peacehealth financial statements · peace island medical center ... peacehealth sacred heart...
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PEACEHEALTH
Consolidated Financial Statements
June 30, 2013 and 2012
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets
PEACEHEALTH
Consolidated Financial Statements
June 30,2013 and 2012
Table of Contents
Consolidated Statements of Operations
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
I
2-3
4
5
6
7-36
KPMG LLP Suite 3800 1300 South West Fifth Avenue Portland, OR 97201
_____________________ Jndependent-Audito.-s'-Repo.-tc---------------
The Board of Directors PeaceHealth:
We have audited the accompanying consolidated financial statements ofPeaceHealth (a Washington notfor-profit corporation), which comprise the consolidated balance sheets as of June 30, 2013 and 2012, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In maldng those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of PeaceHealth as of June 30, 2013 and 2012, and the results of its operations, changes in net assets, and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
Portland, Oregon October I, 2013
KPMG llP Is a Delaware limited liabilitY !)artnership, the u.s. member firm or KPMG lnternallor~al Coopera\llte ("KPMG International"), a Swiss entity.
Current assets: Cash and cash equivalents Short-term investments
Assets
PEACEHEALTII
Consolidated Ba:lance Sheets
June 30, 2013 and 2012
(In thousands)
Accounts receivable, net of allowance for doubtful accounts of $95,196 and $82,009
Other receivables
2013
$ 92,689 276,979
265,512 38,707 >6.;i81 18,725
-~-----~Inventory ofsuppliesr---~~--------------~-~
Prepaid expenses and other Assets whose use is limited that are required for current liabilities 29,770_
758,963
2012
147,179 300,926
253,312 28,127 33,820 20,912 23,258
807,534 Total current assets
~-Ass~ets~whOSj)_\lSJ; is limited:_ Cash and investments
--- --- -908,2123--- -- -642,736 ___ - ---
Investments in joint ventures and other
Total assets whose use is limited
Less current portion ·
Net assets whose use is limited
Property, plant, and equipment: Land and improvements Buildings, fixed equipment, and other Moveable equipment Construction in progress
Total property, plant, and equipment
Less accumulated depreciation
Net property, plant, and equipment
Interest in net assets of related foundations Other assets
Total assets
See accompanying notes to consolidated financial staten1ents.
2
$
34,952 40,838
943,375 683,574
(29,770) (23,258)
913,605 660,316
120,838 118,297 1,612,140 1,565,987
640,378 570,371 27,921 61,236
2,401,277 2,315,891
~1,064,262) (928,722)
1,337,015 1,387,169
44,439 32,663 30,671 38,092
3,084,693 2,925,774
(Continued)
PEACEHEALTH
Consolidated Balance Sheets
June 30, 2013 and 2012 -------------------(m-tnousanas) _________________ -----
Liabilities and Net Assets
Current liabilities: Accounts payable Accrued payroll, payroll taxes, and employee benefits Accrued interest payable Other current liabilities Medical claims payable Reimbursement settlements payable Current portion oflong-tenn debt
Total current liabilities
Other long-term liabilities
Long-term debt due after one year
Net assets: Unrestricted Temporarily restricted Permanently restricted
Total net assets
Total liabilities and net assets
See accompanying notes to consolidated financial statements.
3
2013 2012
$ 79,418 70,644 150,694 136,200
5,138 4,545 26,504 40,745
5,986 6,533 9,768 18,596
20,683 18,033
298,191 295,296
263,816 324,921
905,858 830,381
1,552,980 1,428,152 37,798 35,644 26,050 11,380
1,616,828 1,475,176
3,084,693 $=~~= 2,925,774
Revenues:
PEACEHEALTH
Consolidated Statements of Operations
Years ended June 30, 2013 and 2012
(In thousands)
Net patient service revenue before provision for bad debts Provision for bad debts
$
Net patient service revenue
2013
2,145,535 (161,192)
1,984,343
~- - -~ ---------Eremium=rallenue 'IL.,J)C'S Other operating revenue oil t\ez 7""T,V...JV
Total revenues 2,170,757
Expenses: Salaries and wages 989,540
2012
2,103,580 (133,814)
1,969,766 -- -- -
-
141,598 11:r52~
2,185,516
975,830 -------payrolttax<Js-arrd-benefits --- -
Professional fees ·- -251-,40'7-- ----- 221,755
Medical claims expense Supplies and other expenses Depreciation and amortization of other assets Interest and amortization of deferred financing costs
Total expenses
Income from operations
Other income (loss): Investment income, net (Loss) gain on investments recorded on the equity method Change in valuation of interest rate swaps Other
Excess (deficiency) of revenues over expenses
Net assets released from restrictions for property, plant and equipment Change in interest in net assets of related foundations Change in pension liability Other changes in unrestricted net assets
Increase (decrease) in unrestricted net assets
See accompanying notes to consolidated financial statements.
4
$
36,065 26,274 59,126 97,121
650,211 657,502 150,299 146,517
24,261 25,997
2,160,909 2,150,996
9,848 34,520
61,538 15,777 (1,138) 149 35,317 (95,377) (9,124) 1,628
96,441 (43,303)
6,571 23,016 547 653
27,964 (57,499) (6,695) 656
124,82il_ J76,477)
PEACEHEALTH
Consolidated Statements of Changes in Net Assets
Years ended June 30,2013 and 2012
(In thousands) ------------------------------:
Unrestricted
Net assets at June 30, 20 II $ 1,504,629
Deficiency of revenues over expenses (43,303) Other restricted contributions Net assets released from restrictions 23,016 Change in interest in net assets of related foundations 653 Change in pension liability (57,499) Other changes in net assets 656
Change in net assets (76,477)
Net assets at June 30, 2012 1,428,152
Excess of revenues over expenses 96,441 Other restricted contributions Net assets released from restrictions 6,571 Change in interest in net assets of related foundations 547 Change in pension liability 27,964 Other changes in nel assets (6,695)
Change in net assets 124,828
Net assets at June 30, 2013 $ 1,552,980
See accompanying notes to consolidated financial statements.
5
Temporarily restricted
46,295
8,202 (20,322)
1,708
(239)
(10,651)
35,644
11,070 (8,666)
(463)
213
2,154
37,798
Permanently restricted
11,168
8
203
I
212
11,380
1,708
11,692
1,270
14,670
26,050
Total
1,562,092
(43,303) 8,210 2,694 2,564
(57,499) 418
(86,916)
1,475,176
96,441 12,778 (2,095) 11,776 27,964 (5,212)
141,652
1,616,828
Cash flows from operating activities:
PEACEHEALTH
Consolidated Statements of Cash Flows
Years ended June 30,2013 and 2012
(In thousands)
Change in net assets Adjustments to reconcile change in net assets to net cash provided by
operating activities: Depreciation and amortization Gain on sale of land held for sale and property, plant, and equipment :Provision for bad debts Change in pension liability'
2013
$ I41,652
I51,482 (2,524)
161,192 (27,964)
----------~IR~tricted~aont~ibutions~~~~--~--------------~ Net change in unrealized (gains) losses -on investments
ill,71_8) (32,091)
Realized gains on investments Valuation adjustments on swap arrangements Impairment of intangible assets Equity investment loss (gain) Increase in interest in net assets of related foundations DistnblltiOllsQfearningSft;OtifjOifilVe-ntures Changes in operating assets and liabilities:
Increase in: Accounts receivable, net Other assets
Increase in: Accounts payable Accrued payroll, payroll taxes, and employee benefits Other liabilities
Net cash provided by operating activities
Cash flows from investing activities: Purchase of property, plant, and equipment Proceeds· from sale of land held for sale and property, plant, and equipment Capital contributions to joint ventures Purchase of investments Sales and maturities of investments Change in securities lending asset Decrease in assets whose use is limited, other
Net cash used in investing activities
Cash flows from financing activities: Proceeds from long-term borrowings Principal payments on long-term debt Proceeds from restricted contributions Deferred financing costs expended Swap contract tennination fees expended Change in securities lending liability
Net cash provided by (used iH) financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
6
(3,615) (50,809)
6,600 1,138
(11,776) ---~ -9;405
(I83,972) (1 ,598)
8,774 14,494 6,810
174,420
(107,490) I 1,262 (2,535)
(383,654) 175,498
(306,919)
156,910 (79,097)
12,778 (417)
(I2,165)
78,009
(54,490)
147,179
$ 92,689
2012
(86,916)
149,648 (2,180)
133,8I4 ~'-57;499
(l0,300L 7,920 (471)
77,564
(6,474) (2,564) 7,618
(139,191) (12,629)
(17,082) (2,384) 22,204
176,136
(82,257) 3,383
(303,915) 193,879 23,459
5,186
-~Jl60,265)
213,500 (216,378)
10,300
(23,459)
(16,037)
(166)
I47,345
147,179
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
---------------------l(mtllousands of<lollars)c--------------
(1) Organization
(a) Corporate Structure
PeaceHealth (the Corporation) is a Washington not-for-profit corporation with its corporate office located in Vancouver, Washington, which is sponsored by the Sisters of St. Joseph of Peace, and is recognized to be a Private Pontifical Juridic Person by the Roman Catholic Church. At June 30, 2013, the following regional healthcare delivery systems and operating divisions were components of the Corporation:
Northwest Network: PeaceHealth Ketchikan Medical Center PeaceHealth St. Joseph Medical Center Peace Island Medical Center
Columbia Network: PeaceHealth St. John Medical Center PeaceHealth Southwest Medical Center (Southwest)
Oregon Network: PeaceHealth Sacred Heart Medical Center at University District PeaceHealth Sacred Heart Medical Center at RiverBend PeaceHealth Cottage Grove Community Medical Center PeaceHealth Peace Harbor Hospital
Systemwide Organizations: PeaceHealth Medical Group PeaceHealth Laboratories PeaceHealth Self-insured Trusts Columbia United Providers (CUP)
These healthcare delivery systems and operating divisions, provide inpatient, outpatient, primary care and home care services in Alaska, Washington and Oregon. The Corporation operates these businesses primarily in Ketchikan, Alaska; Bellingham, Longview and Vancouver, Washington; Springfield, Eugene, Florence and Cottage Grove, Oregon.
The Corporation included the following controlled affiliates at June 30, 2013: Southwest Washington Health System Property and Buildings, LLC Health Ventures Pooled Income Funds (including Charitable Life Income Funds) PeaceHealth Southwest Medical Center Foundation
The consolidated financial statements inclnde the accounts of the Corporation and its controlled affiliates. All significant intercompany transactions and balances have been eliminated.
7 (Continued)
(b) Future Affiliation,,
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
The Corporation has entered into an agreement to affiliate with United General Hospital in Sedro Wooley, Washington. United General Hospital is a Critical Access Hospital with approximately $40,000 in net operating revenue annually. Management anticipates this affiliation will be completed during fiscal year 2014.
(2) Summary ofSiguificarit Xccoimtirig Poiicieies!~~~~~~~~~~~~~~~~~~~~~~~~~~
(a) Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
-- -- assumptions-that-affect the Teported -amounts-of assets-and liabilities-and-disclosure- oi'C<Jntingent~~---~-assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The significant estimates in the Corporation's consolidated financial statements include accounts receivable allowances, reimbursement settlements payable, valuation of alternative investments, interest rate swaps, pension obligations, incurred but not reported amounts related to accrued healthcare costs, and liabilities related to self-insurance programs.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of petty cash, cash in demand bank accounts, and all highly liquid debt instruments purchased with an original maturity of three months or less other than those amounts included in assets whose use is limited by the board of directors. The Corporation held cash equivalents of approximately $83,567 and $117,787 as ofJune 30, 2013 and 2012, respectively.
The Corporation maintains cash and cash equivalents on deposit at various institutions, which, at times, exceed the insured limits of the Federal Deposit Insurance Corporation. This exposes the Corporation to potential risk of loss in the event the institution becomes insolvent.
(c) Short-Term Investments
Short-term investments consist primarily of certificates of deposit, U.S. govermnent, and other investment-grade securities, which are carried at fair value. Investment income or loss (including realized and unrealized gains and losses and interest and dividends) is included in the excess of revenues over expenses.
(d) Inventory of Supplies
Inventory is valued on weighted average cost.
(e) Other Receivables
Other receivables primarily consist of amounts receivable from the federal goverrnnent related to grants for electronic health record implementation, amounts receivable from the state of Oregon and
8 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012 -------------------,cm-rnousanas of<IO!lars)' _________________ ----
third-party payors related to Medicaid programs, amounts receivable from excess insurance carriers and other miscellaneous amounts due.
(/) Assets Whose Use is Limited
The majority of these assets have been set aside by management of the Corporation for future capital improvements and other purposes, over which management retains control and may, at its discretion, subsequently use for other purposes. Amounts required to meet current liabilities of the Corporation have been reclassified as current in the consolidated balance sheets at June 30, 2013 and 2012. These items consist primarily of investments in marketable equity and fixed income securities, mutual funds, aud investments in joint ventures. Money market funds and all marketable securities have readily determinable market values and are, therefore, carried at fair value. The investments in joint ventures and other are accounted for using the equity or cost method.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost at the date of acquisition or fair value at the date of donation. Improvements and replacements of plant and equipment are capitalized. Maintenance and repairs are expensed as they are incurred. When property, plant and equipment is sold or retired, the cost and the related accumulated depreciation are removed from the accounts, and the resulting gain or I oss is recorded.
The Corporation assesses potential impairment of its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss is indicated when the sum of expected undiscounted future net cash flows is less than the carrying amount. The loss recognized is the difference between the fair value and the carrying amount. No impairment losses related to property, plant and equipment were recognized during the years ended June 30, 2013 and 2012.
In addition to consideration of impairment due to the events or changes in circumstances described above, management regularly evaluates the remaining lives of long-lived assets. If estimates are revised, the carrying value of affected assets is depreciated or amortized over remaining lives.
The Corporation has capitalized salary and wages along with related benefit costs in the amount of $3,897 during fiscal year 2013 related to the development of software for internal use.
9 (Continued)
(h) Depreciation
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
Depreciation on property, plant and equipment is computed using the straight-line method over the following estimated useful lives:
Land improvements 5 - 25 years Buildings and improvements 5 - 80 years
~--~-~~~~~~~---~IFixed-equipmen +0-2"-years-----~-~---------~
Leasehold improvements Shorter of remaining length of
Moveable equipment
(i)-- Other Assets-- - -- -------
the lease or useful life 3-20 years
Other assets include intangible assets, primarily deferred financing costs, trade names and goodwill. The deferred financing costs are amortized over the lives of the related debt issuances using the effective interest method The intangibles have indefinite useful lives. Intangible assets with indefinite lives are evaluated annually for impairment. Impairment losses of $6,600 and $0 were recognized during the years ended June 30, 2013 and 2012, which is included in other income (loss) on the consolidated statements of operations.
(j) Other Long-Term Liabilities
The caption other long-term liabilities on the consolidated balance sheets consists primarily of the estimated fair value associated with the Corporation's interest rate swaps of approximately $91,617 and $154,591 at June 30, 2013 and 2012, respectively; the liability for the Southwest pension plan of approximately $57,620 and $85,857 at June 30, 2013 and June 30, 2012, respectively; and the long-term portion of the liability for the self-insurance programs of approximately $51,850 and $47,746 at June 30,2013 and 2012, respectively.
(k) Contributions and Grants
Contributions and grants are recognized as revenue upon receipt of the donor's pledge to contribute. Contributions and grants are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts pledged that are restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support. Unconditional promises to give that are silent as to the due date are presumed to be time restricted by the donor until received and are reported as temporarily restricted net assets.
A donor restriction expires when an unconditional promise with an implied time restriction is collected or when the purpose for the restriction is accomplished. Upon expiration, temporarily restricted net assets are reclassified to unrestricted net assets and are reported in the consolidated statements of operations as net assets released from restrictions. Restricted contributions received in the same year in which the restrictions are met are recorded as an increase in restricted support at the time of receipt and as net assets released from restrictions at the time restrictions are met.
10 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
----------------(Jn-thuusamls of<lollars)·--------------
Pennanently restricted net assets include the principal amount of contributions with the stipulation from the donor that the principal be maintained in perpetuity and only the income is available to be expended for purposes specified by the donor, if any.
(I) Interest in Net Assets of Related Foundations
The Corporation accounts for activities with its unconsolidated related foundations in accordance with applicable accounting guidance. That guidance requires the Corporation to recognize its interests in the net assets of these foundations on the consolidated balance sheet as the asset caption interest in net assets of related foundations, and the annual changes as shown in the consolidated statement of changes in net assets.
(m) Net Patient Service Revenues
The Corporation has agreements with third-party payors that provide for payments of amounts different from established charges. The Corporation's net patient service revenue came from the following sources:
Medicare Medicaid Commercial and other Private pay
2013
36% 11 52
I
100%
2012
36% 10 52
2
100%
There is a corresponding significant concentration of credit risk in net accounts receivable balances at June 30, 2013 and 2012:
Medicare Medicaid Commercial and other Private pay
2013
30% 9
59 2
100"/o
2012
27% 9
63 I
100%
Reimbursement for inpatient services rendered to Medicare recipients has been made principally under a prospective pricing system based on diagnosis-related groups. Most outpatient services provided to Medicare patients are reimbursed based on prospectively detennined rates. Services to Medicaid patients are also reimbursed based on a combination of prospectively determined rates and cost reimbursement methodology. Continuation of these reimbursement programs at the present level, and on the present basis, is dependent upon future policies of federal and state goverrunental agencies. The Corporation has four critical access hospitals that are exempt from both inpatient and outpatient prospective payment systems. Inpatient and outpatient services rendered to Medicare and Medicaid program beneficiaries at critical access hospitals are reimbursed based on costs. Interim
II (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
Jnne 30,2013 and 2012
(In thousands of dollars)
reimbursement to critical access hospitals is based upon tentative rates and retroactive adjustment is made to actual cost during final settlement by either the Medicare fiscal intermediary or the applicable state's Medicaid agency. Charges made on behalf of providers employed by the medical groups in the Corporation are generally reimbursed on a fee schedule.
The Corporation has estimated payments for services rendered to Medicare and MeJlk<!id ].lali"nts -----~-·~--~dmin~th~y.eaLb~appL)ling _the _].laymen! JJrinci ~_of _t,h"_a _ ]ic_a_ble_. g_ov<:t'lll_ne~_t1li_ agencies and
believes that an adequate provision has been made in the accompanying consolidate- nailci~al~--~-~ statements for final settlement. Estimates of final settlements due to and due from Medicare, Medicaid, and other third-party payors have been reflected net as reimburSement settlement payable in the accompanying consolidated balance sheets. Differences between the net amounts accrued and subsequent settlements are recorded in operations at the time of settlement. The net amount of
- -ad,iustmeilti! from fiiialiiittion-atid adjustmenrorprto-.-years'-cost-reports-and-other-third-party-settlements resulted in an decrease in net patient service revenue of $3,500 in 2013 and an increase in net patient service revenue of$13,700 in 2012.
Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretations. As a result, there is at least a reasonable possibility that that recorded estimates associated with these programs will change by a material amount in the near term.
The Corporation has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Corporation nuder these agreements includes prospectively determined rates per nnit of service and discounts from established charges. Most arrangements provide for payment or reimbursement to the Corporation at amounts different than established rates. Contractual discounts represent the difference between established rates for services and amounts paid or reimbursed by these third-party payors.
The Corporation provides for an allowance against patient accounts receivable for amounts that could become uncollectible. The Corporation estimates this allowance based on the aging of accounts receivable, historical collection experience by payor, and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and nnderinsured patients, the increased burden of copayments to be made by patients with insurance coverage and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process used by the Corporation. Net bad debt wtite-offs during fiscal year 2013 were $148,005.
(n) Premium Revenue and Accrued Healthcare Costs
The Corporation's majority-owned subsidiary, CUP, receives premium revenues that consist of premiums paid by the State of Washington for healthcare services. Premium revenues are received on a prepaid basis and are recognized as revenue during the month with which the premiums are associated. CUP's premium revenues were received under two primary contract sources at the State of Washington (the State), the Basic Health Plan and Healthy Options.
12 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
---------------------------------------~("m~t~h~ou~s~an~d~s~o~f~·a~nonna~r~s)_------------------------------
The contract with the State expired on July 1, 2012. CUP has entered into an agreement with another health plan that has been awarded the contract from the State for the period July I, 2012 through December 31, 2013. Under this contract, in return for receiving a defined premium amount from the other health plan, CUP will be responsible for providing medical, hospital, pharmaceutical and related medical services to Healthy Options and Basic Health Plan members assigned to CUP from the other plan. Under the terms of its contract with the other health plan, CUP will continue to perform most of the administrative services for assigned members that it previously performed under the expiring contract.
Under these contracts, the Corporation recognized premium revenues of $92,358 and $141,598 for the years ended June 30, 2013 and 2012, respectively, which is included as premium revenue in the accompanying consolidated statements of operations. The related medical expense recognized by CUP was $59,126 and $97,121 for the years ended June 30, 2013 and 2012, respectively, and is included in medical claims expense in the consolidated statements of operations.
CUP has stop-loss reinsurance indemnifying it against the cost of providing services to individual enrolled participants at 90% in excess of $125 for hospital charges up to a maximum of $1,000 per year for each enrolled member.
(o) Other Operating Revenue
Other operating revenue includes revenue from nonpatient care services, clinical space rental revenues, and contributions both unrestricted in nature and those released from restriction to support operating activities, grants from the federal govermnent to help fund electronic health record implementation (discussed below in Meaningful Use) and other miscellaneous revenue.
(p) Meaningful Use
The Health mformation Technology for Economic and Clinical Health Act, part of the American Recovery and Reinvestment Act of 2009, created an incentive program, beginning in 2011, to promote the "meaningful use" of Electronic Health Records (EHR). To qualify, providers must attest that they are using certified EHR in a "meaningful" way by meeting objectives at established thresholds, as defined by the Centers for Medicare and Medicaid Services. Meaningful use revenues are recognized as grant revenue. Grant revenue is recognized when there is reasonable assurance that the grant will be received and that the organization will comply with the conditions attached to the grant. Meaningful use revenues of $18,730 and $7,111 were recognized for the years ended June 30, 2013 and 2012, respectively, and are included in other operating revenue in the accompanying consolidated statements of operations. The amount recognized is based on management's best estimate and is subject to audit and potential retrospective adjustments.
(q) Income from Operations
Income from operations excludes certain items that the Corporation deems outside the scope of its primary business.
13 (Continued)
I ------· I
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
(r) Excess of Revenues over Expenses
Excess of revenues over expenses includes results from the Corporation's operating and nonoperating investing activities. Investment income includes interest income, dividends, realized and unrealized investment gains and losses and equity in earnings from joint ventures. Changes in unrestricted net a3sets not included in excess of revenues over expenses include net assets· released
~~~~-~~~~~~~~-frnm~estdction for the purchase oLJ]!:QJle.rly •. changesi[l theComoration's interest in the net assets of noncontrolled foundations, and certain changes in funded status of postretirement benefit plans.
(s) Federal and State Income Taxes
The Corporation has received detennination letters from the Internal Revenue Service stating that it ___ _is_exemptfromfederaLand state incomtJ_t!IJ{_under_Section 50l(c)_(3) of the Internal Revenue Code
except for tax on unrelated business income. It is management's belief that none of its activities have ~- -~- --produced material unrelated business income.
The Corporation recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that exceeds a 50% probability of being realized. Changes in recognition or measurement are reflected in the period in which the chaoge in estimate occurs.
The affiliated entities included in the consolidated financial statements may be subject to taxation. The tax expense and related provision for these entities are not material to the consolidated financial statements.
(t) Oregon State Provider Tax and Washington State Safety Net Assessment
Effective July I, 2004, the State of Oregon instituted a provider tax on certain patient service revenues at qualifying hospitals. The State of Washington enacted the safety net program in 2009 involving Washington State hospitals to increase funding from other sources and obtain additional Federal funds to support increased payments to providers for Medicaid services. These programs resulted in enhanced payments from the states in the way of lump sum payments and per claim increases. PeaceHealth expensed $47,873 and $48,593 in provider tax and safety net assessments during the fiscal year ending June 30,2013 and 2012, respectively, which is included in supplies and other expenses in the accompanying consolidated statements of operations. At June 30, 2013 and 2012, a receivable of $7,105 and $5,498, respectively, was included in other receivables on the accompanying consolidated balaoce sheets for enhanced lump sum payments.
(u) Recently Adopted or Issued Accounting Standards
In 2011, the Financial Accounting Standards Board (FASB)issued Accounting Standard Update No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for DoubtfUl Accounts for Certain Health Care Entities, which provides financial statement users with greater transparency about a healthcare entity's net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity's sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require healthcare entities that recognize
14 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
--------•(lnlliousanos ofaO!Iii!s)
significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient's ability to pay, to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual aiiowances and discounts) on their statement of operations. This standard is effective for the 2013 fiscal year. The adoption of this standard resulted in a change in presentation of balances previously reported as of June 30, 2012.
(v) Healthcare Reform
As enacted, the Health Reform Law wiii change how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital payments, and the establishment of programs in which reimbursement is tied to quality and integration. In addition, the law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. Further, it provides for a value-based purchasing program, the establislnnent of Accountable Care Organizations (ACO's) and bundled payment pilot programs, which may create sources of additional revenue. On June 28,2012, the United States Supreme Court upheld the constitutionality of the individual mandate provisions of the Health Reform Law but struck down the provisions that would have aiiowed Health and Human Services to penalize states that do not implement the Medicaid expansion provisions with the loss of existing federal Medicaid funding. States that choose not to implement the Medicaid expansion wiii forego funding established by the Health Reform Law to cover most of the expansion costs.
(w) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation to more consistently present financial information between years.
(3) Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as foiiows:
• Level I inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
• Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety fails is based on the lowest level input that is significant to the fair value measurement in its entirety.
15 (Continued)
PEACE HEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
The Corporation uses a practical expedient for the estimation of the fair value of investments in funds for which the investment does not have a readily determinable fair value. The practical expedient used by the Corporation is the net asset value (NAV) per share, or its eqnivalent. In some instances, the NA V may not equal the fair value that would be calculated under fair value accounting standards. Valuations provided by fund administrators consider variables such as the financial performance of underlying investments, recent sales prices of underlying investments, and other pertinent information. In addition, aetna:! marlcet
~---~~---,exchwges-at)'ear~end~provide~additionaJ~observabJe~markeHnput..-ef~the~&xit~priee.-Management~n•viows-~---~
the valuations and assumptions provided by fund administrators for reasonableness and believes that the carrying amounts of these financial instruments are reasonable estimates of fair value. Because the net asset value reported for these funds is used as a practical expedient to estimate the fair value of the Corporation's interest therein, its classification in Level2 is based on the Corporation's ability to redeem its-interest aLor.near_the_balanc_e_sheeLdaw. Thl'_initial \lab!atio11 is'!djl!ste_d when changes _I<> in!'J1ts and assumptions are corroborated by evidence, such as transactions of similar securities, completed or pending third.party transactions in the underlying security or comparable entities, offerings in the capital markets, and changes in fmancial results, data, or cash flows. For positions that are not traded in active markets or are subject to notice provisions, valuations are adjusted to reflect such provisions, and such adjustments are generally based on available market evidence.
The fair value of long·term debt is based on Level 2 inputs, such as the discounted value of the future cash flows using current rates for debt with the same remaining maturities, considering the existing call premium and protection. When available, quoted market prices are also used. The carrying value and fair value of debt, was approximately $910,334 and $920,679, respectively, as of June 30, 2013, and approximately $826,216 and $847,046, respectively, as of June 30,2012.
Other financial instruments of the Corporation include cash and cash equivalents and other receivables. The carrying amount of these instruments approximates fair value because these items mature in less than one year. The carrying amount of other long· term investments approximates fair value.
16 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012 =~------------------ -------,
IiilliousandSOfOollars)
(4) Investments
The composition of cash and investments carried at fair value on a recurring basis at June 30, 2013 is set forth in the following table.
Assets: Short-term investments:
Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Domestic debt securities International debt securities
Other short-term investments
Total
Designated for capital acquisition: Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Fixed income Domestic equities:
Large capitalization Medium~small capitalization
$
June 30, 2013
2,663
48,130 39,428
9,391 42,692
6,223
118,883 8,768
801
276,979
11,978
44,919 68,273
10,139 53,612
16,521
80,804
177 ;2.27 75,077
17
Fair value measurements at reporting date using
Levell Level 2 Level3
2,663
48,130 39,428
9,391 42,692
6,223
118,883 8,768
801
130,314 146,665
7,468 4,510
44,919 68,273
10,139 53,612
16,521
80,804
177 ;2.27 75,077
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
Fair value measurements at reportin_g date using
June 30, 2013 Levell Level 2 Level3
International equities: Foreign stock $ 94,188 94,188 Emerging mru·kets 32,639 32,639
Real estate trusts 2r;r8o~~2t;no~~~~~~~~~~~~~~~~~~~~
Commodities 31,859 6,264
Total
Funds designated for 457 plans: -Gash-and-short-term --~-·· Mutual funds:
Equity Fixed income Target/blended! other
Total
Trustee~held funds: Cash and money market funds Fixed income:
Government obligations and other
Mortgage~backed securities: Residential
Mutual funds: Domestic equities:
Large capitalization Medium-small capitalization
International equities: Foreign stock and emerging
markets Domestic debt securities International debt securities
Real estate
Total
Total assets
Liabilities: Interest rate swaps
Total liabilities
718,416
60L
12,720 5,449
13,337
32,107
25,103
3,461
5,764
30,610 12,773
21,388 34,170
3,377 4,238
140,884
$_j)68,386
$ 91,617
$ 91,617
18
494,847
- _._6.0 ]_ __ ---
12,720 5,449
13,337
32,107
25,103
30,610 12,773
21,388 34,170
3,377 4,238
131,659
788~
25,595
223,569
3,461
5,764
9,225
379,459
91,617
91,617
- ·------
(Continued)
; __
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012 -----~--(In-thousands<Jtdollars) _____________ _
The composition of cash and investments carried at fair value on a recurring basis at June 30, 2012 is set forth in the following table.
Assets: Short-term investments:
Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Domestic debt securities International debt securities
Other short-term investments
Total
Designated for capital acquisition: Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Fixed income Domestic equities:
Large capitalization Medium-small capitalization
$
June 30, 2012
4,152
59,564 43,281
9,343 53,434
10,902
I 12,122 7,327
801
300,926
11,595
59,329 57,621
10,383 55,153
9,091
48,646
99,975 38,935
19
Fair value measurements at reporting date using
Level I Level 2 Level 3
4,152
59,564 43,281
9,343 53,434
10,902
112,122 7,327
801
1 19,449 181,477
6,426 5,169
59,329 57,621
I 0,383 55,153
9,091
48,646
99,975 38,935
(Continued)
--- _, I
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
International equities: Foreign stock Emerging markets
Reru cstatetrUSt Real estate Commodities
Total
(In thousands of dollars)
$
June 30, 2012
64,474 18,796
Fair value measurements at reporting date using_
Level 1 Level 2
64,474 18,796
F2,~73----- ~l-2,~~3-
423 - 423 20,784 - 20,784
507,778 289,825 217,953
_____ Funds_designate_d for 4c5_7 gl_Qt_l_§~ -------
Cash and short term 572 57'2 Mutual funds:
Equity 8,070 8,070 Fixed income 5,092 5,092 Target/blended/other 10,863 10,863
Total 24,597 24,597
Trustee-held funds: Cash and money market funds 27,729 27,424 305 Fixed income:
Government obligations and other 3,725 - 3,725
Mortgage-backed securities: Residential 6,042 - 6,042
Mutual funds: Domestic equities:
Large capitalization 11,177 11,177 Medium-small capitalization 6,244 6,244
International equities: Foreign stock and emerging
markets 10,682 10,682 Domestic debt securities 19,467 19,467 International debt securities 2,038 2,038
Real estate 960 960
Total 88,064 77,992 10,072
Total assets $ 921,365 511,863 409,502
Liabilities: Interest rate swaps $ 154,591 - 154,591
Total liabilities $ 154,591 - 154,591
20
Level3
---
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
The Corporation holds alternative investments, as defined by the American Institute of Certified Public Accountants, in two limited partnerships of $25,220 and $20,423 at June 30, 2013 and 2012 respectively, which are not publicly traded. These amounts are included as a part of commodities in the tables above. The underlying assets in the limited partnerships are based on fair market values, and the redemption period related to these investments is between 3 to 30 days.
At June 30, 2013 and 2012, the Corporation had $17,016 and $22,297, respectively, in alternative investments, referred to as Private Equity, Real Estate Trusts and Distressed Debt, accounted for using the equity method, which are not publicly traded. These amounts are not included in the tables above. These investment instruments contain elements of both credit and market risk. Such risks may include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, emphasis on speculative investments (nonmarketable investments), and nondisclosure of portfolio composition. Because these investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a readily available market for such investments existed. These investments represented 1.4% and 2.3% of total investments and 1.1% and 1.5% of total net assets of the Corporation at June 30, 2013 and 2012, respectively.
Investment income is comprised of the following for the years ended June 30, 2013 and 2012.
Interest and dividend income Net realized gains (losses) on sales of investments Change in net rmrealized gains (losses) on investments
Investment income, net
Other Investments
$
2013
25,832 3,615
32,091
$ ===6=1,5=3=8=
2012
23,141 2,371
(9,735)
15,777
Health Ventures is a not-for-profit corporation that has entered into joint ventures to provide radiology, oncology, and surgery services. The Corporation is the sole member ofi-Iealth Ventures. Health Ventures is included in the consolidated financial statements but is not part of the obligated group. The Corporation accounts for these joint ventures on the equity method. As of June 30, 2013 and 2012, the carrying value of the joint ventures was approximately $14,823 and $11,378, respectively and is recorded in investments in joint ventures and other on the consolidated balance sheets. Investment income from the joint ventures of $7,586 and $6,704 for the years ended June 30, 2013 and June 30, 2012, respectively, is included in other operating revenue. The assets, liabilities and equity of these joint ventures at June 30, 2013 were $41,007,$10,372 and $30,635, respectively.
The Corporation is a minority investor in Premier Purchasing Partners (Premier). The Corporation has invested in Premier with other healthcare providers for the purpose of lowering costs through group purchasing. The Corporation accounts for its interest in Premier on the cost method.
21 (Continued)
-------l
(5) Charity Care
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
The Corporation provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenues.
--------·~·~T,\1"'e~C"'o!Jloration maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for semces and siipplies-linder its cl1iiri"'tyJi'cocar"e"'po"l'"lc"'y".-~~--~ Estimated costs (based on the proportion of overall costs to charges foregone for charity care) for services and supplies furnished under the charity care policy for the years ended June 30, 2013 and 2012 were approximately $68,050 and $72,158, respectively.
22 (Continued)
(6)
PEACEHEALTH
Notes to Consolidated Financial Statements
J\llle 30, 2013 and 2012
(Intllousanosofaollars)
Long-Term Debt
Long-term debt at June 30 consisted of the following:
Series 1995 (PeaceHealth) Oregon Bonds, variable interest rate (0.04% at June 30, 2013) payable each December I, due in annual installments through December 2015
Series 1999 (Southwest) Washington bonds, 3.00% to 5.00% payable annually through September 2028.
Series 2001 (PeaceHealth) Oregon Bonds, 5.00% to 5.25%, interest payable each May 15 and November 15, due in annual installments from 2016 through November 2032
Series 2004 (PeaceHealth) Oregon Bonds, Series A, 3.00% to 5 .00"/o, interest payable each February I and August I, due in annual installments from 2010 through August 2014, called during fiscal year 2013
Series 2008 (PeaceHealth)Washington Bonds, Series A, fixed interest rate of 5% payable on each May I and November I, through November 2018.
Series 2008 (PeaceHealth) Oregon Bonds, Series A-B, variable interest rate (0.05% at June 30, 2013), principal payable each August, due in annual installments from 2030 to 2034 for Series A and B
Series 2008 (Southwest) Washington Bonds, Series A, variable interest rate, principal payable each September, due in
$
annual installments through 2034, called during fiscal year 2013
Series 2009 (PeaceHealth) Oregon Bonds, Series A, fixed interest rates of3.25% to 5.00% payable each May and November, due in installments from 2013 to 2039.
Series 2009 (PeaceHealth) Washington Bonds, Series A, fixed interest rates of 3.0% to 5.0% payable each in May and November, due in installments through 2028
Series 2011 (PeaceHealth) Oregon Bonds, Series A-B, variable interest rates (0.83% at June 30, 2013) principal payable each May, due in installments from 2036 to 2047
2011 (PeaceHealth) Direct Note Obligation to Union Bank 2.46% payable monthly based on a ten-year amortization with remaining amount due November 2016
23
2013 2012
3,675 4,770
46,025 47,885
70,000 70,000
9,280
80,650 80,650
145,975 145,975
54,500
100,795 100,795
83,245 87,550
150,000 150,000
8,500 9,500
(Continued)
--
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
2012 (Southwest) Bridge Loan Obligation to Bank of America, variable interest rate (0.84% at June 30, 2013) due on July 31, 2014
2012 (PeaceHealth) Direct Note Obligation to US Bank, -variallleii\terestraTeW:90% a:ntrrte 30;L.01"3~,
due on February 28, 2015
2012 Direct Note Obligation to Bank of America, fixed interest rate of 2.2%, due on December I, 2022
2013 Washington Bonds, Series A, variab-le interest rate (0.83% at June 30, 2013), principal payable each September, in annual installments from 2013 to 2034
Long-term debt at par value
Premium and other on long-term debt
Other long-term debt
Total long-term debt
Less amounts due within one year
Total long-term debt due after one year
$
$
2013 2012 -
54,000 54,000
o,ooo~
53,445
-----
53,465
899,775 814,905
10,559 8,927
16,207 24,582
926,541 848,414
(20,683) (18,033)
905,858 830,381
On January 1, 2013, the legal entity formerly known as Southwest Washington Medical Center was merged into the Corporation. The Corporation became liable for all outstanding debts of Southwest Washington Medical Center on the date of the merger.
The Corporation is the sole member of the PeaceHealth Obligated Group. The assets of the Obligated Group are available for the satisfaction of debts of the Corporation under the terms of its Master Trust Indenture. The controlled affiliates of PeaceHealth are not members of the Obligated Group.
The Series 1995 Oregon Variable Rate Demand Bonds, the Series 2008 Oregon Series A-B Variable Rate Demand Bonds, the Series 2011 Oregon Series A-B Direct Placement Bonds, and the Washington 2013(A) Direct Placement Bonds have variable interest rates that may bear interest at a daily, weekly, 28-day, monthly, semiannual, or annual rates. The rate determination mode may be changed upon request of the Corporation. The bonds are subject to optional redemption by PeaceHealth, in whole or in part at 100% of the principal amount plus accrued interest. The Variable Rate Demand Bonds are backed by letters of credit in the amount of approximately $147,600 for the 2008 Oregon bonds and $3,700 for the 1995 Oregon bonds. The letter of credit for Series A-B of the 2008 Oregon bonds will expire in June 2017. The letter of credit for the 1995 Oregon bonds will expire in January 2017. The 2011 Oregon bonds are held directly by two financial institutions subject to continuing covenant agreements, which contain substantially the same credit terms as the letters of credit, but which are not subject to the same
24 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
----(In-thousands-ohlnllars)
remarketing and put risk as the 1995 and 2008 bonds. The 2011 Oregon bonds and Washington 2013(A) bonds can be converted to publicly held variable rate demand bonds if the Corporation chooses. The continuing covenant agreements for the Oregon 2011 Direct Placement Bonds expire in August 2015 for Series (A) and August 2017 for Series (B). The continuing covenant agreement for the Washington 2013(A) bonds expires February 2016. The letters of credit and the continuing covenant agreements are extendable annually at the option of the bank upon request from the Corporation for an additional year. The 2008,2011 and 2013(A) bonds are matched to fixed payor swaps ranging between 3.60% and 4.10% for approximately their par value, the notional amounts of swaps amortizing proportionately to the bonds.
The Series 1995 Oregon and Series 2008 Oregon variable rate demand bonds, which have long-term amortization periods, may be put back to the letter of credit bank on any interest rate reset date if the bonds fail to be remarketed. In the event of a failed remarketing, the letter of credit bank is obligated under the terms of the letter of credit agreement to buy the bonds. If the bonds continue to fail to be remarketed, and become a term loan from the letter of credit bank to the Corporation, the payments commence not less than 367 days after the purchase of the bonds by the letter of credit bank, and are payable in equal quarterly installments thereafter. The Series 1999 Washington bonds are currently redeemable at par.
The Series 2008 Washington bonds Series A were redeemed dnring the 2013 fiscal year with proceeds from the WHCFA 2013 bonds, which is matched to a fixed payor swap bearing a rate of3.60%.
Other long-term debt primarily includes an $11 ,000 note payable paying interest of 6% with principal due and payable through 2017, as well as amounts related to capital lease obligations.
25 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
Scheduled ptincipal payments of long-term debt, excluding the premium on bonds and fair value adjustment due to affiliation, as due according to their original!ong-tetm amortization schedule and other debt according to its original maturity schedule for the next five years and thereafter are as follows:
----~-~~~~'\:'ear-ending-June-30,~: ~--
2014 $ 2015 2016 2017 2018
-- -- -Thereafter---
Long-term debt
18,754 123,520 18,921 23,310 19,144
- 696,126 ----
Total $ 899,775
Less amounts representing interest Present value of net minimum
capita! lease payments Less current installments of
obligations under capital leases Obligations under capital leases,
excluding current installments
Total long-term debt
Capitalized Leases Other TotaL
1,412 695 20,861 1,042 771 125,333
922 610 20,453 492 634 24,436 507 8,855 28,506
- 83'7- ------ 696,963
5,212 11,565 916,552
(570) (570)
--4,642
(1,234)
3,408 =
915,982
The PeaceHealth Master Trust Indenture, the loan agreements and other contractual documents under which the Corporation's bonds were issued include covenants which, among others, obligate the Corporation to: maintain net patient service revenues at levels sufficient to achieve specified debt service coverage ratios; meet certain financial tests before additional debt can be incurred; and meet certain financial tests before there can be any significant disposition of property.
Cash paid for interest totaled approximately $24,261 and $23,447 for the years ended June 30, 2013 and 2012, respectively. Interest totaling approximately $1,347 and $663 was capitalized in connection with construction projects during the years ended June 30, 2013 and 2012, respectively.
(7) Accounting for Derivative Instruments and Hedging Activities
In accordance with the policy adopted by the Board of Directors, the Corporation may use interest rate swap contracts to manage its net exposure to interest rate changes in attempting to reduce its overall cost of borrowing over time. Interest rate swap contracts generally involve the exchange of fixed and floating interest rate payments without the exchange of underlying principal (the swap of fixed or floating rates are on a notional amount). The Corporation accounts for its interest rate hedging transactions in accordance with F ASB ASC 815 -Derivatives and Hedging. That standard requires that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at its estimated fair value. The
26 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(IililiousanoSOfaollars)
interest rate swaps do not meet the criteria for hedge accounting and all changes in the valuation of the interest rate swaps are recognized in the consolidated statements of operations.
The Corporation had the following interest rate swap contracts outstanding as of June 30, 2013 with a total current notional amount of approximately $434,200: a $40,000 basis swap where the Corporation receives 81.9% of 30 day LIBOR and pays a 30 day tax-exempt index rate, and approximately $394,200 (fixed payer swaps) which the Corporation uses to convert a portion of the outstanding variable rate bonds to fixed rates ranging from 3.5% to 4.1 %. The fixed payer interest rate swaps are associated with the variable rate bonds, but have not been integrated to any of the underlying debt for the purpose of hedge accounting.
Change in valuation of interest rate swaps consists of the non-cash change in the liability and the cash payments and receipts associated with the swaps. The non-cash change in the fair value of the interest rate swaps, was a decrease of $50,809 and an increase of $77,564 in the liability for the years ended June 30, 2013 and 2012, respectively. Net cash settlement cost for the interest rate swaps was $15,492 and $17,813, for the years ended June 30, 2013 and 2012, respectively.
Derivative instruments are recorded at fair value taking into consideration the Corporation's nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. The impact of taking into account the nonperformance risk on the estimated fair value of the interest rate swaps was a benefit of approximately $13,399 and $19,644, as of June 30, 2013 and June 30, 2012, respectively. Recording the interest rate swaps at fair value results in a total liability of $91,617 and $154,591 as of June 30, 2013 and June 30, 2012, respectively in other long-term liabilities in the accompanying consolidated balance sheets rather than the $105,016 and $174,235 that would be paid if all of the swaps were terminated as of June 30, 2013 and June 30, 2012, respectively. The inputs used to determine the impact of the counterparty nonperformance risk are Level 2 inputs; as such derivative liabilities have been recorded as Level 2 in the Corporation's disclosure of fair value instruments, see note 4.
The Corporation currently has five swap counterparties which minimize counterparty risk and collateral posting requirements. These swap agreements contain various credit thresholds that if breached by the Corporation would constitute an additional termination event whereby the swap counterparties could terminate the swap by either making a payment to, or receiving a payment from the Corporation, depending upon the tennination value of the swaps as of the date of termination. PeaceHealth retains the right to terminate the swaps at any point, which would also require either making or receiving a payment depending on the termination value of the swap as of the termination date.
(8) Benefit Plans
Defined Benefit Pension Plan
The Corporation sponsors a noncontributory defined benefit pension plan, the Southwest Washington Health System Retirement Plan (the Plan), covering all employees at Southwest who meet requirements as specified in the Plan. The assets of the Plan are available to pay the benefits of all eligible employees of the Plan. The Plan has two benefit structures that include a cash balance and a final average pay structure. Effective December 31, 2010, the Plan was frozen. No new participants are admitted to the Plan after this date. This event did not terminate the Plan. Benefits earned before the plan was frozen will continue to be
27 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
paid as participants qualify to receive benefits. All related charges related to this event were recorded prior to the affiliation of Southwest with PeaceHealth.
The following table sets forth disclosures related to the Plan in accordance with FASB ASC 715-20-65, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, as of June 30, 2013 and 2012.
Change in projected benefit obligation: Projected benefit obligation (PBO) at begiuning of period Service cost
--- - Iti.ieieSicosf -- --Actuarial (gain) loss on PBO Benefits and administrative expenses paid
Projected benefit obligation at June 30
Change in fair value of plan assets: Fair value of assets at beginning of period Actual return on plan assets Employer contribution Benefits paid Administrative expenses
Fair value of assets at June 30
Reconciliation of funded status: Funded status
Net amount recognized
Amounts recognized in the consolidated balance sheets consist of:
Accmed pension liability Accumulated change in net assets
$
$
$
$
$
$
$
Years ended June 30 2013 2012
218,246 168,844 572
----8;6ls- - --------g~Jso-------(20,009) 44,484
(5,732) (4,232)
201,692 218,246
132,389 127,743 14,069 (2,966) 3,346 11,844
(5,033) (4,232) (699)
144,072 132,389
(57,620) (85,857)
(57,620) (85,857)
57,620 85,857 (30,961) (59,198)
The accumulated benefit obligation for the Plan was $201,692. and $218,246 at June 30, 2013 and 2012, respectively.
28 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
---(In-thousands-ofdollars)- ----------------
Net periodic benefit cost for the years ended June 30, 2013 and 2012 included the following components and is included in payroll taxes and benefits in the accompanying consolidated statements of operations and changes in net assets:
Service cost Interest cost Expected return on plan assets Amortization of!oss
Net periodic pension cost (benefit)
(a) Assumptions
2013
$ 572 8,615
(10,702) 4,588
3,073 $=~~=
2012
9,150 (I 0,837)
788
(899)
The Corporation used the following actuarial assumptions to determine its benefit obligations at June 30, 2013 and 2012, with measurement dates of June 30, 2013 and 2012:
2013 2012
Discount rate 4.65% 4.0%
The Corporation used the following actuarial assumptions to determine its net periodic benefit cost for the years ended June 30, 2013 and 2012:
Discount rate Expected Iong-tenn rate of return on plan assets
2013
4.0% 7.5%
2012
5.5% 8.5
This discmmt rate is based on a proprietary yield curve tool used by the Plan's actuary, which uses a composite of high-yield, investment-grade corporate bonds, and the projected payouts from the Plan to develop an equivalent yield rate to use in determining plan liabilities.
The expected long-term rate of return on plan assets was based on the asset allocation mix and the long-term historical retmn for each asset class, taking into account current and expected market conditions. The actual return (loss) on pension plan assets was approximately 10.9% and (1.8)% during the years ended June 30, 2013 and 2012, respectively. In the calculation of pension plan expense, the expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a four-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns and expected returns based on the Iong-tenn rate of return assumptions.
29 (Continued)
(b) Pension Plan Assets
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
The asset allocation ofthe Corporation's pension plan at June 30,2013 and 2012 is as follows:
2013 2012
Equity securities : . Debt securities 59,192 - ··· - 46,931 Other 2;155 8,695
Total $ 144,072 132,389
Pension plan assets are managed according to an investment policy adopted by the Plan's trustees. Prof~sslonal Tnvestmerit -managers are-retaiiiea To manage specific-as-sen lasses and-professional--consulting is utilized for investment performance reporting. The primary objective of the Plan's trustees is to achieve the highest possible total return commensurate with safuty and preservation of capital in real, inflation-adjusted terms. The objective includes having funds invested in the long tmm, which protect the principal and produce returns sufficient to meet future benefit obligations. The investment policy includes an asset allocation that includes equity securities, debt securities, and cash/other investments. The target allocations are 7% cash and bonds, 19% low volatility hedge, 54% global equity, and 20% long-short hedge. Assets are rebalanced quarterly when balances fall outside of the approved range for each asset class.
In accordance with F ASB ASC 820, financial assets and financial liabilities measured at fuir value are grouped in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to estimate fair value. These levels and the adoption of F ASB ASC 820 are further discussed in note 4.
Following is a description of the valuation methodologies used for plan assets measured at fair value.
• Mutual Funds: Valued at the NA V of shares held by the plan at year-end.
• Common and Collective Trusts: Valued at fair value of the underlying assets on close of the valuation date and expressed in units. The unit value is determined at the valuation date by dividing the value of the entire common and collective trust by the number of units.
• Real Estate Investment Fund and Hedge Fund: Valued based on the fair value of the underlying assets as supported by audited financial statements.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
30 (Continued)
' ,, ,, I-I I
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(futliousands ofaolliifs)
The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of June 30,2013:
Total fair Assets value Levell Level2 Level3
Cash and money markets $ 2,155 2,155 Mutual funds:
Fixed income 34,833 34,833 Large cap 28,098 9,761 18,337 Mid cap 7,782 7,782 Small cap 4,991 4,991
Foreign stock and emerging markets 31,142 25,757 5,385
Hedge capital appreciation fund 24,359 24,359
Long-short hedge 9,205 9,205 Private equity 1,507 1,507
Total plan assets at fair value $ 144,072 85,279 58,793
The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of June 30, 2012:
Total fair Assets value Levell Level2 Level3
Cash and money markets $ 8,695 8,695 Mutual funds:
Fixed income 24,506 24,506 Large cap 23,418 8,083 15,335 Mid cap 6,176 6,176 Small cap 4,027 4,027
Emerging market funds 27,180 22,381 4,799 Hedge capital appreciation
Fund 22,425 22,425 Long-short hedge 8,410 8,410 Distressed debt 6,459 6,459 Private equity 1,093 1,093
Total plan assets at fair value $ 132,389 73,868 58,521
31 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
The following tahle presents a reconciliation of the beginning and ending balances of those Level 3 assets:
Fair value measurements
Level3
------~------~--Fair~value~June-30,--20-1~1 $ !12,61.0'----------~ Realized and unrealized gains, net 2,052 Purchases, issuances, and
settlements, net 13,859
Fair value June 30, 2012 58,521 _ Realiz®lln<l_l!!ll:~~li_ze<l_gains, net_ 6,880 Purchases, issuances, and ----
settlements, net (6,60B
Fair value June 30, 2013 $ 58,793
At June 30, 2013 and 2012, the Plan held $58,793 and $58,521, respectively, in altemative investments, reflected as Level 3 assets in the above table, which are not publicly traded. These investment instruments contain elements of both credit and market risk Such risks may include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, emphasis on speculative investments (nonmarketable investments), and nondisclosure of portfolio composition. Because these investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a readily available market for such investments existed. These investments represented 40.8% and 44.2% of Plan assets at June 30,2013 and 2012, respectively.
(c) Cash Flows
The Corporation's policy with respect to funding the Plan is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts deemed appropriate. In fiscal year 2014, Southwest expects to contribute approximately $6,300 to the Plan.
Benefit payments are expected to be paid as follows for the fiscal years ended June 30:
2014 2015 2016 2017 2018 2019-2023
32
$
Pension benefits
6,645 7,265 8,097 8,789 9,620
58,138
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
--'(In tliousands ofuolliiTsJ
Expected benefit payments presented above are based on actuarial estimates. Actual benefit payments may vary significantly from these estimates.
Management is not aware of any settlements or curtailments that would require additional recognition during 2013.
(9) Defined Contribution Retirement Plans
The Corporation sponsors two defined contribution retirement plans for the employees of PeaceHealth and Southwest. At June 30, 2013, employees of Southwest are eligible for the Southwest Plan and employees of the PeaceHealth operating divisions are eligible for the PeaceHealth Plan. There had not been an integration of the plans as of June 30, 2013 or 2012. These plans cover substantially all employees of PeaceHealth meeting certain age and length of service requirements. Total defined contribution retirement plan costs charged to operations were approximately $66,912 and $65,221 for the years ended June 30, 2013 and 2012, respectively, and are included in payroll taxes and benefits in the accompanying consolidated statements of operations.
PeaceHealth Deferred Compensation Plans
The estimated fair value associated with the plan assets of the Corporation's 457(b) and 457(!) postretirement savings plans, in the amount of approximately $32,107 and $24,597 at June 30, 2013 and 2012, respectively, is included in assets whose use is limited, cash and investments, with a corresponding amount included in other long-term liabilities.
(10) Restricted Net Assets
Restricted net assets are those whose use by the Corporation has been limited by donor-imposed restrictions to a specific time period and/or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity.
Temporarily restricted net assets are available for the following purposes at June 30:
2013 2012
Purchase of property, plant, and equipment $ 16,986 14,015 Hospice and indigent care 3,430 2,946 Patient care 12,846 13,993 Other 4,536 4,690
$ 37,798 35,644
33 (Continued)
PEACEJffiALTH
Notes to Consolidated Financial Statements
June 30,2013 and 2012
(In thousands of dollars)
The income on the following permanently restricted net assets is available for these purposes at June 30:
Purchase of property, plant, and equipment Hospice and indigent care Patient care operating activities
--------~----~Bther~----~--------------~~------------~
$
2013
699 8,085
16,476 90
$ 26,050
2012
545 7,322 2,543
920
11,380
Approximately $6,571 and $23,016 were released from restriction for capital expenditures made during -~----20Hand~20t2,-respectively~ --~ ~-~- -~---- --- --~-~ ~~--- __ _
Charitable Gijl Annuities
The Corporation has been granted a license by the State of Washington, Office of Insurance Commissioner, to issue Charitable Gift Annuities in support of its charitable activities. The Corporation has delegated all its charitable fund raising activities to several fund raising foundations whose net assets, held for the beneficial interest of the Corporation, are shown on the consolidated balance sheets of the Corporation. In fiscal 2013, the liability for annuity contracts issued nuder the PeaceHealth license and the separately maintained reserve accounts are recorded on the books of PeaceHealth. In fiscal 2012 the liability for annuity contracts and the separately maintained reserve accounts were recorded by the foundations which support the hospitals that the donors designated to benefit from their charitable gift annuity contributions. As of June 30, 2013 and 2012, the following liabilities for annuity contracts issued under the Corporation license and reserve account investments were recorded:
State of Washington gift annuity liabilities (other long~term
liabilities)
Gift annuity reserve accounts (other assets whose use is limited, cash and investments)
$
2013
887
1,089
2012
597
702
During the fiscal 2013 the gift annuities issued under the license held by PeaceHealth Southwest Medical Center Foundation were transferred to the PeaceHealth license and are included in the above table.
(11) Commitments and Contingent Liabilities
(a) Litigation
Various laws and regulations of federal, state, and local governments govern the healthcare industry. These laws and regulations are subject to ongoing government review and interpretation, as well as regulatory actions unknown or unasserted at this time. The Corporation is also involved in litigation
34 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
- ------ --('In-thousands-of-dollars)---- --
and regulatory investigations arising in the normal course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Corporation's future financial position or results of operations.
(b) Operating Leases
The Corporation leases, for a nominal amount, the buildings aud certain equipment for Ketchikan General Hospital from the City of Ketchikan, Alaska under a 10-year lease that expires in 2023.
Rent and lease expense Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2013 are as follows:
Year ending June 3 0: 2014 2015 2016 2017 2018 Later years, 2019 through 2023
Total minimum lease payments
$
Operating leases
18,758 17,404 16,020 14,683 11,384 50,290
$ ====12=8.,,53=9=
Rent expense related to all operating leases was $35,119 and $34,482 during the years ended June 30, 2013 and June 30, 2012, respectively, and was included in supplies and other expenses in the consolidated statements of operations.
(c) Collective Bargaining Agreements
Approximately 26% and 27% of the Corporation's employees are covered under collective bargaining agreements, including nurses, professional employees, and service employees as of June 30, 2013 and 2012, respectively. The Corporation's various collective bargaining agreements expire between September 2013 and March 20 I 6.
(12) Insurance Coverages
The Corporation has a self-insurance program for hospital and physician professional and general liability claims under which the Corporation contributes actuarially determined amounts to a trust to fund estimated ultimate losses. In connection with the self-insurance program, the Corporation has accrued estimates for asserted and incurred but not reported claims, including both the expected liability under each claim and the cost to administer the claim. Self-insured professional and general liability retention in 2013 and 2012 was $5,000 per occurrence and $20,000 in aggregate. Individual general and professional liability claims in excess of the above self-insured retention levels are insured through a claims-made excess insurance policy.
35 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(In thousands of dollars)
The Corporation also self-insures all or a portion of liabilities for medical and dental benefit plans, unemployment, and workers' compensation claims. Funding levels and liabilities are detennined based on actuarial studies
Based on the actuarial studies, the Corporation has recorded a liability for all of the self-insurance programs of approximately $74,006 and $68,671 at June 30, 2013 and 2012, respectively. Theliabilities
·e classi 1ed within other currentliabilities and other long-term liabilities based on the historical mnouiits paid within one year. Total current amounts inclu ed in· o er currenf fiaoih1ies were approxifnatel"y~~~~~~ $22,156 and $20,925 at June 30, 2013 and 2012, respectively. In accordance with the adoption of ASU No. 2010-24, Health Care Entities (Fopic 954): Presentation of Insurance Claims and Related Insurance Recoveries, management has recorded amounts receivable from excess insurance carriers totaling $5,384 and $5,587 as of June 30,2013 and June 30, 2012, respectively, which is included in other receivables in
- theiiccompartyingconsoltdated-bala:nce-sheets. -·- -. -- ---- -- - ----
The Corporation is a minority investor in American Excess Insurance Exchange (AEIX). AEIX is a risk retention group owned by a group of healthcare providers and provides them with excess professional liability insurance coverage. The Corporation accounts for its interest in AEIX on the equity method of accounting less mandatory withdrawal penalties and an estimated discount to present value. As of June 30, 2013 and 2012, the carrying value of AEIX was approximately $10,673 and $14,868, respectively, and is recorded in investments in joint ventures and other on the consolidated balance sheets. Investment income from AEIX is recorded as an adjustment to supplies and other operating expenses in the accompanying consolidated statements of operations.
(13) Functional Expenses
The Corporation provides general healthcare services to residents within its geographic location. Expenses related to providing these services are as follows:
Healthcare services General and administrative
(14) Subsequent Events
$
2013
1,878,664 282,245
$ 2,160,909
2012
1,877,186 273,810
2,150,996
In connection with the preparation of the consolidated financial statements in accordance with FASB ASC Topic 855, Subsequent Events, the Corporation has evaluated subsequent events through October\, 2013, which is the date the consolidated financial statements were issued.
36
PEACEHEALTH
Consolidated Financial Statements
June 30, 2012 and 2011
(With Independent Auditors' Report Thereon)
PEACEHEALTH
Consolidated Financial Statements
June 30, 2012 and 2011
Table of Contents
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
1
2-3
4
5
6
7-39
The Board of Directors PeaceHealth:
KPMG LLP Suite 3800 1300 South West Fifth Avenue Portland, OR 97201
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of PeaceHealth (the Corporation) (a Washington not-for-profit corporation) as of June 30, 2012 and 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted ow· audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PeaceHealth as of June 30, 2012 and 2011, and the results of its operations, changes in net assets, and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
October 18, 2012
KPMG LLP Is a Delaware limited liability partnerehip, the U.S. member nrrn or KPMG lntematlonal Cooperative {"KPMG lrllemation~:~l'), a Swiss entity.
til)& Purtla11d0ffioo 1 9 1 2 · 2 0 I~
PEACEHEALTH
Consolidated Balance Sheets
June 30, 2012 and 2011
(In thousands)
Assets
Current assets: Cash and cash equivalents Short-term investments (note 4) Accounts receivable, net (note 6) Other receivables Assets under securities lending agreement (note 4)
-------~Jlnventory-ofsupplies---------
Prepaid expenses and other Assets whose use is limited that are required for current liabilities
Total current assets
Assets wh<JS"-us_<ljslimit.,<l:__ _ __ Cash and investments (note 4) Investments in joint ventures and other
Total assets whose use is limited
Less current portion
Net assets whose use is limited
Property, plant, and equipment: Land and improvements Buildings, fixed equipment, and other Moveable equipment Construction in progress
Total property, plant, and equipment
Less accumulated depreciation
Net property, plant, and equipment
Deferred financing costs, net Interest in net assets of related foundations Other assets
Total assets
2
$
$
2012 2011
147,179 147,345 300,926 245,396 253,312 251,312
31,620 28,243 23,459
3,8'20 33;030 20,912 25,476 23,258 22,578
811,027 776,839
-- 619,irs3 ---- ---s-s-5,762~
40,838 56,214
660,321 611,976
(23,258) (22,578)
637,063 589,398
118,297 115,184 1,565,987 1,550,109
570,371 530,680 61,236 57,355
2,315,891 2,253,328
(928,722) (800,696)
1,387,169 1,452,632
6,829 8,088 32,663 30,099 54,516 45,791
2,929,267 2,902,847
(Continued)
PEACEHEALTH
Consolidated Balance Sheets
June 30, 2012 and 2011
-- ----- ---cnnllousands)- - ----------
Liabilities and Net Assets
Current liabilities: Accounts payable Accrued payroll, payroll taxes, and employee benefits Accrued interest payable Other current liabilities Medical claims payable Reimbursement settlements payable Payable under securities lending agreement (note 4) Current portion of long-term debt (note 7)
Total current liabilities
Other long-term liabilities
Long-term debt due after one year (note 7)
Net assets: Unrestricted Temporarily restricted (note 12) Permanently restricted (note 12)
Total net assets
Total liabilities and net assets
See accompanying notes to consolidated financial statements.
3
2012
$ 70,644 136,200
4,545 40,745
6,533 22,089
18,033
298,789
324,921
830,381
1,428,152 35,644 11,380
1,475,176
2,929,267 $===========
2011
87,726 138,584
4,701 33,878
7,649 8,500
23,459 15,891
320,388
186,838
833,529
1,504,629 46,295 11,168
1,562,092
2,902,847
PEACEHEALTH
Consolidated Statements of Operations
Years ended June 30, 2012 and 2011
(In thousands)
Revenues: Net patient service revenue (note 2) $ Premium revenue Other operating revenue
Total revenues
Expenses: Salaries and wages Payroll taxes and benefits Professional fees Medical claims expense
____ Supplies~and other_expenses ---------
Provision for bad debts Depreciation and amortization of other assets Interest and amortization of deferred financing costs
Total expenses
Excess of revenues over expenses from operations
Other income (loss): Contribution from the Southwest affiliation (note !(b)) Investment income, net (note 4) Gain on investments recorded on the equity method Change in valuation of interest rate swaps Other
Total other income, net
(Deficiency) excess of revenues over expenses
Donations for land, buildings, and equipment Net assets released from restrictions Change in interest in net assets of related foundations Change in pension liability Other changes in unrestricted net assets
(Decrease) increase in unrestricted net assets $
See accompanying notes to consolidated financial statements.
4
2012 2011
2,126,236 1,774,469 141,598 67,303 67,041 57,054
2,334,875 ~- ::c1 ,898,826
961,564 809,703 237,300 208,587
26,274 19,626 104,007 47,232
_§6!l,059 535,880 133,814 ----- -91,862-
146,517 126,050 43,810 39,770
2,321,345 1,878,710
13,530 20,116
- 487,026 12,629 66,034 6,474 3,865
(77,564) 15,558 1,628 961
(56,833) 573 444
(43,303) 593,560
3,808 1,753 19,208 8,101
653 3,932 (57,499) (1,699)
656 4,356
(76,477) 610,003
PEACEHEALTH
Consolidated Statements of Changes in Net Assets
Years ended Jtme 30, 2012 and 2011
Net assets at June 30, 2010
Excess of revenues over expenses Restricted contribution fium the Southwest affiliation Other restricted contributions Donations for land, buildings and equipment Net assets released from restrictions Change in interest in net assets of related foundations Change in pension liability Other changes in net assets
Change in net assets
Net assets at June 30, 20 II
(Deficiency) excess of revenues over expenses Other restricted contributions Donations for land, buildings and equipment Net assets released from restrictions Change in interest in net assets of related foundations Change in pension liability Other changes in net assets
Change in net assets
Net assets at June 30, 2012
See accompanying notes to consolidated financial statements.
(In thousands) ---- -----
Unrestricted
$ 894,626
593,560
1,753 8,101 3,932
(1,699) 4,356
610,003
1,504,629
(43,303)
3,808 19,208
653 (57,499)
656
(76,477]
$ 1,428,152
5
----
Temporarily restricted
20,611
1,064 23,476 11,518
(11,928) 2,520
(966)
25,684
46,295
17 1,718 6,484
(20,322) 1,708
(256)
(10,651)
35,644
-----------
Permanently restricted Total
3,437 918,674
594,624 7,324 30,800
11,518 1,753
(3,827) 190 6,642
(1,699) 217 3,607
7,731 643,418
11,168 1,562,092
(43,286) 8 1,726
10,292 (1, 114)
203 2,564 (57,499)
401
212 (86,916]
11,380 1,475,176
Cash flows from operating activities: Change in net assets
PEACEHEALTH
Consolidated Statements of Cash Flows
Years ended June 30, 2012 and 2011
(In thousands)
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Contribution from the Southwest affiliation Depreciation and amortization (Gain) loss on _s_alc of land held for sale and property, plant, and equipment Provision for bad debts
2012
$ (86,916)
149,648 (2,180)
133,814 ,..,.... ...........
------~-~~Jhange.Jn_p_en.sion.Jiabilicy: __ :) ', ... .,,. Restricted contributions 11 o 'tOO\ ,.~,~~~~
Net change in unrealized gains (losses) on inve..'ltments 7,920 Realized gains on investments (471) Valuation adjustments on swap arrangements 77,564 Equity investment gain (6,474)
(2,564)
2011 ---643,418
(517,826) 126,435
6,204 'fl';862
1,699 (1,753)
(42,575) (3,706)
(15,637) (3,865) (6,642) Increase in interest in net assets of related foundations
Changes -in--operating ·assets and liabilities: -- --- --- -----
Increase in: Accounts receivable, net Other assets
Increase (decrease) in: Accounts payable (net of capital expenditures) Accrued payroll, payroll taxes, and employee benefits Other liabilities
Net cash provided by operating activities
Cash flows from investing activities: Contribution of cash from the Southwest affiliation Purchase of property, plant, and equipment Proceeds from sale of land held for sale and property, plant, and equipment Purchase of investments Sales and maturities of investments Change in securities lending asset Decrease in assets whose use is limited, other
Net cash used in investing activities
Cash flows from financing activities: Proceeds from long~term borrowings Principal payments on long-term debt Proceeds from restricted contributions Change in securities lending liability
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disc1osure of cash flow information: Contribution from the Southwest affiliation
See accompanying notes to consolidated financial statements.
6
$
$
( 139,191) (116,388) (4,951) (31,937)
(17,082) 17,249 (2,384) 20,576 22,204 (8,478)
176,136 158,636
32,738 (82,257) (89,910)
3,383 1,255 (303,915) (78,764) 193,879 50,957 23,459 (7,132)
5,186 9,573
(160,265) (81,283)
213,500 9,131 (216,378) (10,967)
10,300 1,753 (23,459) 3,107
(16,037) 3,024
(166) 80,377
147,345 66,968
147,179 147,345
- (517,826)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
---- -omnousmnlsofaollars)-- ---------------
(1) Organization
(a) Corporate Structure
PeaceHealth (the Corporation) is a Washington not-for-profit corporation with its corporate office located in Vancouver, Washington, which is sponsored by the Sisters of St. Joseph of Peace, and is recognized to be a Private Pontifical Juridic Person by the Roman Catholic Church. At June 30, 2012, the following regional healthcare delivery systems and operating divisions were components of the Corporation:
Southeast Alaska Region: PeaceHealth Ketchikan Medical Center
Whatcom Region: PeaceHealth St. Joseph Medical Center
Lower Columbia Region: PeaceHealth St. John Medical Center
Southwest Washington Health System (Southwest): PeaceHealth Southwest Medical Center Southwest Medical Group PeaceHealth Southwest Medical Center Foundation Property and Building Company, LLC Columbia United Providers (CUP)
Oregon Region: PeaceHealth Sacred Heart Medical Center at University District PeaceHealth Sacred Heart Medical Center at River Bend PeaceHealth Cottage Grove Community Medical Center
Siuslaw Region: Peacel-Iealth Peace Harbor Hospital
Systemwide Organizations: PeaceHealth Medical Group PeaceHealth Laboratories PeaceHealth Self-insured Trusts
These healthcare delivery systems and operating divisions, provide inpatient, outpatient, primary care and home care services in Alaska, Washington and Oregon. The Corporation operates these businesses primarily in Ketchikan, Alaska; Bellingham, Longview and Vancouver, Washington; Springfield, Eugene, Florence and Cottage Grove, Oregon.
(b) Southwest Washington Health System Affiliation
On January I, 20 II, the Corporation became the sole corporate member of Southwest. The financial position and results of operations of Southwest have been included in the consolidated financial statements of the Corporation since that date. Southwest's operations primarily consist of two
7 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
hospital campuses, several medical groups, a fundraising foundation, a Medicaid health plan (CUP), and certain other entities located in the Vancouver, Washington service area.
This transaction was accounted for as an acquisition under Accounting Standards Codification (ASC) 958-805, Not-for-Profit Entitles -Business Combinations. No consideration was paid by the Corporation to acquire the net assets of Southwest. The affiliation resulted in an excess of assets-
--------------acquired~oyer~liabilities~assumed,~or~a~c_ontrihution_from_Smlt.l:twe_sLto the Corporation of approximately $517,826. The unrestricted portion of the contribution of $487,026 is included in other income in the accompanying consolidated statement of operations. The remaining $30,800 of the contribution was restricted and is recorded in restricted net assets in the consolidated statement of changes in net assets.
------- -- -- TliefolloW111g-·taole sllmnral'izertl!e fair-value-estimates -or·tl!e Southwest-ass-ets--.rcquired-and--liabilities assumed as of January 1, 2011:
Tangible assets acquired Intangible assets acquired Liabilities assumed Noncontrolling interests
Total identifiable net assets assumed/ contribution
$ 808,028 22,717
(310,893) (2,026)
$ 517,826
The fair value of the intangible assets acquired of $22,717 consisted primarily of trade names (Southwest and Southwest Medical Center) valued at approximately $21,990,. which has been assigned an indefinite useful life.
The following are the financial results of Southwest included in the Corporation's 2011 consolidated statement of operations during the six-month period from the date of the affiliation through June 30, 2011:
Total revenues Deficiency of revenues over expenses from operations Excess of revenues over expenses
$ 351,960 (I ,307) 8,690
The following pro forma consolidated financial information presents the Corporation's results as if the affiliation had been reported as of the beginning of the Corporation's fiscal year of July 1:
Total revenues Excess of revenues over expenses from operations Excess of revenues over expenses Total assets
8
$
Actual
1,898,826 20,116
593,560 2,902,847
2011 Pro forma
2,239,666 17,241
635,744 2,902,848
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(2) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the Corporation and its controlled affiliates. All significant intercompany transactions and balances have been eliminated.
(b) Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The significant estimates in the Corporation's consolidated financial statements include accounts receivable allowances, reimbursement settlements payable, valuation of alternative investments, interest rate swaps, pension obligations, incurred but not reported amounts related to accrued healthcare costs, and liabilities related to self-insurance programs.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of petty cash, cash in demand bank accounts, and all highly liquid debt instruments purchased with an original maturity of three months or less other than those amounts included in assets whose use is limited by the board of directors. The Corporation held cash equivalents of approximately $117,787 and $86,159 as ofJune 30, 2012 and 2011, respectively.
(d) Short-Term Investments
Short-term investments consist primarily of certificates of deposit, U.S. government, and other investment-grade securities, which are carried at fair value. Investment income or loss (including realized and unrealized gains and losses and interest and dividends) is included in the excess of revenues over expenses.
(e) Inventory of Supplies
Inventory is valued on a last-in, first-out basis, weighted average cost.
(f) Other Receivables
Other receivables primarily consist of amounts receivable from the states of Oregon and Washington and third-party payors related to Medicaid programs, amounts receivable from excess insurance can-iers, and other miscellaneous amounts due for rent, meals, various settlements, and other items.
(g) Assets Whose Use is Limited
The majority of these assets have been set aside by management of the Corporation for future capital improvements and other pmposes, over which management retains control and may, at its discretion, subsequently use for other purposes. Amounts required to meet current liabilities of the Corporation
9 (Continued)
i
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
have been reclassified as current in the consolidated balance sheets at June 30, 2012 and 2011. These items consist primarily of assets held by trustees under indenture agreements, investments in marketable equity and fixed income securities, mutual funds, and investments in joint ventures. Money market funds and all marketable securities have readily determinable market values and are, therefore, carried at fair value. The investments in joint venlureli and other llcre accounted for using the equity or cost method.
(h) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Improvements and replacements of plant and equipment are capitalized. Maintenance and repairs are expensed as they are incurred. When property, plant, and equipment is sold or retired, the cost and the related accumulated depreciation aretemoved-frorrnhe aCCOU!lts;and the resulting gain-or loss is-recordedo- ---- --------------
The Corporation assesses potential impairment of its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss is indicated when the sum of expected undiscounted future net cash flows is less than the carrying amount. The loss recognized is the difference between the fair value and the carrying amount. No impairment losses were recognized during the years ended June 30, 2012 and 2011.
(i) Depreciation
Depreciation on property, plant, and equipment is computed using the straight-line method over the following estimated useful lives:
Land improvements Buildings and improvements Fixed equipment Leasehold improvements
Moveable equipment
aJ Deferred Financing Costs
5-25 years 5-80 years 10-25 years Shorter of remaining length of
the lease or useful life 3-20 years
These costs are amortized over the lives of the related debt issuances using the effective interest method.
(k) Other Assets
Other assets includes the estimated fair value associated with the plan assets of the Corporation's 457(b) and 457(f) postretirement savings plans, in the amount of approximately $21,360 and $13,865 at June 30, 2012 and 2011, respectively, with a conesponding amount included in other long-term liabilities. In addition, other assets include the estimated fair value associated with intangible assets, primarily the tradenarnes "Southwest Washington Health System" and "Southwest Medical Center." As a result of the affiliation transaction, approximately $21 ,990 was assigned to these intangible
10 (Continued)
PEACEI-IEALTI-1
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
-(Intliousands of dollars J----
assets, which have indefinite useful lives. Intangible assets with indefinite lives are evaluated annually for impairment. No impairment losses were recognized during the years ended June 30, 2012 and 2011.
(I) Other Long-Term Liabilities
The caption other long-term liabilities on the consolidated balance sheets consists primarily of the estimated fair value associated with the Corporation's interest rate swaps of approximately $154,591 and $77,106 at June 30,2012 and 2011, respectively; the liability for the Southwest pension plan of approximately $85,857 and $41,101 at June30, 2012 and June30, 2011, respectively; and the long-term portion of the liability for the self-insurance programs of approximately $39,849 and $27,620 at June 30, 2012 and 2011, respectively.
(m) Contributions and Grants
Contributions and grants are recognized as revenue upon receipt of the donor's pledge to contribute. Contributions and grants are considered to be available for unrestricted use unless specifically restlicted by the donor. Amounts pledged that are restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support. Unconditional promises to give that are silent as to the due date are presumed to be time restricted by the donor until received and are reported as temporarily restricted net assets.
A donor restriction expires when an unconditional promise with an implied time restriction is collected or when the purpose for the restriction is accomplished. Upon expiration, temporarily restricted net assets are reclassified to unrestricted net assets and are reported in the consolida:ted statements of operations as net assets released from restrictions. Restricted contributions received in the same year in which the restrictions are met are recorded as an increase in restricted support at the time of receipt and as net assets released from restrictions at the time restrictions are met.
Permanently restricted net assets include the principal amount of contributions with the stipulation from the donor that the principal be maintained in perpetuity and only the income is available to be expended for purposes specified by the donor, if any.
(n) Interest in Net Assets of Related Foundations
The Corporation accounts for activities with its unconsolidated related foundations in accordance with applicable accounting guidance. That guidance requires the Corporation to recognize its interests in the net assets of these foundations on the consolidated balance sheet as the asset caption interest in net assets of related foundations, and the annual changes as shown in the consolidated statement of changes in net assets.
11 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
(o) Net Patient Service Revenues
Jnne 30, 2012 and 2011
(In thousands of dollars)
The Corporation has agreements with third-party payors that provide for payments of amounts different from established charges. The Corporation's net patient service revenue came from the following sources:
Medicare Medicaid Commercial and other Private pay
2012
34% 9
49 8
100%
2011
33% 11 50
6
100%
There is a corresponding significant concentration of credit risk in net accounts receivable balances at June 30, 2012 and 2011:
Medicare Medicaid Commercial and other Private pay
2012
27% 9
64
100%
2011
31% 10 53
6
100%
The Corporation has estimated payments for services rendered to Medicare and Medicaid patients during the year by applying the payment principles of the applicable governmental agencies and believes that an adequate provision has been made in the accompanying consolidated financial statements for final settlement. Estimates of final settlements due to and due from Medicare, Medicaid, and other third-party payors have been reflected as a reimbursement settlement payable and other receivables in the accompanying consolidated balance sheets. Differences between the net amounts accrued and subsequent settlements are recorded in operations at the time of settlement.
Reimbursement for inpatient services rendered to Medicare recipients has been made principally nuder a prospective pricing system based on diagnosis-related groups. Most outpatient services provided to Medicare patients are reimbursed based on prospectively determined rates. Services to Medicaid patients are also reimbursed based on a combination of prospectively determined rates and cost reimbursement methodology. Continuation of these reimbursement programs at the present level, and on the present basis, is dependent upon future policies of federal and state governmental agencies. The Corporation has three critical access hospitals that are exempt from both inpatient and outpatient prospective payment systems. Inpatient and outpatient services rendered to Medicare and Medicaid program beneficiaries at critical access hospitals are reimbursed based on costs. Interim reimbursement to critical access hospitals is based upon tentative rates and retroactive adjustment is
12 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
-- --- -(Intliousands of dollars)---
made to actual cost during final settlement by either the Medicare fiscal intermediary or the applicable state's Medicaid agency. Charges made on behalf of providers employed by the medical groups in the Corporation are generally reimbursed on a fee schedule for Medicare and commercial patients and on a cost basis for Medicaid patients.
The Corporation has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Corporation under these agreements includes prospectively determined rates per unit of service and discounts from established charges. Most arrangements provide for payment or reimbursement to the Corporation at amounts different than established rates. Contractual discounts represent the difference between established rates for services and amounts paid or reimbursed by these third-party payors.
(p) Premium Revenue and Accrued Healthcare Costs
The Corporation's majority-owned subsidiary, CUP, receives premium revenues that consist of premiums paid by the State of Washington for healthcare services. Premium revenues are received on a prepaid basis and are recognized as revenue during the month with which the premiums are associated. All of CUP's premium revenues were received under two primary contract sources at the State of Washington (the State), the Basic Health Plan and Healthy Options. The Corporation recognized premium revenues of $141,598 and $67,303 for the year ended June 30, 2012 and the six months ended June 30, 2011, respectively, which is included as premium revenue in the accompanying consolidated statements of operations. The related medical expense recognized by CUP was $124,019 and $59,682 for the year ended June 30, 2012 and the six months ended June 30, 2011, respectively, and is included in medical claims expense in the consolidated statements of operations.
The contract with the State expired on July 1, 2012. CUP has entered into an agreement with another health plan that has been awarded the contract from the State for the period July 1, 2012 through December 31,2013. Under this contract, in return for receiving a defined premium amount from the other health plan, CUP will be responsible for providing medical, hospital, pharmaceutical and related medical services to Healthy Options and Basic Health members assigned to CUP from the other plan. Under the terms of its contract with the other health plan, CUP will continue to perform most of the administrative services for assigned members that it previously performed under the expiring contract.
CUP has stop-loss reinsurance indemnifying it against the cost of providing services to individual enrolled participants at 90% in excess of $125,000 for hospital charges up to a maximum of $1,000,000 per year for each emolled member.
(q) Provision for Bad Debts
The Corporation provides for an allowance against patient accounts receivable for amounts that could become uncollectible. The Corporation estimates this allowance based on the aging of accmmts receivable, historical collection experience by payor, and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn
13 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
have an impact on unemployment rates and the number of uninsured and underinsured patients, the increased burden of copayments to be made by patients with insurance coverage and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process used by the Corporation.
(r) Other Operating Revenue
Other operating revenue includes ievenlle ffilm nonpafient care serv1ees, c1ifri:c1tl~pace-rental-----revenues, and contributions both unrestricted in nature and those released from restriction (other than the Southwest affiliation contribution) to support operating activities.
(s) Excess of Revenues over Expenses
Excess of revenues over -expenses lnclllaes-results- fforii- the -col'poration's operating-and-investingactivities. Changes in unrestricted net assets not included in excess of revenues over expenses include net assets released from restriction for the purchase of property, changes in the Corporation's interest in the net assets of noncontrolled foundations, certain changes in funded status of postretirement benefit plans, and other.
(t) Federal and State Income Taxes
The Corporation has received determination letters from the Internal Revenue Service stating that it is exempt from federal income tax under Section 50l(c)(3) of the Internal Revenue Code except for tax on unrelated business income. It is management's belief that none of its activities have produced material unrelated business income.
The Corporation recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that exceeds a 50% probability of being realized. Changes in recognition or measurement are reflected in the period in which the change in estimate occurs.
(u) Recently Adopted or Issued Accounting Standards
In 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-24, Health Care Entities- Presentation of Insurance Claims and Related Insurance Recoveries, which clarifies that insurance recoveries should not be netted against a related claim liability. The claim liability amount should be calculated without consideration of insurance recoveries. This standard is effective for the 2012 fiscal year and permits retrospective application but it is not required. The adoption of this standard resulted in an increase in other payables and corresponding increase in other long-term receivables of $5,587 in the accompanying consolidated balance sheet as of June 30, 2012. Management determined that the amount related to 2011, was not significant and, therefore, has not applied the standard to the balances as of June 30, 2011.
In 2010, the FASB issued ASU No. 2010-23, Health Care Entities- Measuring Charity Care for Disclosure, which requires a standardized process be used by healthcare entities that provide charity care to determine the measurement basis. Cost will be used as the measurement basis for disclosure purposes and should include both the direct and indirect costs for providing charity care. This
14 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
standard is effective for the 2012 fiscal year. The adoption of this standard resulted in a change in presentation of balances reported as of June 30, 2011 within note 5 from $139,925 of charges foregone to $70,058 of estimated costs related to providing charity care.
In 2011, the FASB issued ASU No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, which provides financial statement users with greater transparency about a healthcare entity's net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity's sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require healthcare entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient's ability to pay, to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. This standard is effective for the 2013 fiscal year. The adoption of this standard is not expected to have a material impact on the Corporation's consolidated financial statements.
(v) Healthcare Reform
As enacted, the Health Reform Law will change how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital payments, and the establishment of programs in which reimbursement is tied to quality and integration. In addition, the law reforms certain aspects of health insw·ance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. Further, it provides for a value-based purchasing program, the establishment of Accountable Care Organizations (ACO's) and bundled payment pilot programs, which may create sources of additional revenue. On June 28,2012, the United States Supreme Court upheld the constitutionality of the individual mandate provisions of the Health Reform Law but struck down the provisions that would have allowed Health and Human Services to penalize states that do not implement the Medicaid expansion provisions with the loss of existing federal Medicaid funding. States that choose not to implement the Medicaid expansion will forego funding established by the Health Reform Law to cover most of the expansion costs.
(w) Reclassifications
Certain reclassifications have been made to prior year amounts to confonn to the current year presentation to more consistently present financial information between years.
15 (Continued)
PEACE HEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousanda of dollars)
(3) Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Levell measurements) and the lowest priority to measurements involving significant unobservable inputs (LeveU msmements). The thr~:e levels of the fair value hierarchy are as follows:
• Levell inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
• Level 2 inputs are inputs other than quoted prices included within Levell that are observable for the ________ asset orJiability,_dther.dirr&tly_Qr_ln<:!irectly. ________________ _
• Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The Corporation uses a practical expedient for the estimation of the fair value of invesnnents in funds for which the investment does not have a readily determinable fair value. The practical expedient used by the Cotporation is the net asset value (NA V) per share, or its equivalent. In some instances, the NA V may not equal the fair value that would be calculated under fair value accounting standards. Valuations provided by fund administrators consider variables such as the financial performance of underlying invesnnents, recent sales prices of underlying investments, and other pertinent information. In addition, actual market exchanges at year-end provide additional observable market inputs of the exit price. Management reviews the valuations and assumptions provided by ti.tnd administrators for reasonableness and believes that the carrying amounts of these financial instruments are reasonable estimates of fair value. Because the net asset value repmted for these funds is used as a practical expedient to estimate the fair value of the Corporation's interest therein, its classification in Level 2 is based on the Cmporation's ability to redeem its interest at or near the balance sheet date. The initial valuation is adjusted when changes to inputs and assumptions are corroborated by evidence, such as transactions of similar securities, completed or pending third-party transactions in the underlying security or comparable entities, offerings in the capital markets, and changes in financial results, data, or cash flows. For positions that are not traded in active markets or are subject to notice provisions, valuations are adjusted to reflect such provisions, and such adjusnnents are generally based on available market evidence.
The fair value oflong-term debt is based on Level2 inputs, such as the discounted value of the future cash flows using current rates for debt with the same remaining maturities, considering the existing call premium and protection. When available, quoted market prices are also used. The carrying value and fair value of debt, was approximately $826,216 and $847,046, respectively, as of June 30, 2012, and approximately $825,669 and $827,876, respectively, as of June 30, 2011.
Other financial instruments of the Corporation include cash and cash equivalents and other receivables. The catrying amount of these instruments approximates fair value because these items mature in less than one year. The carrying amount of other long-term investments approximates fair value.
16 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
. -· ---- --Eln thousands·ofdollars)- -·
(4) Investments
The composition of cash and investments at June 30, 2012 is set forth in the following table. Investments are stated at fair value.
Assets: ShortRterm investments:
Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgagewbacked securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Domestic debt securities International debt securities
Other short-term investments
Total
Designated for capital acquisition: Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Fixed income Domestic equities:
Large capitalization Medium-small capitalization
$
June 30, 2012
16,729
46,987 43,281
9,343 53,434
10,902
112,122 7,327
801
300,926
22,529
35,062 57,621
10,383 69,265
8,626
49,069
I 00,583 39,173
17
Fair value measurements at reporting date using
Level 1 Level 2 Level 3
16,729
46,987 43,281
9,343 53,434
10,902
112,122 7,327
801
119,449 181,477
1,797 20,732
35,062 57,621
10,383 69,265
8,626
49,069
100,583 .39,173
(Continued)
--·I
PEACE HEALTH
Notes to Consolidated Financial Statements
International equities: Foreign stock Emerging markets
Real~estate~trust
Real estate Commodities Options
Total
-Trusree-he1Q -fun <:Is:---Cash and money market funds Fixed income:
Government obligations and other
Mortgage-backed securities: Residential
Mutual funds: Domestic equities:
Large capitalization Medium-small capitalization
International equities: Foreign stock and emerging
markets Domestic debt securities International debt securities
Real estate
Total
Total assets
Liabilities: Interest rate swaps
Total liabilities
June 30, 2012 and 2011
(In thousands of dollars)
Fair value measurements at re2orting date using,
June 30, 2012 Levell Level2 Level3
$ 64,527 64,527 18,796 18,796 12 588 12,588
424 - 424 20,784 20,784
(309) - (309)
509,121 286,533 222,588
27,729 - 27,729
3,725 - 3,725
6,042 - 6,042
11,178 11,178 6,244 6,244
10,682 10,682 19,467 19,467 2,038 2,038
960 960
88,065 50,569 37,496
$ 898,112 456,551 441,561
154,591 - 154,591
$ 154,591 - 154,591
The table above does not include $11,658 of private equity funds, $9,170 of distressed debt funds, or $1,469 of real estate funds at June 30, 2012, which are accounted for under the equity method of accounting.
18 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In-thousands-or dollars)--
The composition of cash and investments at June 30, 2011 is set forth in the following table. Investments are stated at fair value.
Assets: Short-term investments:
Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Domestic debt securities International debt securities
Total
Designated for capital acquisition: Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage-backed securities:
Commercial Residential
Municipal, foreign, and other fixed income
Mutual funds: Treasury Inflation-Protected
Securities Fixed income Domestic equities:
Large capitalization Medium-small capitalization
$
June 30, 2011
8,489
37,164 40,035
6,595 49,808
6,872
91,298 5,135
245,396
22,505
20,383 37,998
4,839 47,353
9,959
7,394 60,402
74,879 29,968
19
Fair value measurements at reporting date using
Levell Level2 Level3
2,300 6,189
37,164 40,035
6,595 49,808
6,872
91,298 5,135
98,733 146,663
16,274 6,231
325 20,058 37,998
4,839 47,353
4,856 5,103
7,394 60,402
74,879 29,968
(Continued)
-!
PEACEHEALTH
Notes to Consolidated Financial Statements
International equities: Foreign stock Emerging markets
Real=e-statc-Commodities Options Other investment.<~
Total --------------
Trustee held funds: Cash and money market funds Fixed income:
Government obligations and other
Mortgage backed securities: Residential
Mutual funds: Domestic equities:
Large capitalization Medium-small capitalization
International equities: Foreign stock and emerging
markets Domestic debt securities International debt securities
Real estate
Total
Total assets
Liabilities: Interest rate swaps
Total liabilities
June 30, 2012 and 2011
(In thousands of dollars)
Fair value measurements at rel!orting date using
June 30, 2011 Levell Level2 Level3
$ 67,600 67,600 17,740 17,740 14~49 l4c;§49 19,707 6,935 12,772 17,580 17,580
307 307
453,163 301,229 151,934 --------
18,342 178 18,164
2,334 - 2,334
5,969 5,969
14,815 14,815 5,770 5,770
8,724 8,724 12,639 12,639 6,563 6,563
866 866
76,022 49,555 26,467
$ 774,581 449,517 325,064
77,106 - 77,106
$ 77,106 - 77,106
The table above does not include $9,862 of private equity funds, $13,714 of distressed debt funds, or $3,001 of real estate funds at June 30, 2011, which are accounted for under the equity method of accounting.
The Corporation holds alternative investments, as defined by the American Institute of Certified Public Accountants, in two limited partnerships of $20,423 and $12,772 at June 30, 2012 and 2011 respectively, which are not publicly traded. These amounts are included as a part of commodities in the table above. The
20 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
- - -- - --{In tliousands ofoollars)--
underlying assets in the limited partnership are based on fair market values, and the redemption period related to these investments is between 3 to 30 days.
At June 30, 2012 and 2011, the Corporation had $22,297 and $26,577, respectively, in alternative investments, referred to as Private Equity, Real Estate Trusts and Distressed Debt, accounted for using the equity method, which are not publicly traded. These amounts are not included in the tables above. These investment instruments contain elements of both credit and market risk. Such risks may include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, emphasis on speculative investments (nonmarketable investments), and nondisclosure of portfolio composition. Because these investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a readily available market for such investments existed. The majority of these investments are accounted for under the equity method of accounting. These investments represented 2.42% and 3.32% of total investments and 0.02% and 0.02% of total net assets of the Corporation at June 30, 2012 and 2011, respectively.
Investment income is comprised of the following for the years ended June 30, 2012 and 2011.
Interest and dividend income Net realized gains (losses) on sales of investments Change in net unrealized gains (losses) on investments
Investment income, net
Securities Lending Agreement
$
$
2012
20,085 (118)
~7,338)
12,629
2011
19,753 3,706
42,575
66,034
The Corporation entered into a securities lending agreement whereby a portion of investments are loaned to various financial institutions in return for cash or other securities as collateral for the securities loaned. Pursuant to the agreement, the collateral received is required to be at least 102% of the fair value of the securities loaned, which is determined at the end of each business day. The securities on loan are comprised entirely of fixed income securities. Net investment gains and losses, which are not significant for the years ended June 30, 2012 or 2011, are included in investment income, in the accompanying consolidated statements of operations. There were no securities on loan as of June 30, 2012.
Other Investments
Health Ventures is a not-for-profit corporation that has entered into joint ventures to provide radiology, oncology, and surgery services. The Corporation is the sole member of Health Ventures. Health Ventures is included in the consolidated financial statements but is not part of either obligated group. See note 7 for further discussion on the obligated groups.
The Corporation is a minority investor in both Premier Purchasing Partners (Premier) and American Excess Insurance Exchange (AEIX). The Corporation has invested in Premier with other healthcare providers for the purpose of lowering costs through group purchasing. The Corporation accounts for its interest in Premier on the cost method. AEIX is owned by a group of healthcare providers and provides
21 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
them with excess professional liability insurance coverage. The Corporation accounts for its interest in AEIX on the equity method of accounting less mandatory withdrawal penalties and an estimated discount to present value. As of June 30, 2012 and 2011, the carrying value of Premier and AEIX was approximately $14,868 and $15,614, respectively, and is recorded in investments in joint ventures and other on the consolidated balance sheets.
~~-~·(5_)--CharityJ::ar_e_ .. _________________________________ ~
The Corporation provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Corporation does not pursue collection of amounts determined to quality as charity care, they are not reported as revenues.
____ ~-The __ Corporation maintains. records_ to _identify. and_monitor_the_leveLof _charity_ care_it_provides. _These-· records include the amount of charges forgone for services and supplies under its charity care policy, Estimated costs (based on the proportion of overall costs to charges foregone for charity care) for services and supplies furnished under the charity care policy for the years ended June 30, 2012 and 2011 were approximately $78,922 and $70,058, respectively.
(6) Accounts Receivable
Accounts receivable at June 30 consisted of the following:
Patient accounts receivable Less:
Allowance for doubtful accounts Allowance for estimated contractual discounts
Net patient accounts receivable
22
$
2012
630,628
(74,128) (303, 188)
$ 253,312
2011
601,472
(83,127) (267,033)
251,312
(Continued)
(7)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
··\In lno.:isaiiCisofdollars)
Long-Term Debt
Long-term debt at June 30 consisted of the following:
Series 1995 (PeaceHealth) Oregon Bonds, variable interest rate (0.15% at June 30, 2012) payable each December I, due in annual installments through December 2015 $
Series 1999 (Southwest) Washington bonds, 3.00% to 5.00% payable annually through September 2028.
Series 2001 (PeaceHealth) Oregon Bonds, 5.00% to 5.25%, interest payable each May 15 and November 15, due in annual installments from 2016 through November 2032
Series 2004 (PeaceHealth) Oregon Bonds, Series A, 3.00% to 5.00%, interest payable each February 1 and August I, due in annual installments fi"om 2010 through August 2014.
Series 2008 (PeaceHealth) Washington Bonds, Series A, fixed interest rate of 5% payable on each May I and November 1, through November 2018.
Series 2008 (PeaceHealth) Oregon Bonds, Series A-B, variable interest rate (0.13% at June 30, 2012), principal payable each August, due in annual installments from 2030 to 2034 for Series A and B
Series 2008 (Southwest) Washington Bonds, variable interest rate (0.19% at June 30, 2012), principal payable each September, due in annual installments through 2034
Series 2009 (PeaceHealth) Oregon Bonds, Series A, fixed interest rates of 3.25% to 5.00% payable each May and November, due in installments from 2013 to 2039.
Series 2009 (PeaceHealth) Washington Bonds, Series A, fixed interest rates of3.0% to 5.0% payable each in May and November, due in installments through 2028
Series 2011 (PeaceHealth) Oregon Bonds, Series A-B, variable interest rates (0.87% at June 30, 2012) principal payable each May, due in installments from 2036 to 2047
2011 (PeaceHealth) Direct Note Obligation to Union Bank 2.46% payable monthly based on a ten-year amortization with remaining amount due November 2016
23
2012 2011
4,770 5,805
47,885 49,665
70,000 70,000
9,280 12,180
80,650 80,650
145,975 295,975
54,500 109,475
100,795 100,795
87,550 91,685
150,000
9,500
(Continued)
--
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
2012 .(Southwest) Bridge Loan Obligation to Bank of America, variable interest rate (0.90% at June 30, 2012) due on July 31, 2013
Long-term debt at par value
Premium and other on lOng~ term de6t
Other long-term debt
Total long-term debt
_ I,es~ a!Il<J1Jl1Y.due_\Vithillone year ------ -
Total long-term debt due after one year
$
$
2012 2011
54,000
814,905 - 816;230
8;927 o,9CJl
24,582 26,289
848,414 849,420
(18,033) (15,891)
830,381 833,529
Prior to the affiliation with Southwest, the regional networks of care or operating units that consisted of the Southeast Alaska Region, Whatcom Region, Lower Columbia Region, Oregon Region, Siuslaw Region; PeaceHealth Laboratories; the PeaceHealth Self-insured Trusts; and the PeaceHealth System Office together formed the PeaceHealth Obligated Group. These entities are not separate legal entities; PeaceHealth is the sole member of its Obligated Group and the assets of any one of the regions listed are available for the satisfaction of debts of the others (subject to the limitations of certain contractual commitments). These entities are obligated under the PeaceHealth Master Trust Indenture.
PeaceHealth Southwest Medical Center is the obligated member under a separate Master Trust Indenture created prior to the affiliation of Southwest with the Corporation. PeaceHealth Southwest Medical Center is not a part of the PeaceHealth Obligated Group as of June 30, 2012 and 2011.
The Corporation is taking steps to make each party a member of the other's obligated group. It is anticipated that all Southwest Master Notes will be retired during the course of various refinancing activities.
The Series 1995 Oregon (PeaceHealth), the Series 2008 Oregon Series A-B (PeaceHealth) bonds, and the Series 2011 Oregon Series A-B (PeaceHealth) bonds have variable interest rates that may bear interest at a daily, weekly, 28-day, monthly, semiannual, or annual rates. The rate determination mode may be changed upon request of the Corporation. The bonds are subject to optional redemption by PeaceHealth, in whole or in part at 100% of the principal amount plus accrued interest. The bonds are backed by letters of credit in the amount of approximately $147,600 for the 2008 Oregon bonds and $4,800 for the 1995 Oregon bonds. The letter of credit for Series A-B of the 2008 Oregon bonds will expire in June 2014. The letter of credit for the 1995 Oregon bonds will expire in January 2017. The 2011 Oregon bonds are held directly by two financial institutions subject to continuing covenant agreements, which contain substantially the same credit terms as the letters of credit, but which are not subject to the same remarketing and put risk as the 1995 and 2008 bonds. The 2011 Oregon bonds can be converted to publicly held variable rate demand bonds if the Corporation chooses. The continuing covenant agreements expire in August 2014. The letters of credit and the continuing covenant agreemen1s are extendable annually at the option of the bank upon
24 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands oi'dollars)
request from the Corporation for an additional year. The 2008 and 2011 bonds are matched to fixed payor swaps ranging between 3.92% and 4.10% for approximately their par value, the notional amounts of swaps amortizing proportionately to the bonds.
The Series 1995 Oregon (PeaceHealth) and Series 2008 Oregon (PeaceHealth) variable rate demand bonds, which have long-term amortization periods, may be put back to the letter of credit bank on any interest rate reset date when the bonds are due to be remarketed. In the event of a failed remarketing, the letter of credit bank is obligated under the terms of the letter of credit agreement to buy the bonds. If the bonds continue to fail to be remarketed, and become a term loan from the letter of credit bank to the Corporation, the payments commence not less than 367 days after the purchase of the bonds by the letter of credit bank, and are payable in equal quarterly installments thereafter.
The Series 1999 Washington bonds (Southwest) and the Series 2008 Washington bonds Series A (Southwest) are secured by PeaceHealth Southwest Medical Center's gross revenues. The 1999 Washington bonds maturing on or after September I, 2010 are redeemable at the option of Southwest at a redemption price of 101%, beginning September I, 2009, declining to 100.5% on September 1, 2010 and 100% on September I, 2011 and thereafter. The 2008 Washington bonds are redeemable in whole or in part at the option of Southwest at no premium. During the current year, the 2008 Washington bonds Series B were redeemed with proceeds from a taxable variable rate loan (the Bridge Loan), which is matched to a fixed payor swap bearing a rate of3.509%. The Bridge Loan is secured by Peacei-Iealth Southwest Medical Center's gross revenues, and further is guaranteed by the PeaceHealth Obligated Group.
The Series 2008 Washington bonds Series A (Southwest) bear variable interest based on weekly remarketing, not to exceed 12% per annum, and further a fixed payor swap at the rate of 3.603% on approximately 98% of the outstanding balance of the bonds remains in place. In conjunction with the issuance of the 2008 Washington bonds Series A, Southwest entered into a three-year Letter of Credit and Reimbursement Agreement, which expires in December 2013. These bonds, while subject to a long-teJm amortization period, may be put to the underlying letters of credit upon a failed remarketing. In an event of a draw under agreements, and amounts remain outstanding after 30 days, such amounts are converted to a term loan due in either equal semiannual payments with the first principal installment not due less than one year after the draw and the balance paid in full on the third anniversary of the draw or paid in full upon expiration of the agreement.
Other long-term debt primarily includes a $12,000 note payable paying interest of 6% with principal due and payable through 2017, as well as amounts related to capital lease obligations.
25 (Continued)
PEACEHEAl,TH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars}
Scheduled principal payments of long-te1m debt, excluding the premium on bonds and fair value adjustment due to affiliation, as due according to their long-term amortization schedule and other debt according to its maturity schedule for the next five years and thereafter are as follows:
Long-term debt Other
------¥oar-endingJune-3D:~-----~----=------:-:-:-=------2013 $ 1,... 1 1:.'£'0 t:" J,883 2014 2015 2016 2017 Thereafter -- --
Total
1£,1JV
70,740 17,500 13,585 17,850
683,080- - --- - -
01 A OQS $ Ui"T,-'
2,060 1,656 1,432 1,054
10,1-13 --
22,198
Total ---18,033 72,800 19,156 15,017 18,904
- ___ 693,193 -
837,103
The PeaceHealth Master Trust Indenture, the PeaceHealth Southwest Medical Center agreements with the Washington Healthcm"O Facilities Authority, and the loan agreements and other contractual documents under which the Corporation's bonds were issued include covenants, which among others, obligate the Corporation to: maintain net patient service revenues at levels sufficient to achieve specified debt service coverage ratios; meet certain financial tests before additional debt can be incurred; and meet certain financial tests before there can be any significant disposition of property.
Cash paid for interest totaled approximately $44,415 and $38,355 for the years ended June 30, 2012 a11d 2011, respectively. Interest totaling approximately $663 aod $595 was capitalized in connection with construction projects during the years ended June 30, 2012 aod 2011, respectively.
(8) Accounting for Derivative Instruments and Hedging Activities
In accordance with the policy adopted by the Board of Directors, the Corporation may use interest rate swap contracts to manage its net exposure to interest rate chaoges in attempting to reduce its overall cost of borrowing over time. Interest rate swap contracts generally involve the exchange of fixed and floating interest rate payments without the exchange of underlying principal (the swap of fixed or floating rates are on a notional amount). The Corporation accounts for its interest rate hedging transactions in accordaoce with ASC 815 -Derivatives and Hedging. That staodard requires that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at its estimated fair value. The interest rate swaps do not meet the criteria for hedge accounting and all changes in the valuation of the interest rate swaps are recognized in the statement of operations.
The Corporation had the following interest rate swap contracts outstanding as of June 30, 2012 with a total notional amount of approximately $551,366: a $40,000 basis swap where the Corporation receives 81.9% of 30 day LIBOR aod pays a 30 day tax-exempt index rate, aod approximately $511,366 (fixed payer swaps) which the Corporation uses to convert a portion of the outstanding variable rate bonds to fixed rates ranging from 2.58% to 4.1%. The interest rate swaps while associated with the variable rate bonds, have not been designated to any of the underlying debt.
26 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
· · · (In thousands-of dollars)
The fair value of interest rate swaps designated as cash flow hedges as of June 30, 2012 and 2011 was a liability of $154,591 and $77,106, respectively, which is included in other long term liabilities on the accompanying consolidated balance sheets. Change in the fair value of the interest rate swap, which was a decrease of $77,564 and an increase of $15,558 for the years ended June 30, 2012 and 2011, respectively, has been included in the change in fair value of interest rate swap in the statements of operations and changes in net assets.
Derivative instruments are recorded at fair value taking into consideration the Corporation's nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. The impact of taking into account the nonperformance risk on the fair value of the interest rate swaps was a benefit of approximately $19,644 and $7,763, as of June 30, 2012 and June 30, 2011, respectively. Recording the interest rate swaps at fair value results in a total liability of $154,591 reflected in the consolidated balance sheet rather than the $174,235 that would be paid if all of the swaps were terminated as of June 30, 2012. The inputs used to determine the impact of the counterparty nonperformance risk are Level 2 inputs; as such derivative liabilities have been recorded as Level 2 in the Corporation's disclosure of fair value iostruments, see note 4. Interest payments made and received on the interest rate swaps are included in interest expense on the statement of operations. For the years ended June 30, 2012 and 2011, ioterest expense for the interest rate swaps was $17,819 and $15,523, respectively.
The Corporation currently has five swap counterparties which minimize counterparty risk and collateral posting requirements. These swap agreements contain various credit thresholds that if breached by the Corporation would constitute an additional termination event whereby the swap counterparties could terminate the swap by either making a payment to, or receiving a payment from the Corporation, depending upon the termination value of the swaps as of the date of termination. PeaceHealth retains the right to terminate the swaps at any point, which would also require either making or receiving a payment depending on the termination value of the swap as of the tennination date. For the swaps specifically related to Southwest, the counterparty can terminate the swaps, requiring full settlement of any interest or termination value, only if Southwest's credit rating falls to BBB- or equivalent.
Subsequent to June 30, 2012, PeaceHealth terminated fixed payor swaps with a notional value of approximately $114 million, which were in a liability position of approximately $12,859 at June 30, 2012.
(9) Medicare and Medicaid Revenue
Net revenue for services provided to Medicare patients for the years ended June 30, 2012 and 2011 was approximately $721,129 and $582,969, respectively. Medicaid net patient service revenue for the years ended June 30, 2012 and 2011 was approximately $194,701 and $193,849, respectively.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined or new information is obtained. The net amount of adjustments from finalization and adjustment of prior years cost reports and other third-party settlements did not result in a significant change in net patient service revenues in either 2012 or 2011.
27 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
· (In thousands ·of-dollars)·
The following table sets forth disclosures related to the Plan in accordance with FASB ASC 715-20-65, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, as of June 30, 2012 and 2011.
Change in projected benefit obligation: Projected benefit obligation (PBO) at beginning of period $ Interest cost Actuarial loss on PBO Benefits paid
Year ended June 30,
2012
168,844 9,150
44,484 (4,232)
218,246 Projected benefit obligation at June 30 $ ==~~~~
Change in fair value of plan assets: Fair value of assets at beginning of period $ Actual return on plan assets Employer contribution Benefits paid
Fair value of assets at June 30 $
Reconciliation of funded status:
127,743 (2,966) 11,844 (4,232)
132,389 ==== Funded status $ ----"==L. (85,857)
(85,857) Net amount recognized $ ==d.;~='"=
Amounts recognized in the consolidated balance sheets consist of:
Accrued pension liability $ 85,857 Accumulated change in net assets (59,198)
6 months ended
June 30, 2011
166,268 4,514
37 (1,975)
168,844
116,943 3,465 9,310
(1,975)
127,743
(41,101)
(41,101)
41,101 (1,699)
The accumulated benefit obligation for the Plan was $218,246 and $168,844 at June 30, 2012 and 2011, respectively.
Net periodic benefit cost for the year ended June 30, 2012 and the six months ended June 30, 2011 included the following components and is included in payroll taxes and benefits in the accompanying consolidated statements of operations and changes in net assets:
Interest cost Expected return on plan assets Amortization of gain
Net periodic pension benefit
$
$
29
2012
9,150 (10,837)
788
(899)
2011
4,514 (5,313)
185
(614)
(Continued)
(a) Assumptions
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
The Corporation used the following actuarial assumptions to determine its benefit obligations at June 30,2012 and 2011, with measurement dates of June 30,2012 and 2011:
2012 2011
Discount rate 4.0% 5.5%
The Corporation used the following actuarial assumptions to determine its net periodic benefit cost for the year ended June 30, 2012 and the six months ended June 30, 2011:
Discount rate Expected long-term rate of retmn on plan assets
2012
4.0% 8.5
2011
5.5% 8.5
This discount rate is based on a proprietary yield curve tool used by the Plan's actuary, which uses a composite of high-yield, investment-grade corporate bonds, and the projected payouts from the Plan to develop an equivalent yield rate to use in determining plan liabilities.
The expected long-term rate of return on plan assets was based on the asset allocation mix and the long-term historical return for each asset class, taking into account current and expected market conditions. The actual (loss) return on pension plan assets was approximately (1.8)% and 2.8% for the year ended June 30, 2012 and the six months ended June 30, 2011, respectively. In the calculation of pension plan expense, the expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a fom-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns and expected returns based on the long-term rate of return assumptions.
(b) Pension Plan Assets
The asset allocation of the Corporation's pension plan at June 30, 2012 and 2011 is as follows:
2012 2011
Equity securities $ 76,763 86,224 Debt securities 46,931 31,361 Other 8 695 10 158
Total $ 132,389 127,743
Pension plan assets are managed according to an investment policy adopted by the Plan's trustees. Professional investment managers are retained to manage specific asset classes and professional consulting is utilized for investment perfonnance reporting. The primary objective of the Plan's
30 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2012 and 2011
-cHi tliousaifds of dollars) -
trustees is to achieve the highest possible total return commensurate with safety and preservation of capital in real, inflation-adjusted terms. The objective includes having funds invested in the long tenn, which protect the principal and produce returns sufficient to meet future benefit obligations. The investment policy includes an asset allocation that includes equity securities, debt securities, and cash/other investments. The target allocations are 7% cash and bonds, 19% low volatility hedge, 54% global equity, and 20% long-short hedge. Assets are rebalanced quarterly when balances fall outside of the approved range for each asset class.
In accordance with FASB ASC 820, financial assets and financial liabilities measured at fair value are grouped in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to estimate fair value. These levels and the adoption of F ASB ASC 820 are fmfuer discussed in note 4.
Following is a description of the valuation methodologies used for plan assets measured at fair value.
• Mutual Funds: Valued at the NA V of shares held by the plan at year-end.
• Common and Collective Trusts: Valued at fair value of the underlying assets on close of the valuation date and expressed in units. The unit value is determined at the valuation date by dividing the value ofthe entire common and collective trust by the number of units.
• Real Estate Investment Fund and Hedge Fund: Valued based on the fair value of the underlying assets as supported by audited financial statements.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to detennine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
31 (Continued)
-~
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of June 30, 2012:
Total fair Assets value Levell Level2 Level3
Cash and money markets $ 8,695 8,695 ~Mutual~funds:
Fixed income 24,506 24,506 Large cap 23,418 8,083 - 15,335 Mid cap 6,176 6,176 Small cap 4,027 4,027
_ f\Jl1eJ"ging market funds _ _ _ 27,180 22,381 ~ - 4,799 Hedge capital appreciation
------ --------- -- --
Fund 22,425 22,425 Long-short hedge 8,410 - - 8,410 Distressed debt 6,459 - 6,459 Private equity 1,093 - - 1,093
Total plan assets at fair valne $ 132,389 73,868 - 58,521
The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of June 30, 2011:
Total fair Assets value Levell Level2 Level3
Cash and money markets $ 10,158 10,158 Mutual funds:
Fixed income 13,227 13,227 Hedge capital
appreciation 18,133 - 18,133 Large cap 39,843 39,843 Mid cap 6,188 6,188 Small cap 9,832 9,832 Emerging markets 11,344 5,885 - 5,459
Long-short hedge 11,885 - - 11,885 Distressed debt 6,577 - 6,577 Private equity 556 - - 556
Total plan assets at fair value $ 127,743 85,133 - 42,610
32 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
~(Jn thousands ofdollars)
The following table presents a reconciliation of the beginning and ending balances of those Level 3 assets:
Fair value June 30, 2011 Realized and unrealized gains, net Purchases, issuances, and
settlements, net
Fair value June 30,2012
$
$
Fair value measurements
Level3
42,610 2,052
13,859
58,521
At June 30, 2012 and 2011, the Plan held $58,521 and $42,610, respectively, in alternative investments, reflected as Level 3 assets in the above table, which are not publicly traded. These investment instruments contain elements of both credit and market risk. Such risks may include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, emphasis on speculative investments (nonmarketable investments), and nondisclosure of portfolio composition. Because these investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a readily available market for such investments existed. These investments represented 44.2% and 33.4% of plan assets at June 30, 2012 and 2011, respectively.
(c) Cash Flows
The Corporation's policy with respect to funding the Plan is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts deemed appropriate. In fiscal year 2013, Southwest expects to contribute approximately $5,776 to the Plan.
Benefit payments are expected to be paid as follows for the fiscal years ended June 30:
2013 2014 2015 2016 2017 2018-2022
$
Pension benefits
5,783 6,612 7,222 8,049 8,761
55,018
Expected benefit payments presented above are based on actuarial estimates. Actual benefit payments may vary significantly from these estimates.
33 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 20 II
(In thousands of dollars)
Management is not aware of any settlements or curtailments that would require additional recognition during 2012.
(11) Defined Contribution Retirement Plans
~The Corporation sponsors two defined contribution retirement plans for the employees ofPeaceHealth and Southwest. At June 30, 2012, employees of Southwest are eligible for the Southwest plari iirid~ employees
------~of ffie PeaceHea!Ui operating Oivtswns ~ate eligiblefortlt\,-PeaceHealth~Plan~'Phere~had~not~been4lnl--~--~ integration of the plans as of June 30, 2012 or 2011.
PeaceHealth Southwest Medical Center Employer Contribution Plan
Employees who complete one hom of service are eligible to participate in the PeaceHealth Southwest -~-!V!eaical--Center-nmployer-contfioutlon Plan; a~ defined ~contribution~- retirement- plano-The~ level- of
contribution depends on, among other things, the level of employee contributions to the plan and years of service, with Southwest contributing between 4% ~ 15% of the employees' eligible annual compensation. Employer contributions under this plan were $15,589 for the year ended June 30, 2012 and $7,941 for the six-month period ended June 30, 2011 and are included in payroll taxes and benefits expense in the consolidated statement of operations.
PeaceHealth Defined Contribution Retirement Plan
The Corporation has a defined contribution retirement plan that covers substantially all employees of PeaceHealth meeting certain age and length of service requirements. Total retirement plan costs charged to operations were approximately $49,632 and $44,221 for the years ended June 30, 2012 and 2011, respectively, and are included in payroll taxes and benefits in the accompanying consolidated statements of operations.
(12) Restricted Net Assets
Restricted net assets are those whose use by the Corporation has been limited by donor-imposed restrictions to a specific time period and/or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity.
Temporarily restricted net assets are available for the following purposes at June 30:
2012 2011
Purchase of property, plant, and equipment $ 14,015 32,954 Hospice and indigent care 2,946 1,503 Patient care 13,993 6,475 Other 4,690 5,363
$ 35,644 46,295
34 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousaiids-ofdollars)
The income on the following permanently restricted net assets is available for these purposes at June 30:
Purchase of property, plant, and equipment Hospice and indigent care Patient care operating activities Other
$
2012
545 7,322 2,543
970
$ ===1=1,3=8=0=
2011
2,436 4,001 3,310 1,421
11,168
During fiscal year 2012 and 2011, net assets were released from donor restrictions by incurring operating expenses satisfying the restricted purposes of approximately $1,114 and $3,827, respectively. Further, approximately $19,208 and $8,101 were released from restriction for capital expenditures made during 2012 and 2011, respectively.
Endowment Funds
The Corporation accounts for endowments consistent with the provisions of ASC Section 950-205-45. The ASC provides guidance on classifYing net assets associated with donor-restricted endowment funds held by organizations that are subject to an enacted version of Uniform Prudent Management oflnstitutional Funds Act (UPMIFA). The ASC requires that unexpended earnings on endowment funds are classified as temporarily restricted net assets until appropriate for expenditure. The Corporation's endowment consists of twelve individual funds established for a variety of purposes. Its endowment includes donor-restricted endowments and uurestricted funds functioning as endowments through board designation. As required by generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.
As of June 30,2012 and 2011, donor-restricted endowments totaled $6,879 and $6,871, respectively, and board-designated endowments totaled $2,235 and $2,460, respectively.
The Corporation's management has interpreted UPMIFA as requiring the preservation oftl1e fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Corporation classifies as permanently restricted net assets (a) the original value of the gifts donated to the permanent endowment; (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund.
The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Corporation in a manner consistent with the standard of prudence prescribed by UPMIF A. In accordance with UPMIFA, the Corporation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:
• The duration and preservation of the fund
35 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
• The purposes of the Corporation and the donor" restricted endowment fund
• General economic conditions
• The possible effect of inflation and deflation
• The expected total return from income and the appreciation of investments
• ~Ollier resources or-tlle-Corporation
• The investment policies of the Corporation
In accordance with UPMIFA and board policy, assets classified as permanent endowments in accordance with donor intention are only utilized for current period expenditures to the extent that cumulative earnings -onlKeendowmencexceed theorlg-tm~l·fatrvalue·ofthe donation;- - -- -- - ---- -
Substantially all investments the Corporation holds for endowments are pooled for investment pmposes. Income earned on endowment fund investments is allocated on the basis of each fund's proportionate interest in the pooled investment portfolio. There were no funds with significant deficiencies as of June 30, 2012 and 2011.
Charitable Gift Annuities
The Corporation has been granted a license by the State of Washington, Office of Insurance Commissioner, to issue Charitable Gift Annuities in support of its charitable activities. The Corporation has delegated all its charitable fund raising activities to several fund raising foundations whose net assets, held for the beneficial interest of the Corporation, are shown on the balance sheet of the Corporation. Accordingly, the liability for annuity contracts and the separately maintained reserve accounts are recorded by the foundations which support the hospitals that the donors designated to benefit from their charitable gift annuity contributions. As of June 30, 2012 and 2011, the following liabilities for annuity contracts issued under the Corporation license and reserve account investments were recorded by the foundations:
State of Washington gift annuity liabilities Gift annuity reserve accounts
$
2012
(231) 330
2011
(253) 398
In addition the Corporation has issued two charitable gift annuities in the states of Alaska and Oregon for which the liability for annuity contracts as of June 30, 2012 and 2011 was $707 and $959, respectively, and separately maintained the reserve account balance of $953 and $1,318, respectively, which is recorded on the balance sheets of the supporting foundations located in those states. The St. John Medical Center Foundation and the PeaceHealth Southwest Medical Center Foundation have been granted separate licenses to issue charitable gift annuities by the state of Washington.
36 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
(13) Commitments and Contingent Liabilities
(a) Litigation
Various laws and regulations of federal, state, and local governments govern the healthcare industry. These laws and regulations are subject to ongoing government review and interpretation, as well as regulatory actions unknown or unasserted at this time. The Corporation is also involved in litigation and regulatory investigations arising in the normal course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Corporation's future financial position or results of operations.
(b) Operating Leases
The Corporation leases, for a nominal amount, the buildings and certain equipment for Ketchikan General Hospital from the City of Ketchikan, Alaska under a 10-year lease that expires in 2013.
Future minimum lease payments under noncancelable capital and operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2012 are as follows:
Year ending June 30: 2013 2014 2015 2016 2017 Later years, through 2020
Total minimum lease payments
Less amount representing interest
Present value of net minimum capital lease payments
Less current installments of obligations under capital leases
Obligations under capital leases, excluding current installments included in Long-term debt
(c) Collective Bargaining Agreements
Capital leases
$ 5,875 1,583 1,242
934 492
1,341
11,467
(954)
10,513
5,530
$ ====="4, .. 98=3=
Operating leases
23,277 19,864 16,780 15,577 14,363 58,896
$ 148,757
Approximately 27% and 30% of the Corporation's employees are covered under collective bargaining agreements, including nurses, professional employees, and service employees as of June 30, 2012 and 2011, respectively. The Corporation's various collective bargaining agreements expire between September 2012 and April 2014.
37 (Continued)
(14) Insurance Coverages
PEACEHEALTII
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands of dollars)
The Corporation has a self-insurance program for hospital and physician professional and general liability claims under which the Corporation contributes actuarially determined amounts to a trust to fund estimated ultimate losses. In connection with the self-insurance program, the Corporation has accrued estimates for asserted and incurred but not reported claims, including both the expected liability under e_acll_-clahn_and_ the cost to administer the claim. Self-insured professional and general liability retention in 2012 and 2011
----------w"'--"'a~s $s:ooo per occilrrerice iln<r$T8:ouo iri aggregate. Ilfdivioual generala.riaprofessiotiariiiiliilifY'chiims i"n-----~ excess of the above self~insured retention levels are insured through a claims-made excess insurance policy.
The Corporation also self-insures all or a portion of liabilities for medical and dental benefit plans, _ _ -~- \!!lemplnyment, aod_'Nmke.!'&' _ c_o~mp~nsativ_u_ claim.s,_ Funding .levels andliabilities are_determined_based_on _____ _
actuarial studies. Based on the actuarial studies, the Corporation has recorded a liability for all of the self-insurance programs of approximately $70,836 and $50,738 at June 30, 2012 and 2011, respectively. The liabilities are classified within other current liabilities and other long-term liabilities based on the historical amounts paid within one year. Total current amounts included in other current liabilities were approximately $23,090 and $22,118 at June 30, 2012 and 2011, respectively. In accordance with the adoption of ASU No. 2010-24 management has recorded amounts receivable from excess insurance catTiers totaled $5,587 as of June 30, 2012, which is included in other receivables in the accompanying consolidated balance sheet.
(15) Functional Expenses
The Corporation provides general healthcare services to residents within its geographic location. Expenses related to providing these services are as follows:
2012 2011
Healthcare services $ 1,677,011 1,315,420 General and administrative 644,334 563,290
$ 2,321,345 1,878,710 =
(16) Subsequent Events
In connection with the preparation of the financial statements and in accordance with FASB ASC Topic 855, Subsequent Events, the Corporation has evaluated subsequent events through October 18, 2012, which was the date the consolidated financial statements were issued.
On August 17, 2012, Catholic Health Initiatives, a not-for-profit healthcare system headquartered in Colorado, and the Corporation, entered into a nonbinding letter of intent to create a new regional healthcare system.
38 (Continued)
PEACE HEALTH
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(In thousands ofdollars)
It is envisioned that the new company would constitute an integrated health system, combining seven Catholic Health Initiatives hospitals and related healthcare operations in Washington and Oregon with nine PeaceHealth hospitals and related healthcare operations in Washington, Oregon, and Alaska. This new organization would include nearly 26,000 employees and about 950 employed physicians serving in hospitals, physician clinics, outpatient care clinics, long-term care facilities, laboratories, and private homes across the region. The transaction is subject to the parties' due diligence and negotiation of definitive agreements.
39
PEACEHEALTH
Consolidated Financial Statements
June30,2011 and2010
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets
PEACEHEALTH
Consolidated Financial Statements
June 30, 2011 and 2010
Table of Contents
Consolidated Statements of Operations
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
2-3
4
5
6
7-38
The Board of Directors ofPeaceHealth:
KPMG LLP Suite 900 801 Second Avenue Seattle, WA 98104
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of PeaceHealth (the Corporation) (a Washington not-for-profit corporation) as of June 30, 2011 and 2010, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit Includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the efl'ectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and signi flcant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofPeaceHealth Corporation as of June 30,2011 and 2010, and the results of its operations, changes in net assets, and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
October 17, 2011
KPMG LLP, !a DoiOIWfO llmllod llobllity pm1narstlip, lho U.s member Orrn of KPMG lnl&rnalioflal Coop~rab'vo ("KPMG International"), a Swiss enlily
PEACEHEALTH
Consolidated Balance Sheets
June 30,2011 and 2010
Liabilities and Net Assets
Current liabilities: Accounts payable Accrued payroll, payroll taxes, and employee benefits Accrued interest payable Other current liabilities Medical claims payable Reimbursement settlements payable Payable under securities lending agreement (note 3) Current portion of long-term debt (note 7)
Total current liabilities
Other long-term liabilities
Long-term debt due after one year (note 7)
Commitments and contingent liabilities (note 13)
Net assets: Unrestricted Temporarily restricted (note 12) Permanently restricted (note 12)
Total net assets
Total liabilities and net assets
See accompanying notes to consolidated financial statements,
3
$
2011
87,725,858 138,584,148
4,700,862 33,877,616
7,648,995 8,500,280
23,459,022 15,891,290
320,388,071
186,838,087
833,529,097
1,504,629,032 46,294,919 11,168,394
I ,562,092,345
$ 2,902,847,600
2010
46,753,474 92,662,826
3,884,034 21,816,108
3,845,891 20,353,228
7,953,529
197,269,090
143,113,421
671 ,969,170
894,626,180 20,610,460
3,436,952
918,673,592
I ,931,025,273
--
Revenues:
PEACEHEALTH
Consolidated Statements of Operations
Years ended Jtme 30, 20 II and 20 I 0
2011 2010
Net patient service revenue (note 2) $ 1,774,468,590 1,393,201,549 Premium revenue 67,303,241 Other operating revenue 57,053,669 47,517,160
Total revenues 1,898,825,500- 1,440,718,709 Expenses: ___ -- -
Salari·es<ttTd-wages 809,702,4iiJ~6J4,-400,0-28 Payroll taxes and benefits 208,586,461 176,511,788 Professional fees 19,626,231 I 0,512,061 Medical claims expense 47,232,453 Supplies and other expenses 535,880,368 410,838,341 Provision for bad debts 91,861,990 75,855,030 Depreciation anda:nmrt!zat!on- ----- 126;050,368- - --103,013,-180- -- -- ---Interest and amortization of deferred financing costs 39 770,412 33,857,322
Total expenses 1,878,710!736 I ,444,987, 750
Excess (deficit) of revenues over expenses from operations 20,114,764 _(4,269,041)
Other income (loss): Contribution from the Southwest affiliaition (note I b) 487,026,000 Investment income, net (note 3) 66,034,107 35,163,733 Gain on investments recorded on the equity method 3,865,012 3,022,189 Change in valuation of interest rate swaps 15,558,286 (20,989,904) Write-off of deferred financing costs - (756,940) Other 960,860 741,640
Total other income, net 573,444,265 17,180,718
Excess of revenues over expenses 593,559,029 12,911,677
Donations for land, buildings and equipment 1,753,146 Net assets released from restrictions used for purchase of
prope1ty and equipment 8,101,488 6,058,827 Change in interest in net assets of related foundation 3,931,835 Other changes in unrestricted net assets 2,657!354 583,201
Increase in unrestricted net assets $ 610,002,852 19,553,705
See accompanying notes to consolidated financial statements.
4
PEACEHEALTH
Consolidated Statements of Changes in Net Assets
Years ended June 30, 2011 and 2010
Temporarily Permanently Unrestricted restricted restricted Total
Net assets at June 30, 2009 $ 875,072,475 18,463,959 3,057,636 ~96,594,070
Excess of revenues over expenses 12,911,677 - - 12,911,677 Restricted contributions - 9,931,702 - 9,931,702 Net assets released from restrictions used for the purchase
of property and equipment 6,058,827 (6,058,827) Net assets released from restrictions used for operations - (3,985,463) - (3,985,463) Change in interest in net assets of related foundations - 2,348,222 379,316 ; 2,727,538 Other changes in net assets 583,201 (89,133) - 494,068
Change in net assets 19,553,705 2,146,501 379,316 '22,079,522
Net assets at June 30, 2010 894,626,180 20,610,460 3,436,952 918,673,592
Excess of revenues over expenses 593,559,029 1,064,000 - 594,623,029 Restricted contribution from the Southwest affiliation - 23,476,000 7,324,000 ' 30,800,000 Other restricted contributions - 11,518,051 - ' 11,518,051 Donations for land, buildings and equipment 1,753,146 - - 1,753,146 Net assets released from restrictions used for the purchase
of property and equipment 8,101,488 (8,101,488) Net assets released from restrictions used for operations - (3,826,274) - ' (3,826,274) Change in interest in net assets of related foundations 3,931,835 2,519,779 190,447 ' 6,642,061 Other changes in net assets 2,657,354 (965,609) 216,995 1,908,740
Change in net assets $ 610,002,852 25,684,459 7,731,442 643,418,753
Net assets a! June 30, 2011 1,504,629,032 46,294,919 11,168,394 1,562,092,345
See accompanying notes to consolidated financial statements.
5
PEACEHEALTH
Consolidated Statem~~nts of Cash Flows
Years ended June 30,2011 and 2010
Cash f1ows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash pl'Ovided by
operating activities: Contribution from the Southwest affiliaition Depreciation and amortization Los? (gain)_on sale ofland held for sale and prope1ty, plant, and equipment -Provision-for bad dihls· Restricted contributions Net -change in unrc8.hiea gains71oSSes on itivestnients Realized (gains)/losses on investments Valuation adjustments on swap arl'angements Wl'ite~off of deferred financing costs Equity investment gain Increase in interest in net assets of !'elated foundations
___ ChangcsJILOJ1era_ti_ogJlssets an.d lLaPjllti~s~ (Increase) decrease in:
Accounts receivable, net Other assets
Increase (decrease) in: Accounts payable (net of capital expenditures) Accrued payroll, payro11 taxes, and employee benefits Other liabilities
Net cash provided by operating activities
Cash llows from investing activities: Contribution of cash from the Southwest affiliation Putchase of property, plant, and equipment Proceeds from sale of land held for sale and property, plant, and equipment Purchase of investments Sales and maturities of investments Change in securities lending asset Decrease in assets w11ose use is limited, other
Net cash used in by investing activities
Cash flows from financing activities: Proceeds from long~ term borrowings Principal payments on long~ term debt Payment ofshort·terrn debt Proceeds from restricted contributions Advance repurchase of long·term debt Change in securities lending liability Payment of deferred financing costs
Net cash provided by financing activities
Net increase (dec1·ease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information; Contribution from the Southwest affiliaition
See accompanying notes to consolidated financial statements.
6
2011 2010
$ 643,418,753 22,079,522
(517,826,000) 126,435,069 103,557,366
6,203,959 (763,640) 91,861,990 ·75;.85.5,Q1Q .. (8,101,488) (6,058,827)
'\42;515;03())-· -· ··--('2-2~984~+09) (3,706,376) 2,097,973
(15,637,336) 20,989,904 -- 756,940
(3,865,0 12) (3,022, 189) (6,642,061) (2,727,538)
--- - --
(116,387,807) (69,440,442) (31 ,936,502) 1,450,720
17,249,384 (7,770,412) 20,576,322 4,827,694 (6,779,279) 972 498
152,288,580 119,820,490
32,738,000 (89,910,469) (57,996, 158)
1,254,890 1,703,250 (78,764,223) (178,735,313) 50,956,837 37,184,547 (7, 131 ,569) (6,846,215) 9,573,158 2,655,744 -
~83,376) .J202,034, 145)
9,131,190 205,588,817 (10,966,690) (153,970,841)
·- (49,300,000) 8,101,488 6,058,827
-- (8,784,526) 3,105,794 6,603,228
(2,682,784)
~~ 3,512,721
80,376,986 (78,700,934)
66,967,863 145,668,797
$ 147 344,849 66,967,863
$ (517,826,000)
(1) Organization
(a) Corporate Structure
PEACEHEALTH
Notes to Consolidated Financial Statements
June30,2011 and2010
PeaceHealth (the Corporation) is a Washington not-for-profit corporation with its corporate office located in Bellevue, Washington, which is sponsored by the Sisters of St. Joseph of Peace, and is recognized to be a Private Pontifical Juridic Person by the Roman Catholic Church. At June 30, 2011, the following regional healthcare delivery systems and operating divisions were components of the Corporation:
Southeast Alaska Region: PeaceHealth Ketchikan Medical Center
Whatcom Region: PeaceHealth St. Joseph Medical Center
Lower Columbia Region: PeaceHealth St. John Medical Center
Southwest Washington Health System (Southwest): PeaceHealth Southwest Medical Center Southwest Medical Group Southwest Washini,>ton Medical Center Foundation Property and Building Company, LLC Columbia United Providers
Oregon Region: PeaceHealth Sacred Heart Medical Center at University District PeaceHealth Sacred Hearl Medical Center at RiverBend PeaceHealth Cottage Grove Community Medical Center
Siuslaw Region: PeaceHealth Peace Harbor Hospital
System-wide Organizations: PeaceHealth Medical Group PeaceHealth Laboratories PeaceHealth Self-insured Trusts
These healthcare delivery systems and operating divisions, provide inpatient, outpatient, primary care and home care services in Alaska, Washington and Oregon. The Corporation operates these businesses primarily in the greater metropolitan areas of Ketchikan, Alaska; Bellingham, Longview and Vancouver, Washington; Springfield, Eugene, Florence and Cottage Grove, Oregon.
(b) Southwest Washington Health System Affiliation
On January I, 2011, the Corporation became the sole corporate member of Southwest Washington Health System. The financial position and results of operations of Southwest have been included in the consolidated financial statements of the Corporation since that date. Southwest's operations primarily consist of two hospital campuses, several medical groups, a fundraising foundation, a
7 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
Medicaid health plan (Columbia United Providers) and certain other entities located in the Vancouver, Washington service area.
This transaction has been accounted for as an acquisition under ASC 958-805, Not-for-Profit Entities ~Business Combinations. No consideration was paid by the Corporation to acquire the net assets of _S<m!hwe.sL.Ihe affiliatioJ1 resulted in an_ excess_ of assets acquired over liabilities assumed, or an inherent contribution of Southwest to the Corporation- of approXimately $517,82o;ooo: The
-~~~~~~~~~~~~u"'m"'·e"'st"'r•ictea portJonoftneilillererifcontrtblltl1llTof~$48"/;026~000·ts-inclo-ded·in<!ther·income-in-the~~~~~~
accompanying consolidated statement of operations. The remaining $30,800,000 of the contribution was restricted and is recorded in restricted net assets in the consolidated statement of changes in net assets.
The following table summarizes the fair value estimates of the Southwest assets acquired and liabilities assumed as of January 1, 2011: - --- --~ ---- - - -- -----
Tangible assets acquired Intangible assets acquired Liabilities assumed Noncontrolling interests
Total identifiable net assets assumed/inherent contribution
$ 808,028,000 22,717,000
(310,893,000) ~2,026,000}
$ 517,826,000
The fair value of the intangible assets acquired of $22,717,000 consists primarily of trade names (Southwest Washington Health System and Southwest Medical Center) valued at approximately $21,990,000 which has been assigned an indefinite useful life.
The following are the financial results of Southwest included in the Corporation's 2011 consolidated statement of operations during the six-month period from the date of the affiliation through June 30, 2011:
Total revenues Deficit of revenues over expenses from operations Excess of revenues over expenses
8
$ 351,960,000 (1,307,000) 8,690,000
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and2010
The following pro forma financial information presents the Corporation's results as if the affiliation had been reported as of the beginning of the Corporation's fiscal year of July I:
2011 20!0 Actual Pro forma Actual Pro forma
Total revenues $ I ,898,825,500 2,239,665,500 1,440,718,709 2,051,170,000 Excess (deficit) of
revenues over expenses from operations 20,114,764 17,240,764 (4,269,041) (23,657,000)
Excess of revenues over expenses 593,559,029 635,744,029 12,912,677 20,821,000
Total assets 2,902,847,600 2,902,847,600 1,931,025,273 2,746,776,000
(2) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the Corporation and its controlled affiliates, All significant intercompany transactions and balances have been eliminated. The Corporation has performed an evaluation of subsequent events through October 17, 20 II which is the date these consolidated financial statements were issued.
(b) Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The significant estimates in the Corporation's consolidated financial statements include accounts receivable allowances, reimbursement settlements payable, valuation of alternative investments, interest rate swaps, pension obligations, incurred but not reported amounts related to accrued healthcare costs and liabilities related to self-insurance programs.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of petty cash; cash in demand bank accounts and all highly liquid debt instruments purchased with an original matmity of three months or less other than those whose use is limited by the Board of Directors. The Corporation held cash equivalents of approximately $86,159,000 and $55,968,000 as ofJune 30, 2011 and 2010, respectively.
(d) Short-Term Investments
Short-term investments consist primarily of U.S. government and other investment grade securities, and certificates of deposit which are carried at fair value. Investment income or loss (incltJding realized and unrealized gains and losses and interest and dividends) is included in the excess of revenues over expenses.
9 (Continued)
(e) Inventory of Supplies
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
Inventory is valued on a last-in, first-out basis, weighted average cost
(f) Other Receivables
~ Other re~eivables prinuuiJY consist of premiums receivable due from a department of the State of ~~~~~~~~~~~--W'-'· i'as"'h;inr:ig'"t;o;,:n~fo::::r~m:;;;at:.;e;:;rn~i:;:,tyc_;case rates and newborn premiums due under the Healthy Options conti·acf
related to Coh.imbia Dn1ted l'i'oviOers.
(g) Assets Whose U~·e is Limited
The majority of these assets have been set aside by management of the Corporation for future capital improvements and other purposes, over which management retains control and may, at its discretion,
~~ -stlbsequently~use~for-otherpurposes;-Amounts required to meet current-liabilities-of the~Corporation-~- ~
have been reclassified as current in the consolidated balance sheets at June 30, 2011 and 2010. These items consist primarily of assets held by trustees ·under indenture agreements, investments in marketable equity and fixed income securities, mutual funds and investments in joint ventures. Money market funds and all marketable securities have readily determinable market values and are therefore carried at fair value. The investments in joint ventures and other ao·e accounted for using the equity or cost method.
(h) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Improvements and replacements of plant and equipment are capitalized. Maintenance and repairs are expensed as they are incurred. When property, plant, and equipment is sold or retired, the cost and the related accumulated depreciation are removed from the accounts, and the resulting gain or loss is recorded.
(i) Depreciation
Depreciation on property, plant, and equipment is computed using the straight-line method over the following estimated useful lives:
Land improvements Buildings and improvements Fixed equipment Leasehold improvements
Moveable equipment
(j) Deferred Financing Costs
5-25 years 5-70 years 10-25 years Shorter of remaining length of
the lease or useful life 3-20 years
These costs are amortized over the lives of the related debt issues using the effective-interest method.
(k) Other Assets
Other assets includes the estimated fair value associated with the plan assets of the Corporation's 457(b) post-retirement savings plan, in the amount of approximately $13,865,418 and $9,275,000 at
10 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
June 30, 2011 and 2010, respectively, with a corresponding amount included in other long-term liabilities. In addition, other assets include the estimated fair value associated with intangible assets, primarily the trade names "Southwest Washington Health System" and "Southwest Medical Center." As a result of the affiliation transaction, approximately $2I,990,000 was assigned to these intangible assets.
(f) Otlter Long-Term Liabilities
The caption other long-term liabilities on the consolidated balance sheets consists primarily of the estimated fair value associated with the Corporation's interest rate swaps of approximately $77,I 06,000 and $80,315,000 atJune 30, 20I I and 20I 0, respectively; the liability for the Southwest pension plan of approximately $4 I, I 0 I ,000 at June 30, 201 I; and the long-term portion of the liability for the self-insurance programs of approximately $27,620,000 and $30,70I,OOO at June 30, 2011 and 20IO, respectively,
(m) Contributions and Grants
Contributions and grants are recognized as revenue upon receipt of the donor's pledge to contribute. Contributions and grants are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts pledged that are restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support. Unconditional promises to give that are silent as to the due date are presumed to be time restricted by the donor until received and are reported as temporarily restricted net assets.
A donor restriction expires when an unconditional promise with an implied time restriction is collected or when the pmpose for the restriction is accomplished. Upon expiration, temporarily restricted net assets are reclassified to unrestricted net assets and are reported in the consolidated statements of operations as net assets released from restrictions. Restricted contributions received in the same year in which the restrictions are met are recorded as an increase in restricted support at the time of receipt and as net assets released from restrictions at the time restrictions are met.
Permanently restricted net assets include the principal amount of contributions with the stipulation from the donor that the principal be maintained in perpetuity and only the income is available to be expended for purposes specified by the donor, if any.
(n) Interest In Net Assets of Related Foundations
The Corporation accounts for activities with its unconsolidated related foundations in accordance with applicable accounting guidance. That guidance requires the Corporation to recognize its interests in the net assets of these foundations on the consolidated balance sheet as the asset caption interest in net assets of related foundations, and the annual changes as shown in the consolidated statement of changes in net assets.
I I (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
(o) Net Patient Service Revenues
The Corporation has agreements with third-party payors that provide for payments of amounts different from established charges. The Corporation's net patient service revenue carne from the following sources:
2011 2om ~~~~~~~~~~~Medicare 3Jo/ff · 34o/o~~~~~~~
Medicaid 11 9 Commercial and other 50 51 Private pay • 6 6
100% 100%
There is a corresponding significant concentration of credit risk in net accounts receivable balances at June 30, 2011 and 2010:
Medicare Medicaid Commercial and other Private pay
2011
31% 10 53 6
100%
2010
29% 9
59 3
100%
The Corporation has estimated payments for services rendered to Medicare and Medicaid patients during the year by applying the payment principles of the applicable governmental agencies and believes that an adequate provision has been made in the accompanying consolidated financial statements for final settlement Estimates of final settlements due to and due from Medicare, Medicaid, and other third-party payors have been reflected as a reimbursement settlement payable and other receivables in the accompanying consolidated balance sheets. Ditierences between the net amounts accrued and subsequent settlements are recorded in operations at the time of settlement.
Reimbursement for inpatient services rendered to Medicare recipients has been made principally under a prospective pricing system based on diagnosis-related groups. Most outpatient services provided to Medicare patients are reimbursed based on prospectively determined rates. Services to Medicaid patients are also reimbursed based on a combination of prospectively determined rates and cost reimbursement methodology. Continuation of these reimbursement programs at the present level, and on the present basis, is dependent upon future policies of federal and state governmental agencies. The Corporation has three critical access hospitals that are exempt from both inpatient and outpatient prospective payment systems. Inpatient and outpatient services rendered to Medicare and Medicaid progl'am beneficiaries at critical access hospitals are reimbursed based on costs. Interim reimbursement to critical access hospitals is based upon tentative rates and retroactive adjustment is made to actual cost during final settlement by either the Medicare fiscal intermediary or the
12 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
applicable state's Medicaid agency. The medical groups in the Corporation are generally reimbursed on a fee schedule for Medicare and commercial and on a cost basis for Medicaid patients.
The Corporation has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Corporation under these agreements includes prospectively determined rates per unit of service and discounts from established charges. Most arrangements provide for payment or reimbursement to the Corporation at amounts different than established rates. Contractual discounts represent the difference between established rates for services and amounts paid or reimbursed by these third-party payers.
(p) Premium Revenue and Accrued Healthcare Costs
The Corporations majority-owned subsidiary, Columbia United Providers (CUP), receives premium revenues that consist of premiums paid by the State of Washington for healthcare services. Premium revenues are received on a prepaid basis and are recognized as revenue during the month with which the premiums are associated. All of CUP's premium revenues were received under two primary contract sources at the State of Washington, the Basic Health Plan and Healthy Options. The Corporation recognized premium revenues of $67,303,241 for the six months ended June 30, 2011 which is included as premium revenue in the accompanying consolidated statement of operations. The related medical expense recognized by CUP was $47,232,453 for the six months ended June 30, 2011 and is included in medical claims expense in the consolidated statement of operations.
CUP has stop-loss reinsurance indemnifying it against the cost of providing services to individual enrolled participants at 90% in excess of $125,000 for hospital charges up to a maximum of $1,000,000 per year for each enrolled member.
( q) Provision for Bad Debts
The Corporation provides for an allowance against patient accounts receivable for amounts that could become uncollectible. The Corporation estimates this allowance based on the aging of accounts receivable, historical collection experience by payor, and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, the Increased burden of copayments to be made by patients with insurance coverage and business practices related to collection efforts. These factors continuously change and can have an Impact on collection trends and the estimation process used by the Corporation.
(r) Other Operating Revenue
Other operating revenue includes revenue from nonpatient care services, clinical space rental revenues, and contributions both unrestricted in nature and those released from restriction (other than the Southwest affiliation contribution) to support operating activities.
13 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
(.v) Excess of Revenues over Expenses
Excess of revenues over expenses includes results from the Corporation's operating and investing activities. Changes in unrestricted net assets not included in excess of revenues over expenses include net assets released from restriction for the purchase of property, changes in the Corporation's interesLin~Jhe_~net assets_ oLmmcontrolle<.l foundations, certain changes in funded status of
~ posfreiii'emenfb~enefif plans, and other.
(t) Federal and State Income Taxes
The Corporation has received determination letters from the Internal Revenue Service stating that it is exempt t\·om federal income tax under Section 50l(c)(3) of the Internal Revenue Code except for tax on unrelated business income. It is management's belief that none of its activities have produced
--------- ---material-unrelated_business incnme.~
The Corporation recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that exceeds a 50% probability of being realized. Changes in recognition or measurement are reflected in the period in which the change in estimate occurs.
(u) Recently Adopted or Issued Accounting Standard•·
In 2009, the FASB issued ASC Subtopic 958-805 (Subtopic 958-805), fonnerly Statement of Financial Accounting Standards 164. Not-for-Profit Entitles: Mergers and Acquisitions- Including an amendment of FASB Statement No. 142, which establishes principles and requirements for detennining whether a combination is a merger or an acquisition; applies the carryover method in accounting for a merger; applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer; and determines what infonnation to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition. Additionally, Subtopic 958-805 sets forth guidance on subsequent accounting for goodwill and other intangible assets acquired in an acquisition and amendments related to noncontrolling interests in consolidated financial statements. The date of adoption, of Subtopic 958-805 for the Corporation was July I, 2010. This guidance was applied in the Corporation's accounting for the affiliation transaction discussed in note l(b). Noncontrolling interests of consolidated joint ventures as of and for the year ended June 30, 2011 were not significant.
In August2010, the Financial Accounting Standards Board (FASB) issued Accounting Standatds Update (ASU) No. 2010-24, Health Care Entities- Presentation of Insurance Claims and Related Insurance Recoveries, which clarifies that insurance recoveties should not be netted against a related claim liability. The claim liability amount should be calculated without consideration of insurance recoveries. This standard is effective for the 2012 fiscal year. The adoption of this standard is not expected to have a material impact on the Corporation's consolidated financial statements.
14 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
In August 2010, the FASB issued ASU No. 2010-23, Health Care Entities- Measuring Charity Care for Disclosure, which requires a standardized process be used by health care entities that provide charity care to determine the measurement basis. Cost will be used as the measurement basis for disclosure purposes and should be broken down between direct and indirect costs for providing charity care. This standard is effective for the 2012 fiscal year. The adoption of this standard is not expected to have a material impact on the Corporation's consolidated financial statements.
In 2011, the FASB issued ASU No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubiful Accounts for Certain Health Care Entities, which provides financial statement users with greater transparency about a health care entity's net patient service revenue and the related allowance for doubtful accounts. This Update provides information to assist financial statement users in assessing an entity's sources of net patient service 1·evenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient's ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. This standard is effective for the 2013 fiscal year. The Adoption of this standard is not expected to have a material impact on the Corporation's consolidated financial statements.
(v) Healtll Care Reform
The Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (Reconciliation Act) were both signed by President Obama in the first calendar quarter of 2010. The legislation went into effect upon signing with provisions to become effective over the next seven years. This legislation is expected to broadly impact the Corporation's operations, including patient access, service reimbursement rates, and reporting requirements in the future. The Corporation has evaluated those provisions which went into effect upon signing noting they did not have a significant impact on the consolidated financial statements. The Corporation has not yet determined the future financial statement impact that this legislation might cause as further provisions become effective.
(w) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation to more consistently present financial information between years.
15 (Continued)
(3) Investments
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 201\ and 2010
The composition of c.ash and investments at June 30, 20 II and 20 I 0 is set forth in the following table:
Assets: ~~~~~~~~~~S'IfoiHerm.investment:J1sF: ~~~~~~-~~~--~
Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage backed securities:
----comrriercial-~--- ----- -
Residential Municipal, foreign and other fixed income
Mutual funds: Domestic debt securities International debt securities Other short-term inveshnents
Total
Designated for capital acquisition: Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage backed securities:
Commercial Residential
Municipal, foreign and other fixed income Mutual funds:
Treasury Inflation-Protected Securities (TIPs) Fixed income Domestic equities:
Large capitali:;<ation Medium-small capitalization
16
Junc30 !liTf
$ 8,489,384
37,163,665 40,034,900
---- --6~595;053 -49,808,477 6,872,109
91,298,033 5,134,804
i'Ufij
735,517
82,373,689 29,3]0,999
--2-35;970-37,162,285 6,976,044
75,622,449
424,251
245,396,425 232,841,204
22,504,964
20,382,088 37,998,276
4,839,359 47,352,826
9,959,484
7,394,000 60,402,000
74,879,432 29,967,523
9,057,650
23,301,398 40,579,733
3,029,898 31,756,322
4,206,905
38,974,676 13,805,018
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
June 30 20ii 2010
International equities: Foreign stock $ 67,599,750 21,015,293 Emerging markets and other 17,740,150 2,686,695
Real estate trusts 3,001,166 Private equity 9,861,582 Distressed debt 13,713,503 Real estate 14,548,720 5,670,375 Commodities 19,706,769 9,640,586 Options 17,580,246 18,159,816
Total 479,431,838 221 ,884,365
Trustee held funds: Cash and money market funds 18,341,885 18,622,502 Fixed income:
Government obligations and other 2,334,101 226,410 Mortgage backed securities:
Commercial 7,179,946 Residential 5,968,946
Mutual funds: Domestic equities:
Large capitalization 14,814,766 12,106,172 Medium-small capitalization 5,769,646 3,414,124
International equities: Foreign stock and emerging markets 8,724,165 6,670,418
Domestic debt securities 12,638,639 8,267,640 International debt securities 6,563,333 445,287
Real estate 866,375 645,787
Total 76,021,856 57,578,286
Other investments: Cash and short-term investments 308,677 287,143
Total $ 801,158,796 512,590,998
The Corporation holds alternative investments, as defined by the American Institute of Certified Public Accountants, in two limited partnerships of $12,771,589 and $9,640,586 at June30, 2011 and 2010 respectively, which are not publicly traded. These amounts are included as a part of commodities in the table above. The underlying assets in the limited partnership are based on fair market values, and the redemption period related to these investments is between 3 to 30 days.
At June 30, 2011, the Corporation had $26,576,251 in alternative investments, referred to as Private Equity, Real Estate Trusts and Distressed Debt in the table above which arc not publicly traded. These investment instruments contain elements of both credit and market risk. Such risks may include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, emphasis
17 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
on speculative investments (nonmarketable investments), and nondisclosure of portfolio composition. Because these investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market for such investments existed. The majority of these investments are accounted for under the equity method of accounting. These investments represented 3.3% of total investments and 1.7% of total net assets of the Corporation at
- June30,.201l.
Investment income Is -comprlsetl<tfthe-following-for-the~years-ended-June~3Q,201-l--and-i!0-10~. ~~~~~~~~~~-
Interest income Net realized gains (losses) on sales of investments
---~~~-Change_innet_unrealiz_ed_gains/lp~~li_Qn_iD_ye.§Lm_ents_
Investment income, net
Securities Lending Agreement
$
$
2011 2010
19,752,695 14,277,597 3,706,376 (2,097,973)
42,575,036 22,984,109
66,034,107 35,163,733
The Corporation has entered into a securities lending agreement whereby a portion of investments are loaned to various financial institutions in return for cash or other securities as collateral for the secmlties loaned. Pursuant to the agreement, the collateral received is required to be at least 102% of the fair value of the securities loaned, which is determined at the end of each business day. The securities on loan are comprised entirely of fixed income securities. Net investment gains and losses, which are not significant as of June 30, 2011 or 2010, are included in investment income, in the accompanying consolidated statements of operations.
Other Investments
Health Ventures is a not-for-profit corporation that has entered into joint ventures to provide radiology, oncology, and surgery services. The Corporation is the sole member of Health Ventures. Health Ventures is included in the consolidated financial statements but is not part of either obligated groups. See note 7 for further discussion on the obligated groups.
The Corporation is a minority investor in both Premier Purchasing Partners (Premier) and American Excess Insurance Exchange (AEIX). The Corporation has invested in Premier with other healthcare providers for the purpose of lowering costs through group purchasing. The Corporation accounts for its interest in Premier on the cost method. AEIX is owned by a group of healthcare providers and provides them with excess professional liability insurance coverage. The Corporation accounts for its interest in AEIX on the equity method of accounting less mandatory withdrawal penalties and an estimated discount to present value. As of June 30, 2011 and 20 I 0 the canying value of Premier and AEIX was approximately $15,614,000 and $17,091,000, respectively, and is recorded in investments in joint ventures and other on the consolidated balance sheets.
18 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June30,2011 and2010
(4) Fair Value of Financial Instruments
ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
• Level I inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
• Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The Corporation uses a practical expedient for the estimation of the fair value of investments in funds for which the investment does not have a readily determinable fair value. The practical expedient used by the Corporation is the Net Asset Value (NA V) per share, or its equivalent. In some instances, the NA V may not equal the fair value that would be calculated under fair value accounting standards. Valuations provided by fund administrators consider variables such as the financial performance of underlying investments, recent sales prices of underlying investments, and other pertinent information. In addition, actual market exchanges at year-end provide additional observable market inputs of the exit price. Management reviews the valuations and assumptions provided by fund administrators for reasonableness and believes that the carrying amounts of these financial instruments are reasonable estimates of fair value. Because the net asset value repot1ed for these funds is used as a practical expedient to estimate the fair value of the Corporation's interest therein, its classification in Level 2 is based on the Corporation's ability to redeem its interest at or near the balance sheet date. The initial valuation is adjusted when changes to inputs and assumptions are corroborated by evidence, such as transactions of similar securities, completed or pending third-party transactions in the underlying security or comparable entities, offerings in the capital markets, and changes in financial results, data, or cash flows. For positions that are not traded in active markets or are subject to notice provisions, valuations are adjusted to reflect such provisions, and such adjustments are generally based on available market evidence.
19 (Continued)
---- -----
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value) at June 30 2011:
~ Short tenn investments:
Cash and money market funds Fixed income:
Government obligations Corporate .obligations
~ ~ __ Mortgage ]2l!Qked secmi\ies: _ Commercial Residential
Municipal, foreign and other fixed income
Mutual funds: Domestic debt securities International debt securities
Total
Designated for capital acquisition: Cash and money market funds Fixed income:
Government obligations Corporate obligations Mortgage backed securities:
Commercial Residential
Municipal, foreign and other fixed income
Mutual funds: Treasury Inflation-Protected
Securities (TIPs) Fixed income Domestic equities:
Large capitalization Medium~small capitalization
June JO,JOll
$ 8,489,384
37,163,665 40,034,900
--- ---- -
6,595,053 49,808,477
6,872,109
91,298,033 5,134,804
~396,425
22,504,964
20,382,088 37,998,276
4,839,359 47,352,826
9,959,486
7,394,000 60,402,000
74,879,432 29,967,523
20
Fair value measurements at reporting date using
Levell Levell Level3
2,299,931
91,298,033 5,134,804
~.768
16,274,274
324,514
4,856,185
7,394,000 60,402,000
74,879,432 29,967,523
6,189,453
37,163,665 40,034,900
6,595,053 49,808,477
6,872,109
146,663,657
6,230,690
20,057,574 37,998,276
4,839,359 47,352,826
5,103,301
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
Fair value measurements at r•c:pol'ting date using
June 30, 2011 Levell Level2 Level3
Intemationa1 equities: Foreign stock $ 67,599,750 67,599,750 Emerging markets 17,740,150 17,740,150
Real estate trusts 3,001,166 3,001,166 Private equity 414,582 414,582 Distressed debt 576,503 576,503 Real estate 14,548,720 14,548,720 Commodities 19,706,769 6,935,180 12,771,589 Options 17,580,246 17,580,246
Total 456,847,840 304,913,979 151,933,861
Trustee held funds: Cash and money market funds 18,341,885 178,065 18,163,820 Fixed income:
Government obligations and other 2,334,101 2,334,101
Mortgage backed securities: Residential 5,968,946 5,968,946
Mutual funds: Domestic equities:
Large capitalization 14,814,766 14,814,766 Medium-small capitalization 5,769,646 5,769,646
International equities: Foreign stock and emerging
markets 8,724,165 8,724,165 Domestic debt securities 12,638,639 12,638,639 International debt securities 6,563,333 6,563,333
Real estate 866,375 866,375
Total 76,021,856 49,554,989 26,466,867
Assets under securities lending agreement 23,459,022 23,459,022
Total assets $ 801,725,143 453,20 I ,736 348,523,407
Liabilities: Payable under securities lending $ 23,459,022 23,459,022 Interest rate swaps 77,106,000 77 106,000
Total liabilities $ 100,565,022 100,565,022
The table above does not include $9,447,000 of private equity funds and .~ 13,137,000 of distressed debt funds at June 30, 2011, which are accounted for under the equity method of accounting.
21 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value) at June 30, 2010.
Fair value measurements at
:!'!•• 30, 1011 Levell rcgoo·tin& date uslnfL ____
Level 2 LeveJ 3
As~e_t_s: _ Short term investments:
Cash and rnoncy market funds $ 8,489,384 2,299,931 6,189,453 Fixed income:
Government obligations 37,163,665 - 37,163,665 Corporate obligations 40,034,900 -- 40,034,900
______ _ _MQtlg~~ backed securities: Commercial --6,595~053 -- -- ----o;ws;o5r ------
Residential 49,808,477 -- 49,808,477 Municipal, foreign and other
fixed income 6,872,109 - 6,872,109 Mutual funds:
Domestic debt securities 91,298,033 91,298,033 International debt securities 5,134,804 5,134,804 --
Total 245,396,425 98,732,768 146,663,657
Designated for capital acquisition: Cash and money market funds 22,504,964 16,274,274 6,230,690 Fixed income:
Government obligations 20,382,088 324,514 20,057,574 Corporate obligations 37,998,276 .... _ 37,998,276 Mortgage backed securities:
Commercial 4,839,359 -- 4,839,359 Residential 47,352,826 - 47,352,826
Municipal, foreign and other fixed income 9,959,486 4,856,185 5,103,301
Mutual funds: Treasury Inflation~ Protected
Securities (TIPs) 7,394,000 7,394,000 Fixed income 60,402,000 60,402,000 Domestic equities:
Large capitalization 74,879,432 74,879,432 Medium-small capitalization 29,967,523 29,967,523
22 (Continued)
PEACE HEALTH
Notes to Consolidated Financial Statements
June 30, 20 II and 20 I 0
Fair value measurements at
June 30, 2011 Level I I'CJ)OI'tlng date using
Level2 Level3
International equities: Foreign stock $ 67,599,750 67,599,750 Emerging markets 17,740,150 17,740,150
Real estate trusts 3,001,166 3,001,166 Private equity 414,582 414,582 Distressed debt 576,503 576,503 Real estate 14,548,720 14,548,720 Commodities 19,706,769 6,935,180 12,771,589 Options 17,580,246 17,580,246
Total 456,847,840 304,913,979 151,933,861
Trustee held funds: Cash and money market funds 18,341,885 178,065 18,163,820 Fixed income:
Government obligations and other 2,334,101 2,334,101
Mortgage backed securities: Residential 5,968,946 5,968,946
Mutual funds: Domestic equities:
Large capitalization 14,814,766 14,814,766 Medium~small capitalization 5,769,646 5,769,646
International equities: Foreign stock and emerging
markets 8,724,165 8,724,165 Domestic debt securities 12,638,639 12,638,639 International debt securities 6,563,333 6,563,333
Real estate 866,375 866,375
Total 76,021,856 49,554,989 29,466,867
Assets under securities lending agreement 23,459,022 23,459,022
Total assets $ 801,725,143 453,20 I 1736 348,523,407
Liabilities: Payable under securities lending $ 23,459,022 23,459,022 Interest rate swaps 77,106,000 77,106,000
Total liabilities $ 100,565,022 100,565,022
23 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
The following table presents the Corporation's activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level3) as defined in Topic 820 for the years ended June 30, 2011 and 2010:
Assets held Liabilities under under
securities sCCUPitieS--~-
lending . le.rulin~
Balance at June 30, 2009 $ 737,500 5,000,000 Total realized and unrealized gains, net:
Included in income 237,500 ---- ---Balance at June 30, 2010 975,000 5,000,000
Total realized and unrealized gains, net: -------
Included in income 4,025,000 Transfer in and/or out of Level 3 (net) (5,000,000) (5,000,000l
Balance at June 30,2011 $
The fair value of long-term debt is based on level 2 inputs, such as the discounted value of the future cash flows using current rates for debt with the same remaining maturities, considering the existing call premium and protection. When available, quoted market prices are also used. The carrying value and fair value of tax-exempt bonds, was approximately $825,669,000 and $827,876,000, respectively, as of June 30, 2011, and approximately $673,986,000 and $677,746,000, respectively, as of June 30, 2010.
Other financial instruments of the Corporation include cash and cash equivalents and other receivables. The carrying amount of these instruments approximates fair value because these items mature in less than one year. The carrying amount of other long-term investments approximates fair value.
(5) Charity Care
The Corporation provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, they are not reporied as revenues.
The Corporation maintains records to identify and monitor the level of charity care it provides. Charges forgone for services and supplies furnished under the charity care policy for the years ended June 30, 20 II and 2010 were approximately $139,925,000 and $102,415,000, respectively.
24 (Continued)
(6)
(7)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
Accounts Receivable
Accounts receivable at June 30 consisted of the following:
2011
Patient accounts receivable $ 60 I ,471,958 Less:
Allowance for doubtful accounts (83, 126,484) Allowance for estimated contractual discounts (267,033,0782
Net patient accounts receivable $ 251,312,396
Long-Term Debt
Long-term debt at June 30 consisted of the following:
lOll
Series 1995 (PeaceHealth) Oregon Bonds, variable interest rate, (0.05% at June 30, 2011) payable each December I, due in annual installments through December 2015 $ 5,805,000
Series 1999 (Southwest) Washington bonds, 3.00% to 5.00% payable annually through September 2028. 49,665,000
Series 2001 (PeaceHealth) Oregon Bonds, 5.00% to 5.25%, interest payable each May 15 and November 15, due in annual installments from 2016 through November 2032 70,000,000
Series 2004 (Peace Health) Oregon Bonds, Series A, 3.00% to 5.00%, interest payable each February I and August I, due in annual installments from 2010 through August 2014. 12,180,000
Series 2008 (PeaceHealth) Washington Bonds, Series A, fixed interest rate of 5% payable on each May I and November 1, through November 2018. 80,650,000
Series 2008 (PeaceHealth) Oregon Bonds, Series A-D, variable interest rate, (0.07% to 0.09% at June 30, 2011), principal payable each August, due in annual installments from 2030 to 2034 for Series A and B; principal payable each May, due in annual installments from 2036 to 2047 for Series C and D. 295,975,000
Series 2008 (Southwest) Washington Bonds, variable interest rate, (.08% at June 30, 2011), principal payable each September, due in annual installments through 109,475,000
25
2010
346,169,606
(59,448,197) (127,954,8301
158,766,579
2010
6,780,000
70,000,000
15,000,000
80,650,000
295,975,000
(Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
Series 2009 (PeaceHealth) Oregon Bonds, Series A, fixed
2011
interest rates of3.25% to 5.00% payable each May and November, due in installments from 2013 to 2039. $ 100,795,000
cccccSeriys2009Jf'ea<JeHealth)Washington Bonds, Series A, fixed interest rates of.3:o% to 5.0% payable each
2010
100,795,000
-~~~~~~~~~~~trrMaram:l~November~dudn-installments~through 9-1-,68! _ ;,002.__ ------94,8J$,000
Long-term debt at par value
Premium and other on long-term debt
Total long-term debt at par value
Other long-term debt
Total long-term debt
Less amounts due within one year
Total long-term debt due after one year $
816,230,000
9,439,371
825,669,371
23,751,016--
849,420,387
Cl5,891,29oL
833,529,097
664,035,000
9,951,248
673,986,248
5;936~451 ______
679,922,699
·~ (7,953,529)
671,969,170
The regional systems or operating units (prior to the affiliation of Southwest), Alaska Region, Whatcom Region, Lower Columbia Region, Oregon Region, Siusilaw Region; and PeaceHealth Laboratories; and the PeaceHealth Self-insured Trusts; and the Peacel-Iealth System Office form the PeaceHealth Obligated Group. These entities arc not separate legal entities; and the assets of any one are available for the satisfaction of debts of the others (subject to the limitations of certain contractual commitments). These entities are obligated under the PeaceHealth Master Trust lndentw·e.
PeaceHealth Southwest Medical Center is the obligated member under a separate Master Trust Indenture created prior to the affiliation of Southwest with the Corporation. Peace Health Southwest Medical Center is not a part of the PeaceHealth Obligated group as of June 30, 20 II.
The Series 1995 Oregon (Peacel-lealth) and the 2008 Oregon Series A-D (Peacel-Iealth) bonds have variable interest rates that may bear interest at a daily, weekly, 28 day, monthly, semi-annual or annual rates. The rate determination mode may be changed upon request of the Corporation. The bonds are subject to optional redemption by Peace Health, in whole or in part at 100% of the principal amount plus accrued interest. The bonds are backed by letters of credit in the amount of approximately $299,530,000 for the 2008 Oregon bonds and $5,900,000 for the 1995 Oregon bonds. The letter of credit for Series A-B of the 2008 Oregon bonds will expire in June 2013 and the letter of credit for Series C-D of the 2008 Oregon bonds will expire in June 2012. The letter of credit for the 1995 Oregon bonds will expire in January 2017. The let!ers of credit are extendable annually at the option of the bank upon request from the Corporation for an additional year.
The 1995 Oregon (PeaceHealth) and 2008 Oregon (Peacel-lealth) variable rate demand bonds, which have long-term amortization periods, may be put back to the letter of credit bank on any interest rate reset date when the bonds are due to be remarketed. In the event of a failed remarketing the letter of credit bank is obligated under the terms of the letter of credit agreement to buy the bonds. If the bonds continue to fail to
26 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
be remarketed, and become a term loan from the letter of credit bank to the Corporation, the payments commence not less than 367 days after the purchase of the bonds by the letter of credit bank, and are payable in equal quarterly installments thereafter.
The 1999 Revenue Bonds (Southwest) and the 2008 Revenue Bonds (Southwest) are secured by Southwest Washington Medical Center's gross revenues. The 1999 Revenue Bonds (Southwest) maturing on or after September I, 2010 are redeemable at the option of Southwest at a redemption price of 10 I%, beginning September 1, 2009, declining to 100.5% on September I, 2010 and 100% on September 1, 2011 and thereafter. The 2008 Revenue Bonds (Southwest) are redeemable in whole or in part at the option of the Medical Center at no premium.
The Series 2008 Washington (Southwest) Revenue Bonds bear variable interest based on weekly remarketing, not to exceed 12% per annum. In conjunction with the issuance, Southwest entered into two three-year Letters of Credit and Reimbmsement Agreements with two financial institutions. These bonds, while subject to a long-term amortization period, may be put to the underlying letters of credit upon a failed remarketing. In an event of a draw under agreements, and amounts remain outstanding after 30 days, such amounts are converted to a term loan due in either equal semiannual payments with the first principal installment not due less than one year after the draw and the balance paid in full on the third anniversary of the draw or paid in full upon expiration of the agreement.
Other long-term debt primarily includes a $12,000,000 note payable paying interest of 6% with principal due and payable through 2027, as well as amounts related to capital lease obligations.
Scheduled principal payments of long-term debt, excluding the premium on bonds, as due according to their long-term amortization schedule and other debt according to its maturity schedule for the next five years and thereafter are as follows:
Year ending June 30: 2012 2013 2014 2015 2016 Thereafter
Total
Long-term debt
$ 11,825,000 12,175,000 16,790,000 17,600,000 13,735,000
744, I 05,000
816,230,000 $.=;,;,=~=
Other Total
4,066,290 15,891,290 4,050,688 16,225,688 1,501,949 18,291,949 1,596,866 19,196,866 1,371,832 15,106,832
11,163,391 755,268,391
23,751,016 839,981,016
The PeaceHcalth Master Trust Indenture, the Southwest Washington Medical Center agreements with the Washington Healthcare Facilities Authority, and the loan agreements and other contractual documents under which the Corporation's bonds were issued include covenants, which among others, obligate the Corporation to: maintain net patient service revenues at levels sufficient to achieve specified debt service coverage ratios; meet certain financial tests before additional debt can be incurred; and to meet certain financial tests before there can be any significant disposition of property. Management believes they are in compliance with these covenants.
27 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
Cash paid for interest totaled approximately $38,354,549 and $32,385,000 for the years ended June 30, 2011 and 2010, respectively. Interest totaling approximately $595,000 and $232,000 was capitalized in connection with construction projects during the years ended June 30,2011 and 2010, respectively.
Subsequent to the year-ended June 30, 2011, in August 2011 management called $150,000,000 of the ::::Series_e-Q20Q&Oregon ])gnds and issued$150,000,000 in new bonds. The2011 Oregon bonds areplaeed
directly with Wells Fargo Bank and US Bank and are not backed by letters of credit. These banks -are -~~~~~~~~~r~e"'q~u"'~r~edTito_c,hOldtne-ooiidsfor-a Three year- peitoo-alla-oe-at-mterestar68%~or-one-manth-lolB6Rfllus-ant~~~~~~~
applicable spread. These bonds are matched to existing fixed payor swaps wherein the variable rate received by PeaceHealth is also equal to 68% of one month LJBOR. Peace Health may request the banks to extend the direct placement period annually which the banks may grant at their sole discretion. In the event that at the end of the initial three year placement period the bonds fail to he remarketed, or converted to
~-- - -~----~~ another_interesLrate_ mode,_ so_long_lls_n_Q_e_vcnt_cl_default h'l~jlj)mmed,_tll_e_Qank~ are__reqlJired to .. grant a three year term out loan, the first principal amount of which is not due until the first anniversary ofsucha - -~- -term out loan.
(8) Accounting for Derivative Instruments and Hedging Activities
In accordance with the policy adopted by the Boa1·d of Directors, the Corporation may use interest rate swap contracts to manage its net exposure to interest rate changes in attempting to reduce its overall cost of borrowing over time. Interest rate swap contracts generally involve the exchange of fixed and floating interest rate payments without the exchange of underlying principal (the swap of fixed or floating rates are on a notional amount). The Corporation accounts for its interest rate hedging transactions in accordance with ASC 815 - Derivatives and Hedging. That standard requires that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at its estimated fair value. During 2010, management changed its policy and is no longer designating the interest rate swap contracts they enter into as cash flow hedges. As such, the interest rate swaps do not meet the criteria for hedge accounting and all changes in the valuation of the interest rate swaps are recognized in the statement of operations.
The Corporation had the following interest rate swap contracts outstanding related as of June 30, 2011 with a total notional amount of approximately $580, 175,000: a $40,000,000 basis swap where the Corporation receives 81.9% of 30 day LIBOR and pays a 30 day tax-exempt index rate, and approximately $540,175,000 (fixed payer swaps) which the Corporation uses to convert a portion of the outstanding variable rate bonds to fixed rates ranging from 2.58% to 4.1 %. The interest rate swaps while associated with the variable rate bonds, have not been designated to any of the underlying debt.
The following table presents the effect of interest rate swap contracts on the consolidated balance sheets:
Interest rate swaps not designated as hedges
Balance sheet location
Other long-term liabilities
28
$
June 30 tott 2o1o
77,106,000 80,3 I 5,336
(Continued)
l'EACEHEALTH Notes to Consolidated Financial Statements
June 30, 2011 and 2010
The following table presents the information on the effect of interest rate swap agreements not separately disclosed on the consolidated statements of operations:
Interest rate swaps not designated as hedges
Statement of operations location
Interest expense $
June 30 2011 20t0
1,077,343 150,004
Derivative instruments are recorded at fair value taking into consideration the Corporation's nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. The impact of taking into account the nonperformance risk on the fair value of the interest rate swaps was a benefit of approximately $7,763,000 and $11,300,000, as of June 30, 2011 and June 30, 20 I 0, respectively. Recording the interest rate swaps at fair value l'esults in a total liability of $77,106,000 reflected in the consolidated balance sheet rather than the $84,869,000 that would be paid if all of the swaps were terminated as of June 30, 2011. The inputs used to determine the impact of the counterparty nonperformance risk are level 2 inputs; as such derivative liabilities have been recorded as level 2 in the Corporation's disclosure of fair value instruments, see note 4.
The Corporation currently has five swap counterparties which minimize counterparty risk and collateral posting requirements. These swap agreements contain various credit thresholds that if breached by the Corporation would constitute an additional termination event whereby the swap counterparties could terminate the swap by either making a payment to, or receiving a payment from the Corporation, depending upon the termination value of the swaps as of the date of termination. Peace Health retains the right to terminate the swaps at any point, which would also require either making or receiving a payment depending on the termination value of the swap as of the termination date. For the swaps specifically related to Southwest, the counterparty can terminate the swaps, requiring full settlement of any interest or termination value, only if Southwest's credit rating falls to BBB- or equivalent.
(9) Medicare and Medicaid Revenue
Net revenue for services provided to Medicare patients for the years ended June 30, 2011 and 2010 was approximately $582,968,535 and $490,239,000, respectively. Medicaid net patient service revenue for the years ended June 30, 2011 and 2010 was approximately $193,849,205 and $137,484,000, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation.
As a result, retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements arc determined or new information is obtained. The net amount of adjustments from· finalization and adjustment of prior years cost reports and other third-party settlements did not result in a significant change in net patient service revenues in either 2011 or20l0.
The Medicare cost reports are subject to retroactive adjustment for three years after settlement, unless held open longer for disputed items. The cost reports receive either full- or limited-scope audits by the fiscal intermediary appointed by Medicare. Settlements for open years will be finalized after review by the appropriate government agencies.
29 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June30,2011 and2010
(10) Benefit Plans
Defined Benefit Pension Plan
The Corporation sponsors a noncontributory defined benefit pension plan, the Southwest Washington Health System Retirement Plan (the Plan), covering all employees at Southwest who meet requirements as
c~PeJ.OJfit~dJn!I:!O:Plallc Th~cassets ofthe Plan are available to pay the benefits of all eligible employees of the Plan. The Plan has two benefit structures that include~ a cash balance arid a final average pay strucftlre. Tlie
~~~~~~~~~~c"'a"'sfiliruance structure provi1les an almlll!l~~nefir-puynrent~based~on~years-of-service~in~addition~to~an,~~~~~~ interest credit; the cash balance benefit is available for those hired on or after January I, 2009. The final average pay structure provides a lifetime monthly benefit based on the participant's average compensation over a specified period of employment; the final average pay benefit is available for those hired before January I, 2009. Benefits for the Plan were frozen as of December 31, 20 I 0, and all related charges were
- _ ------_ _____rec_orded_prior_Jo_the_aJfiliation JJLSQt!!!l_W~~t~ Vlilh_f'eace!-I<Jalth.
The following table sets forth disclosures related to the Plan in accordance with FASB ASC 715-20-65, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, at June 30, 2011.
Change in projected benefit obligation: Projected benefit obligation (PBO) at
January I, 2011 Service cost Interest cost Actuarial loss on PBO Benefits paid
Projected benefit obligation at June 30, 20\ I
Change in fair value of plan assets; Fair value of assets at
January 1, 2011 Actual return on plan assets Employer contribution Benefits paid
Fair value of assets at June 30, 20 II
Reconciliation of funded status; Funded status
Net amount recognized
Amounts recognized in the consolidated balance sheets consist of:
Accrued pension liability Accumulated change in net assets
$ 166,268,000
4,514,000 37,000
(1,975,00Ql
$ 168,844,000
$ 116,943,000 3,465,000 9,310,000
(1,975,000)
$ 127,743,000
$ (41,101,000)
$ (41,101,000)
$ 41,101,000 (25,832,000)
The accumulated benefit obligation for the Plan was $168,844,000 at June 30, 20 II.
30 (Continued)
PEACE HEALTH Notes to Consolidated Financial Statements
June 30,2011 and 2010
Net periodic benefit cost for the six months ended June 30, 20 II included the following components and is included in payroll taxes and benefits in the accompanying consolidated statements of operations and changes in net assets:
Interest cost $ 4,514,000 Expected return on plan assets (5,313,000) Amortization of gain/loss 185,000
Net periodic pension (benefit) cost $ ==(=6=14=o':OO;,;O"")=
(a) Assumptio11s
Southwest used the following actuarial assumptions to determine its benefit obligations at June 30, 2011, with measurement dates of June 30,2011:
Discount rate Expected long-term rate of return on
plan assets
5.5%
8.5
Southwest used the following actuarial assumptions to determine its net periodic benefit cost for the six months ended June 30, 20 II:
Discount rate Expected long-term rate of return on
plan assets
5.5%
8.5
This discount rate is based on a proprietary yield curve tool used by the Plan's actuary, which uses a composite of high-yield, investment-grade corporate bonds and the projected payouts from the Plan to develop an equivalent yield rate to use in determining plan liabilities.
The expected long-term rate of return on plan assets was based on the asset allocation mix and the long-term historical return for each asset class, taking into account cunent and expected market conditions .. The actual return on pension plan assets was approximately 2.8% for 2011. In the calculation of pension plan expense, the expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a four-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns and expected returns based on the long-term rate of return assumptions.
31 (Continued)
(b) Pension Plan Assets
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
The asset allocation of Southwest's pension plan at June 30, 201 I is as follows:
Equity securities $ 86,224,000 Debt securities 31,361,000 Other 10,158,000
otal_ $ _l27,74MQO
Pension plan assets are managed according to an investment policy adopted by the Plan's trustees. Professional investment managers are retained to manage specific asset classes and professional consulting is utilized for investment performance reporting. The primary objective of the Plan's
---- -- --------- ----trustees-is-to-achieve-the-highest -possible-total-return-commensurate-with safety-and preservation of------capital in real, inflation-adjusted terms. The objective includes having funds invested in the long term, which protect the principal and produce returns sufficient to meet future benefit obligations. The investment policy includes an asset allocation that includes equity securities, debt securities, and cash/other itwestments. The target allocations are 56% equity, 34% debt, and 10% real estate. Assets are rebalanced quarterly when balances fall outside of the approved range for each asset class.
In accordance with FASB ASC 820, financial assets and financial liabilities measmed at fair value are grouped in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to estimate fair value. These levels and the adoption of FASB ASC 820 are further discussed in note 4.
Following is a description of the valuation methodologies used for plan assets measured at fair value.
• Mutual Funds: Valued at the NAY of shares held by the plan at year-end.
• Common and Collective Trusts: Valued at fair value of the underlying assets on close of the valuation date and expressed in units. The unit value is determined at the valuation date by dividing the value of the entire common and collective trust by the number of units.
• Real Estate Investment Fund and Hedge Fund: Valued based on the fair value of the underlying assets as supported by audited financial statements.
The methods described above may pi'Oduce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthennore, while the Plan believes its valuation methods are appi'Opriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
32 (Continued)
.,
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 2011 and 2010
The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of June 30, 2011:
Assets
Cash and money markets Mutual funds:
Fixed income Hedge capital
appreciation Large cap Mid cap Small cap Emerging markets
Long-short hedge Distressed debt Private Equity
Total plan assets at fair value
Total fair value
$ 10,158,000
!3,227,000
18,133,000 39,843,000 6,188,000 9,832,000
11,344,000 11,885,000 6,577,000
556 000
$ 127,743,000
Levell
10,158,000
13,227,000
39,843,000 6,188,000 9,832,000 5,885,000
85,133,000
Lcvel2 Lcvel3
18,133,000
5,459,000 11,885,000 6,577,000
556,000
42,610,000
The following table presents a reconciliation of the beginning and ending balances of those Level3 assets:
(c) Cash Flows
Fair value January 1, 20 ll Transfer in and/or out of Level 3
(net) Realized and unrealized (losses)
gains, net Purchases, issuances, and
settlements, net
Fair value June 30, 2011
$
Fair value measurements
Level3
52,893,000
(5,885,000)
(2,098,000)
(2,300,000)
$ ==42;;;,6;,;,1~0,0~0;;;.0..,
Southwest's policy with respect to funding the Plan is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts deemed appropriate. In fiscal year 2012, Southwest expects to contribute approximately $4,244,005 to the Plan.
33 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
Benefit payments are expected to be paid as follows for the fiscal years ended June 30, 20 II:
Pension benefits
2012 $ 5,025,000 2013 .. 5,737,000 2014 6,472,000
~~~~~~~~~~~~~~~2ots '7,!o9,ooo,~~~~~~~~~~~
2016 7,955,000 2017-2021 51,183,000
These estimates are based on assumptions about future events. Actual benefit payments may vary -sjgnificantlyfrom theseestil!ill!es~-· --- · - ·
Management is not aware of any settlements or curtailments that would require additional recognition during the 6 month period ended June 30, 2011.
(11) Defined Contribution Retirement l'lans
The Corporation sponsors two defined contribution retirement plans for the employees of PeaceHealth and Southwest. At June 30, 2011, employees of Southwest are eligible for the Southwest plan and employees of the PeaceHealth operating divisions are eligible for the PeaceHealth Plan. There has not been an integration of the plans as of June 30, 2011.
Southwest Washlngt<m Medical Center Defined Contribution Retirement Plan
Employees who complete one hour of service are eligible to participate in the Southwest Washington Medical Center Defined Contribution Retirement Plan, a defined contribution retirement plan. The level of contribution depends on, among other things, the level of employee contributions to the plan with Southwest matching up to 3% of the employees' eligible annual compensation.
Employer contributions under this plan were $7,941,000 for the six month period ended June 30, 2011 and are included in payroll taxes and benefits expense In the consolidated statement of operations.
PeaceHealth Defined Contribution Retirement Plan
The Corporation has a defined contribution retirement plan that covers substantially all employees of Peace Health meeting certain age and length of service requirements. Total retirement plan costs charged to operations were approximately $44,221,000 and $35,455,000 for the years ended June 30, 2011 and 201 0, respectively, and are included in payroll taxes and benefits in the accompanying consolidated statements of operations.
(12) Restricted Net Assets
Restricted net assets are those whose use by the Corporation has been limited by donor-imposed restrictions to a specific time period and/or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity.
34 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
Temporarily restricted net assets are available for the following purposes at June 30:
Purchase of property, plant, and equipment Hospice and indigent care Patient care operating activities Other
$
2011
32,954,509 I ,503,000 6,474,755 5,362,655
$ ===46:,;,2;,;,94=,9=1=9=
Permanently restricted net assets are available for the following purposes at June 30:
2011
Purchase of property, plant, and equipment $ 2,435,626 Hospice and indigent care 4,000,997 Patient care operating activities 3,309,913 Other I ,421,858
$ 11,168,394
2010
17,302,635 207,467
2,340,410 759,948
20,610,460
2010
2,453,086 253,268 688,232 42,366
3,436,952
During fiscal year 20 II and 20 I 0, net assets were released from donor restrictions by incurring operating expenses satisfying the restricted purposes of approximately $3,826,000 and $3,985,000, respectively. Purther, approximately $8,101,000 and $6,059,000 were released from restriction for capital expenditures made during 2011 and 2010, respectively.
The Corporation accounts for restricted funds consistent with the provisions of ASC Section 950-205-45. The ASC provides guidance on classifying net assets associated with donor-restricted endowment funds held by organizations that are subject to an enacted version of Uniform Prudent Management of Institutional funds Act (UPMIFA). The ASC requires that unexpended earnings on endowment funds are classified as temporarily restricted net assets until appropriate for expenditure. The foundation's endowment consists of twelve individual funds established for a variety of purposes. Its endowment includes donor-restricted and board designated endowment funds. As required by generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.
The Foundation's management has interpreted UPMIFA enacted in the State of Washington as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Foundation classifies as permanently restricted net assets (a) the original value of the gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund.
The remaining portion of the donor-restricted endowment fund that is not classified as pennanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for
35 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30,2011 and 2010
expenditure by the Foundation in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Foundation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:
• The duration and preservation of the fund
- • ---'fhe jltirposes of the Foundation and the donor-restricted endowment fund
~~~~~~~~~~.oo~oenerl\1 economtc corttl!tl<i ms:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
• The possible effect of inflation and deflation
• The expected total return from income and the appreciation of investments
• Other resources of the Foundation
• The investment policies of the Foundation
In accordance with UPMIFA and board policy, assets classified as permanent endowments in accordance with donor intention are only utilized for current period expenditw·es to the extent that earnings on the endowment exceed the original fair value of the donation.
Substantially all Investments of the Corporation held for endowment are pooled for investment purposes. Income earned on endowment fund investments is allocated on the basis of each fund's proportionate interest in the pooled investment portfolio. There were no flmds with significant deficiencies as of June 30, 2011.
(13) Commitments and Contingent Liabilities
Various laws and regulations of federal, state, and local governments govern the healthcare industry. These laws and regulations are subject to ongoing government review and interpretation, as well as regulatory actions unknown or unasserted at this time. The Corporation is also involved in litigation and regulatory investigations arising in the normal course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Corporation's future financial position or results of operations.
The Corporation leases, for a nominal amount, the buildings and certain equipment for Ketchikan General Hospital from the City of Ketchikan, Alaska under a 10-year lease that expires in 2013.
36 (Continued)
PEACEHEALTH
Notes to Consolidated Financial Statements
June30,2011 and2010
Future mtmmum lease payments under noncancelable capital and operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2011 are as follows:
Year ending June 30: 2012 2013 2014 2015 2016 Later years, through 2020
Total minimum lease payments
Less amount representing interest
Present value of net minimum capital lease payments
Less current installments of obligations under capital leases
Obligations Lmder capital leases, excluding current installments included in Long Term Debt
Collective Bargaining Agreements
$
$
Capital leases
1,315,000 I ,398,000 I, 165,000 I, 180,000
872,000 1,834,000
7,764,000
(I, I 08,000)
6,656,000
I, 156,025
5,499,975
Operating leases
15,529,000 12,509,000 8,306,000 6,384,000 5,737,000
26,753,000
75,218,000
Approximately 30% of the Corporation's employees are covered under collective bargaining agreements, including nurses, professional employees, and service employees as of June 30, 2011. The Corporation's various collective bargaining agreements expire between September2011 and April2014.
37 (Continued)
(14) Insurance Coverages
PEACEHEALTH
Notes to Consolidated Financial Statements
June 30, 20 II and 20.10
The Corporation has a self-insurance program for it's PeaceHealth operating divisions (not including the Southwest entities) hospital and physician professional and general liability claims under which the Corporation contributes actuarially determined amounts to a trust to fund estimated ultimate losses. In connection wit]l the self-insurance program, The Corporation has accrued estimates for asserted and incurred but notwported claims, including both the expected liability under each claim anihhe-'cost·to
~~~~~~~~~administ0r-the~claimc~Self.insur.ed~professional~and~general~liability~retention~ln-20JJ~and~lLHL.was~~~~~~~ $5,000,000 per occurrence and $18,000,000 in aggregate. Individual general and professional liability claims in excess of the above self-insured retention levels are insured through a claims-made excess insurance policy.
The Corporation also self-insures all or a portion of liabilities related to it's PeaceHealth operating --~·-~-~ -~ --··divisions-(not~ including-the Southwest~entities) medical-and-dental~benefit plans,- unemployment,--and-~~- ---
workers' compensation claims. Funding levels and liabilities are determined based on actuarial studies. Based on the actuarial studies, the Corporation has recorded a liability for all of the PeaceHealth self-insurance programs of approximately $50,738,000 and $56,280,000 at June 30, 2011 and 2010, respectively. The liabilities are classified within other current liabilities and other long-term liabilities based on the historical amounts paid within one year. Total current amounts included in other current liabilities were approximately $22,118,000 and $25,579,000 at June 30, 2011 and 2010, respectively.
Funded amounts for the PeaceHealth self-insured plans, were approximately $75,862,000 and $57,478,000 at June 30, 2011 and 2010, respectively, such amounts are held in trust and are included in assets whose use is limited in the accompanying consolidated balance sheets.
The Corporation has purchased professional liability insurance coverage for Southwest on a claims-made basis. The Corporation has recorded a liability for claims incurred but not reported during the new policy period based upon the estimate of losses from unreported incidents and claims on an expected undiscounted basis as determined by its third-party actuary. Additionally, a liability has been recorded for Southwest's retention of known claims. These liabilities are included in other long-term liabilities.
(15) Functional Expenses
The Corporation provides general healthcare services to residents within its geographic location. Expenses related to providing these services are as follows:
Healthcare services General and administrative
38
2011
$ 1,315,420,000 563,291,000
$ 1,878,711,000
2010
980,361,000 464,627,000
1,444,988,000