting and/or program related and not minor at all.  

“The organization was subject to some significant Medicaid audits and money was taken back,” she explains.

In fact, retroactive audits of Medicaid billings with often significant recoupments are a regular part of almost all healthcare related programs, including mental health, medical services, substance abuse and others. 

“The very best agencies, the ones with the best tracking systems and the best billing systems and the best supervision and oversight still count on a roughly 10-15% take back,” says Saperia.  “You end up serving people who are ineligible and you didn’t know it or supervisors are out sick for two or three days and they miss a form.  There is a very high denial rate.  You can appeal but it is an enormously tedious and difficult process.”

Further complicating the picture was the fact that Article 31 mental health clinics are sometimes reimbursed under a two-part rate system which included both a base Medicaid rate for units of service and an additional Comprehensive Outpatient Services (COPS) rate designed to provide some extra financial support.  However, agencies are only eligible to receive the COPS rate up to a certain number of units of service, i.e. clinic visits.  Government doesn’t stop paying you – but they will come and ask to get the excess COPS payments back later.

“You think you have finished a contract and you are good and two years later they review the contract and tell you that you owe $500,000,” says Joan Bartolomeo, Chair of Brooklyn CareWorks Board of Directors.

“It is complicated and difficult,” says Saperia. “You have to have some fairly sophisticated monitoring or computer software.  Agencies frequently find themselves in trouble.”

In fact, Brooklyn CareWorks had been in this kind of trouble all along.  All the way back in FY1999, the agency owed almost $1.5 million to its government funders – a debt which has continued to grow slightly over time as the result of new audit recoupments despite substantial repayments.

These forms of retroactive audits and recoupments are typical of many government contracts.  In years gone by, for example, foster care agencies were routinely subjected to final contract audits as much as seven years after the fact – the contractually allowable limit before the City lost its rights to audit.  These audits would then determine the final contractual rate to which the agency was entitled and often identify hundreds of thousands of dollars due to the City.

Bad Business

More fundamentally, however, Brooklyn CareWorks’ problems stemmed from the fact that it was almost entirely concentrated in those specific types of mental health services – clinics and school-based programs – which are the hardest to run financially. “These are the ones that routinely bring people into deficits,” says Saperia.

For years, advocates and providers have been complaining about the inadequacy of funding models for community mental health clinics.  In 2005, the situation appeared to near its breaking point when Catholic Charities of the Archdiocese of New York made a decision to get out of the community mental health business and transfer its four clinics to other providers.  Soon after, the Coalition of Behavioral Health Agencies published a report outlining the “Crisis in Community Clinic Funding”.  Despite a few subsequent minor adjustments to clinic reimbursement rates, the situation remained largely unchanged over the past several years.  Generally speaking, clinics are still money-losing programs for most providers.  

Lawrence Mitchell, Brooklyn CareWorks’long time chief financial officer, simply describes the agency’s deficits on the five clinic programs as “substantial”.

“The clinic model wasn’t working,” says Straker.

Complicating the basic inadequacy of Medicaid reimbursement was the growing role of managed care programs – private health insurers and government-funded programs such as Medicaid managed care, Family Health Plus and Child Health Plus.   “We weren’t able to collect enough on managed care,” says Mitchell who cites problems with obtaining or documenting authorizations to provide specific services, getting accurate billing information from clients and the limited time window which managed care plans offer for submitting bills. 

If clinics are bad, school-based mental health programs are worse – at least financially speaking.

Many of Brooklyn CareWorks’ nine school-based programs operated like mini-satellites where clinic services were provided in a school setting.  The model sounds good on paper, but…  “The program becomes the repository for all of the school’s problems,” says Saperia.  “How do you say not to a principal who asks for services that aren’t billable?  How do you say no to an immigrant child who isn’t eligible for Medicaid?  How do you bill for kids who don’t have their Medicaid cards?   There are enormous barriers to getting paid for service and these programs almost always lose money?”

“There was a lot of free care,” says Mitchell.

“I know the deficit on those programs alone could be $300,000 a year,” says Straker.

“Everyone loves these programs,  but the bottom line is that they are financially untenable,” says Bartolomeo.  It remains unclear whether the City has found new providers to take on the programs.

Where’s the Beef?

As noted, Brooklyn CareWorks wasn’t the only provider to face substantial and recurring losses on clinics and school-based services.  It was, however, one of very few which did not operate these programs within a larger corporate structure and/or a broader, more diversified continuum of services.

“Sometimes larger agencies can find economies of scale which are helpful,” says Saperia.  

Multiple programs can share the costs of sophisticated billing systems and help pay for the compliance and quality assurance staff needed to minimize denied claims and recoupments, explains Peter Campanelli, President and CEO of the Institute for Community Living (ICL), a major provider of mental health and other services which has taken over two of Brooklyn CareWorks’ programs.

Just as importantly, a broader mix of services can include some programs capable of generating surpluses to offset losses in clinics and school-based services.  Housing programs, for example, can generate developer fees and allow providers to build up equity in their buildings which provide a firmer financial foundation going forward.   

“We did try to diversify,” says Mitchell.  “We submitted RFPs for other programs but the system is very competitive.  It just didn’t happen for us.  We didn’t get the new contracts we thought we would get.”

Where’s the Giving?

Just as important to many providers of community mental health services is a firm base of private philanthropic support to supplement the inadequate funding levels afforded by government and managed care payers.   In 2005, for example, the Jewish Board of Family and Children’s Services indicated that it was using as much as $3 million annually, or more than 40% of its total private contributions, to supplement its $20 million clinic services budget.  Catholic Charities indicated that it was spending $1.5 million to support its four clinics before making the decision to transfer them.

Brooklyn CareWorks, however, was never able to generate this level of private support.  During the six year period from 2000 through 2005, its annual fundraising revenues averaged $175,000, or just 2% of revenues – even as the agency’s average annual deficits after these contributions remained at $648,000 or another 9% shortfall.

“It was very difficult,” says Straker. “People just didn’t want to give to something that said ‘psychiatric’.”   In response, Brooklyn Psychiatric Centers rebranded itself as Brooklyn CareWorks in .

Living on the Edge

How did Brooklyn CareWorks survive during the six year-period from 2000 through 2005 when it ran a cumulative net deficit of $3.9 million?   By piling up debt – in the form of lines of credit and money owed to City agencies – and holding off on payments to vendors. 

While the agency’s liability to government funders remained relatively constant at around $1.5 million or so, Brooklyn CareWorks’ outstanding balances on lines of credit with local banks began to mushroom.  In 2000, it showed a $275,000 balance; by 2004, this would rise to over $1 million.

The agency’s liabilities to its vendors grew even faster.  In 1999, Brooklyn CareWorks had accounts payable of just $281,000.  Over the next six years it would rise steadily, peaking at $3.9 million at the end of 2005.  The agency, it seemed, owed money to everybody, including Local 1199 SEIU United Healthcare Workers East which supplied health insurance coverage to its unionized employees.  Ultimately, it would be these late payments to the union which would trigger Brooklyn CareWorks’ bankruptcy filing in April of 2008.

Turnaround Effort

In the meantime, however, Brooklyn CareWorks had begun a major effort to turn things around– an effort which led to the agency’s first annual surplus – a whopping $642,000 -- in 2006.

The improved results were partly due to the closing of some programs.  One was a school-based program, the other a geriatric day program which the agency was also operating at a deficit. 

“We did a lot of back billing and kept a tight rein on expenses,” says Mitchell.

Straker believed that earlier investments in computerizing the agency were beginning to pay off.  “The billing was much easier to get done and we were getting more aggressive about people keeping their appointments,” she explains.

Productivity requirements – under which counselors were required to see 27 patients a week – were also negotiated into the union contract.

And, the agency began to press harder to bring in new sources of revenue. 

“We added fundraisers and grantwriters who knew how to raise money and who had already brought in $100,000 for one of our programs,” says Straker.  “By 2007, we brought in people who were ready to bring some big money to the table.  Individuals were stepping to the plate.”

New Contract Speed Bump

One of these apparent success stories – the winning of a $600,000-plus award in FY 2008 as part of a City Council Geriatric Mental Health Initiative  -- would ultimately prove to be a trap.  The extended delays in the Council’s final designation of the award and the Department of Health and Mental Hygiene’s processing of the contract – all while the agency had begun providing services and incurring expenditures – would become the final straw on the back of Brooklyn CareWorks’ cashflow camel.

“The monies never came,” says Straker.

Once again, Brooklyn CareWorks was only one of many agencies affected by this problem, either.   On January 29th of 2008, seven months after the start of the fiscal year, the Coalition of Behavioral Health Agencies testified before the City Council regarding the contracting delays.  The situation only grew worse as all Council budget allocations became enmeshed in last year’s “slush fund” scandals.

“It took forever to get those contracts through,” says Saperia.  “There are some agencies that are only vouchering now for money they spent last fiscal year.”

The Beginning of the End

Larger agencies with better cash reserves might be able to withstand a full-year delay in payment on a $600,000 contract.  Brooklyn CareWorks couldn’t.  This, together with the fundamental unprofitability of its core programs and a mountain of debt, combined to bring the agency to its knees.

“In 2006, we spent a huge amount of money on accounting advisory fees and we thought  we had turned it around,” says Bartolomeo.  “Then, in 2007, it just started slipping again.”

In April, after the union sought to enforce a judgment diverting the agency’s Medicaid payments to cover monies due to the welfare fund, Brooklyn CareWorks filed for Chapter 11 bankruptcy protection. 

It didn’t take long to realize that the agency was finished. “Within two weeks, the assessment was made,” says Roy Ryniker of  Reorganizations Alternative Group, Ltd., which had been brought in to work out a restructuring plan.  “The liabilities were so large that the annual debt service, even if restructured, would be an insurmountable hurdle.  The only viable alternative was to transfer the patients to other agencies.”

As of its filing, Brooklyn CareWorks estimated that it had total liabilities “in excess of $2.5 million”, including $414,000 in secured loans, federal tax liens of $900,000, and over $1.5 million to unsecured creditors.  Since then, that estimate has increased dramatically.  New York State reportedly claims that the agency’s COPS liability alone is $2.5 million.  The IRS has increased its claims to $1.8 million and other claims are mounting.   The list of unsecured creditors includes many names familiar to the local nonprofit community, including Seedco Financial Services which extended a $500,000 loan to Brooklyn CareWorks last year as part of the turnaround effort.  (By way of disclosure, NYNP is also owed $1,492 for advertising fees.)

Against these debts, Brooklyn CareWorks calculated $3.3 million in total assets, the bulk of which -- $3 million – was in accounts receivable.

The accuracy -- or possible lack of it – in the agency’s original financial estimates has raised questions about the agency’s general financial management and accounting systems.  Motions filed with the Bankrupcty Court have maintained that Mitchell “(now terminated CFO) had understated by a significant amount, the debtor’s liability to various taxing authorities, the Union, as well as vendors.”  Michell denies the claim. Neither Straker nor Bartolomeo would comment.

The End and Afterwards

The transfer of its clinic services to new providers (see list box top left) marked the end of Brooklyn CareWorks as an operating entity. 

The final conclusion of the story has yet to be written.  There are already rumblings about potential lawsuits against the board and its members.   If, in fact, the agency failed to pay the “trust fund” portion of federal withholding taxes – i.e. that portion deducted from employees salaries-- individual board members can be held liable.

Even more important in the long run will be the lessons learned by other nonprofits and government policy makers.  

In some cases, efforts are underway to fix some of the problems highlighted by Brooklyn CareWorks’ experience.  The New York State Office of Mental Health has launched a major effort to develop a new reimbursement model for community mental health clinics and ended the practice of recouping excess COPS payments as of this fiscal year.  Whether, this effort will result in a system which truly supports clinic programs and services remains to be seen.  

Generally, however, many of the root causes of Brooklyn CareWorks’ fate remain a challenge to the nonprofit sector as a whole.  Contract processing and payment delays are a regular part of doing business.  As a rule, government continues to knowingly underfund the services it purchases.  And, private philanthropic support for nuts and bolts human services remains illusive.

Finally, nonprofit executives and volunteer board members still have a natural tendency to press their organizations forward in the face of what appear to be and actually are overwhelming odds – fiscal or otherwise.