War of the Wards

Phoenix Children's Hospital, for years hidden inside Good Samaritan hospital, seems to have been misplaced by the federal government

What calls itself a hospital, has acted like a hospital since its formation 16 years ago, is licensed as a general hospital in the state of Arizona, but isn't really a hospital?

According to federal authorities, the answer is: Phoenix Children's Hospital.

In a development that surprised those who have supported the state's only children's hospital since its early days, Phoenix Children's has been told by the federal Health Care Financing Administration (HCFA) that the feds never approved the facility as a hospital and don't consider it one now.

Baby Koreen Sullivan in ICU of the Phoenix Children's Hospital is attended to by (left to right): her mother, Jennifer Sullivan, RN Tracy Atwood and RN B.J. Spinks.
Paolo Vescia
Baby Koreen Sullivan in ICU of the Phoenix Children's Hospital is attended to by (left to right): her mother, Jennifer Sullivan, RN Tracy Atwood and RN B.J. Spinks.
Phoenix Children's Hospital President Burl Stamp.
courtesy of Phoenix Children's Hospital
Phoenix Children's Hospital President Burl Stamp.

The government has been asking Phoenix Children's to prove that it is a hospital, as defined under federal law. If it couldn't, HCFA threatened to yank federal funding on October 31, which could have added up to tens of millions of dollars -- about half the hospital's revenue.

But now it looks like Phoenix Children's has won a reprieve. Hospital officials met with HCFA authorities in San Francisco for the first time last week, and reached a compromise. The facility will be allowed to continue to operate as it always has, providing it meets key deadlines toward opening a long-talked-about freestanding hospital, about two years away.

"We were very pleased and very appreciative of HCFA working with us as we develop the new hospital," says Phoenix Children's president and chief executive officer Burl Stamp.

An HCFA official refused to confirm Stamp's version of the agreement reached last week, saying authorities were making no comments to the press.

Janice Caldwell, an administrator at the regional HCFA office in San Francisco, says she first learned about the hospital when a complaint against its license was forwarded to her office last year. A check of the agency's records yielded no evidence that Phoenix Children's even existed, she says.

And so, at a time when Phoenix Children's wanted to be concentrating on moving out of its "hospital within a hospital" setting at Good Samaritan Regional Medical Center and moving toward its longtime goal of building a freestanding hospital, it was quietly fighting not only HCFA, but a vicious local rumor mill.

Some of what HCFA was demanding as proof that Phoenix Children's is a hospital -- a separate entrance, a dedicated physical location, independent billing and other departments -- can't be accomplished in the short term. Phoenix Children's officials hoped the feds would bear with them for two years until an independent hospital opens. The hospital has been on and off the drawing board for decades, but now officials say it could open by 2001.

"The freestanding hospital will meet any of the questions that HCFA has," Stamp says.

But before last Thursday's meeting, Caldwell wasn't willing to let Phoenix Children's maintain the status quo while the new hospital is in development.

"That's not okay," she said then.

Stamp says Phoenix Children's officials were able to convince the feds that changing things now to meet their requirements would be costly, diverting money away from the new hospital plans.

When Phoenix Children's Hospital first opened in 1983, it was heralded as a creative way to address the problem of unused adult hospital beds in existing Phoenix hospitals while answering the need for a children's hospital. Good Sam could shift some of its unused beds to the new children's facility.

A citizens' committee selected Good Sam as the home for the fledgling hospital, much to the chagrin of its rival, St. Joseph's Hospital and Medical Center.

Stamp, who has only been at Phoenix Children's since August 1998, says state and federal regulations were followed at the time. "We were licensed as a hospital within a hospital by the state," he says. "And this arrangement was blessed by HCFA at that time. We were supported by the community and DHS [Arizona's Department of Health Services] and by the state Legislature as a way to develop a children's hospital for Arizona."

Dr. Daniel Cloud, Phoenix Children's founding president, says he was startled to hear rumblings about current troubles with the hospital's status.

"We met to the last letter what was necessary according to state law and what was requested of us. . . . Phoenix Children's Hospital has been properly accredited and licensed from day one, from the minute it started," he says.

Stamp says the hospital originally asked HCFA for its own Medicare certification number, which was required to receive federal Medicare payments and has since become tied to state Medicaid payments issued through Arizona Health Care Cost Containment System (AHCCCS). But because Phoenix Children's did not meet federal requirements to qualify as its own hospital for Medicare purposes, it decided to share a Medicare number with Good Sam, meaning its costs would be reported jointly and Good Sam would then pay Phoenix Children's its share of the federal money. Phoenix Children's officials say there was nothing sinister or secretive about this setup.

Both Cloud and Stamp claim HCFA was aware of and approved its unique arrangement with Good Sam, a fact Caldwell disputes.

"If they've got proof that it was approved, I'd like to see it," says Caldwell, associate regional administrator for HCFA's Division of State Operations. "We do not have a record that shows that."

Stamp sent New Times a 1984 letter indicating HCFA was aware of the situation, but says he did not share it with Caldwell last week.


From its start as a 71-bed "hospital in a hospital," Phoenix Children's has grown to occupy 219 beds on the Good Samaritan campus at 11th Street and McDowell. As the only Arizona hospital caring exclusively for kids, Phoenix Children's staff admitted nearly 9,500 patients last year and performed more than 2,000 operations. In its outpatient clinics in Mesa, Phoenix, Scottsdale and Glendale, Phoenix Children's treated an additional 35,000 children. Stamp says the hospital's occupancy rate of about 75 percent is one of the highest in the state and at the top of children's hospitals in the country.

Phoenix Children's blends physically with Good Sam, occupying the fourth and eighth floors as well as some surgical space on the third floor. Signs in front of the hospital and the emergency room feature "Phoenix Children's Hospital" directly beneath "Good Samaritan." Even a page on the hospital's Web site admits it's tricky to figure out where it is.

"Finding Phoenix Children's Hospital isn't easy," the site says, then describes how since 1983, it has leased floors at Good Sam. Phoenix Children's contracts with Good Sam for key hospital services, including billing, laboratory, radiology, surgery and pharmacy services. Financial reports from the last three years show Phoenix Children's has paid an average of $40 million a year to Good Sam's parent company (from annual revenues averaging $127 million) for what they call "ancillary services."

Phoenix Children's arrangement with Good Sam, although it was lauded at the time, was supposed to be temporary. The hospital's goal from the beginning has been to become independent. Over the years, while hopes were heightened and then dashed, alliances forged and broken, Phoenix Children's continued to hold onto that goal. It also continued to raise money toward that end, through the annual Children's Miracle Network telethon as well as other fund-raising events. Stamp says the hospital now has more than $100 million on hand dedicated to opening its own facility.

The goal of finally getting a freestanding children's hospital is "far closer than ever," Stamp says, adding that final details are being worked out. Backing a new facility are nearly all of the 225 doctors in the Greater Phoenix Pediatric Consortium, as well as Maricopa Medical Center and Samaritan. St. Joseph's is not on board, but communication lines are still open, officials say. Insiders say Phoenix Children's is leaning toward buying and renovating the Columbia HCA hospital at 20th Street and Thomas.

Supporters of an independent children's hospital in Phoenix and others are puzzled by the sudden scrutiny of Phoenix Children's and its organizational structure. Why, they wonder, are issues that have not changed for 16 years suddenly being questioned by HCFA?

Political intrigue and speculation aside, the official explanation goes like this: When a Phoenix Children's surgeon sliced open the abdomen of an 8-year-old boy due for removal of a neck tumor last summer, someone complained to the state. It turned out to be a case of lax identification procedures -- the surgeon and others thought the boy was a 5-year-old due to have a cyst removed from his gallbladder. The Division of Assurance and Licensure Services of the Department of Health Services checked out the complaint and found a number of procedural deficiencies. Phoenix Children's responded with a plan of correction, implemented safeguards to help prevent such a mix-up from occurring again and was given a clean bill of health in November 1998.

But during that inquiry, state investigators raised questions about Phoenix Children's license as a general hospital, including "specifically, the absence of various services such a [sic] nursing, surgical, dietetic, emergency, medical records, laboratory, pharmacy, and radiology services which are not directly provided by PCH." Reports from the summer 1998 investigation got forwarded to HCFA and first alerted authorities to a possible problem with Phoenix Children's Hospital. A DHS licensing program manager, who no longer works for DHS, told a reporter last year the questions were surfacing because such a serious investigation had not been undertaken before.

"That's bull," says Dr. Cloud. The retired pediatric surgeon and former head of the American Medical Association says the initial on-site investigations of Phoenix Children's were incredibly thorough. And he says PCH was just as careful about meeting all the required criteria.

"DHS at first opposed our license for political reasons," he says. "Other forces didn't want Phoenix Children's Hospital to develop. So we overcame that by dotting every 'i' and crossing every 't,' which made it impossible for them not to grant us the license."

Dan Green, vice president of communications at Samaritan, says officials there have been kept abreast of HCFA's concerns about Phoenix Children's relationship with Good Sam. And the CEO of Samaritan traveled to San Francisco for last week's meeting.

He said the issue of sharing the Medicare number with Phoenix Children's Hospital was sanctioned in 1983 and 1984 by authorities. Green says the sudden suspicion about the whole arrangement is "a little bit of a mystery."

Others interviewed by New Times expressed confusion about what was going on with HCFA and Phoenix Children's. Many had heard something was up, but didn't know what it entailed. Some were puzzled by the secrecy about the controversy; although Phoenix Children's and HCFA have been wrestling with the issue since January, there have been no public statements or publicity about the discussions. Even Dr. Richard Reznick, head of the pediatric consortium working toward seeing a children's hospital become a reality, says he doesn't know details about the discussions between the feds and Phoenix Children's.

Some allege a concerted effort by hospital officials to keep these problems quiet. Stamp denies this, but admits Phoenix Children's hasn't tried to publicize the mess. Others suggest that politics and preferential treatment have led to state officials downplaying the seriousness of the situation. One observer says keeping a lid on the whole issue "is the worst way to deal with it," because it leads people to believe Phoenix Children's has something to hide.

An August 31 letter from HCFA to Stamp about the meeting Thursday suggests Phoenix Children's didn't want much to leak out about the issue.

"It is necessary to notify the Arizona State Agency and its Title XIX program of this meeting and so we are sending them a copy of this letter. We will not notify anyone else, as you requested," HCFA's Wayne Moon wrote.

Stamp is reluctant to reveal much about the hospital's specific plans, saying an announcement will be made soon.

And while he characterized the communications between Phoenix Children's and HCFA as an ongoing attempt to smooth things over, an examination of HCFA's letters reveals a growing sense of irritation on the part of the government.

From an August 7, 1998, letter: "It has come to our attention that Phoenix Children's Hospital (PCH) is not a Medicare certified hospital. Rather than meeting the requirements for a childrens hospital . . . and meeting the requirements for a hospital-in-a-hospital, PCH is operating as part of Good Samaritan Hospital, using its Medicare provider number . . . and has been treated as a department of Good Samaritan Hospital for Medicare reimbursement over the years.

"If the Health Care Financing Administration (HCFA) approved this arrangement, it was in error and now it must be decided whether or not PCH wishes to meet the requirements for a childrens hospital as the current arrangement cannot continue."

From a March 11 letter: "Thank you for your letter of January 29, 1999 in which you explain your desire to be Medicare certified as a children's hospital in a hospital. There are other items, in addition to the qualifications mentioned in your letter, that must be met before your facility can be certified as you have requested . . .

"In order to be a separate hospital, Phoenix Children's Hospital must have its own discreet space (i.e. not scattered throughout GSRMC [Good Samaritan Regional Medical Center]), with its own entrance and signage so the public knows it is entering PCH rather than GSRMC when presenting at the facility. Beds may not be commingled with those of GSRMC and the services you provide must be in your own square footage . . ."

The letter questions Phoenix Children's contention that it meets a federal requirement that at least 75 percent of its patients are referred by hospitals other than the "host hospital" -- Good Sam.

"Would you clarify for us how neonates [newborns] delivered on campus are direct admits rather than transfers from GSRMC? Or does PCH have its own labor and delivery department? If the babies are born in GSRMC and then admitted to PCH's NICU [Neonatal Intensive Care Unit], the admission would be considered a transfer from the host hospital."

Also questioned is how Phoenix Children's can segregate its costs and services from Good Sam's. "We believe it is critical for PCH to address how it, as a separately certified hospital, intends to account for its costs, which currently are included in GSRMC's cost reports."

An August 4 letter:

"In our March 11, 1999 response to your letter of January 29, 1999, we explained what was necessary for Phoenix Children's Hospital to qualify as a free-standing hospital. You never responded to that letter . . . This will notify you that by October 15, 1999, the Health Care Financing Administration must receive a complete outline of how Phoenix Children's Hospital intends to qualify for Medicare certification as a hospital. Your plan must include a reasonable time frame for accomplishing the project, as well as acceptable benchmarks for each step involved in order for us to approve it. If we cannot approve it, we will instruct Blue Cross of Arizona to cease payment for any services provided by your organization effective October 31, 1999. This action will be coordinated with AHCCCS, the Arizona Medicaid agency."

And from an August 31 note:

"The letter you sent on August 17, 1999 was a good beginning but is not detailed enough to be the acceptable plan we requested. As already mentioned, HCFA cannot permit the current situation to continue until 2001."


So what could HCFA have done? Some suggested it would levy a huge fine or shut the hospital down, but Caldwell, the HCFA administrator, says she didn't plan to do either. "My main interest is getting it straightened out," she says.

Another option would be to make Phoenix Children's pay back all the money it has improperly received from the government. One estimate of that amount -- dollars received in excess of what it would have had it not been reimbursed at higher children's hospital amounts -- places that figure at around $20 million a year.

But will Phoenix Children's officials be asked to cough up those dollars?

"Technically, they could, but who would be stupid enough to try and do that?" Caldwell asks. She explains that the money went to cover costs of health care services that have already been performed. "It's not like they put the money in a Swiss bank account."

Withholding Medicare funding (the federal government's health care program for those 65 and over) would affect only a handful of kidney dialysis patients at Phoenix Children's who are covered under a special section of that program, according to Stamp.

But Caldwell says if the Medicare funding goes, so will the AHCCCS funding. AHCCCS, the state's alternative to the federal Medicaid program for the poor, receives the largest chunk of its money from the federal government. And AHCCCS money makes up the largest part of the revenues received by Phoenix Children's. Stamp says about half its patients are covered by AHCCCS, making the hospital the largest provider of services to low-income children in the state.

While the worst-case scenario included HCFA withdrawing all federal funds, cutting deeply into Phoenix Children's revenue sources, HCFA envisioned a different resolution to the debate.

Before the compromise plan was adopted last week, the feds wanted Phoenix Children's to admit it is not a hospital but merely a department within Good Sam. With Samaritan Health System's recent merger with the Lutheran Health System network, Caldwell says, it might be an appropriate time to realign certain problem areas, including billing services and other shared departments.

But Green, the Samaritan vice president, says the merger has no bearing on his hospital's relationship with Phoenix Children's. And he says officials there see no reason to tamper with a system that has worked well, particularly when an independent hospital is on the horizon.

Phoenix Children's wasn't likely to happily downgrade to a department. Not only could that arrangement result in a cut in revenues, such a designation wouldn't play well in the fund-raising arena. Why should charitable types dole out for a mere pediatric department, when there are similar departments in other hospitals as well as nonpediatric departments that might also like some extra money?

Caldwell says while HCFA is working with Phoenix Children's, patients and their families shouldn't be alarmed. "As far as the public is concerned, it's business as usual."

While the mess gets untangled, some are concerned that the controversy might hurt the push for a children's hospital. Supporters are confident everything will be worked out painlessly.

"I've got to think it's a bureaucratic snafu of some sort," says Cloud. "I can't imagine that it would be anything to deliver a fatal blow to anyone."

Stamp says threats of withholding federal funding appear to have been abated. If Phoenix Children's doesn't meet the agreed-upon deadlines for steps toward construction of the new hospital, the money won't be cut off automatically, he says. Another meeting would be held with HCFA, he says. Stamp says Phoenix Children's will continue to work with HCFA to make sure solutions are found that don't detract from its mission of caring for kids and meeting increasing demands for service.

"That's really the bottom line," he says.

Contact Laura Laughlin at her online address: llaughlin@newtimes.com

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