Week 2 MOHA 550
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AuditedFinancialStatementsSH3.pdf
Spectrum Health System and Affiliates Consolidated Financial Statements December 31, 2019
I. Chief Financial Officer Report
II. Other Financial Information A. Ratio Analysis B. Key Statistics C. Liquidity Report
III. Audited Consolidated Financial Statements (prepared by Ernst & Young)
Spectrum Health System and Affiliates Details of Consolidation
December 31, 2019
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CHIEF FINANCIAL OFFICER’S REPORT Year ending December 31, 2019
*Prior year data includes three months of Spectrum Health Lakeland, as a result of the October 1, 2018 integration.
The enclosed package represents the consolidated financial statements for Spectrum Health System and Affiliates (the System). The financial statements have been summarized by the System’s delivery, insurance and other operations. On October 29, 2019, Spectrum Health issued bonds totaling $438.4 million. A portion of the proceeds were used to refinance existing debt, resulting in interest savings of $14 million over the life of the bonds. The remaining proceeds will be used to fund the Center for Transformation and Innovation and other capital needs. VOLUME
Spectrum Health Grand Rapids adjusted (for outpatient) admissions totaled 118,141 which was behind December 2018 by 0.4% but ahead of Plan by 0.9%. Regional adjusted admissions totaled 106,998 which was an increase of 8.3% from December 2018 and above Plan by 2.4%. Lakeland adjusted admissions were 45,918, which was ahead of Plan by 1.1%. Spectrum Health Physicians Services wRVUs totaled 6.1 million, which was 1.5% ahead of Plan. Excluding Lakeland, wRVUs increased 3.1% from the prior year. Health insurance membership was 842,712 as of December 31, 2019, which was ahead of Plan by 1.5% and prior year by 7.7%.
OPERATING MARGIN
The System’s operating margin was $332.1 million, or 4.6% of net operating revenue, which was favorable to Plan and prior year by $102.4 million and $98.3 million, respectively.
The Delivery System’s operating margin was $214.0 million, or 6.1%, which was favorable to Plan and prior year by $37.1 million and $74.4 million, respectively. Favorable results were driven by higher than planned volumes.
Lakeland’s operating margin was $27.7 million, or 4.9%, which was favorable to Plan by $8.3 million. Favorable results were driven by favorable volumes and lower than planned expenses.
Priority Health’s operating margin was $98.7 million, or 2.4%, which was favorable to Plan by $13.8 million and lower than prior year by $1.8 million. Priority Health experienced favorability in Medicare risk adjustment settlements, offset by higher than planned medical trends.
118,576 118,141
98,836 106,998
11,356
45,918
12/31/2018 12/31/2019
Spectrum Health System Adjusted Admissions
Grand Rapids Regional Lakeland
4,454,077 4,591,522
761,124 786,491
164,003 693,586 5,215,201
6,071,599
12/31/2018 12/31/2019
Spectrum Health System wRVUs
SHMG Regional Lakeland
427,682 458,743
67,647 85,374 125,703
125,864 161,296
172,731 782,328 842,712
12/31/2018 12/31/2019
Spectrum Health System Priority Health Membership
Commercial Individual Medicaid Senior Products
$140
$5
$101
$234 $214
$28
$99
$332
$177
$19
$85
$230
Delivery System Lakeland Priority Health System Total
Spectrum Health System Operating Margin
(in millions)
12/31/2018 12/31/2019 Plan
CHIEF FINANCIAL OFFICER’S REPORT Year ending December 31, 2019
TOTAL MARGIN
The System’s excess of revenue over expense as of December 31, 2019 was $608.6 million or 8.1% of total revenue. Net other revenue of $290.6 million was comprised primarily of $225.5 million of unrealized investment gains and $194.0 million of realized investment returns (interest, dividends and realized gains/losses), offset by $63.7 million in pension settlements, $42.2 million of interest rate swap losses, which are a function of the market, and $11.1 million in losses on extinguishment of debt.
LIQUIDITY AND CASH FLOW
At December 31, 2019 total cash and investments for the System were $4.2 billion, an increase of $839.6 million from December 31, 2018. The increase to cash was driven by an operating cash flow margin of $615.9 million, net debt proceeds of $235.1 million, net non-operating investment gains of $217.3 million, increases to working capital of $42.5 million, and other net asset activity of $35.8 million. These were offset by facility, information technology, and equipment additions totaling $307.0 million.
RATIOS
Days cash on hand for the System increased 36.1 days to 230.2 at December 31, 2019 from 194.1 days at December 31, 2018. Priority Health’s risk based capital (RBC) was 589.0%. Operating cash flow margin was 8.5%, which was above Moody’s 2018 Aa3 median of 8.3%.
EQUITY STRUCTURE
Debt was approximately $1.1 billion at the end of December and fund balance was approximately $5.0 billion. The debt to capitalization ratio for the System was 18.7%, which was lower than the Moody’s 2018 Aa3 median of 29.7%. Total assets for the System were approximately $7.8 billion.
Respectfully submitted,
Matthew E. Cox Senior Vice President & Chief Financial Officer ([email protected])
194.1
230.2
192.3
209.2
12/31/2018 12/31/2019
Spectrum Health System Days Cash on Hand
System Total Plan
582.0% 589.0%
600.0% 600.0%
12/31/2018 12/31/2019
Priority Health Risk Based Capital %
Risk Based Capital % Plan %
Ratio Analysis - Total System December 31, 2019
Actual Plan S&P Median Moody's Median Calendar Year 2019 Calendar Year 2019 2018 2018
Profitability Ratios
Operating margin 4.6% 3.2% 4.4% 2.9%
Total margin 8.1% 4.4% 6.7% 6.3%
Return on assets 7.8% 4.4% n/a 4.7%
Operating cash flow margin 8.5% 7.1% n/a 8.3%
Liquidity Indicators
Days in patient receivables 49.1 47.6 51.7 47.4
Days cash (unrestricted) on hand 230.2 209.2 314.1 237.6
Current ratio 1.6 1.5 n/a 1.7
Cash to debt % 385.9% 364.6% n/a 222.0%
Capital Structure
Total debt to capitalization 18.7% 19.1% 22.7% 29.7%
Debt to cash flow 1.3 1.8 n/a 2.3
Risk based capital (PH only) 589.0% 600.0% n/a 471.0% (a)
Average age of plant 8.5 8.9 10.5 10.2
Capital expenditures to depreciation 1.3 1.5 1.5 1.3
(a) Provider Sponsored Health Plan benchmark which consists of seven similar sized health plans. RBC benchmark data is based on December 31, 2018 statutory filings.
Note: Moody's figures are medians for freestanding hospitals, single-state & multi-state healthcare systems with Aa3 bond ratings for 2018. Spectrum Health's current rating from Moody's is Aa3.
S&P figures are medians for not-for-profit health care systems with AA bond ratings for 2018. Spectrum Health's current rating for S&P is AA.
Key Statistics Year ending December 31, 2019
Actual Plan Spectrum Health Grand Rapids
Admissions 70,186 69,850 Patient days - acute care 326,457 315,084 Patient days - observation 15,829 12,044 Patient days - long term care 72,483 78,179 Adjusted admissions 118,141 117,126 Net revenue per adjusted patient admission 19,870$ 19,461$ Cost per adjusted patient admission 18,600$ 18,213$
Spectrum Health Regional Hospitals Admissions 16,337 16,773 Patient days - acute care 42,336 44,624 Patient days - observation 5,200 4,483 Patient days - long term care 40,359 40,764 Adjusted admissions 106,998 104,518 Net revenue per adjusted patient admission 5,914$ 5,863$ Cost per adjusted patient admission 5,295$ 5,394$
Spectrum Health Post Acute Care Patient days - Kalamazoo 62,481 65,109 Home health admissions 9,917 10,138 Hospice days 139,289 118,708 Hours of care - Neuro homecare 258,924 292,327
Spectrum Health Physician Services Primary care covered lives 441,673 434,899 Priority Health assigned lives 100,992 N/A
Spectrum Health Medical Group Encounters 2,886,277 2,851,513 wRVUs 4,591,522 4,518,538 wRVUs / encounter 1.59 1.58 Net patient revenue per wRVU 88.48$ 85.18$ Cost per wRVU 149.30$ 149.83$
Spectrum Health Regional Hospital Physician Services Encounters 563,496 546,830 wRVUs 786,491 765,495 wRVUs / encounter 1.40 1.40
Spectrum Health Lakeland Admissions 15,109 15,283 Patient days - acute care 64,368 67,850 Patient days - observation 10,158 7,118 Patient days - long term care 37,824 37,597 Adjusted admissions 45,918 45,405 Net revenue per adjusted patient admission 12,388$ 12,550$ Cost per adjusted patient admission 11,785$ 12,125$ Encounters 395,793 381,640 wRVUs 693,586 698,843 wRVUs / encounter 1.75 1.83 Net patient revenue per wRVU 72.95$ 74.27$ Cost per wRVU 89.75$ 90.57$
Key Statistics Year ending December 31, 2019
Actual Plan
Membership
Group 346,305 338,900
Individual 85,374 110,000
ASO stop loss 112,438 84,800
Total commercial 544,117 533,700
Senior products (Medicare and Medigap) 172,731 173,300
Medicaid 125,864 123,000
Total membership 842,712 830,000
Medical cost ratio
Total commercial 86.8% 87.3%
Senior products (Medicare and Medigap) 89.7% 90.0%
Medicaid 85.2% 91.8%
Total medical cost ratio 87.8% 88.7%
Cash & Cash Equivalents 141,256$ -$ -$ 141,256$ S&P Rated Money Market Funds (> Am) 595,451 6,244 - 601,696 U.S. Treasury Debt Obligations (> 1 year) - 105,924 - 105,924 U.S. Agencies (> 1 year) - - 118,037 118,037 Investment Grade Debt (not included above) - 107,583 169,732 277,315 Equities - 159,863 307,939 467,802
Total 736,707$ 379,615$ 595,708$ 1,712,030$
Same-Day Notice Next-Day Notice > Next-Day Notice Total Series 2015A Variable Rate Demand Obligation (Windows) -$ -$ 78,400$ 78,400$
*The table represents assets that would be reasonably available to Spectrum Health System to satisfy a liquidity event. The table does not include assets held by affiliates that would not be reasonably available to satisfy a liquidity event, including assets held by Spectrum Health Foundation, Lakeland Health and Priority Health, among others.
Spectrum Health System Liquidity Worksheet* December 31, 2019
(in thousands)
Assets
Assets With Same-Day Liquidity
Assets With Next-Day Liquidity
Assets > Next-Day Liquidity Total
Self-Liquidity Backed Debt
Ernst & Young LLP
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 L I N F O R M A T I O N
Spectrum Health System and Affiliates Year Ended December 31, 2019 With Reports of Independent Auditors
1909-3267234
Spectrum Health System and Affiliates
Consolidated Financial Statements and Supplemental Information
Year Ended December 31, 2019
Contents
Report of Independent Auditors .................................................................................................. 1
Consolidated Financial Statements
Consolidated Balance Sheet ........................................................................................................ 3 Consolidated Statement of Operations and Changes in Net Assets ............................................... 5 Consolidated Statement of Cash Flows ........................................................................................ 7 Notes to Consolidated Financial Statements ................................................................................ 8
Supplemental Information
Report of Independent Auditors on Supplemental Information .................................................. 50 Spectrum Health System Consolidating Balance Sheet .............................................................. 51 Spectrum Health System Consolidating Statement of Operations and Changes in
Net Assets .............................................................................................................................. 53 Spectrum Health Lakeland Consolidating Balance Sheet ........................................................... 55 Spectrum Health Lakeland Consolidating Statement of Operations and Changes in
Net Assets .............................................................................................................................. 57 Community Benefit Expense (Unaudited) ................................................................................. 59
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Ernst & Young LLP Suite 600 171 Monroe Avenue, NW Grand Rapids, MI 49503
Tel: +1 616 774 0710 Fax: +1 616 774 0190 ey.com
1909-3267234 1
Report of Independent Auditors
The Board of Directors Spectrum Health System and Affiliates
We have audited the accompanying consolidated financial statements of Spectrum Health System and Affiliates (collectively, the System), which comprise the consolidated balance sheet as of December 31, 2019, and the related consolidated statements of operations and changes in net assets and cash flows for the year 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 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.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
A member firm of Ernst & Young Global Limited
1909-3267234 2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Spectrum Health System and Affiliates at December 31, 2019, and the consolidated results of their operations and changes in net assets, and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, in 2019 the System changed its method of accounting for leases effective January 1, 2019, as a result of the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842). Our opinion is not modified with respect to this matter.
Required Supplementary Information
Accounting principles generally accepted in the United States require that the incurred and paid claims development prior to the most recent year and the average annual percentage payout of incurred claims disclosed in Note 1 to the consolidated financial statements be presented to supplement the consolidated financial statements. Such information, although not a part of the financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
March 16, 2020
Assets Current assets:
Cash and cash equivalents 812,029$ Short-term investments 361,466 Accounts receivable:
Patients 430,371 Other 192,574
Pledges receivable 18,802 Inventories 56,999 Prepaid expenses and other current assets 68,596
Total current assets 1,940,837
Investments 3,273,717 Property and equipment – net 1,984,670 Right of use assets – net 155,736
Other assets: Investments in joint ventures 38,206 Goodwill 18,154 Pledges receivable 48,544 Other 344,785
449,689
Total assets 7,804,649$
Continued on next page.
Spectrum Health System and Affiliates
Consolidated Balance Sheet (In Thousands)
December 31, 2019
3 1909-3267234
Liabilities and net assets Current liabilities:
Accounts payable and accrued expenses 477,276$ Salaries, wages, and related withholdings 250,696 Health plan claims payable 323,681 Current maturities of long-term debt 23,057 Short-term debt 78,400 Current portion of lease obligations 28,509
Total current liabilities 1,181,619
Third party settlement liabilities 66,048 Long-term debt, less current maturities 989,414 Lease obligations, less current portion 153,571 Professional liability accrual 82,537 Interest rate swaps 124,260 Other long-term liabilities 173,852 Total liabilities 2,771,301
Net assets: Controlling interest in net assets without donor restrictions 4,753,741 Noncontrolling interest in subsidiaries 68,324 Net assets without donor restrictions 4,822,065 Net assets with donor restrictions 211,283
Total net assets 5,033,348 Total liabilities and net assets 7,804,649$
See accompanying notes.
Spectrum Health System and Affiliates
Consolidated Balance Sheet (continued) (In Thousands)
December 31, 2019
1909-3267234 4
Spectrum Health System and Affiliates
Consolidated Statement of Operations and Changes in Net Assets
3,915,051$ 3,197,911
147,407 7,260,369
2,281,548 1,540,648 2,822,250
251,775 32,047
6,928,268 332,101
419,534 (42,248) (11,858) (63,694) (11,085) 290,649
622,750
14,159 608,591$
(In Thousands)
Year Ended December 31, 2019
Operating revenue Premium revenue Net patient service revenue Other Total operating revenue
Operating expenses Salaries, wages, and employee benefits Supplies and other Health care claims expense Depreciation and amortization Interest Total operating expenses Net operating income
Other nonoperating revenue (expenses) Investment income, net Loss on interest rate swaps, net Other expenses, net Pension settlement expense Loss on extinguishment of debt Total other nonoperating revenue, net Excess of revenue over expenses Less: Excess of revenue over expenses
attributable to noncontrolling interest Excess of revenue over expenses
Continued on next page.
1909-3267234 5
Total Controlling Noncontrolling
622,750$ 608,591$ 14,159$ 231 231 –
(559) (559) – 3,141 3,141 –
56,699 56,699 – 8,934 10,488 (1,554)
691,196 678,591 12,605
49,067 49,067 – (29,041) (29,041) – 16,590 16,590 – (3,141) (3,141) – (9,433) (9,433) – 24,042 24,042 –
715,238 702,633 12,605
4,318,110 4,262,391 55,719 5,033,348$ 4,965,024$ 68,324$
Spectrum Health System and Affiliates
Consolidated Statement of Operations and Changes in Net Assets (continued) (In Thousands)
Year Ended December 31, 2019
Net assets without donor restrictions Excess of revenue over expenses Contributions Expenditures for donor sponsored programs Net assets released for capital acquisitions Pension related changes other than net
periodic pension costs Other Increase in net assets without donor restrictions
Net assets with donor restrictions Contributions Expenditures for donor sponsored programs Investment returns Net assets released for capital acquisitions Other Increase in net assets with donor restrictions Increase in net assets
Net assets, beginning of year Net assets, end of year
See accompanying notes.
1909-3267234 6
Operating activities and other revenue Increase in net assets 715,238$ Adjustments to reconcile increase in net assets to net cash
provided by operating activities and other revenue: Contributions and other net asset activity (35,789) Unrealized loss in market value of interest rate swaps 33,977 Pension related changes other than net periodic pension costs (56,699) Payments on extinguishment of debt 9,140 Depreciation and amortization 251,775 Changes in operating assets and liabilities:
Trading securities (741,684) Changes in patients accounts receivable, other accounts receivable
inventories, prepaid expenses, and other operating assets (58,848) Changes in accounts payable and accrued expenses, accrued salaries,
wages, and related withholdings, health plan claims payable, third party settlement liabilities, and other operating liabilities 160,935
(1,629) 276,416
(307,010) (103,371) (410,381)
35,789 438,370
(189,870) (9,140) (4,237)
270,912 136,947
691,246 828,193$
139,085$
Spectrum Health System and Affiliates
Consolidated Statement of Cash Flows (In Thousands)
Year Ended December 31, 2019
Other Net cash provided by operating activities
Investing activities Additions to property and equipment Other Net cash used in investing activities
Financing activities Contributions and other net asset activity Proceeds from issuance of long-term debt Payments on long-term debt Payments on extinguishment of debt Payments on financing lease obligations Net cash provided by financing activities Increase in cash and cash equivalents
Cash, cash equivalents, and restricted cash at beginning of year Cash, cash equivalents, and restricted cash at end of year
Noncash activities Right of use assets obtained in exchange for new lease liabilities, net
See accompanying notes.
1909-3267234 7
1909-3267234 8
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (In Thousands)
December 31, 2019
1. Significant Accounting Policies
The Reporting Entity and Principles of Consolidation
Spectrum Health System is a nonprofit Michigan corporation formed as a holding company to direct the activities of an integrated health care delivery system. The consolidated financial statements include the accounts of Spectrum Health System and its wholly owned or controlled affiliates (collectively, the System). The controlled affiliates include Spectrum Health Hospitals’ acute care campuses located in western Michigan; Spectrum Health Lakeland’s acute-care campuses located in southwest Michigan; Priority Health, a managed care health plan; Spectrum Health Medical Group, a physician organization; and various other affiliates and subsidiaries providing acute care, long-term care, home health care, physician, and other services in their respective markets in Michigan. All intercompany accounts and transactions have been eliminated in consolidation.
On December 31, 2019, the System through its affiliate, Priority Health, funded the acquisition of Total Health Care, Inc. and Total Health Care USA, Inc. (collectively, Total Health). The payment is included in other long-term assets on the December 31, 2019, consolidated balance sheet as the effective date of the acquisition is January 1, 2020. Total Health provides health insurance coverage to Medicaid, group, and individual markets in southeast Michigan. This acquisition supports the System’s long-term strategy to provide access to affordable, quality health plans in this market. The preliminary purchase price allocation for this acquisition will be completed during 2020.
Effective July 1, 2019, the System changed its fiscal year-end to December 31. Accordingly, the consolidated financial statements reflect the results of operations and cash flows for the year ended December 31, 2019.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Although actual results could differ from these estimates, management believes estimated amounts recorded are reasonable and appropriate.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 9
1. Significant Accounting Policies (continued)
Mission Statement and Other Nonoperating Revenue and Expenses
The System’s mission is to improve health, inspire hope and save lives. Only those activities directly related to this mission are considered operating activities. Other activities that result in revenue or expenses unrelated to the primary mission are considered to be other nonoperating revenue and expenses.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid investments with a maturity of three months or less when purchased.
Restricted Cash
Amounts included in restricted cash represent those required to be set aside by a contractual agreement or for donor restricted purposes. Restricted cash is classified within cash and cash equivalents and investments on the consolidated balance sheet.
Short-Term Investments
Short-term investments primarily consist of debt securities and are internally designated as current assets because such amounts are available to meet the System’s operating cash requirements.
Inventories
Inventories consist primarily of medical supplies and pharmaceuticals and are stated at the lower of cost or market, with cost being determined primarily on an average cost basis.
Investments and Investment Income
Investments include assets held by trustees under indenture, statutory requirements, and self- insurance agreements; health plan and foundation assets; and designated assets set aside by the Board of Directors (the Board) over which it retains control and may, at its discretion, subsequently use for other purposes. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value based on observable quoted prices.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 10
1. Significant Accounting Policies (continued)
Investments also include investments in commingled funds and hedge funds. Commingled funds that hold securities directly are stated at the fair value of the underlying securities, as determined by the administrator, based on readily determinable market values. Certain alternative investments, mainly hedge funds through limited partnerships, are accounted for using the equity method based on their net asset value.
All investments are considered to be trading securities. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in the excess of revenue over expenses, unless the income or loss is restricted by donor or law. Gains and losses with respect to disposition of marketable securities are based on the specific-identification method. Investment income related to net assets with donor restrictions is added to or deducted from the appropriate net asset balance based on donor intent.
Investment securities purchased and sold are reported based on the trade date. Due to the period lag between the trade date and the settlement date, the System reports receivables for securities sold but not settled and reports liabilities for securities purchased but not settled. These receivables and payables are settled from within the investment portfolio and are presented on a net basis within investments on the consolidated balance sheet.
Property and Equipment
Property and equipment are stated on the basis of cost or approximate fair value at the date of acquisition or donation. Included in property and equipment are costs for software developed for internal use. Depreciation is provided on a straight-line basis over the estimated useful lives of the property. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the length of the lease. Interest cost incurred in connection with borrowings to finance major construction or facility expansion is capitalized during the construction period and subsequently amortized over the lives of the related assets.
Right of Use Assets
Right of use assets under financing and operating lease obligations are amortized on a straight-line basis in accordance with lease accounting standards. Financing lease amortization is included within depreciation and amortization, and operating lease amortization is included within supplies and other expense on the accompanying consolidated statement of operations and changes in net assets.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 11
1. Significant Accounting Policies (continued)
Asset Impairment
The System considers whether indicators of impairment are present and performs the necessary test to determine whether the carrying value of an asset is appropriate. Impairment write-downs are recognized in operating income at the time the impairment is identified. No asset impairments were recorded in 2019.
Goodwill
In connection with business combinations, the System has recorded goodwill on the accompanying consolidated balance sheet. Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired organizations. Goodwill is amortized using the straight-line method over ten years. The System evaluates goodwill for impairment at the entity level when an event or circumstance indicates that the fair value of the entity may be less than its carrying amount. Impairment was not indicated during 2019.
Derivative Financial Instruments
The System has entered into interest rate swap agreements with certain banks to manage risks associated with changes in interest rates. The System records its derivative instruments as either assets or liabilities on the accompanying consolidated balance sheet at fair value. None of the System’s current derivatives are designated as a hedge. Accordingly, both unrealized and realized derivative gains and losses related to the interest rate swaps are included in loss on interest rate swaps, net on the consolidated statement of operations and changes in net assets.
Net Assets
Net assets, revenue, gains, and losses are classified based on the existence or absence of donor or grantor imposed restrictions. Net assets and changes therein are classified and reported as follows:
Net Assets Without Donor Restrictions – Net assets available for use in general operations and not subject to donor restrictions.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 12
1. Significant Accounting Policies (continued)
Net Assets With Donor Restrictions – Net assets subject to donor imposed restrictions. Some donor imposed restrictions are temporary in nature to a specific time period or purpose. Other donor imposed restrictions are perpetual in nature and are maintained by the System in perpetuity. Donor imposed restrictions are released when a restriction expires, that is, when the stipulated time has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both.
Noncontrolling Interest in Subsidiaries
The System attributed income of $14,159 for the year ended December 31, 2019, to the noncontrolling interests based on the ownership percentage of the noncontrolling interests in certain of the System’s consolidated subsidiaries. These amounts are recognized in net assets without donor restrictions on the consolidated balance sheet, net of distributions.
Performance Indicator
The System’s performance indicator (excess of revenue over expenses) includes all changes in net assets without donor restrictions other than contributions without donor restrictions and related expenditures for donor sponsored programs, net assets released for capital acquisitions, and certain changes in the pension obligations.
Net Operating Revenue
Net operating revenue is recognized in the period in which the System satisfies performance obligations under contracts by transferring goods or services to its customers. Net operating revenue is recognized in the amounts to which the System expects to be entitled, which are the transaction prices allocated to the distinct services. Net operating revenue for the System’s health care delivery operations primarily consists of net patient service revenue, principally for patients covered by Medicare, Medicaid, managed care, and other health plans, as well as certain uninsured patients and other uninsured discount and charity programs. Net operating revenue for the System’s health plan operations primarily consists of health insurance premium revenue for its members, who have obtained insurance coverage through commercial agreements, Medicare Advantage, Medigap, or Medicaid, and administrative services, which consist of self-funded health plans and other various ancillary administrative services.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 13
1. Significant Accounting Policies (continued)
Charity Care
In support of its mission, the System provides various health-related services, at a loss, to the indigent and other residents in its service area. Policies have been established that define charity care and provide guidelines for assessing a patient’s ability to pay. Evaluation procedures for charity care qualification have been established for those situations when previously unknown financial circumstances are revealed or when incurred charges are significant when compared to the individual patient’s income and/or net assets. Because the System does not pursue collection of amounts determined to qualify as charity care, such amounts are not reported in net patient service revenue. In addition, the System provides services to other medically indigent patients under various Medicare and Medicaid programs, which pay providers amounts that are less than the costs incurred for the services provided to the recipients.
The estimated costs of charity care are $6,582 for the year ended December 31, 2019. Costs are estimated using the ratio of each facility’s costs to its charges at a department level applied to gross charity charges. These ratios are then applied to all system costs to determine the value of charity care. Any reimbursements are then deducted from the cost to arrive at the estimated cost of charity care.
Recently Adopted Accounting Standards
Effective January 1, 2019, the System adopted Financial Accounting Standards Board (FASB) Accounting Standards Update No. (ASU) 2016-02, Leases, using a modified retrospective approach, which replaced Accounting Standard Codification (ASC) Topic 840 with ASC Topic 842. The changes to the lease accounting model require operating leases to be recorded on the balance sheet through recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right of use (ROU) asset. The System’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments.
Leases with an initial term of 12 months or less and that do not have an option to purchase the underlying asset that is deemed reasonably certain to exercise are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease. When readily determinable, the System uses the interest rate implicit in a lease to determine the present value of future lease payments.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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1. Significant Accounting Policies (continued)
For leases where the implicit rate is not readily determinable, the risk-free discount rate is utilized. The System’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The System elected all available practical expedients in the standard upon adoption, including (1) using a package of practical expedients whereby an entity need not reassess expired contracts for lease identification or classification as a finance or operating lease, or for the reassessment of initial direct costs; (2) using hindsight to determine the lease term for its leases at transition; (3) combining lease and non-lease components when determining lease payments; and (4) for certain equipment leases such as copiers, applying a portfolio approach to effectively record the operating lease liability and ROU asset.
The adoption of the standard resulted in the System recording an ROU asset of approximately $179,770 and a lease liability of approximately $202,495 on January 1, 2019. The difference between the asset and liability is related to the previously recorded capital leases. The adoption had no impact on the January 1, 2019, net assets.
Effective January 1, 2019, the System adopted FASB ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This guidance adds or clarifies guidance on the classification of certain cash receipts and payments on the consolidated statement of cash flows. The impact on the consolidated statement of cash flows upon adoption was a reclassification of a cash outflow of $9,140 related to debt prepayment costs from operating to financing activities.
Effective January 1, 2019, the System adopted FASB ASU 2016-18, Statements of Cash flows (Topic 230): Restricted Cash. This guidance adds and clarifies guidance in the presentation of changes in restricted cash on the statement of cash flows and requires restricted cash to be included with cash and cash equivalents on the statement of cash flows. The guidance does not provide a definition of restricted cash. The adoption of this guidance resulted in $16,164 of restricted cash being included on the consolidated statement of cash flows.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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1. Significant Accounting Policies (continued)
Effective January 1, 2019, the System early adopted FASB ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU intends to improve the effectiveness of disclosures in the notes to financial statements by modifying disclosure requirements for fair value measurements. The adoption of the ASU had no impact on the disclosures that the System historically provided.
Effective January 1, 2019, the System adopted the FASB ASU 2019-06, Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities. This ASU extends the private company accounting alternatives on goodwill and certain identifiable intangible assets to not-for-profit entities. In adoption of the goodwill accounting alternative, the System will now amortize current and future goodwill on a straight-line basis over ten years and perform a one-step impairment test at the entity level only when an impairment indicator exists. The impact on the consolidated statement of operations and changes in net assets was an additional $2,017 of amortization expense.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU intends to improve the effectiveness of disclosures in the notes to the financial statements by modifying disclosure requirements for employers that sponsor defined benefits pension or other postretirement plans. The ASU is effective for the System for annual reporting periods ending after December 15, 2021, with early adoption permitted. The System is currently assessing the impact that ASU 2018-14 will have on its consolidated financial statements and will adopt the provisions upon the effective date.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalized implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU is effective for the System for annual reporting periods beginning after
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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1. Significant Accounting Policies (continued)
December 15, 2020, with early adoption permitted. The System is currently assessing the impact that ASU 2018-15 will have on its consolidated financial statements and is considering adopting the provision for the period beginning January 1, 2020.
Subsequent Events
The System evaluated subsequent events after December 31, 2019, through March 16, 2020, representing the date that the consolidated financial statements were available to be issued. The System concluded that no material events or transactions occurred subsequent to December 31, 2019, that provided additional evidence about conditions that existed at December 31, 2019, or after, requiring adjustment to or disclosure in the consolidated financial statements.
2. Liquidity and Availability
Financial assets available for general expenditure within one year of December 31, 2019, include the following:
Cash and cash equivalents $ 812,029 Patient receivables 430,371 Other receivables 192,597 Investments 3,358,702 Endowment spending-rate distributions and appropriations 3,663
$ 4,797,362
The System has the ability to structure its financial assets to be available as its general expenditures and other obligations become due. Cash in excess of daily requirements is invested. The System maintains a $200,000 revolving credit facility as discussed in Note 12. As of December 31, 2019, $196,600 was available under this credit agreement. There were no principal amounts outstanding; however, outstanding letters of credit utilize capacity.
The System has certain investments where access to liquidity may be greater than one year. As such, these investments have been excluded from the amounts above. The nature of these specific investments generally restricts the liquidity and availability of these investments to be available for general expenditure of the System within one year of the consolidated balance sheet.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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3. Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown on the consolidated statement of cash flows:
Cash and cash equivalents $ 812,029 Restricted cash included in investments 16,164
$ 828,193
Restricted cash included in investments represents the cash portion of the investments in Note 11 that are restricted by donor, for professional and general liability claims; by bond indenture; and by state insurance commissioner.
4. Net Patient Service Revenue and Net Patient Accounts Receivable
Net patient service revenue is recorded at the amounts that reflect the consideration to which the System expects to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payers, and others, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. Generally, patients and third- party payers are billed several days after the services are performed or shortly after discharge. Revenue is recognized as performance obligations are satisfied.
Performance obligations are based on the nature of the services provided. Revenue is recognized for performance obligations satisfied over time based on actual charges incurred in relation to total expected or actual charges. The System believes that this method provides an appropriate depiction of the transfer of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Generally, performance obligations satisfied over time relate to patients receiving inpatient acute care services or continuing care services. Performance obligations for inpatient acute care services are measured from admission to the point when there are no further services required for the patient, which is generally the time of discharge. Performance obligations for continuing care services are satisfied over the defined period in the patient contract, typically monthly. Revenue for performance obligations satisfied at a point in time, which generally relate to patients receiving outpatient services, is recognized when: (1) services are provided; and (2) it is not likely that the patient requires additional services.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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4. Net Patient Service Revenue and Net Patient Accounts Receivable (continued)
Because patient service performance obligations relate to contracts with a duration of less than one year, the System applies the exemption provided in the accounting standards and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period.
The System utilizes the portfolio approach practical expedient for contracts related to net patient service revenue. The System accounts for the contracts within each portfolio as a collective group, rather than individual contracts, based on the payment pattern expected in each portfolio category and the similar nature and characteristics of the patients within each portfolio. The portfolios consist of major payer classes for inpatient revenue and outpatient revenue. Based on historical collection trends and other analyses, the System has concluded that revenue for a given portfolio would not be materially different than if accounted for on a contract-by-contract basis.
The System has agreements with third-party payers that generally provide for payments to the System at amounts different from its established rates. For uninsured patients who do not qualify for charity or discounted care, the System recognizes revenue based on established rates, subject to certain discounts and implicit price concessions as determined by the System. The System determines the transaction price based on standard charges for services provided, reduced by explicit price concessions provided to third-party payers, discounts provided to uninsured patients in accordance with the System’s policy, and implicit price concessions provided to uninsured patients. Explicit price concessions are based on contractual agreements, discount policies, and historical experience. Implicit price concessions represent differences between amounts billed and the estimated consideration the System expects to receive from patients, which are determined based on historical collection experience, current market conditions, and other factors.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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4. Net Patient Service Revenue and Net Patient Accounts Receivable (continued)
Generally, patients who are covered by third-party payers are responsible for related co-pays, coinsurance and deductibles, which vary in amount. The transaction price for patients with copays, coinsurance, and deductibles is estimated based on historical collection experience and current market conditions. The initial estimate of the transaction price is determined by reducing the standard charge by any explicit price concessions, discounts, and implicit price concessions. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to net patient revenue in the period of the change. For the year ended December 31, 2019, adjustments arising from a change in the transaction price were not significant. Subsequent changes that are determined to be the result of an adverse change in the patient’s ability to pay are recorded as bad debt expense. Bad debt expense for the year ended December 31, 2019, was not significant. As of December 31, 2019, there are no known claims, disputes, or unsettled matters with any payer that would materially affect the System’s revenue that have not been adequately provided in the accompanying consolidated financial statements.
The System is paid a prospectively determined rate for the majority of inpatient acute care and outpatient, skilled nursing, and rehabilitation services provided (principally Medicare, Medicaid, and certain insurers). These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Payments for capital are received on a prospective basis for Medicare and on a cost reimbursement methodology for Medicaid. Payments are received on a prospective basis for the System’s medical education costs, subject to certain limits. The System is paid for cost reimbursable items at a tentative rate, with final settlement determined after submission of annual cost reports by the System and audits thereof by Medicare.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation, as well as significant regulatory action and, in the normal course of business, the System is subject to contractual reviews and audits, including audits initiated by the Medicare recovery audit contractor program. As a result, there is at least a reasonable possibility that recorded estimates will change in the near term. The System believes it is in compliance with applicable laws and regulations governing the Medicare and Medicaid programs and that adequate provisions have been made for any adjustments that may result from final settlements.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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4. Net Patient Service Revenue and Net Patient Accounts Receivable (continued)
Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews, or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care using the expected value method. These settlements are estimated based on the terms of the payment agreement with the payer, correspondence from the payer, and historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known or as years are settled or are no longer subject to such audit, review, or investigation. Patient service revenue on the accompanying consolidated statement of operations and changes in net assets was not materially affected in 2019 by changes in estimated settlements from prior years.
The composition of net patient service revenue net of price concessions by major payer source was as follows:
Medicare $ 868,058 27% Medicaid 567,133 18 Commercial and managed care 1,729,599 54 Self-pay 33,121 1 Total all payers $ 3,197,911 100%
Patient accounts receivable consist of amounts due for health care services provided. The System grants credit without collateral to its patients, most of whom are local residents and insured under third-party arrangements. The System’s concentration of credit risk relating to patient receivables is limited due to the diversity of patients and payers. Patient receivables consist of amounts due from government programs, commercial insurance companies, other group insurance programs, and private pay patients. At December 31, 2019, 36% of patient accounts receivable, net were collectible from governmental payers, 51% from commercial and managed care payers, and 13% from self-pay patients.
The System’s policy is not to adjust the promised amount of consideration from patients and third- party payers for the effects of a significant financing component due to the System’s expectation that the period between the time the service is provided to a patient and the time that the patient or a third-party payer pays for that service will be one year or less. However, the System does, in certain instances, enter into payment agreements with patients that allow payments in excess of one year. For those cases, the financing component is not deemed to be significant to the contract.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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5. Premium Revenue and Health Care Claims Expense
Priority Health contracts with various providers for the provision of certain health care services to its members. Priority Health compensates providers for services under risk-savings/sharing programs, capitation arrangements, diagnosis-related group contracts and discounted charges, and fee-for-service arrangements. Priority Health contracts for primary care and specialty physician services, hospital services, mental health services, certain ancillary services, and pharmacy benefits.
Health care costs are recognized as expenses when services are rendered and include an estimate of costs incurred but not reported (IBNR) at the consolidated balance sheet date. Under capitation arrangements and risk-savings/sharing programs, health care costs are recognized when the obligation is triggered under the providers’ respective agreements. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known.
Priority Health has various agreements with participating providers to furnish health care services to participating subscribers and their dependents. The agreements with certain participating providers call for reimbursement at various capitated rates or percentages of fees, less applicable member copayments, coinsurance, or deductibles, on a current basis. The agreements provide for contingent reimbursement to participating providers based upon the results of operations within their defined pay for performance groups. In the event the pay for performance group’s utilization of defined measures meets, exceeds, or is less than documented thresholds (depending on the threshold), the providers may share in the surplus and be eligible for the return of previously withheld fees, as defined in their respective contracts. In addition, Priority Health provides for a quality incentive to be paid to certain providers contingent upon achieving specified quality goals.
Premiums are billed and collected monthly from employer groups and members in Medicare, Medicaid, and commercial products. Premium revenue is recognized as income in the period members are entitled to receive services and is net of estimated uncollectible amounts and retroactive membership adjustments.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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5. Premium Revenue and Health Care Claims Expense (continued)
Priority Health’s costs under provider arrangements are recognized as expenses when services are rendered and include an estimate of costs IBNR at the consolidated balance sheet date. Costs of health care and medical costs payable for health care services provided to members are estimated by management based on evaluations of providers’ claims submitted and provision for IBNR. The System estimates IBNR using standard actuarial loss development methodologies applied to loss development data summarized on the basis of the month in which services are rendered and the month in which claims are paid, processed, or received and considers other items, including, without limitation, historical levels of denied claims, medical cost trends, seasonal patterns, and changes in membership mix. Those estimates are subject to the effects of trends in claim severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for IBNR are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known.
Adjustments to previously recorded claims reserve estimates are recorded on the consolidated statement of operations and changes in net assets in the period in which the estimates are revised. Such reserve adjustments consist of remeasurements of claims estimates and could be material in the future. Given the nature of the health care costs and provider billing requirements, as defined by the participating providers’ agreements, amounts accrued at December 31 are predominantly paid in the following year.
Claims adjustment expenses are costs that are incurred in connection with the adjustment and recording of health care costs. On the consolidated statement of operations and changes in net assets, claims adjustment expenses are a component of salaries, wages, and employee benefits; supplies and other; and depreciation and amortization and totaled $126,954 in 2019.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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5. Premium Revenue and Health Care Claims Expense (continued)
The following table provides a reconciliation of the beginning and ending balances of health plan claims payable as of at December 31, 2019:
Reserves at beginning of year $ 330,671 Less reinsurance recoverable (1,211)
Reserves at beginning of year, net 329,460 Add provision for claims and claims adjustment expense occurring in:
Current year 2,988,945 Prior years (39,741)
Incurred losses during current year 2,949,204 Deduct payments for claims occurring in:
Current year 2,730,621 Prior years 225,901
Claim payments during current year 2,956,522 Reinsurance recoverable 1,539
Reserves at end of year $ 323,681 Priority Health has maintained capital and surplus, as determined in accordance with accounting practices prescribed or permitted by the Michigan Department of Insurance and Financial Services, in which it is licensed, in excess of the minimum requirements. In 2019, favorable development of previously recorded claims reserve estimates was experienced due to lower than expected medical expense trends and favorable shifts in the utilization and cost of services.
The cumulative number of paid claims was approximately 22,777 in 2019. This measure includes medical service encounters plus pharmaceutical claims. The provided claims frequency amounts are not a precise tool for understanding utilization of medical services. They could be impacted by a variety of factors, including changes in provider billing practices, provider reimbursement arrangements, mixture of services, benefit design, and processing systems. The cumulative number of reported claims has been provided to comply with accounting standards and is not used by management in claims analysis. The cumulative number of reported claims may not be comparable to similar measures reported by other companies, as there is no universal claims frequency metric.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 24
5. Premium Revenue and Health Care Claims Expense (continued)
The following tables provide information about incurred and paid claims development as of December 31, 2019, net of reinsurance:
Cumulative Incurred Claims, Net of Reinsurance Claims incurred year:
2019 $ 2,988,945 2018 2,723,115 2017 3,264,347
Cumulative Paid Claims, Net of Reinsurance Claims incurred year:
2019 $ 2,730,621 2018 2,808,498 2017 3,116,880
The information about incurred and paid claims development above is presented as required unaudited supplementary information.
6. Taxes and Government Fees
Income Taxes
The System and most of its controlled affiliates are tax-exempt organizations as described in Section 501(c)(3) of the Internal Revenue Code (IRC). These controlled affiliates are tax-exempt under IRC Section 501(c)(3). Certain other affiliates are tax-exempt organizations under IRC Section 501(c)(4). Tax-exempt organizations are subject to income tax on any income from unrelated business activities and excise tax on highly paid individuals. The System also owns or controls certain taxable affiliates. Net deferred tax assets of $34,053 at December 31, 2019, which are primarily related to net operating loss carryforwards, have respective valuation allowances of $26,432 recorded against them due to the uncertainty of realizing those benefits in the future, and are included in other long-term assets on the consolidated balance sheet.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 25
6. Taxes and Government Fees (continued)
Taxes Based on Membership
The state of Michigan assesses a tax based on prior year enrolled membership to providers, also known as the Insurance Provider Assessment. The System passes this tax through to covered groups or individuals but is ultimately responsible for the payment of the final tax liability. Tax expense totaled $12,218 in 2019 and is included in supplies and other expense on the consolidated statement of operations and changes in net assets. Outstanding liability as of December 31, 2019, totaled $6,207, and is included in accounts payable and accrued expenses on the consolidated balance sheet.
Fees Paid to the Federal Government by Health Insurers
The System is levied a nondeductible fee based on a ratio of an insurer’s net health insurance premiums written for the previous calendar year, compared with the U.S. health insurance industry total. The federal government has issued a moratorium on the annual health insurance industry fees for calendar year 2019. As such, the System has no amounts accrued as of December 31, 2019, and had no amounts expensed in calendar year 2019 related to these fees.
7. Net Assets and Gifts With Donor Restrictions
Pledges receivable, which are unconditional promises to give cash and other assets, are recorded at fair value at the date the promise is received and are reported as contributions on the consolidated statement of operations and changes in net assets. If the gifts are received with donor stipulations that limit the use of the donated assets, the gifts are reported as net assets with donor restrictions. Donor restricted contributions whose restrictions are met within the same year as received are reflected as contributions to net assets without donor restrictions in the accompanying consolidated financial statements. Management believes these are Level 2 measurements (as defined in Note 14) recorded on a nonrecurring basis.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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7. Net Assets and Gifts With Donor Restrictions (continued)
The System has received unconditional promises to give from donors, which include the following:
In less than one year $ 19,602 In one to five years 23,731 43,333 Less amounts representing interest (2,857) 40,476 Beneficial interest in perpetual pledge from Kent Community Hospital
Foundation, less current portion of $1,311 in 2019 26,870 Amount recognized on consolidated balance sheet $ 67,346
Endowment
The System’s endowments consist of 183 individual funds established for a variety of purposes. The endowments include donor restricted endowment funds and, as required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor imposed restrictions. As of December 31, 2019, such endowment with donor restrictions was $100,559.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) requires the System to exercise ordinary and prudent care in good faith in its discretion to invest and appropriate some or all of the net appreciation or depreciation of investments. In the absence of a relevant law or donor stipulations, fiduciary responsibility to exercise ordinary care and prudence does not extend donor stipulations to the earnings and losses on investments. UPMIFA, along with other relevant state laws, guides the System’s investment policies for restricted funds.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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8. Goodwill
The following is a summary of the System’s goodwill:
Goodwill $ 20,171 Less accumulated amortization (2,017) $ 18,154
Total amortization expense was $2,017 and no impairment was indicated in 2019.
9. Property and Equipment
Property and equipment include the following:
Land and improvements $ 121,777 Buildings 1,870,945 Equipment 1,215,586 Software 495,341 Leasehold improvements 106,362 In progress:
Software 7,913 Construction and equipment 246,522
4,064,446 Less accumulated depreciation and amortization (2,079,776) $ 1,984,670
The System has several ongoing construction projects and purchase commitments. These projects will largely be funded from existing cash reserves. Outstanding purchase commitments to complete various construction and renovation projects approximate $112,506 at December 31, 2019. There was no interest capitalized in 2019.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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10. Leases
The System has the right to use certain buildings, equipment, and vehicles held under operating or financing lease contracts. Each contract is evaluated for the right to control the use of identified property for a period of time in exchange for consideration. When capitalizing lease contracts, the System applies the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component for all underlying asset classes. Variable lease payments, not based on an index or rate, are typically based upon the System’s operations and are therefore not included in the lease liability. Variable payments are instead recognized in the period in which the achievement of the specified target that triggers the payment becomes probable. The System also applies the portfolio approach to certain groups of similar leases when it is reasonably expected that the application of the leases model to the portfolio would not differ materially from the application to individual leases. Short-term leases (12 months or less) are not subject to capitalization per the System’s accounting policy. Included in the lease term are any renewal options reasonably certain of being exercised. The System uses a risk-free discount rate commensurate with the lease term to determine the present value of lease payments used to record the right of use asset and related lease liability.
The table below summarizes the components of lease cost by lease, followed by disclosure of weighted average remaining lease term and weighted average discount rate by type:
Finance lease cost: Amortization of right of use assets $ 6,018 Interest on lease liabilities 5,759
Operating lease cost 26,845 Short-term lease cost 2,897 Variable lease cost 14,253 Total lease cost $ 55,772
Weighted average remaining lease term – finance leases (years) 15.8 Weighted average remaining lease term – operating leases (years) 5.0 Weighted average discount rate – finance leases 7.7% Weighted average discount rate – operating leases 2.7%
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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10. Leases (continued)
The following table presents supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases $ 8,438 Operating cash flows for finance leases 5,759 Financing cash flows for finance leases 4,237
The following table reconciles the undiscounted cash flows to the operating and financing lease liabilities recorded on the balance sheet at December 31, 2019:
Operating
Leases Financing
Leases 2020 $ 26,303 $ 10,263 2021 23,893 8,693 2022 18,658 8,494 2023 15,023 8,252 2024 11,466 6,638 Thereafter 23,799 110,201 Total minimum lease payments 119,142 152,541 Less: amount of lease payments representing interest (8,713) (80,890) Present value of future minimum lease payments 110,429 71,651 Less: current obligations under leases (23,766) (4,743) Long-term lease obligations $ 86,663 $ 66,908
Related party financing leases primarily consist of two building lease agreements, with remaining terms varying from 18 to 22 years. As of December 31, 2019, $61,218 remains outstanding under these agreements.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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11. Investments
The fair value of investments is as follows:
Cash and cash equivalents $ 297,502 Short-term investments 372,642 U.S. treasury securities 204,511 Corporate debt securities 329,865 Mortgage-backed securities 310,013 Mutual funds – U.S. fixed income 514,818 Mutual funds – U.S. equity 357,864 Mutual funds – non U.S. equity 293,854 Mutual funds – global equity 213,747 Marketable equity securities 113,886 Commingled funds 408,962 Alternative investments 230,418 3,648,082 Due to broker, net (12,899) $ 3,635,183
The System’s investments are exposed to various types and levels of risk. Fixed-income securities expose the System to interest rate risk, credit risk, and liquidity risk. As interest rates change, the value of many fixed-income securities is affected, particularly those with fixed interest rates. Credit risk is the risk that the obligor of the security will not fulfill its obligation. Liquidity risk is affected by the willingness of market participants to buy and sell a particular security.
Equity securities expose the System to market risk, performance risk, and liquidity risk. Market risk is the risk associated with major movements of the equity markets, both domestic and international. Performance risk is the risk associated with a particular company’s operating performance. Liquidity risk, as previously defined, tends to be higher for certain alternative investments and international and domestic small capitalized equity companies. The System’s alternative investment risk is limited to the investment’s carrying value.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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11. Investments (continued)
The uses of investments are as follows:
Unrestricted $ 1,867,006 For health plan operations 1,113,410 Board designated for Spectrum Health Lakeland 417,760 For donor restricted purposes 213,689 For professional and general liability claims 16,582 Restricted funds (by bond indenture agreement) 4,285 Restricted funds (by state insurance commissioner) 2,451 $ 3,635,183
Investment income, net, as reported in the consolidated statement of operations and changes in net assets, consists of the following:
Nonoperating Restricted
Funds Total Investment income $ 83,397 $ 4,816 $ 88,213 Net realized gains on sale of investments 115,597 923 116,520 198,994 5,739 204,733 Less investment management fees (4,969) – (4,969) 194,025 5,739 199,764 Net unrealized gains on investments held 225,509 10,851 236,360 $ 419,534 $ 16,590 $ 436,124
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
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12. Borrowings
Obligated Groups
The System operates under a Master Trust Indenture (MTI) that provides for issuance of long-term debt under an obligated group structure. The members of the System Obligated Group under the terms of the MTI dated June 1, 1998, as amended, are Spectrum Health System and Spectrum Health Hospitals. Certain of Spectrum Health System’s affiliates are Designated Affiliates under the MTI (the Designated Affiliates). The Designated Affiliates consist of Spectrum Health United, Spectrum Health Continuing Care, including its wholly owned subsidiaries, Newaygo County General Hospital Association (dba Spectrum Health Gerber Memorial), and Zeeland Community Hospital (dba Spectrum Health Zeeland Community Hospital). The System Credit Group consists of the System Obligated Group and the Designated Affiliates.
Lakeland also has an MTI that provides for issuance of long-term debt under an obligated group structure. The member of the Lakeland Obligated Group under the terms of the MTI dated December 15, 1993, as amended, is Lakeland Hospitals at Niles and St. Joseph, Inc.
Long-term debt consists of the following obligations:
System Credit Group Hospital Facilities Refunding Revenue Bonds:
Series 2019A at an interest rate of 3.49% maturing in 2049 $ 353,390 Series 2019B at interest rates from 2.09% to 3.12%, maturing in
varying amounts through 2034 84,980 Series 2017A, variable rate demand bonds (2.02% at December 31,
2019), maturing in varying amounts through 2045 56,490 Series 2015A, variable rate demand bonds (1.86% at December 31,
2019), maturing in varying amounts through 2047 78,400 Series 2015B at an interest rate of 3.50%, maturing in varying amounts
through 2030 39,130 Series 2014A, variable rate demand bonds (1.78% at December 31,
2019), maturing in varying amounts through 2047 61,895 Series 2014B, variable rate demand bonds (1.80% at December 31,
2019), maturing in varying amounts through 2047 40,025 Series 2012A, variable rate demand bonds (2.03% at December 31,
2019), maturing in varying amounts through 2045 56,490
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 33
12. Borrowings (continued)
System Credit Group (continued) Hospital Facilities Refunding Revenue Bonds (continued):
Series 2011A at interest rates from 4.63% to 4.98%, maturing in varying amounts through 2029 $ 15,200
Series 2011B, variable rate demand bonds (2.37% at December 31, 2019), maturing in varying amounts through 2047 103,770
Series 2008B, variable rate demand bonds (1.62% at December 31, 2019), maturing in varying amounts through 2047 50,000
Series 2008C, variable rate demand bonds (1.65% at December 31, 2019), maturing in varying amounts through 2026 36,500
Other 459 Total System Credit Group 976,729 Lakeland Obligated Group Series 2006, variable rate demand bonds (1.67% at December 31, 2019),
maturing in varying amounts through 2035 37,900 Series 2003, variable rate demand bonds (1.67% at December 31, 2019),
maturing in varying amounts through 2032 23,800 Series 2002, variable rate demand bonds (1.67% at December 31, 2019),
maturing in varying amounts through 2032 24,400 Total Lakeland Obligated Group 86,100 Other entities Priority Health loan bearing interest based on one-month LIBOR (1.80%
at December 31, 2019), plus 98 basis points, maturing in July 2023 20,653 Lakeland loan bearing interest at 2.33%, maturing in September 2024 7,055 Lakeland loan bearing interest at 3.44%, maturing in June 2024 6,026 Other 1,144 34,878 Total long-term debt 1,097,707 Less current maturities (23,057) Less debt financing costs (6,836) Less short-term debt (78,400) Total long-term debt $ 989,414
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 34
12. Borrowings (continued)
In October 2019, the Series 2019A and 2019B bonds were issued totaling $438,370. The Series 2019A fixed rate taxable bonds, totaling $353,390, were issued by the System with an initial term of 30 years. The Series 2019B fixed rate taxable bonds, totaling $84,980, were issued by the Kent Hospital Finance Authority as Hospital Revenue Refunding Bonds and have maturities with an initial term of 15 years. Proceeds were used to refund certain amounts outstanding on the Series 2011A bonds, refund all outstanding amounts on the Series 2011C bonds, refinance certain amounts on the revolving credit facility, and provide capital for future needs. In connection with the issuance of the Series 2019A and 2019B bonds, the System recognized a loss on extinguishment of debt of $11,085 on the consolidated statement of operations and changes in net assets.
In December 2017, the Kent Hospital Finance Authority issued the Hospital Revenue Refunding Bonds (Spectrum Health System) Series 2017A Bonds, totaling $56,490. Proceeds were used to refund all amounts outstanding on the Series 2012B Bonds. The Series 2017A Bonds were issued directly to a bank, with a term expiring, as amended, on March 1, 2029, and have maturities with an initial term of 28 years.
In January 2015, the Kent Hospital Finance Authority issued the Hospital Revenue Refunding Bonds (Spectrum Health System) Series 2015A Windows Bonds, totaling $78,400. Proceeds were used to refund all amounts outstanding on the Series 2008A Bonds. The Series 2015A variable rate bonds are supported by the System’s self-liquidity and have maturities with an initial term of 32 years. The 2015A bonds can be tendered on any day by the bondholders, and the System has up to 210 days to remarket the bonds, convert the bonds to a different mode, or pay off the bonds. As such, the 2015A bonds are classified as short-term debt on the consolidated balance sheet. As of December 31, 2019, no bonds had been tendered.
In February 2015, the 2015B taxable bonds, totaling $50,000, were issued directly to an insurance company and have an initial term of 15 years. Proceeds were used to refund outstanding amounts on the Spectrum Health revolving credit facility.
In January 2014, the Kent Hospital Finance Authority issued the Hospital Revenue Refunding Bonds (Spectrum Health System) Series 2014A and 2014B Bonds, totaling $111,850. Proceeds were used to refund certain amounts outstanding on the Series 2008A Bonds, Gerber variable rate revenue bonds, and the Zeeland Series 2010 Bonds. The Series 2014A and 2014B Bonds were issued directly to banks, with terms expiring on January 1, 2024 and January 15, 2021, respectively, and have maturities with an initial term of 33 years.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 35
12. Borrowings (continued)
In January 2012, the Kent Hospital Finance Authority issued the Hospital Revenue Refunding Bonds (Spectrum Health System) Series 2012A Bonds, totaling $56,490. Proceeds were used to refund certain amounts outstanding on the Series 2008A and Series 2008B Bonds. The Series 2012A Bonds were issued directly to a bank, with a term expiring, as amended, on July 1, 2026, and have maturities with an initial term of 33 years.
In June 2011, the Kent Hospital Finance Authority issued the Hospital Revenue Refunding Bonds (Spectrum Health System) Series 2011A and 2011B, totaling $212,860, including premium. Proceeds were used to refund certain amounts outstanding on the Series 2008B and 2005B Bonds, and to reduce amounts outstanding on the Spectrum Health revolving credit facility. The Series 2011A Bonds have an initial term of 18 years and $48,650 was refunded with the Series 2019 Bonds. The Series 2011B Bonds were issued directly to a bank, with a term expiring, as amended, on June 1, 2025, and have an initial term of 36 years.
In September 2008, the Kent Hospital Finance Authority issued the Hospital Revenue Refunding Bonds (Spectrum Health System) Series 2008C. Proceeds were used to refund all amounts outstanding on the Series 1998B Bonds. Variable rate bonds are remarketed weekly, with the option to convert to a fixed rate, and have an initial term of 17 years. The bonds are secured by a letter of credit that is scheduled to terminate on September 30, 2022.
In April 2008, the Kent Hospital Finance Authority issued the Hospital Revenue and Refunding Bonds (Spectrum Health System) Series 2008B. Proceeds were used to refund certain amounts outstanding on the Series 2001B, Series 2007A, and Series 2007B Bonds. The remaining proceeds were used for capital expenditures and reimbursement for prior capital expenditures. Variable rate bonds are remarketed weekly, with the option to convert to a fixed rate, and have an initial term of 40 years. The bonds are secured by a standby bond purchase agreement scheduled to terminate on April 29, 2021.
In January 2006, the Hospital Finance Authority of the City of St. Joseph issued the Hospital Revenue Bonds (Lakeland Hospitals at Niles and St. Joseph, Inc.) Series 2006. Proceeds were used for capital expenditures. The bonds are pledged by essentially all revenue received by the Lakeland Obligated Group, unless specifically restricted by the donor. Variable rate bonds are remarketed weekly and have an initial term of 29 years. The bonds are secured by a standby bond purchase agreement scheduled to terminate on February 1, 2022.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 36
12. Borrowings (continued)
In December 2003, the Hospital Finance Authority of the City of St. Joseph issued the Hospital Revenue Bonds (Lakeland Hospitals at Niles and St. Joseph, Inc.) Series 2003. Proceeds were used to refund certain amounts outstanding on the Series 1993 Bonds. The remaining proceeds were used for capital expenditures. The bonds are pledged by essentially all revenue received by the Lakeland Obligated Group, unless specifically restricted by a donor. Variable rate bonds are remarketed weekly and have an initial term of 28 years. The bonds are secured by a standby bond purchase agreement scheduled to terminate on February 1, 2022.
In January 2002, the Hospital Finance Authority of the City of St. Joseph issued the Hospital Revenue Bonds (Lakeland Hospitals at Niles and St. Joseph, Inc.) Series 2002. Proceeds were used for capital expenditures. The bonds are pledged by essentially all revenue received by the Lakeland Obligated Group, unless specifically restricted by a donor. Variable rate bonds are remarketed weekly and have an initial term of 30 years. The bonds are secured by a standby bond purchase agreement scheduled to terminate on February 1, 2022.
Other long-term debt consists primarily of term loans and other obligations related to the acquisition of property and equipment. The System has a syndicated revolving credit facility with various banks. Under this credit agreement, the System may borrow up to $200,000. The credit agreement expires on February 22, 2022, at which time all amounts outstanding will become due. Interest is paid at a floating rate based on the designated one-month London Interbank Offered Rate (LIBOR), plus 75 basis points. There were no principal amounts outstanding as of December 31, 2019.
The System is required to meet certain debt coverage and other financial covenants. As of December 31, 2019, the System was in compliance with all financial covenants.
Principal maturities of long-term debt, due subsequent to December 31, 2020, according to the long-term amortization schedule, are as follows:
2021 $ 23,333 2022 26,798 2023 26,323 2024 30,741 Thereafter 889,055
Interest paid on long-term debt totaled $25,976 in 2019.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 37
13. Interest Rate Swaps
The System has entered into interest rate swap agreements to manage exposure to certain risks. The interest rate swap agreements utilized by the System effectively modify the System’s exposure to interest rate risk. Certain interest rate swap agreements convert the System’s floating rate debt to a fixed rate basis for the next 27 years, thus reducing the impact of interest rate changes on future interest expense. This involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements, without an exchange of the underlying principal amount. In addition, the System utilizes a basis swap to reduce exposure to rising variable rates. This agreement involves the receipt of a short-term taxable rate in exchange for a short-term tax-exempt rate based on the Securities Industry and Financial Markets Association (SIFMA).
Outstanding interest rate swap agreements are as follows:
Notional Amount Maturity Date Rate Received Rate Paid
$ 251,520 January 2047 67% of three-month LIBOR
(1.91% at December 31, 2019) Fixed rate of 3.698%
196,000 July 2022 75.125% of one-month LIBOR SIFMA (1.61% at December 31, 2019)
61,620 July 2031 62.4% of one-month LIBOR, plus 0.29%
Fixed rate of 3.857%
36,500 January 2026 66% of one-month LIBOR Fixed rate of 3.853% 9,670 December 2023 SIFMA Fixed rate of 4.18%
37,900 January 2035 67% of five-year LIBOR (1.57% at December 31, 2019)
minus 0.36%
Fixed rate of 3.315%
23,600 December 2031 67% of five-year LIBOR minus 0.36%
Fixed rate of 3.772%
22,900 December 2031 67% of five-year LIBOR minus 0.36%
Fixed rate of 4.067%
Guidance on fair value accounting stipulates that a credit valuation adjustment (CVA) should be applied to the mark-to-market valuation position of interest rate swaps to more clearly capture the fair value of such instruments. As of December 31, 2019, the fair value of the interest rate swaps was a liability of $124,260, which is net of CVA of $3,350. Changes in the fair value of these derivative financial instruments are included on the accompanying consolidated statement of operations and changes in net assets within other nonoperating revenue (expenses).
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 38
13. Interest Rate Swaps (continued)
The System recorded the following loss on the accompanying consolidated statement of operations and changes in net assets related to these derivative financial instruments:
Loss on interest rate swaps, net: Unrealized loss on interest rate swaps $ (33,977) Realized loss on interest rate swaps (8,271)
$ (42,248) The System has used various derivative contracts in connection with certain prior obligations and investments. Although minimum credit ratings are required for counterparties for seven of the derivative instruments having a notional value of $630,040, this does not eliminate the risk that the counterparty may fail to honor its obligations. Derivative contracts are subject to periodic mark-to-market valuations. A derivative contract may, at any time, have a positive or negative value to the System. In the event that the negative value reached certain thresholds established in the derivative contracts, the System is required to post collateral, which could adversely affect its liquidity. Collateral arrangements reduce the credit exposure and are considered in determining the CVA. The aggregate fair value of all derivative instruments, with credit-risk-related contingent features, which are in a liability position on December 31, 2019, was $123,336. There was no collateral posted at December 31, 2019. The System’s accounting policy is not to offset collateral amounts against fair value amounts recognized for derivative instrument obligations.
14. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820, Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 39
14. Fair Value Measurements (continued)
Certain of the System’s financial assets and financial liabilities are measured at fair value on a recurring basis, including money market, fixed-income, and equity instruments, and interest rate swap contracts. The three levels of the fair value hierarchy and a description of the valuation methodologies used for instruments measured at fair value are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities as of the reporting date. Level 1 primarily consists of financial instruments such as money market securities and listed equities.
Level 2 – Pricing inputs other than quoted prices included in Level 1 that are either directly observable or that can be derived or supported from observable data as of the reporting date. Instruments in this category include certain U.S. government agency and sponsored entity debt securities and interest rate swap contracts.
Level 3 – Pricing inputs include those that are significant to the fair value of the financial asset or liability and are not observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The carrying values of cash and cash equivalents, patient accounts receivable, other accounts receivable, and accounts payable are reasonable estimates of fair value due to the short-term nature of these financial instruments. The carrying value of pledges receivable is estimated by management to approximate fair value. The fair values of the System’s fixed rate bonds are based on quoted market prices for the same or similar issues and total $506,978 as of December 31, 2019, and represent Level 2 measurements. The fair value of the System’s variable rate debt approximates the carrying amount as of December 31, 2019, and excludes the impact of third- party credit enhancements. The variable rate debt represents a Level 2 measurement.
The System’s alternative investments, of approximately $230,418 as of December 31, 2019, are accounted for using the equity method of accounting. Accordingly, the alternative investments are omitted from the following schedule of financial instruments measured at fair value.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 40
14. Fair Value Measurements (continued)
The value of financial assets measured at fair value on a recurring basis was determined using the following inputs at December 31, 2019:
Fair Value Measurements Using
Total
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Unobservable
Inputs (Level 3)
Financial assets: Cash and cash equivalents $ 1,113,185 $ 1,113,185 $ – $ – Short-term investments 374,769 108,223 266,546 – U.S. treasury securities 204,512 204,264 248 – Corporate debt securities 329,865 – 329,865 – Mortgage-backed securities 310,013 – 310,013 – Mutual funds – U.S. fixed income 557,637 557,637 – – Mutual funds – U.S. equity 426,106 426,106 – – Mutual funds – non-U.S. equity 315,289 315,289 – – Mutual funds – global equity 213,747 213,747 – – Marketable equity securities 113,907 100,146 13,761 –
Total financial assets at fair value 3,959,030 $ 3,038,597 $ 920,433 $ – Investments measured at NAV:
Commingled funds – U.S. equity(a) 226,419 Commingled funds – non-U.S. equity(b) 58,501 Commingled funds – global equity(c) 90,409 Commingled funds – emerging
markets(d) 33,633 Total investments measured at NAV 408,962 Due to broker, net (12,899) $ 4,355,093 Financial liabilities:
Interest rate swap agreements $ 124,260 $ – $ 124,260 $ – Total financial liabilities at fair value $ 124,260 $ – $ 124,260 $ –
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 41
14. Fair Value Measurements (continued)
(a) Commingled funds – U.S. equity: The purpose of the U.S. equity funds is to approximate the risk and return characteristics of certain U.S. equity market segments. These funds may participate in securities lending.
(b) Commingled funds – non-U.S. equity: The purpose of the non-U.S. equity funds is to invest primarily in equity securities of non-U.S. domiciled companies or depository receipts of non-U.S. domiciled companies.
(c) Commingled funds – global equity: The purpose of the global equity funds is to invest primarily in equity securities listed on global stock exchanges.
(d) Commingled funds – emerging markets: The purpose of the emerging markets funds is to invest primarily in emerging market equity securities.
The fair values of the securities included in Level 1 were determined through unadjusted quoted market prices. The fair values of Level 2 securities (primarily fixed income) were determined using third-party quotes based on quoted market prices of similar securities and other observable inputs. The fair values of the interest rate swap agreements are based on forward interest rate curves and reflect a credit spread adjustment in order to reflect the CVA for nonperformance risk.
The CVA is derived from other comparably rated entities’ bonds priced in the market. Due to the volatility of the capital markets, there is a reasonable possibility of significant changes in fair value and additional gains or losses in the near term subsequent to December 31, 2019. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the System believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 42
14. Fair Value Measurements (continued)
Investments in Entities Measured Using Net Asset Value per Share (NAV)
The System holds shares or interests in investment companies at year-end whereby the fair value of the investment held is based on the NAV per share (or its equivalent) of the investment company.
All of the System’s investments measured at NAV are considered commingled funds. A commingled fund consists of assets from several investors that are combined into a single fund. Investors in commingled fund investments benefit from economies of scale, which typically results in lower trading costs. Commingled funds are valued using NAV, calculated and provided by the administrator of the fund and reviewed by the investment manager. These assets are reported at NAV as a practical expedient and the NAV is audited by an outside firm on an annual basis. For the year ended December 31, 2019, 56% of the System’s investments in NAV measured commingled funds were daily liquid, 8% were weekly liquid, 14% monthly liquid, and 22% were liquid twice per month.
There were no unfunded commitments or redemption restrictions related to the investments valued at NAV at December 31, 2019.
15. Professional and General Liability and Other Insurance
The System maintains coverage for professional and general liability risks through a combination of policies with an insurance reciprocal (self-funded) and commercial insurance carriers. The first tier of coverage is provided through the Michigan Professional Insurance Exchange and is funded by actuarially computed premium payments with specific retention limits that vary by year. The risk management plan provides for consolidated supplemental comprehensive excess insurance provided through commercial insurance carriers. Amounts exceeding the insurance provided by other commercial insurance would be the responsibility of the System.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 43
15. Professional and General Liability and Other Insurance (continued)
Malpractice and general liability claims have been asserted against the System’s affiliates by various claimants and are in various stages of discovery. Also, known and unknown incidents have occurred through December 31, 2019, that may result in the assertion of additional claims. Although the System is unable to precisely estimate the ultimate cost of settlements, management has accrued its best estimate for claims identified and an amount for potential claims IBNR based on historical experience. The estimated cost of claims is actuarially determined based upon past experience and is discounted using a discount rate of 1.9% for 2019. Provisions for malpractice insurance charged to operations amounted to $33,152 in 2019, which include additional amounts related to IBNR.
The System’s risk management plan for other insurance is a combination of retained and reinsured limits. Priority Health has reinsurance contracts whereby it cedes exposure to potential losses arising from large claims. Management believes, after considering legal counsel and claim management advisors’ evaluations of all actions and claims, that insurance coverage and accruals for estimated losses are adequate to cover expected settlements.
16. Employee Benefit Plans
Defined Contribution Plans
The System maintains defined contribution retirement plans. Employer contributions to those plans are based on either a percentage of a participant’s contribution or a percentage of a participant’s compensation. Contributions to the defined contribution plans were $80,465 in 2019.
Defined Benefit Plans
The System sponsors a defined benefit pension plan. The benefits are based on years of service and compensation. The defined benefit plan has been frozen, and no new participants are permitted. Contributions to this plan are sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts as may be determined to be appropriate from time to time.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 44
16. Employee Benefit Plans (continued)
The System recognized the net funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension plan in other liabilities on the consolidated balance sheet as of December 31, 2019. The net funded status was a $331 liability at December 31, 2019. The annual adjustment to net assets without donor restrictions represents the unrecognized actuarial losses, unrecognized prior service credits, and settlement gains, which will be subsequently recognized as net periodic pension cost. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same period will be recognized as a component of net assets without donor restrictions. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as amounts recognized in net assets without donor restrictions.
A summary of the information related to the System’s defined benefit plan is as follows:
Change in benefit obligation Projected benefit obligation at beginning of year $ 379,454
Interest cost 13,218 Actuarial losses 55,583 Benefits paid (12,378) Settlement (119,901)
Projected benefit obligation at end of year 315,976 Change in net plan assets Fair value of plan assets at beginning of year 367,591
Actual return on plan assets 71,333 Employer contributions 9,000 Benefits paid (12,378) Settlement (119,901)
Fair value of plan assets at end of year 315,645 Net funded status and amount recognized on balance sheet $ (331) Amounts recognized on consolidated balance sheet Accumulated adjustments to net assets without donor restrictions:
Net actuarial loss $ (1,521) Prior service credit 162,205
Net amount recognized $ 160,684
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 45
16. Employee Benefit Plans (continued)
Accumulated adjustments to net assets without donor restrictions at December 31, 2019, include amounts related to net actuarial loss and unrecognized prior service credit that have not yet been recognized in net periodic benefit cost. Expected amortization of amounts included in net assets without donor restrictions is expected to increase net periodic benefit cost by $8,020 during 2020.
Components of net periodic benefit cost Interest cost $ 13,218 Expected return on plan assets (20,546) Amortization of unrecognized prior service credit (143) Amortization of unrecognized net loss 11,268 Net periodic cost 3,797 Settlement cost 63,694 Net pension cost $ 67,491 Accumulated benefit obligation at end of year $ (306,794)
The components of net periodic benefit cost are included in nonoperating expenses on the consolidated statement of operations and changes in net assets.
Weighted average assumptions used to determine benefit obligation as of December 31
Discount rate 2.95% Rate of compensation increase 3.00 Weighted average assumptions used to determine net periodic benefit
cost as of December 31 Discount rate for periodic pension costs 2.87% Expected return on plan assets 6.00 Rate of compensation increase 3.00
Actuarial losses of $55,583 related to fiscal 2019 increased the projected benefit obligation and are primarily attributable to changes in the discount rate, lump-sum interest rates, and mortality assumptions.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 46
16. Employee Benefit Plans (continued)
The expected return on plan assets is determined by applying the target allocation in each asset category of plan investments to the anticipated return for each asset category based on historical and projected returns.
The investment strategy for the System’s defined benefit plan is both to meet the liabilities of the plans as they become due and to maximize the return on invested assets within appropriate risk tolerances. The System’s pension plan asset allocations by major asset category are as follows:
Plan Assets
Asset Category December 31,
2019 Target Asset Allocation
Cash and cash equivalents 5% 0.0–10.0% Equity securities 42 27.5–77.5% Debt securities 53 35.0–60.0% Total 100%
On October 2, 2019, the System purchased annuities from an unrelated third party for $113,887 to assume a portion of the accumulated benefit obligation of the pension plan. Along with lump-sum payments throughout fiscal 2019, this purchase resulted in pension settlement expense of $63,694, which was recognized in other nonoperating revenue (expenses) on the consolidated statement of operations and net assets.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 47
16. Employee Benefit Plans (continued)
The following table presents the plan’s financial instruments as of December 31, 2019, measured at fair value on a recurring basis within the fair value hierarchy as disclosed in Note 14:
Total Level 1 Level 2 Level 3 Cash and cash equivalents $ 17,173 $ 17,173 $ – $ – Short-term investments 4,112 4,112 – – U.S. Treasury securities 64,613 64,613 – – Corporate debt securities 75,267 – 75,267 – Mortgage-backed securities 239 – 239 – Mutual funds – U.S. fixed
income 34,002 – 34,002 – Mutual funds – non-U.S.
equity 45,288 45,288 – – Other: private equity/futures (4,195) – (4,195) – Total assets measured at fair
value on a recurring basis 236,499 $ 131,186 $ 105,313 $ – Investments measured at
NAV: Commingled funds –
U.S. equity(a) 75,970 Commingled funds –
non-U.S. equity(b) 25,373 Total investments measured
at NAV 101,343 Due to broker, net (22,197) $ 315,645
(a) Commingled funds – U.S. equity: The purpose of the U.S. equity funds is to approximate
the risk and return characteristics of certain U.S. equity market segments. These funds may participate in securities lending.
(b) Commingled funds – non-U.S. equity: The purpose of the non-U.S. equity funds is to invest primarily in equity securities of non-U.S. domiciled companies or depository receipts of non-U.S. domiciled companies.
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 48
16. Employee Benefit Plans (continued)
For the year ended December 31, 2019, 75% of the plan’s investments in NAV measured commingled funds were daily liquid and 25% were monthly liquid. There were no unfunded commitments or redemption restrictions related to the plan’s investments valued at NAV at December 31, 2019.
Projected benefits to be paid in the years subsequent to December 31, 2019, are as follows:
2020 $ 20,417 2021 20,071 2022 19,561 2023–2029 126,564
17. Functional Expenses
The following statement of functional expenses reports the System’s operating expenses, as presented on the consolidated statement of operations and changes in net assets, by each of the System’s major operating functions for the year ended December 31, 2019. Operating expenses that are attributable to more than one operating function have been allocated using a basis representative of the operating expenditure, such as patient volume, full-time equivalent, or facility size.
Delivery System
Health Plan
Management and General Total
Salaries, wages, and employee benefits $ 1,761,700 $ – $ 519,848 $ 2,281,548
Supplies and other 1,090,080 119,519 331,049 1,540,648 Health care claims expense – 2,822,250 – 2,822,250 Depreciation and
amortization 194,633 7,958 49,184 251,775 Interest 27,633 825 3,589 32,047 Total operating expenses $ 3,074,046 $ 2,950,552 $ 903,670 $ 6,928,268
Spectrum Health System and Affiliates
Notes to Consolidated Financial Statements (continued) (In Thousands)
1909-3267234 49
18. Consent Decree
In connection with the formation of Spectrum Health, the System agreed to be bound by the terms of a consent decree with a federal court. The consent decree contains a series of formal assurances to the West Michigan community with respect to the operation of the merged entity, Spectrum Health. Although numerous requirements were imposed by the consent decree, the most restrictive terms expired in September 2004 (including the limitations on price increases). However, the following requirements will continue in perpetuity:
• Spectrum Health will target a five-year rolling average total margin for the merged system that does not exceed the average of Moody’s or Standard & Poor’s upper quartile total margins for other health systems nationally.
• Spectrum Health has committed to establish a fund to provide health care programs for the underserved in the community, including services such as community-based clinics, immunization and preventive care, and health education programs. The Community Commitment fund will include a budgeted item in the amount of $6 million per year.
• The Community Commitment also opens the budget and pricing process of Spectrum Health to the public for both input in advance of the adoption of the budget and scrutiny of past performance. A permanent Finance Advisory Committee counsels the Finance and Audit Committee of the Spectrum Health System Board of Directors during the budgeting process and prior to any budgetary recommendation to the Spectrum Health System Board of Directors.
• The Board of Directors of Spectrum Health System will be representative of the community it serves.
As of December 31, 2019, and for the year then ended, management believes the System is in compliance with the terms of the consent decree.
1909-3267234
Supplemental Information
1909-3267234 50
Report of Independent Auditors on Supplemental Information
The Board of Directors Spectrum Health System and Affiliates
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The community benefit expense, consolidating balance sheet and consolidating statement of operations and changes in net assets are presented for purposes of additional analysis and are 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, except for that portion marked “unaudited,” 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, except for that portion marked “unaudited,” on which we express no opinion, is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
March 16, 2020
A member firm of Ernst & Young Global Limited
Ernst & Young LLP Suite 600 171 Monroe Avenue, NW Grand Rapids, MI 49503
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Spectrum Health Spectrum Health Spectrum Health Obligated Designated Credit Spectrum Health Spectrum Health System
Group Affiliates Group Lakeland Foundation Other Total Assets Current assets:
Cash and cash equivalents 373,698$ 50,709$ 424,407$ 45,541$ 6,549$ 335,532$ 812,029$ Short-term investments – – – 1,705 – 359,761 361,466 Accounts receivable:
Patients 273,860 30,507 304,367 62,932 – 63,072 430,371 Other 11,633 420 12,053 5,785 – 174,736 192,574
Pledges receivable 4,365 2 4,367 206 14,229 – 18,802 Inventories 37,718 4,656 42,374 9,050 – 5,575 56,999 Prepaid expenses and other current assets 57,378 171 57,549 8,297 250 2,500 68,596
Total current assets 758,652 86,465 845,117 133,516 21,028 941,176 1,940,837
Investments 1,848,961 5,282 1,854,243 456,665 198,594 764,215 3,273,717 Interest in recipient organization 157,266 16,028 173,294 – – (173,294) – Property and equipment – net 1,107,296 120,508 1,227,804 457,685 2,610 296,571 1,984,670 Right of use assets – net 146,436 – 146,436 9,300 – – 155,736
Other assets: Due from affiliates 313,234 (42,871) 270,363 – 254 (270,617) – Investments in affiliates 62,201 – 62,201 – – (62,201) – Investments in joint ventures 37,978 2,806 40,784 402 – (2,980) 38,206 Goodwill 7,329 – 7,329 – – 10,825 18,154 Pledges receivable 26,870 – 26,870 82 21,592 – 48,544 Other 192,540 8,641 201,181 19,498 97 124,009 344,785
640,152 (31,424) 608,728 19,982 21,943 (200,964) 449,689 Total assets 4,658,763$ 196,859$ 4,855,622$ 1,077,148$ 244,175$ 1,627,704$ 7,804,649$
Spectrum Health System and Affiliates
Consolidating Balance Sheet (In Thousands)
December 31, 2019
51 1909-3267234
Spectrum Health Spectrum Health Spectrum Health Obligated Designated Credit Spectrum Health Spectrum Health System
Group Affiliates Group Lakeland Foundation Other Total Liabilities and net assets Current liabilities:
Accounts payable and accrued expenses 173,364$ 8,663$ 182,027$ 27,891$ 1,144$ 266,214$ 477,276$ Salaries, wages, and related withholdings 140,305 14,183 154,488 25,803 437 69,968 250,696 Health plan claims payable – – – – – 323,681 323,681 Current maturities of long-term debt 13,979 3,125 17,104 4,654 – 1,299 23,057 Short-term debt 78,400 – 78,400 – – – 78,400 Current portion of lease obligations 27,354 – 27,354 1,155 – – 28,509
Total current liabilities 433,402 25,971 459,373 59,503 1,581 661,162 1,181,619
Due to affiliates 55,368 16,409 71,777 – 31,107 (102,884) – Third party settlement liabilities 24,090 12,153 36,243 12,530 – 17,275 66,048 Long-term debt, less current maturities 848,510 27,924 876,434 93,024 – 19,956 989,414 Lease obligations, less current portion 145,426 – 145,426 8,145 – – 153,571 Professional liability accrual 66,223 – 66,223 16,314 – – 82,537 Interest rate swaps 106,508 926 107,434 16,826 – – 124,260 Other long-term liabilities 149,125 211 149,336 16,397 – 8,119 173,852 Total liabilities 1,828,652 83,594 1,912,246 222,739 32,688 603,628 2,771,301
Net assets: Controlling interest in net assets without
donor restrictions 2,641,249 97,211 2,738,460 847,155 38,595 1,129,531 4,753,741 Noncontrolling interest in subsidiaries 402 – 402 – – 67,922 68,324 Net assets without donor restrictions 2,641,651 97,211 2,738,862 847,155 38,595 1,197,453 4,822,065 Net assets with donor restrictions 188,460 16,054 204,514 7,254 172,892 (173,377) 211,283
Total net assets 2,830,111 113,265 2,943,376 854,409 211,487 1,024,076 5,033,348 Total liabilities and net assets 4,658,763$ 196,859$ 4,855,622$ 1,077,148$ 244,175$ 1,627,704$ 7,804,649$
Spectrum Health System and Affiliates
Consolidating Balance Sheet (continued) (In Thousands)
December 31, 2019
52 1909-3267234
Spectrum Health Spectrum Health Spectrum Health Obligated Designated Credit Spectrum Health Spectrum Health System
Group Affiliates Group Lakeland Foundation Other Total Operating revenue Premium revenue –$ –$ –$ –$ –$ 3,915,051$ 3,915,051$ Net patient service revenue 2,282,838 371,545 2,654,383 562,022 – (18,494) 3,197,911 Other 69,876 3,968 73,844 6,796 – 66,767 147,407 Total operating revenue 2,352,714 375,513 2,728,227 568,818 – 3,963,324 7,260,369
Operating expenses Salaries, wages, and employee benefits 1,229,556 176,846 1,406,402 304,514 – 570,632 2,281,548 Supplies and other 788,605 153,552 942,157 202,650 – 395,841 1,540,648 Health care claims expense – – – – – 2,822,250 2,822,250 Depreciation and amortization 163,329 13,620 176,949 31,694 – 43,132 251,775 Interest 24,516 2,993 27,509 2,295 – 2,243 32,047 Total operating expenses 2,206,006 347,011 2,553,017 541,153 – 3,834,098 6,928,268 Total operating income 146,708 28,502 175,210 27,665 – 129,226 332,101
Other nonoperating revenue (expenses) Investment income, net 243,417 1,902 245,319 67,466 11,148 95,601 419,534 Loss on interest rate swaps, net (35,578) (268) (35,846) (6,402) – – (42,248) Other revenue (expenses), net (11,894) (5) (11,899) (3,995) (5,485) 9,521 (11,858) Pension settlement expense (63,694) – (63,694) – – – (63,694) Loss on extinguishment of debt (8,714) (2,371) (11,085) – – – (11,085) Total other nonoperating revenue,
(expenses), net 123,537 (742) 122,795 57,069 5,663 105,122 290,649 Excess of revenue over expenses 270,245 27,760 298,005 84,734 5,663 234,348 622,750 Less excess of revenue over expenses
attributable to noncontrolling interest (44) – (44) – – 14,203 14,159 Excess of revenue over expenses 270,289$ 27,760$ 298,049$ 84,734$ 5,663$ 220,145$ 608,591$
Spectrum Health System and Affiliates
Consolidating Statement of Operations and Changes in Net Assets (In Thousands)
Year Ended December 31, 2019
53 1909-3267234
Spectrum Health Spectrum Health Spectrum Health Obligated Designated Credit Spectrum Health Spectrum Health Total
Group Affiliates Group Lakeland Foundation Other Controlling Noncontrolling Total Net assets without donor restrictions Excess of revenue over expenses 270,289$ 27,760$ 298,049$ 84,734$ 5,663$ 220,145$ 608,591$ 14,159$ 622,750$ Contributions – – – 15 216 – 231 – 231 Expenditures for donor sponsored programs – – – – (559) – (559) – (559) Net assets released for capital acquisitions 3,005 101 3,106 – – 35 3,141 – 3,141 Pension related changes other than net – –
periodic pension costs 56,699 – 56,699 – – – 56,699 – 56,699 Other 30,810 (23,852) 6,958 (1,009) 14,937 (10,398) 10,488 (1,554) 8,934 Increase in net assets without
donor restrictions 360,803 4,009 364,812 83,740 20,257 209,782 678,591 12,605 691,196
Net assets with donor restrictions Contributions 9,897 – 9,897 2,106 37,064 – 49,067 – 49,067 Expenditures for donor sponsored programs (11,208) – (11,208) (45) (17,788) – (29,041) – (29,041) Investment returns 2,809 – 2,809 (46) 13,827 – 16,590 – 16,590 Interest in recipient organization 27,150 1,730 28,880 – – (28,880) – – – Net assets released for capital acquisitions – – – – (3,141) – (3,141) – (3,141) Other 20 66 86 (213) (9,297) (9) (9,433) – (9,433) Increase (decrease) in net assets with
donor restrictions 28,668 1,796 30,464 1,802 20,665 (28,889) 24,042 – 24,042
Increase in net assets 389,471 5,805 395,276 85,542 40,922 180,893 702,633 12,605 715,238
Net assets, beginning of year 2,440,238 107,460 2,547,698 768,867 170,565 775,261 4,262,391 55,719 4,318,110 Net assets, end of year 2,829,709$ 113,265$ 2,942,974$ 854,409$ 211,487$ 956,154$ 4,965,024$ 68,324$ 5,033,348$
Spectrum Health System and Affiliates
Consolidating Statement of Operations and Changes in Net Assets (continued) (In Thousands)
Year Ended December 31, 2019
54 1909-3267234
Spectrum Health Spectrum Health Spectrum Health Spectrum Health Lakeland Lakeland Lakeland Lakeland
Obligated Group Foundations Other Total Assets Current assets:
Cash and cash equivalents 21,287$ 251$ 24,003$ 45,541$ Short-term investments 28 1,677 – 1,705 Accounts Receivable:
Patients 47,337 – 15,595 62,932 Other 2,736 – 3,049 5,785
Pledges receivable – 201 5 206 Inventories 8,173 – 877 9,050 Prepaid expenses and other current assets 8,489 – (192) 8,297
Total current assets 88,050 2,129 43,337 133,516
Investments 436,559 19,431 675 456,665 Interest in recipient organization 1,357 – (1,357) – Property and equipment – net 384,603 – 73,082 457,685 Right of use assets – net 9,300 – – 9,300
Other assets: Due from affiliates 7,784 1,519 (9,303) – Investments in joint ventures – – 402 402 Pledges receivable – 82 – 82 Other 14,624 – 4,874 19,498
22,408 1,601 (4,027) 19,982 Total assets 942,277$ 23,161$ 111,710$ 1,077,148$
Spectrum Health Lakeland
Consolidating Balance Sheet (In Thousands)
December 31, 2019
1909-3267234 55
Spectrum Health Spectrum Health Spectrum Health Spectrum Health Lakeland Lakeland Lakeland Lakeland
Obligated Group Foundations Other Total Liabilities and net assets Current liabilities:
Accounts payable and accrued expenses 26,151$ 353$ 1,387$ 27,891$ Salaries, wages, and related withholdings 18,185 – 7,618 25,803 Current maturities of long-term debt 4,225 – 429 4,654 Current portion of lease obligations 1,155 – – 1,155
Total current liabilities 49,716 353 9,434 59,503
Due to affiliates 8,804 1,740 (10,544) – Third party settlement liabilities 11,570 – 960 12,530 Long-term debt, less current maturities 79,918 – 13,106 93,024 Lease obligations, less current portion 8,145 – – 8,145 Professional liability accrual 15,114 – 1,200 16,314 Interest rate swaps 16,826 – – 16,826 Other long-term liabilities 13,246 – 3,151 16,397 Total liabilities 203,339 2,093 17,307 222,739
Net assets: Controlling interest in net assets without
donor restrictions 737,005 6,828 103,322 847,155 Total net assets without donor restrictions 737,005 6,828 103,322 847,155 Net assets with donor restrictions 1,933 14,240 (8,919) 7,254
Total net assets 738,938 21,068 94,403 854,409 Total liabilities and net assets 942,277$ 23,161$ 111,710$ 1,077,148$
Spectrum Health Lakeland
Consolidating Balance Sheet (continued) (In Thousands)
December 31, 2019
1909-3267234 56
Spectrum Health Spectrum Health Spectrum Health Spectrum Health Lakeland Lakeland Lakeland Lakeland
Obligated Group Foundations Other Total Operating revenue Net patient service revenue 429,930$ –$ 132,092$ 562,022$ Other 2,350 (15) 4,461 6,796 Total operating revenue 432,280 (15) 136,553 568,818
Operating expenses Salaries, wages, and employee benefits 193,989 – 110,525 304,514 Supplies and other 174,663 (186) 28,173 202,650 Depreciation and amortization 26,669 – 5,025 31,694 Interest 1,828 – 467 2,295 Total operating expenses 397,149 (186) 144,190 541,153 Total operating income (loss) 35,131 171 (7,637) 27,665
Other nonoperating revenue (expenses) Investment income, net 63,276 3,374 816 67,466 Loss on interest rate swaps, net (6,402) – – (6,402) Other revenue (expenses), net 458 (2,853) (1,600) (3,995) Total other nonoperating revenue
(expenses), net 57,332 521 (784) 57,069 Excess of revenue over (under) expenses 92,463$ 692$ (8,421)$ 84,734$
Spectrum Health Lakeland
Consolidating Statement of Operations and Changes in Net Assets (In Thousands)
Year Ended December 31, 2019
1909-3267234 57
Spectrum Health Spectrum Health Spectrum Health Spectrum Health Lakeland Lakeland Lakeland Lakeland
Obligated Group Foundations Other Total Net assets without donor restrictions Excess of revenue over (under) expenses 92,463$ 692$ (8,421)$ 84,734$ Contributions – 15 – 15 Other (13,216) (372) 12,579 (1,009) Increase in net assets without
donor restrictions 79,247 335 4,158 83,740
Net assets with donor restrictions Contributions 574 595 937 2,106 Expenditures for donor sponsored programs (45) – – (45) Investment returns – – (46) (46) Interest in recipient organization (599) – 599 – Other 3 797 (1,013) (213) Increase (decrease) in net assets with
donor restrictions (67) 1,392 477 1,802
Increase in net assets 79,180 1,727 4,635 85,542
Net assets, beginning of year 659,758 19,341 89,768 768,867 Net assets, end of year 738,938$ 21,068$ 94,403$ 854,409$
Spectrum Health Lakeland
Consolidating Statement of Operations and Changes in Net Assets (continued) (In Thousands)
Year Ended December 31, 2019
1909-3267234 58
1909-3267234 59
Spectrum Health System and Affiliates
Community Benefit Expense (Unaudited) (In Thousands)
December 31, 2019
In support of its mission, the System provides various health-related services, at a loss, to the indigent and other residents in its service area. The following is a summary of the System’s community benefit expense for the year ended December 31, 2019:
Community partnership programs
(Community Commitment fund) $ 7,439 Community partnership programs 13,881 Health clinics 3,240 Health professions education 23,872 Research 1,750 Donations/contributions 2,801 Traditional charity care 6,582 Discounted care (under 250% federal poverty level) 12,280 Unpaid costs for government program patients 478,158 Total community benefit expense $ 550,003
Community partnership programs (Community Commitment fund) – Includes health care programs for the underserved in the community, including services such as community-based clinics, immunizations and preventive care, and health education programs. Examples include programs related to the poor, elderly, substance abuse, child abuse, and others with specific particular health care needs. They also include broader populations who benefit from health community initiatives, such as health promotion, education, and health screening. The Community Commitment fund relates to the System’s established $6 million fund, as part of the Consent Decree (as discussed in Note 18), to provide quality health care programs for the underserved in the community. The remaining programs are funded through operations.
Health clinics – Includes net costs incurred to operate community clinics that are offered at no cost or subsidized cost.
Health professions education – Represents the cost to provide a clinical setting for undergraduate training and internships in order to help prepare future health care professionals.
Spectrum Health System and Affiliates
Community Benefit Expense (Unaudited) (continued) (In Thousands)
1909-3267234 60
Research – Includes the unpaid cost of health care research and studies.
Donations/contributions – Includes cash and in-kind donations that are made on behalf of the poor and needy to community agencies and to special funds for charitable activities, as well as resources contributed directly to programs, organizations, and foundations for efforts on behalf of the poor and disadvantaged.
Traditional charity care – Covers services provided to persons who cannot afford to pay. The amount reflects the cost of free or discounted health services, net of contributions and other revenue received as direct assistance for the provision of charity care. Charity care is determined based on established policies, using patient income and assets to determine payment ability.
Discounted care (under 250% federal poverty level) – Represents the amount of the state of Michigan mandated discounts provided for the uninsured based on financial need. The hospital must accept 115% of Medicare rates as payments in full from an uninsured individual with an annual income level up to 250% of the federal poverty level.
Unpaid costs for government program patients – Represents the estimated shortfall created when a facility receives payments below the costs of treating Medicare and Medicaid beneficiaries.
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- 1909-3267234 Spectrum Health System_FS 12 31 19_FINAL (nonsecure).pdf
- Spectrum Health System and Affiliates
- Year Ended December 31, 2019
- Spectrum Health System and Affiliates
- Notes to Consolidated Financial Statements
- December 31, 2019
- Spectrum Health System and Affiliates
- Community Benefit Expense (Unaudited)
- December 31, 2019
