Accounting for Decision-makers
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A N D S U P P L E M E N T A R Y I N F O R M A T I O N
Frederick Regional Health System, Inc. and Subsidiaries Years Ended June 30, 2016 and 2015 With Report of Independent Auditors
Ernst & Young LLP
1604-1907206
Frederick Regional Health System, Inc. and Subsidiaries
Consolidated Financial Statements and Supplementary Information
Years Ended June 30, 2016 and 2015
Contents
Report of Independent Auditors.......................................................................................................1
Consolidated Financial Statements
Consolidated Balance Sheets ...........................................................................................................3 Consolidated Statements of Operations ...........................................................................................5 Consolidated Statements of Changes in Net Assets ........................................................................6 Consolidated Statements of Cash Flows ..........................................................................................7 Notes to Consolidated Financial Statements ....................................................................................8
Supplementary Information
Supplementary Consolidating Balance Sheet ................................................................................48 Supplementary Consolidating Statement of Operations ................................................................50
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Report of Independent Auditors
The Board of Directors Frederick Regional Health System, Inc. and Subsidiaries
We have audited the accompanying consolidated financial statements of Frederick Regional Health System, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of June 30, 2016 and 2015, 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 Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity 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 financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Monocacy Insurance, Ltd., a wholly-owned subsidiary, which statements reflect total assets of $14,010,249 and $13,231,952 as of June 30, 2016 and 2015, respectively, and net loss after elimination of intercompany revenues of $2,880,630 and $2,692,956, respectively, for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Monocacy Insurance, Ltd., is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the 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 financial statements.
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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, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Frederick Regional Health System, Inc. and subsidiaries as of June 30, 2016 and 2015, and the consolidated results of their operations, changes in their net assets, and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary consolidating information is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.
ey October 11, 2016
2016 2015 Assets Current assets:
Cash and cash equivalents 34,525$ 31,432$ Patient receivables, net 45,935 48,100 Other receivables 5,057 1,860 Inventory 6,055 6,006 Prepaid expenses 3,328 2,430 Assets limited as to use 3,081 3,093 Promises to give, net 1,056 787
Total current assets 99,037 93,708 Net property and equipment 216,683 202,055 Other assets:
Assets limited as to use 1,113 8,840 Investments – donor restricted 6,857 5,855 Promises to give, net 5,361 3,786 Long-term investments 130,641 134,931 Other investments 12,492 5,974 Debt issuance costs, net 1,291 1,379 Other assets 6,085 5,109
Total other assets 163,840 165,874 Total assets 479,560$ 461,637$
Frederick Regional Health System, Inc. and Subsidiaries
Consolidated Balance Sheets (In Thousands)
June 30
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2016 2015 Liabilities and net assets Current liabilities:
Current maturities of long-term debt, line of credit and capital lease obligations 7,007$ 5,103$
Accounts payable 31,544 22,052 Accrued expenses 19,688 18,402 Advances from third-party payors 8,982 9,813 Other current liabilities 1,937 2,475
Total current liabilities 69,158 57,845 Long-term liabilities, net of current portion:
Long-term debt and capital lease obligations 159,170 161,012 Interest rate swap contract 14,058 11,277 Accrued pension expense 24,887 18,868 Other long-term liabilities 19,367 19,487
Total long-term liabilities, net of current portion 217,482 210,644 Total liabilities 286,640 268,489 Net assets:
Unrestricted 179,647 182,721 Temporarily restricted 12,297 9,451 Permanently restricted 976 976
Total net assets 192,920 193,148 Total liabilities and net assets 479,560$ 461,637$ See accompanying notes.
June 30
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2016 2015 Unrestricted revenue and other support:
Net patient service revenue 376,716$ 358,596$ Provision for bad debts (4,683) (3,099) Net patient service revenue less provision for bad debts 372,033 355,497 Other operating revenues 7,608 9,068 Gifts, bequests, and contributions 3,620 2,968 Net assets released from restrictions 167 162
Total unrestricted revenue and other support 383,428 367,695 Operating expenses:
Salaries and wages 135,669 130,059 Employee benefits 34,122 37,602 Professional fees 15,505 13,605 Cost of goods sold 56,634 58,211 Supplies 9,423 9,753 Contract services 75,004 71,287 Other 12,658 11,618 Utilities 4,292 4,265 Insurance 2,719 1,017 Depreciation and amortization 23,789 24,311 Interest 4,495 4,529
Total operating expenses 374,310 366,257 Operating income before pension settlement loss 9,118 1,438
Pension settlement loss (2,279) – Operating income 6,839 1,438 Other income gain (loss), net:
Loss on sale of assets (8) (97) Investment gain, net 4,858 7,016 Change in unrealized losses on trading securities, net (6,006) (4,308) Realized and unrealized losses on interest rate swap contact, net (5,048) (2,482) Other nonoperating income, net 484 387
Total other (loss) income, net (5,720) 516 Excess of unrestricted revenue and other support over expenses 1,119 1,954
Other changes in unrestricted net assets:
Pension adjustment (4,439) (1,679) Released from restriction used to purchase capital 246 132
(Decrease) increase in unrestricted net assets (3,074)$ 407$ See accompanying notes.
Frederick Regional Health System, Inc. and Subsidiaries
Consolidated Statements of Operations (In Thousands)
June 30
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Temporarily Permanently Unrestricted Restricted Restricted Total
Net assets, June 30, 2014 182,314$ 6,897$ 976$ 190,187$
Excess of unrestricted revenue and other support over expenses 1,954 – – 1,954
Pension adjustment (1,679) – – (1,679) Released from restriction used to purchase capital 132 (132) – – Assets released from restrictions – (162) – (162) Restricted gifts, bequests, and contributions – 2,848 – 2,848 Changes in net assets 407 2,554 – 2,961
Net assets, June 30, 2015 182,721 9,451 976 193,148 Excess of unrestricted revenue and
other support over expenses 1,119 – – 1,119 Pension adjustment (4,439) – – (4,439) Released from restriction used to purchase capital 246 (246) – – Assets released from restrictions – (167) – (167) Restricted gifts, bequests, and contributions – 3,259 – 3,259 Changes in net assets (3,074) 2,846 – (228)
Net assets, June 30, 2016 $ 179,647 $ 12,297 $ 976 $ 192,920
See accompanying notes.
Frederick Regional Health System, Inc. and Subsidiaries
Consolidated Statements of Changes in Net Assets (In Thousands)
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2016 2015 Operating activities Change in net assets (228)$ 2,961$ Adjustments to reconcile change in net assets to net cash provided
by operating activities: Depreciation of property and equipment 23,789 24,311 Amortization of original issue discount, premium, and bond issue costs (72) (29) Equity in earnings of joint ventures and Premier non-cash component (1,630) (1,277) Loss on sale of property and equipment 70 333 Change in unrealized gains on trading securities, net 6,006 4,311 Proceeds from realized gains on investments – trading (4,166) (6,554) Decrease (increase) in investments – trading 1,448 (1,828) Proceeds from restricted contributions (411) (294) Realized and unrealized losses in interest rate swap, net 5,048 2,482 Change in operating assets and liabilities:
Receivables, patient, and other 1,080 (1,008) Other assets (3,091) 408 Inventories and prepaids (947) (339) Pledges receivable (1,844) (415) Accounts payable 9,492 1,285 Accrued expenses 1,286 (2,159) Accrued pension expense 6,019 2,266 Advances from third-party payors (831) 1,267 Other short-term liabilities (483) (2,218) Other long-term liabilities (172) (485)
Net cash provided by operating activities 40,363 23,018
Investing activities Decrease in assets limited as to use, nontrading, net 7,739 11,646 Realized losses on interest rate swap contract (2,267) (2,442) Increase in other investments (4,888) (1,444) Purchases of property and equipment (34,936) (27,610) Net cash used in investing activities (34,352) (19,850)
Fundraising and financing activities Proceeds from restricted contributions 411 294 Repayments of long-term debt (5,329) (5,698) Borrowing from line of credit 2,000 – Net cash used in fundraising and financing activities (2,918) (5,404)
Net increase (decrease) in cash and cash equivalents 3,093 (2,236) Cash and cash equivalents at the beginning of the year 31,432 33,668 Cash and cash equivalents at the end of the year 34,525$ 31,432$
Supplemental disclosures Property and equipment acquired under capital lease 3,824$ –$ Cash paid for interest 4,929$ 4,948$
See accompanying notes.
Consolidated Statements of Cash Flows (In Thousands)
Year Ended June 30
Frederick Regional Health System, Inc. and Subsidiaries
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Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Dollars in Thousands)
June 30, 2016
1. Organization and Mission
Frederick Regional Health System, Inc. (the System) is a not-for-profit parent corporation formed on June 23, 2011, exempt from income tax under Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3) whereby only unrelated business income as defined by Section 512(a)(1) of the Code is subject to federal income tax. The System has received a determination letter from the Internal Revenue Service (IRS) stating that it is exempt from federal income taxes under Section 501(c) of the Code.
Frederick Memorial Hospital, Inc. (FMH) is a not-for-profit hospital, exempt from federal income tax under Section 501(a) of the Code as an organization described in Section 501(c)(3) whereby only unrelated business income as defined by Section 512(a)(1) of the Code is subject to federal income tax. FMH is located in Frederick, Maryland, and provides health care services primarily to residents of Frederick County. FMH has received a determination letter from the IRS stating that it is exempt from federal income taxes under Section 501(c) of the Code.
Monocacy Insurance, LTD (MIL) is a Cayman Islands-domiciled single-parent captive incorporated on May 24, 2011, and holds an Unrestricted Class B insurance license issued under Section 7(2) of the Cayman Island Insurance Law. MIL directly provides primary medical professional liability and primary general liability coverage to the System.
Monocacy Health Partners, LLC (MHP) serves as a physician enterprise, providing governance, management, and support functions for employed physicians. MHP is a not-for-profit corporation, formed on June 23, 2011, and operational as of October 1, 2013, exempt from income tax under Section 501(a) of the Code as an organization described in Section 501(c)(3) whereby only unrelated business income as defined by Section 512(a)(1) of the Code is subject to federal income tax. MHP has received a determination letter from the IRS stating that it is exempt from federal income taxes under Section 501(c) of the Code.
Frederick Health Services Corporation (FHSC) is a Maryland for-profit corporation, all of the stock of which is owned by the System. FHSC is subject to federal and state income taxes. No provision for income taxes has been recorded for 2016 or 2015 due to the availability of net operating loss carryforwards. As of June 30, 2016, FHSC recorded a net deferred tax asset of $1,105, which is presented in other assets on the balance sheet.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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1. Organization and Mission (continued)
On March 25, 2014, Frederick Integrated Healthcare Network, LLC (FIHN) was formed and is operated exclusively as a charitable organization for charitable, scientific, and educational purposes within the meaning of Section 501(c)(3) of the Code and the Regulations thereunder as they now exist or as they may hereafter be amended. FIHN was formed to maintain and operate a program of clinical integration and an accountable care organization among health care providers. FIHN is a single-member LLC and a disregarded entity of FRHS for income tax purposes.
The Obligated Group for repayment of the Maryland Health and Higher Educational Facilities Authority (MHHEFA) Series 2012A and 2012B Bonds includes FMH, MHP, and FRHS.
On July 7, 2014, Frederick Memorial Hospital, Meritus Health, and Western Maryland Health System established Trivergent Health Alliance (THA), the parent company to Trivergent Health Alliance MSO (MSO). MSO is a managed services organization that provides regional health care services. The purpose of MSO is to increase operational efficiencies, reduce costs, and enhance the quality of care by focusing efforts in the following areas: human resources, information technology, laboratory services, materials management, pharmacy services, and revenue cycle. FMH contributed working capital of $100 to THA and $900 to the MSO for a 33% ownership interest, which is presented in Other Assets on the balance sheet. Upon establishment of the MSO all employees within the six service areas transferred employment from FMH to the MSO. The related cost to purchase the service from MSO is recorded on the Consolidated Statement of Operations within Contract Services for the year ended June 30, 2016. The System paid a total of $34,549 and $33,494 to the MSO during the years ended June 30, 2016 and 2015, respectively.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and transactions of the System and its wholly owned subsidiaries: FMH, MIL, FHSC, MHP, and FIHN.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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2. Significant Accounting Policies (continued)
FMH has two wholly owned subsidiaries: Hospice of Frederick County, Inc. (HFC) and Emmitsburg Properties, LLC, both of which have been consolidated with FMH into the System in the accompanying consolidated financial statements. HFC, an independent 501(c)(3) organization controlled by FMH, operates as a fund raising organization for the benefit of hospice services and operates the Kline Hospice House. Emmitsburg Properties, LLC contains funds held as collateral on the outstanding Emmitsburg loans.
FHSC has three wholly owned subsidiaries: Rosehill of Frederick, LLC and Corporate Occupational Health Solutions, LLC, which are for-profit limited liability companies, and Frederick Surgical Services Corporation, all of which have been consolidated with FHSC into the System in the accompanying consolidated financial statements.
The accompanying consolidated financial statements include the accounts of the System and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). Certain prior year balances have been reclassified to conform to the current year’s presentation.
Donor-Restricted Gifts
Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets if restricted for capital or reported in the statements of operations as net assets released from restrictions if restricted for operating purposes. Donations received with no restrictions and donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated statements of operations as other operating revenues.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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2. Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less. Those cash and money market funds that are classified as long-term investments are excluded from cash and cash equivalents.
Patient Receivables and Allowances
The System’s policy is to write off all patient accounts that have been identified as uncollectible. An allowance for doubtful accounts is recorded for accounts not yet written off that are anticipated to become uncollectible. Insurance coverage and credit information is obtained from patients when available. No collateral is obtained for accounts receivable.
When determining the allowance, the System considers the collectability of accounts based on past experience, taking into account contractually due amounts from third-party payors and current collection trends on third-party and self-pay receivables. Self-pay receivables include both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill. Credit risks are assessed based on historical write-offs, net of recoveries, as well as an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. The analysis of receivables is performed monthly, and the allowances are adjusted accordingly.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
Cost of Goods Sold
Cost of goods sold consists primarily of drugs, medical supplies, and surgical implants used in the care and treatment of patients.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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2. Significant Accounting Policies (continued)
Investments and Assets Limited as to Use
The fair values of individual investments are based on quoted market prices of individual securities or investments or estimated amounts using quoted market prices of similar investments. Private equity investments are carried at cost, and hedge funds are accounted for using the equity method. Realized and unrealized investment return from all unrestricted investments and assets limited as to use are included in the consolidated statements of operations as part of nonoperating gains and losses. Investment income (loss) on investments of temporarily and permanently restricted assets is added to or deducted from the appropriate restricted fund balance if the income is restricted. The cost of securities sold is based on the specific-identification method. Investments are classified as either current or noncurrent based on maturity dates and availability for current operations.
Substantially all of the System’s investment portfolio (excluding certain assets limited as to use) is classified as trading, with unrealized gains and losses included in excess of unrestricted revenue and other support over expenses. Certain trusteed assets that are included in assets limited as to use are classified as other than trading. These assets primarily consist of funds held for payment of principal and interest on bonds and deferred compensation trusts.
Investment Risk and Uncertainties
The System invests in professionally managed portfolios that contain corporate bonds, U.S. government obligations, municipal obligations, asset-backed securities, marketable equity securities, hedge funds, money market funds, private equity, and alternative investments. Such investments are exposed to various risks, such as interest rate, market, and credit. Due to the level of risk associated with such investments and the level of uncertainty related to changes in the value of such investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment balances and the amounts reported in the financial statements.
Property and Equipment
Property and equipment are carried at historical cost. Items acquired by gift are recorded at fair value at the time of acquisition. Depreciation is recorded on the straight-line method over the estimated useful lives of the depreciable assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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2. Significant Accounting Policies (continued)
Valuation of Long-Lived Assets
The System accounts for the valuation of long-lived assets under Accounting Standards Codification 360-10-45, Accounting for the Impairment or Disposal of Long-Lived Assets. This guidance requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reportable at the lower of the carrying amount or fair value, less costs to sell.
Debt Issuance Costs
Debt issuance costs related to the Series 2012 MHHEFA Bonds are being amortized over the life of the debt using the effective-interest method.
Patient Service Revenue and Allowances
The System has agreements with third-party payors that provide for payments to the System for patient services at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated adjustments under reimbursement agreements with third-party payors. Estimated adjustments are accrued in the period the related services are rendered and are adjusted in future periods as final settlements are determined.
The System’s revenues may be subject to adjustment as a result of examination by government agencies or contractors and as a result of differing interpretation of government regulations, medical diagnosis, charge coding, medical necessity, or other contract terms. The resolution of these matters, if any, often is not finalized until subsequent to the period during which the services were rendered.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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2. Significant Accounting Policies (continued)
Performance Indicator
The performance indicator is the excess of unrestricted revenue and other support over expenses. Changes in unrestricted net assets, consistent with industry practice, includes pension adjustments and net assets released from restriction for capital purposes.
Fair Value of Financial Instruments
The carrying amounts reported on the accompanying consolidated balance sheets for cash and cash equivalents, other receivables, accounts payable, accrued expenses, and advances from third-party payors approximate their fair values. The fair value of the System’s notes receivable, revenue bond notes, and other long-term debt approximate the carrying amounts, based on loans with similar terms and average maturities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. It will be effective for fiscal year 2019, and early adoption is permitted beginning in fiscal year 2018. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for fiscal year 2017. The guidance is not expected to materially impact the System’s consolidated results of operations, net assets, or cash flows.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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2. Significant Accounting Policies (continued)
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02). This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.
3. Patient Receivables and Patient Service Revenue
Patient receivables consist of the following at June 30:
2016 2015 Gross patient receivables $ 61,732 $ 65,450 Less estimated uncollectible accounts and
contractual allowances (15,797) (17,350) Net patient receivables $ 45,935 $ 48,100
Patient service revenue consists of the following for the years ended June 30:
2016 2015 Inpatient charges $ 197,542 $ 176,322 Outpatient charges 276,818 277,812 Gross charges 474,360 454,134 Less contractual and other allowances (85,715) (84,486) Less charity care (11,929) (11,052) Net patient service revenue 376,716 358,596 Less provision for bad debts (4,683) (3,099) Net patient service revenue less provision for bad debts $ 372,033 $ 355,497
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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3. Patient Receivables and Patient Service Revenue (continued)
The System provides care to patients who meet certain criteria under its charity care policy. The System charges at its established rates but waives all or a portion of reimbursement. Because the System does not pursue collection of amounts determined to qualify as charity care, these revenues are not reported as net patient service revenue. Using the cost to charge ratio to approximate cost, charity care provided for the years ended June 30, 2016 and 2015, was $9,092 and $8,616, respectively. The state of Maryland rate system includes components within the rates to partially compensate hospitals for uncompensated care.
4. Assets Limited as to Use
A summary of assets that are limited as to use substantially for debt service and self-insurance at June 30 is as follows:
2016 2015 Current:
Principal, interest, and other – bonds $ 3,001 $ 3,042 Loss escrow account 80 51
$ 3,081 $ 3,093 Noncurrent:
Construction funds $ – $ 7,389 Deferred compensation trusts 1,113 1,451
$ 1,113 $ 8,840
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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4. Assets Limited as to Use (continued)
The assets that are limited as to use consist of the following at June 30:
2016 2015 Current:
Cash and money market accounts $ 3,001 $ 3,042 Mutual funds 80 51
$ 3,081 $ 3,093 Noncurrent:
Cash and money market accounts $ 15 $ 1 Agency securities – 7,388 Corporate or other bonds 84 183 Mutual funds 1,014 1,268
$ 1,113 $ 8,840 The noncurrent assets limited as to use mutual funds are primarily invested in cash and short-duration debt securities.
5. Promises to Give
Promises to give are discounted and are due as follows at June 30:
2016 2015 Less than one year $ 1,242 $ 926 One to five years 3,959 2,968 More than five years 3,847 2,260 9,048 6,154 Less discounting and allowance for
uncollectible promises 2,631 1,581 Total promises to give, net 6,417 4,573 Less current portion of promises to give, net 1,056 787 $ 5,361 $ 3,786
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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5. Promises to Give (continued)
Promises to give include $1,197 and $1,115 for the years ended June 30, 2016 and 2015, respectively, related to charitable remainder trusts. This net amount represents the excess of the fair value of the related trust accounts over the net present value of the annuities to be paid out of the trust to the named beneficiaries over their estimated life expectancy.
6. Investments
Long-term investments represent unrestricted investments and unrestricted income earned on unrestricted, temporarily restricted, and permanently restricted investments.
Donor-restricted investments are designated by the donors for expenses relating to capital projects, replacement or improvement of existing assets, or to cover the cost of services rendered as charity care and other programs.
Long-term and donor-restricted investments consist of the following at June 30:
2016 2015 Cost Fair Value Cost Fair Value Cash and cash equivalents $ 8,079 $ 8,079 $ 6,136 $ 6,136 U.S. government obligations 4,065 4,212 4,356 4,354 Corporate obligations 4,070 4,332 4,036 4,072 Mortgage-backed securities 4,689 4,798 4,007 4,046 Equity securities 28,908 35,302 32,239 40,816 Mutual funds 65,667 63,193 61,616 62,548 $ 115,478 $ 119,916 $ 112,390 $ 121,972
Fair value of investments carried at cost at June 30 is as follows:
2016 2015 Cost Fair Value Cost Fair Value Private equity investments $ 3,307 $ 3,982 $ 3,174 $ 4,593 $ 3,307 $ 3,982 $ 3,174 $ 4,593
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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6. Investments (continued)
The System is invested in a hedge fund that is accounted for under the equity method of accounting, which approximates fair value. The carrying value of the fund was $14,270 and $15,640 as of June 30, 2016 and 2015, respectively. Valuation of this equity investment is primarily based on financial data supplied by the underlying investee fund. The System has the ability to liquidate this investment on a quarterly basis. The System must provide notice of intent to redeem its shares 65 days prior to the redemption date. Within 45 days of the redemption date, 90% of the redemption value will be returned to the System, with the balance payable 30 days after the receipt of the fund’s annual audited financial statements. Value may be based on historical cost, appraisals, or other estimates that require varying degrees of judgment. The historic cost of these investments was $11,500 as of June 30, 2016 and 2015.
Investments are allocated as follows at June 30:
2016 2015 Investment allocation:
Unrestricted long-term investments $ 130,641 $ 134,931 Donor-restricted investments 6,857 5,855
$ 137,498 $ 140,786 Investment income, including income from short-term investments, for the years ended June 30, is as follows:
2016 2015 Unrestricted:
Net realized gains $ 1,412 $ 4,099 Interest and dividends, net of investment expense 2,760 2,891 Income from joint ventures 686 22
$ 4,858 $ 7,012 Investment expense was $392 and $375 for the fiscal years ended June 30, 2016 and 2015, respectively.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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6. Investments (continued)
Other investments consist of the following at June 30:
Carrying Value Income 2016 2015 2016 2015 Premier Class B $ 2,820 $ 1,876 $ – $ – Joint ventures 9,672 4,098 685 22 $ 12,492 $ 5,974 $ 685 $ 22
Investments in joint ventures are accounted for using the equity method, unless otherwise noted, at June 30, and are as follows:
Entity Interest % 2016 2015 Colonial Regional Alliance FMH 14.3% $ 30 $ 30 Carroll Occupational Health, LLC FHSC 25.0 129 105 Comp Claim Management, LLC FHSC 50.0 52 33 Premier Purchasing Partners (cost method) FMH – 392 392 Mt. Airy Health Services, LLC FMH 50.0 494 (33) Mt. Airy Med-Services, LLC FHSC 50.0 4,985 375 Mt. Airy Plaza, LLC FHSC 50.0 18 (67) Trivergent Health Alliance FMH 33.3 100 100 Trivergent Health Alliance MSO FMH 33.3 900 900 Advanced Health Collaborative FRHS – 42 42 Behavioral Health Partners of
Frederick, Inc. FMH 50.0 465 222 Frederick Surgical Center, LLC FHSC 36.2 2,065 1,999 $ 9,672 $ 4,098 The fair value of these joint ventures is not readily determinable.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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6. Investments (continued)
Group Purchasing Organization Initial Public Offering
The System has participated and owned equity in the Premier Limited Partnership (Premier), which has served as a group purchasing organization for many years. This participation provides purchasing contract rates and rebates the System would not be able to obtain on its own. The System accounts for its investment in Premier on the cost method of accounting.
During the year ended June 30, 2014, Premier restructured from a privately held company to a public company and completed an initial public offering (IPO) of its equity securities. Several financial transactions occurred with those holding equity in Premier before the IPO, including the System. As a result, the System received a cash payment of approximately $1.1 million in exchange for 16% of its previous ownership in Premier. In addition, in exchange for the extension of the group purchasing contract, the System received partial ownership of the new public company (the Class B units).
During the year ended June 30, 2014, the System received 233,669 Class B units that are earned in seven separate tranches over an 85-month period ending October 31, 2020. The opportunity will exist in the future for these Class B units to be converted to the Premier public company stock.
Prior to vesting, the Class B units may be transferred or sold with the approval of Premier. The System recognized $944 and $1,200 related to vesting of 33,381 and 32,525 Class B units for the years ended June 30, 2016 and 2015, respectively. These amounts are recorded as an investment on the accompanying consolidated balance sheets and were recognized as a reduction of supplies expense in the accompanying consolidated statements of operations, as the value of the Class B shares is tied to the group purchasing contract and is considered a vendor incentive.
7. Fair Value Measurements
Assets and liabilities recorded at fair value in the accompanying consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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7. Fair Value Measurements (continued)
FASB guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the FASB establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
• Level 1 – Inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the System has the ability to access at the measurement date.
• Level 2 – Inputs are inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the assets or liabilities (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
• Level 3 – Inputs are unobservable inputs for the assets or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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7. Fair Value Measurements (continued)
The determination of the fair value level within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The System’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the assets or liabilities. The following tables present the System’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, as of June 30:
Fair Value Measurements at
Reporting Date Using
Fair Value at June 30,
2016
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Other
Unobservable Inputs
(Level 3) Assets Cash and cash equivalents $ 45,620 $ 45,620 $ – $ – Equity securities 35,302 35,302 – – U.S. government obligations 4,212 – 4,212 – Agency securities 182 – 182 – Corporate and other bonds 4,233 – 4,233 – Mutual funds 64,288 64,288 – – Mortgage-backed securities 4,798 – 4,798 – Private equity investments 3,982 – – 3,982 Contributions receivable 6,417 – – 6,417 Total assets $ 169,034 $ 145,210 $ 13,425 $ 10,399 Liabilities Interest rate swap liability $ (14,058) $ – $ (14,058) $ – Total liabilities $ (14,058) $ – $ (14,058) $ –
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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7. Fair Value Measurements (continued)
Fair Value Measurements at
Reporting Date Using
Fair Value at June 30,
2015
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Other
Unobservable Inputs
(Level 3) Assets Cash and cash equivalents $ 41,318 $ 41,318 $ – $ – Equity securities 40,109 40,109 – – U.S. government obligations 4,354 – 4,354 – Agency securities 7,493 – 7,493 – Corporate and other bonds 4,150 – 4,150 – Mutual funds 63,867 63,867 – – Mortgage-backed securities 4,045 – 4,045 – Private equity investments 4,593 – – 4,593 Contributions receivable 4,573 – – 4,573 Total assets $ 174,502 $ 145,294 $ 20,042 $ 9,166 Liabilities Interest rate swap liability $ (11,277) $ – $ (11,277) $ – Total liabilities $ (11,277) $ – $ (11,277) $ –
The fair value of the System’s trading securities is determined by third-party service providers utilizing various methods dependent upon the specific type of investment. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Where significant inputs, including benchmark yields, broker-dealer quotes, issuer spreads, bids, offers, the London Interbank Offered Rate (LIBOR) curve, and measures of volatility, are used by these third-party dealers or independent pricing services to determine fair values, the securities are classified within Level 2. Private equity investments are carried at cost. Hedge fund investments are carried under the equity method of accounting.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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7. Fair Value Measurements (continued)
Assets utilizing Level 1 inputs include exchange-traded equity securities and equity and fixed- income mutual funds. Assets and liabilities utilizing Level 2 inputs include U.S. government securities, corporate bonds, mortgage-backed securities, and interest rate swaps. Assets utilizing Level 3 inputs are contributions receivable and private equity investments.
Interest Rate Swap
The System entered into an interest rate swap agreement in conjunction with the issuance of variable rate bonds. The swap contract is valued using models based on readily observable market parameters for all substantial terms of the contract. The fair market value of the swap agreement is included as interest rate swap contract in the accompanying consolidated balance sheets. The fair market value calculation includes a credit valuation adjustment as required of $724 and $684, reducing the interest rate swap agreement liability position on June 30, 2016 and 2015, respectively. The change in the fair market value of the swap agreement is included in excess of unrestricted revenue and other support over expenses, as the swap is not designated as an effective hedge.
Credit exposure associated with nonperformance by the counterparty to the derivative instrument is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the balance sheets.
Other
Assets utilizing Level 3 inputs are contributions receivable and private equity investments. Contributions receivable are recorded net of allowance for uncollectible pledges and discounted to net present value. The present value of estimated future cash flows using a discount rate commensurate with the risks involved is an appropriate measure of fair value for unconditional promises to give cash and is considered Level 3. The fair value of the System’s private equity investments is determined by third-party service providers utilizing various methods dependent upon the specific type of investment.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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7. Fair Value Measurements (continued)
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the previous table that used significant unobservable inputs (Level 3):
Year Ended June 30 2016 2015 Contributions receivable Beginning balance, July 1 $ 4,573 $ 4,158
New pledges 4,034 2,073 Collections on pledges (1,090) (1,511) Write-off of pledges (50) (21) Changes in reserves and discounting factor (1,050) (126)
Ending balance, June 30 $ 6,417 $ 4,573
Year Ended June 30 2016 2015 Private equity investments Beginning balance, July 1 $ 4,593 $ 3,304
Purchases 886 1,317 (Losses) gains (744) 336 Return of Capital (753) (364)
Ending balance, June 30 $ 3,982 $ 4,593
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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8. Property and Equipment
Property and equipment consist of the following at June 30:
Estimated
Useful Lives 2016 2015 Land – $ 5,973 $ 3,734 Land improvements 08–20 years 1,869 2,012 Buildings 20–40 years 219,825 208,423 Fixed equipment 10–20 years 17,004 16,679 Movable equipment 03–20 years 212,921 198,478 Leasehold improvements 05–20 years 27,165 25,452 484,757 454,778 Less accumulated depreciation 285,011 266,610 199,746 188,168 Construction in process, renovations,
and deposits 16,937 13,887 $ 216,683 $ 202,055
Construction in progress consists of the System’s building construction and renovations. As these projects are completed, the related assets are transferred out of construction in progress and into the appropriate asset category and are depreciated over the applicable useful lives.
Capitalized computer software, net of accumulated amortization, as of June 30, 2016 and 2015, was $5,607 and $8,504, respectively. Amortization of computer software was $3,784 and $3,731 for fiscal year 2016 and 2015, respectively.
The net book value of assets under capital lease arrangements totaled $4,545 and $2,353 as of June 30, 2016 and 2015, respectively. Depreciation expense related to assets under capital lease arrangements was $1,245 and $1,605 for the fiscal years ended June 30, 2016 and 2015, respectively.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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9. Long-Term Debt
Long-term debt consists of the following as of June 30:
2016 2015 MHHEFA Series 2012A Bonds $ 97,055 $ 98,090 MHHEFA Series 2012B Bonds 63,250 66,140 Line of Credit 2,000 – Capital lease obligations 3,872 1,885 166,177 166,115 Less current maturities 7,007 5,103 $ 159,170 $ 161,012
Series 2012A MHHEFA Revenue Bonds
In December 2012, the System obtained a loan of $96,240 in MHHEFA Revenue Bonds, Frederick Memorial Hospital Issue, Series 2012A. The MHHEFA Series 2012A Bonds were issued to refund all of the MHHEFA Series 2002 Bonds and to finance a portion of certain construction and equipment costs of the System. The Series 2012A Bonds were issued with a premium of $3,990, which is being amortized over the life of the bonds. The accumulated amortization was $570 at June 30, 2016. The annual interest rate on the bond loan ranges between 3% and 5% over the term of the bond. Interest is payable semiannually on each January 1 and July 1, through July 1, 2038.
Series 2012A Bonds maturing on or after July 1, 2023, are subject to redemption prior to maturity beginning on July 1, 2022, at the option of the authority at the principal amount of the Series 2012A Bonds to be redeemed plus accrued interest thereon to the date set for redemption.
Under the provisions of the bond agreement, the System has granted to the authority a security interest in all receipts now owned and hereafter acquired. The Series 2012A Bonds are secured ratably with the Series 2012B Bonds. The fair value of the Series 2012A MHHEFA Revenue Bonds is estimated based on quoted prices in active markets for identical assets. The fair value of the 2012A Bonds as of June 30, 2016, is estimated at $100,932.
There is no debt service reserve requirement associated with the Series 2012A Bonds.
The bond agreement contains certain financial covenants.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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9. Long-Term Debt (continued)
Series 2012B MHHEFA Revenue Bonds
In December 2012, the System obtained a loan of $70,020 in MHHEFA Revenue Bonds, Frederick Memorial Hospital Issue, Series 2012B. The MHHEFA Series 2012B Bonds were issued to refund all of the MHHEFA Series 2008 Bonds. Upon settlement of the bonds, MHHEFA and the obligated group entered into a financing agreement with Branch Banking and Trust (BB&T) whereby BB&T became the initial purchaser of the 2012B Bonds. The interest rate on the bonds is based on an index floating rate determined by BB&T equal to the applicable percentage multiplied by LIBOR plus the applicable spread plus the TEFRA adjustment, if any. Interest on the bonds is paid monthly and averaged 1.45% and 1.33% for the 12 months ended June 30, 2016 and 2015, respectively. The fair value of the 2012B MHHEFA Revenue Bonds approximates carrying value.
Series 2012B Bonds are subject to redemption at the option of the authority at the principal amount of the Series 2012B Bonds to be redeemed plus accrued interest to the date set for redemption. The Series 2012B Bonds, which mature on July 1, 2035, are secured ratably with the Series 2012A Bonds. The System is required to make annual payments to BB&T sufficient to meet the annual debt service requirements of the refunding bond issue for the succeeding year. Annual sinking fund installments for the 2012B bonds range from $1,090 on July 1, 2013, to $4,855 on July 1, 2028.
There is no debt service reserve requirement associated with the Series 2012B Bonds.
The bond agreement contains certain financial covenants.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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9. Long-Term Debt (continued)
Capital Lease Obligations
As of June 30, 2016, the System has entered into certain capital lease obligations to secure major medical equipment. Future payments under these obligations are as follows:
Years ending June 30: 2017 $ 1,187 2018 837 2019 815 2020 815 2021 431
Total payments 4,085 Less interest payments 213 Total lease obligations, principal 3,872 Less current portion 1,101 Long-term obligations under capital leases $ 2,771
Debt service requirements on long-term debt, line of credit and capital lease obligations, excluding original issue premium on bonds at June 30, 2016, of $3,420 is as follows:
Principal Years ending June 30:
2017 $ 7,007 2018 4,841 2019 4,993 2020 5,198 2021 5,032 Thereafter 135,686
$ 162,757
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Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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9. Long-Term Debt (continued)
On September 9, 2013, the System entered into a $20,000 revolving line of credit with a lending institution for the purpose of funding short-term working capital needs. The line of credit bears a variable interest rate of One Month LIBOR plus 1.5% per annum, adjusted monthly. All outstanding principal and interest must be repaid within two years of closing. There must not be any outstanding principal balance for at least 30 consecutive days during each year the line of credit is available. A $5,000 draw was taken upon closing. The outstanding balance on this line of credit was $2,000 and $0 as of June 30, 2016 and 2015, respectively. The line of credit agreement was amended on November 4, 2015, extending the maturity date to December 1, 2017, and decreased the revolving loan commitment from $20,000 to $15,000.
10. Interest Rate Swap Contract
The System records its derivatives as assets or liabilities at fair value. A derivative is typically defined as an instrument, whose value is derived from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment, and can be net settled. The System participates in an interest rate swap contract that is considered a derivative financial instrument.
The System has an interest rate swap contract with a third-party with a notional amount of $63,250 on June 30, 2016, which reduces annually by an amount equal to the sinking fund installment due on bonds until maturity on July 1, 2035. The System is exposed to credit loss in the event of nonperformance by the counterparty to the interest rate swap contract. However, the System does not anticipate nonperformance by the counterparty. Under the swap contract, the System pays interest at a fixed rate of 3.0804% per annum and receives interest at a variable rate equal to 67% of the one-month LIBOR (0.4527% as of June 30, 2016). The swap contract requires payments to be made or received monthly. The fair value of the swap contract was a liability of $14,058 and $11,277 at June 30, 2016 and 2015, respectively.
The System accrued net payments under its interest rate swap program of $2,267 and $2,442 during fiscal years 2016 and 2015, respectively. These amounts are included within realized and unrealized losses on interest rate swap contract, net in the accompanying consolidated statements of operations and investing activities in the accompanying consolidated statements of cash flows.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
1604-1907206 32
10. Interest Rate Swap Contract (continued)
The interest rate swap contract is not designated as an effective cash flow hedge. The System’s objectives of entering into the interest rate swap contract include limiting or hedging variable interest rate payments to achieve lower overall borrowing costs than a comparable unhedged fixed rate borrowing, to alter the pattern of debt service payments, and to improve asset/liability matching. Changes in the fair value of the derivative financial instrument are recognized in realized and unrealized losses on interest rate swap contract, net in the accompanying consolidated statements of operations and investing activities in the accompanying consolidated statements of cash flows.. The carrying value of the System’s derivative financial instrument approximates fair value. The interest rate swap contract is valued using models based on readily observable market parameters for all substantial terms of the contract.
Credit exposure associated with nonperformance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the consolidated balance sheets. The System attempts to mitigate the risk of nonperformance by selecting counterparties with high credit ratings and monitoring their creditworthiness.
The System’s derivative agreements do not contain any credit support provisions that require it to post collateral if there are declines in the derivative value or its credit rating.
Fair Value Balance Sheet Location 2016 2015 Asset derivatives Derivatives not designated as hedging instruments:
Interest rate contracts $ – $ – Liability derivatives Long-term liabilities $ 14,058 $ 11,277 Total derivatives not designated as hedging instruments $ 14,058 $ 11,277
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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10. Interest Rate Swap Contract (continued)
A summary of the effect of the nonhedging derivatives on the System’s income statement for the year ended June 30, 2016, is as follows:
Type of Nonhedging Derivatives
Income Statement
Location of (Loss) Gain Recognized
Derivative (Loss) Gain Recognized
Interest rate swap contract – realized losses Other loss $ (2,267) Interest rate swap contract – unrealized losses Other loss (2,781) Total $ (5,048)
A summary of the effect of the nonhedging derivatives on the System’s income statement for the year ended June 30, 2015, is as follows:
Type of Nonhedging Derivatives
Income Statement
Location of (Loss) Gain Recognized
Derivative (Loss) Gain Recognized
Interest rate swap contract – realized losses Other loss $ (2,442) Interest rate swap contract – unrealized losses Other loss (40) Total $ (2,482)
11. Employee Benefit Plans
The System has a defined benefit pension plan (Plan) that was curtailed on June 30, 2007. The System uses a measurement date of June 30 to determine plan assets and benefit obligations. The curtailment is such that participants will no longer accrue benefits under the plan and no new participants will be accepted. Current participant accounts will not receive any service credits or increases in benefits for post-curtailment compensation increases beyond June 30, 2007, however, the System will make annual contributions to the plan in accordance with actuarially determined amounts to meet future accumulated benefit obligations under the frozen plan.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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11. Employee Benefit Plans (continued)
Effective July 1, 2007, a modified defined contribution plan (403b) was implemented as described below. During November 2015 the Plan offered a lump sum pay-out to all participants with $40 or less in vested benefits resulting in $9,361 in lump sum payments and $2,279 partial Plan settlement loss.
The following provides a reconciliation of the changes in fair value of the Plan’s assets and projected benefit obligations and the plan’s funded status based on a June 30, 2016 and 2015, measurement date:
2016 2015 (In Thousands) Accumulated benefit obligation $ 87,362 $ 88,930 Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 88,180 $ 84,128 Service cost 606 569 Interest cost 3,595 3,706 Actuarial loss 9,518 2,431 Benefits paid and administrative expenses (3,215) (2,654) Settlement payments (9,361) – Settlement loss (1,958) –
Projected benefit obligation at end of year 87,362 88,180 Change in plan assets:
Fair value of plan assets at beginning of year 69,312 67,526 Actual return on plan assets 1,741 1,940 Employer contribution 4,000 2,500 Benefits paid (2,385) (2,264) Administrative expenses (832) (390) Settlement payments (9,361) –
Fair value of plan assets at end of year 62,475 69,312 Funded status (24,887) (18,868) Net amount recognized $ (24,887) $ (18,868)
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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11. Employee Benefit Plans (continued)
The discount rate actuarial assumption was changed from 4.42% to 3.59%, resulting in a $10,400 increase in the projected benefit obligation as of June 30, 2016.
Net amounts recognized in unrestricted net assets that have not been recognized in net periodic benefit cost are as follows:
June 30 2016 2015 Net actuarial loss $ 26,325 $ 21,834 Prior service cost 185 237 Total recognized in unrestricted net assets $ 26,510 $ 22,071
The following table sets forth the weighted-average assumptions used to determine benefit obligations:
June 30 2016 2015 Discount rate 3.59% 4.42% Rate of compensation increase N/A N/A
The following table sets forth the weighted-average assumptions used to determine net periodic benefit cost:
Year Ended June 30 2016 2015 Discount rate 4.42% 4.47% Expected return on plan assets 4.50% 4.50% Rate of compensation increase N/A N/A
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Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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11. Employee Benefit Plans (continued)
Net periodic pension cost included the following components:
2016 2015 Service cost $ 605 $ 569 Interest cost 3,595 3,706 Expected return on plan assets (2,898) (3,087) Amortization of prior service cost 52 52 Unrecognized net actuarial loss 1,946 1,847 Settlement cost 2,279 – Net periodic pension cost $ 5,579 $ 3,087
The estimated net loss that is expected to be amortized from other changes in unrestricted net assets into net periodic benefit cost for the year ending June 30, 2017, is $2,745.
The System determines the expected long-term rate of return on plan assets by taking into consideration the historical returns of various asset classes and the types of investments the plan is expected to hold.
The Plan asset allocation as of the measurement date presented as a percentage of total plan assets was as follows:
2016 2015 Equity securities 26% 24% Debt securities 63 60 Cash 1 3 Hedge funds 10 13 Total 100% 100%
The Plan assets are recorded at fair value and are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
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Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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11. Employee Benefit Plans (continued)
FASB guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the FASB establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
• Level 1 – Inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the System has the ability to access at the measurement date.
• Level 2 – Inputs are inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the assets or liabilities (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
• Level 3 – Inputs are unobservable inputs for the assets or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
The determination of the fair value level within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
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Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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11. Employee Benefit Plans (continued)
The System’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the assets or liabilities. The following tables present the plan’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, as of June 30:
Fair Value Measurements at
Reporting Date Using
Fair Value at June 30,
2016
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Other
Unobservable Inputs
(Level 3) Assets Cash and cash equivalents $ 230 $ 230 $ – $ – Equity securities 16,027 16,027 – – Fixed income mutual funds 40,039 40,039 – – Hedge funds and other alternative 6,179 – – 6,179 Total assets $ 62,475 $ 56,296 $ – $ 6,179
Fair Value Measurements at
Reporting Date Using
Fair Value at June 30,
2015
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Other
Unobservable Inputs
(Level 3) Assets Cash and cash equivalents $ 2,710 $ 2,710 $ – $ – Equity securities 16,308 16,308 – – Fixed income mutual funds 41,436 41,436 – – Hedge funds and other alternative 8,858 – – 8,858 Total assets $ 69,312 $ 60,454 $ – $ 8,858
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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11. Employee Benefit Plans (continued)
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the previous table that used significant unobservable inputs (Level 3):
Hedge Funds Total Balance at June 30, 2014 $ 10,653 $ 10,653
Purchases, issuances, and settlements (1,795) (1,795) Balance at June 30, 2015 8,858 8,858
Purchases, issuances, and settlements (2,679) (2,679) Balance at June 30, 2016 $ 6,179 $ 6,179
The fair value of the Plan’s trading securities is determined by third-party service providers utilizing various methods dependent upon the specific type of investment. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Assets utilizing Level 1 inputs include exchange-traded equity securities and equity and fixed income mutual funds. Assets utilizing Level 3 inputs are hedge funds.
The hedge fund is accounted for at fair value, which has been estimated using the net asset value per share of the fund as of June 30, 2016. The Plan has the ability to liquidate this investment on a quarterly basis. The Plan must provide notice of intent to redeem its shares 65 days prior to the redemption date. Within 45 days of the redemption date, 90% of the redemption value will be returned to the Plan, with the balance payable 30 days after the receipt of the fund’s annual audited financial statements.
Assets of the Plan are invested in a manner consistent with fiduciary standards of the Employee Retirement Income Security Act of 1974, namely, (a) the safeguards and diversity to which a prudent investor would adhere must be present and (b) all transactions undertaken on behalf of the Plan must be for the sole interest of Plan participants and beneficiaries to provide benefits in a prudent manner. Investment objectives of the Plan also include the following:
• Achieve an annualized total return that equals or exceeds the actuarial target
• Preserve the value of the Plan’s assets
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
1604-1907206 40
11. Employee Benefit Plans (continued)
• Diversify assets sufficiently, and, in accordance with modern portfolio theory, avoid large specific risks (losses) and minimize the volatility of the portfolio
• Provide sufficient liquidity to Plan benefit payment outflows and meet the Plan’s requirements
The strategic target asset allocation for the Plan is 23% in equities, 62% in fixed income securities, 10% in hedge funds, and 5% real estate.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
2017 $ 2,690 2018 2,870 2019 3,074 2020 3,323 2021 3,573 2022–2026 20,596
The System also has a tax-deferred annuity savings (403b) plan available to substantially all employees. In conjunction with the curtailment of the defined benefit pension plan, the System modified the (403b) plan effective July 1, 2007. Under the terms of the modified plan, every eligible employee receives a base contribution of 2.5% of earnings. The System will match 50.0% to 70.0% on employee contributions up to 5.0% of employee earnings depending on years of service. In addition, certain employees are eligible for transition credits based on age and years of service to the System. The System’s contribution for base matching and transition credits totaled $4,795 and $5,454 for fiscal years 2016 and 2015, respectively.
The System is partially self-insured against employee medical claims. Expenses include claims paid and a provision for claims incurred but not reported. As of June 30, 2016 and 2015, the System has recorded a liability for claims incurred but not reported of $1,567 and $1,855, respectively. The program has an annual aggregate stop-loss provision of $500 per employee.
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11. Employee Benefit Plans (continued)
In December 2005, the System adopted two nonqualified deferred compensation plans with an effective date of December 15, 2004, for certain members of executive management. Under these plans, participating employees may contribute amounts from their compensation to the plan and may receive a discretionary employer contribution. Employees are fully vested in all employee contributions to the plans. Vesting in employer contributions occurs in accordance with the underlying plan documents. All assets of the plans are held in separate trusts. Total contributions by the System to the plans were $358 and $334 for the years ended June 30, 2016 and 2015, respectively.
12. Concentration of Credit Risk
The System has funds on deposit with financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The System grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors (in percentages) at June 30 was as follows:
2016 2015 Medicare 25% 25% Medicaid 22 19 Blue Cross 15 17 HMOs and PPOs 19 18 Commercial insurance and other third-party payors 5 7 Patients 14 14 100% 100%
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Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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13. Functional Expenses
The System and its subsidiaries provide general health care services to residents within its geographic location. Expenses related to providing these services are as follows:
2016 2015 Health care services $ 328,873 $ 319,664 General and administrative 47,716 46,593 $ 376,589 $ 366,257
14. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are available for the following purposes or periods at June 30:
2016 2015 Health care services:
Buildings and equipment $ 10,192 $ 7,738 Restricted by time only 1,051 815 Education programs 483 403 Indigent care and research 571 495
$ 12,297 $ 9,451 Permanently restricted net assets consist of investments to be held in perpetuity, the income from which is expendable for:
2016 2015 General health care services
(reported as operating income) $ 971 $ 971 Specific health care services
(reported as temporarily restricted income) 5 5 $ 976 $ 976
During 2016 and 2015, net assets were released from donor restrictions by incurring expenses or capital expenditures satisfying the restricted purposes in the amounts of $411 and $294, respectively.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
1604-1907206 43
15. Contingencies
The System has been named as a defendant in various legal proceedings arising from the performance of its normal activities. In the opinion of management, after consultation with legal counsel and after consideration of applicable insurance, the amount of the System’s ultimate liability under all current legal proceedings will not have a material adverse effect on its consolidated financial position or results of operations.
On July 1, 2011, MIL, a single-parent captive, was created to provide a flexible risk financing structure to meet the needs of the System’s organization. As of June 30, 2012, MIL provides FMH with Primary Medical Professional Liability and Primary General Liability coverage with policy limits of liability of $1,000 each and every medical incident with a $3,000 annual aggregate for the 2011/2012 policy year and with a $5,000 annual aggregate for the 2012/2013 policy year onwards. The MIL Primary Policy coverage form is mature claims-made with a retroactive date of July 1, 2005. The policy funding is retrospectively rated.
MIL has also issued an Excess Umbrella Liability mature claims-made policy with a retroactive date of July 1, 2005. This policy is structured on a “dual tower” design. The Excess Medical Professional Liability Tower follows the form of the underlying Primary Medical Professional Liability coverage providing $10,000 limits of liability. The Umbrella Liability Tower provides $10,000 limits of liability excess of scheduled underlying coverages. The “dual towers” are 100% reinsured with Zurich American Insurance Company.
Effective June 30, 2012, MIL assumed Professional Liability and Comprehensive General Liability coverage previously included under FMH’s self-insured plan, for incidents occurring between July 1, 2005 and June 30, 2011 that were reported to FMH prior to June 30, 2011. The policy provides limits of liability of $1,000 each and every medical incident for the hospital professional liability and $1,000 each and every medical incident for comprehensive general liability. The policy is subject to a $3,000 annual aggregate for the hospital professional liability and comprehensive general liability combined, which applies to each covered year separately on a claims-made basis.
Effective June 30, 2012 MIL further assumed Professional Liability and Comprehensive General Liability coverage previously included under another FMH self-insurance plan, for incidents occurring between July 1, 1999 and June 30, 2001, with a limit of liability of $100 per claim.
The Primary Medical Professional and Primary General Liability policy is 100% MIL retained risk. The Excess Umbrella Liability coverage is fully reinsured with Zurich American Insurance Company.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
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15. Contingencies (continued)
There are known claims and incidents that could result in the assertion of additional claims, as well as claims from unknown incidents that could be asserted arising from services provided to patients. Effective July 1, 2011, the System adopted ASU 2010-23, Measuring Charity Care for Disclosure, which clarified that a health care entity should not net insurance recoveries against a related claim liability. The System maintains reserves, including excess coverage, in the amount of $13,008, at June 30, 2016, and $13,224 at June 30, 2015, and a related reinsurance receivable of $4,889 at June 30, 2016, and $4,467 at June 30, 2015. The System employs an independent actuary to estimate the ultimate settlement of such claims.
These reserves are recorded on an undiscounted basis at June 30, 2016 and 2015. In management’s opinion, the amounts recorded provide an adequate reserve for loss contingencies. However, changes in circumstances affecting professional liability claims could cause these estimates to change by material amounts in the short term.
16. Commitments
Operating Leases
The System and its subsidiaries lease facilities under various operating leases, the last of which expires in 2030. The System has various options to renew the leases. The System also leases equipment under various operating leases. Rent expense under all operating leases was $4,926 and $4,346 for 2016 and 2015, respectively. Future minimum payments under noncancelable operating leases are as follows:
Years ending June 30: 2017 $ 4,164 2018 3,725 2019 3,561 2020 3,270 2021 3,009 Thereafter 21,874
$ 39,603
Workers’ Compensation
The System is self-insured against workers’ compensation claims, up to $500 per occurrence, and has excess insurance coverage of $1,000 per occurrence. Expenses include claims paid and a provision for claims incurred but not reported.
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
1604-1907206 45
16. Commitments (continued)
Letter of Credit
The System has a letter of credit issued by a lending institution in the amount of $265. This letter of credit is renewed on an annual basis and is required by the state of Maryland as collateral for unemployment benefits.
Construction Commitments
The System has remaining commitments to contractors for the purpose of building construction and renovation projects totaling approximately $23,687 with expected project completion dates in the next twelve months, that if terminated could result in substantial payments to the contractors.
17. Regulatory Environment
Medicare and Medicaid
The Medicare and Medicaid reimbursement programs represent a substantial portion of the System’s revenues. The System’s operations are subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse.
Over the past several years, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs, together with the imposition of fines and penalties, as well as repayments for patient services previously billed. Compliance with fraud and abuse standards and other government regulations can be subject to future government review and interpretation.
Also, future changes in federal and state reimbursement funding mechanisms and related government budgeting constraints could have an adverse effect on the System.
In 1983, Congress approved a Medicare prospective payment plan for most inpatient services as part of the Social Security Amendment Act of 1983. Hospitals in Maryland are currently exempt from these federal reimbursement regulations under a special waiver. The waiver currently in
Frederick Regional Health System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
1604-1907206 46
17. Regulatory Environment (continued)
effect is subject to renewal based upon criteria defined in the federal law. Under these payment arrangements with Medicare, a retroactive adjustment could occur if certain performance standards are not attained by all hospitals on a statewide basis. The impact, if any, of any retroactive adjustment of the Medicare prospective payment system, should hospitals in Maryland become subject to such system, on future operations of the System, has not been determined.
State of Maryland Health Services Cost Review Commission
Certain hospital charges are subject to review and approval by the Maryland Health Services Cost Review Commission (HSCRC or the Commission). Hospital management has filed the required forms with the Commission and believes the hospital to be in compliance with Commission requirements.
Through June 2016, the current rate of reimbursement for principally all inpatient services and certain other services to patients under the Medicare and Medicaid programs is based on an agreement between the Centers for Medicare and Medicaid Services and the Commission. This agreement is based upon a waiver from Medicare prospective payment system reimbursement principles granted to the state of Maryland under Section 1814(b) of the Social Security Act. As of January 2014, the Centers for Medicare and Medicaid Services approved a modernized waiver that will be in place as long as Maryland hospitals commit to achieving significant quality improvements, limits on all-payor per capita hospital growth, and limits on annual Medicare per capita hospital cost growth to a rate lower than the national annual per capita growth rate. This model is projected to save Medicare at least $330,000 over the next five years.
Beginning in fiscal year 2014, the System entered into an agreement with the HSCRC to participate in the Global Budgeted Revenue (GBR) program. GBR methodology encourages hospitals to focus on population health strategies by establishing a fixed annual revenue cap for each GBR hospital. The agreement is evergreen in nature and covers both regulated inpatient and outpatient revenues.
Under GBR, hospital revenue is known at the beginning of each fiscal year. Annual revenue is calculated from a base year and is adjusted annually for inflation, infrastructure requirements, population changes, performance in quality-based programs, and changes in levels of uncompensated care. Revenue may also be adjusted annually for market levels and shifts of services to unregulated services.
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Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)
1604-1907206 47
17. Regulatory Environment (continued)
The Commission’s rate-setting methodology for hospital service centers consists of establishing an acceptable unit rate for defined inpatient and outpatient service centers within the hospital. The actual average unit charge for each service center is compared to the approved rate month and annually.
Overcharges and undercharges due to either patient volume or price variances, adjusted for penalties where applicable, are applied to decrease (in the case of overcharges) or increase (in the case of undercharges) future approved rates on an annual basis. The System exceeded the allowable target by $501 and $932 for the years ended June 30, 2016 and 2015, respectively.
The timing of the HSCRC’s rate adjustments for the System could result in an increase or reduction in rates due to the variances and penalties described above in a year subsequent to the year in which such items occur, and there is at least a possibility that the amounts may be material. The System’s policy is to record revenue based on actual charges for services to patients in the year in which the services are performed. The hospital recognizes unbilled revenue for in-house patients.
The HSCRC established an uncompensated care fund whereby certain hospitals are required to contribute to the fund to help cover the costs associated with uncompensated care for all Maryland hospitals equitably. The System’s contribution to the fund was $3,945 and $2,456 for the years ended June 30, 2016 and 2015, respectively.
18. Subsequent Events
The System has evaluated subsequent events for the year ended June 30, 2016 through October 11, 2016, the date these financial statements were issued. A single premium guaranteed annuity contract in the approximate amount of $12,900 was purchased on August 22, 2016, which transferred the liability of 475 vested participants from the Plan which resulted in a reduction of approximately $11,700 of the Pension Obligation Liability of the Plan. The impacted Plan participants were those receiving monthly benefit payments less than $470. As a result of this transaction, a settlement loss of approximately $3,900 is expected in the year ending June 30, 2017.
No other significant subsequent events were noted that would require recognition or disclosure at this time.
1604-1907206
Supplementary Information
Frederick Frederick Frederick Monocacy Frederick Frederick Regional Regional Memorial Monocacy Health Health Integrated Health Health Hospital, Inc. Insurance Partners Services Health System, Inc. System, Inc. Consolidated LTD LLC Corporation Network Elimination Consolidated
Assets Current assets:
Cash and cash equivalents 37$ 31,357$ 250$ 1,006$ 1,838$ 37$ –$ 34,525$ Patient receivables, net – 43,141 – 2,156 638 – – 45,935 Other receivables – 2,836 2,112 109 – – – 5,057 Inventory – 6,055 – – – – – 6,055 Prepaid expenses – 3,111 6 93 118 – – 3,328 Assets limited as to use – 3,001 80 – – – – 3,081 Promises to give, net – 1,056 – – – – – 1,056
Total current assets 37 90,557 2,448 3,364 2,594 37 – 99,037 Net property and equipment – 209,128 – 3,413 4,142 – – 216,683 Other assets:
Assets limited as to use – 1,113 – – – – – 1,113 Investments – donor restricted – 6,857 – – – – – 6,857 Promises to give, net – 5,361 – – – – – 5,361 Long-term investments – 123,492 7,149 – – – – 130,641 Other investments 209,321 21,531 – – 7,249 – (225,609) 12,492 Debt issuance costs, net – 1,291 – – – – – 1,291 Other assets – 9,680 4,413 – 1,105 – (9,113) 6,085 Intercompany receivables – 32,151 – – – – (32,151) –
Total other assets 209,321 201,476 11,562 – 8,354 – (266,873) 163,840 Total assets 209,358$ 501,161$ 14,010$ 6,777$ 15,090$ 37$ (266,873)$ 479,560$
Frederick Regional Health System, Inc. and Subsidiaries
Supplementary Consolidating Balance Sheet
June 30, 2016
(Dollars in Thousands)
48 1604-1907206
Frederick Frederick Frederick Monocacy Frederick Frederick Regional Regional Memorial Monocacy Health Health Integrated Health Health Hospital, Inc. Insurance Partners Services Health System, Inc.
System, Inc. Consolidated LTD LLC Corporation Network Elimination Consolidated Liabilities and net assets Current liabilities:
Current maturities of long-term debt, line of credit and capital lease obligations –$ 7,007$ –$ –$ –$ –$ –$ 7,007$
Accounts payable – 31,160 – 19 321 44 – 31,544 Accrued expenses – 16,598 84 2,322 684 – – 19,688 Advances from third-party payors – 8,982 – – – – – 8,982 Loans payable, affiliates – – – – 5,625 – (5,625) – Other current liabilities – 1,332 3,488 605 – – (3,488) 1,937
Total current liabilities – 65,079 3,572 2,946 6,630 44 (9,113) 69,158 Long-term liabilities, net of current portion:
Long-term debt and capital lease obligations – 159,170 – – – – – 159,170 Interest rate swap contract – 14,058 – – – – – 14,058 Accrued pension expense – 24,887 – – – – – 24,887 Other long-term liabilities – 8,727 10,318 322 – – – 19,367 Intercompany liabilities 412 – – 30,587 – 1,152 (32,151) –
Total long-term liabilities, net of current portion 412 206,842 10,318 30,909 – 1,152 (32,151) 217,482
Total liabilities 412 271,921 13,890 33,855 6,630 1,196 (41,264) 286,640 Net assets:
Unrestricted 208,946 215,967 120 (27,078) 8,460 (1,159) (225,609) 179,647 Temporarily restricted – 12,297 – – – – – 12,297 Permanently restricted – 976 – – – – – 976
Total net assets 208,946 229,240 120 (27,078) 8,460 (1,159) (225,609) 192,920 Total liabilities and net assets 209,358$ 501,161$ 14,010$ 6,777$ 15,090$ 37$ (266,873)$ 479,560$
(Dollars in Thousands)
Frederick Regional Health System, Inc. and Subsidiaries
Supplementary Consolidating Balance Sheet (continued)
49 1604-1907206
Frederick Frederick Monocacy Frederick Frederick Regional Regional Frederick Monocacy Health Health Integrated Health
Health Memorial Insurance Partners Services Health System, Inc. System, Inc. Hospital, Inc. LTD LLC Corporation Network Elimination Consolidated
Net patient service revenue –$ 346,378$ –$ 24,967$ 5,489$ –$ (118)$ 376,716$ Provision for bad debts – (4,435) – (248) – – – (4,683) Net patient service revenue less
provision for bad debts – 341,943 – 24,719 5,489 – (118) 372,033
Other operating revenue – 4,566 2,283 1,860 2,736 12 (3,849) 7,608 Gifts, bequests, and contributions – 3,585 – 35 – – – 3,620 Net assets released from restrictions – 167 – – – – – 167 Total unrestricted revenue and other support – 350,261 2,283 26,614 8,225 12 (3,967) 383,428
Operating expenses: Salaries and contract labor – 106,949 – 24,276 4,167 328 (51) 135,669 Employee benefits – 28,077 – 5,050 1,004 27 (36) 34,122 Professional fees – 14,982 130 42 122 230 (1) 15,505 Cost of goods sold – 54,405 – 1,411 818 – – 56,634 Supplies – 9,305 – 196 – 1 (79) 9,423 Contract services 2 71,994 – 3,218 431 209 (850) 75,004 Other – 10,122 99 2,371 721 6 (661) 12,658 Utilities – 3,987 – 216 91 – (2) 4,292 Insurance – 1,883 2,156 889 78 – (2,287) 2,719 Depreciation and amortization – 23,077 – 556 156 – – 23,789 Interest – 4,495 – – 107 – (107) 4,495
Total operating expenses 2 329,276 2,385 38,225 7,695 801 (4,074) 374,310
Operating income before pension settlement loss (2) 20,985 (102) (11,611) 530 (789) 107 9,118 Pension settlement loss – (2,279) – – – – – (2,279)
Operating income (2) 18,706 (102) (11,611) 530 (789) 107 6,839
Frederick Regional Health System, Inc. and Subsidiaries
Supplementary Consolidating Statement of Operations (Dollars in Thousands)
Year Ended June 30, 2016
50 1604-1907206
Frederick Frederick Monocacy Frederick Frederick Regional Regional Frederick Monocacy Health Health Integrated Health Health Memorial Insurance Partners Services Health System, Inc.
System, Inc. Hospital, Inc. LTD LLC Corporation Network Elimination Consolidated Other income (loss):
Gain (loss) on sale of assets –$ (8)$ –$ –$ –$ –$ –$ (8)$ Investment income (loss) – 4,391 101 – 473 – (107) 4,858 Change in unrealized gains (losses) on
trading securities, net – (6,007) 1 – – – – (6,006) Realized and unrealized gains (losses)
on interest rate swap contract, net – (5,048) – – – – – (5,048) Other nonoperating income (loss) – 207 – – 292 – (15) 484
Total other income (loss) – (6,465) 102 – 765 – (122) (5,720) Excess of unrestricted revenue and other
support over expenses (2) 12,241 – (11,611) 1,295 (789) (15) 1,119 Other changes in unrestricted net assets:
Pension adjustment – (4,439) – – – – – (4,439) Released from restriction used to
purchase capital – 246 – – – – – 246 Total other changes in unrestricted net assets – (4,193) – – – – – (4,193) (Decrease) increase in unrestricted net assets (2)$ 8,048$ –$ (11,611)$ 1,295$ (789)$ (15)$ (3,074)$
Supplementary Consolidating Statement of Operations (continued)
Frederick Regional Health System, Inc. and Subsidiaries
(Dollars in Thousands)
51 1604-1907206
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