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northwestern_financial_statements.pdf
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
Northwestern Memorial HealthCare and Subsidiaries
Years Ended August 31, 2012 and 2011
With Reports of Independent Auditors
Ernst & Young LLP
1207-1377461
Northwestern Memorial HealthCare and Subsidiaries
Consolidated Financial Statements
Years Ended August 31, 2012 and 2011
Contents
Report of Independent Auditors.......................................................................................................1
Consolidated Financial Statements
Consolidated Balance Sheets ...........................................................................................................2
Consolidated Statements of Operations and Changes in Net Assets ...............................................4
Consolidated Statements of Cash Flows ..........................................................................................6
Notes to Consolidated Financial Statements....................................................................................7
1207-1377461 1
Report of Independent Auditors
The Board of Directors
Northwestern Memorial HealthCare
We have audited the accompanying consolidated balance sheets of Northwestern Memorial
HealthCare (an Illinois not-for-profit corporation) and Subsidiaries (Northwestern Memorial) as
of August 31, 2012 and 2011, and the related consolidated statements of operations and changes
in net assets and cash flows for the years then ended. These financial statements are the
responsibility of Northwestern Memorial’s management. 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. We were not engaged
to perform an audit of Northwestern Memorial’s internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Northwestern Memorial HealthCare and Subsidiaries as of
August 31, 2012 and 2011, and the consolidated results of their operations and changes in net
assets and their cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, NMHC changed its presentation
of the provision for uncollectible accounts as a result of the adoption of the amendments to the
Financial Accounting Standards Board’s Accounting Standards Codification resulting from
Accounting Standards Update 2011-07, Presentation and Disclosure of Patient Service Revenue,
Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care
Entities, effective September 1, 2010.
November 29, 2012
A member firm of Ernst & Young Global Limited
Ernst & Young LLP 155 North Wacker Drive Chicago, IL 60606-1787 Tel: +1 312 879 2000 Fax: +1 312 879 4000 www.ey.com
August 31 2012 2011
Assets Current assets:
Cash and cash equivalents 139,343$ 131,311$ Short-term investments 112,925 85,188 Current portion of investments, including
assets limited as to use 89,247 91,138 Patient accounts receivable, net of estimated
uncollectibles of $39,036 and $32,338 in 2012 and 2011, respectively 279,775 232,460
Current portion of pledges and grants receivable, net 9,257 16,250 Current portion of insurance recoverable 13,060 14,433 Inventories 31,528 31,715 Other current assets 33,138 28,239
Total current assets 708,273 630,734
Investments, including assets limited as to use, less current portion 2,430,351 2,247,163
Property and equipment, at cost: Land 237,953 227,820 Buildings 1,668,000 1,613,399 Equipment and furniture 522,343 509,021 Construction-in-progress 46,573 90,101
2,474,869 2,440,341 Less accumulated depreciation 1,116,818 1,100,060
1,358,051 1,340,281
Prepaid pension cost 30,814 53,216 Insurance recoverable, less current portion 74,444 71,249 Other assets, net 99,751 98,495 Total assets 4,701,684$ 4,441,138$
Northwestern Memorial HealthCare and Subsidiaries
Consolidated Balance Sheets (In Thousands)
2 1207-1377461
August 31 2012 2011
Liabilities and net assets Current liabilities:
Accounts payable 81,070$ 87,535$ Accrued salaries and benefits 94,948 85,044 Grants and academic support payable, current portion 37,588 28,250 Accrued expenses and other current liabilities 34,871 42,575 Due to third-party payors 207,440 177,399 Current accrued liabilities under self-insurance programs 65,633 72,462 Current maturities of long-term debt 14,500 13,710
Total current liabilities 536,050 506,975
Long-term debt, less current maturities 806,155 821,354 Accrued liabilities under self-insurance programs,
less current portion 420,941 414,173 Grants and academic support payable, less current portion 97,254 36,068 Due to insureds 62,415 45,303 Interest rate swaps 104,503 73,845 Pension liability 3,863 – Other liabilities 51,929 70,372 Total liabilities 2,083,110 1,968,090
Net assets: Unrestricted:
Undesignated 2,182,940 2,075,713 Board-designated 138,600 130,618
Total unrestricted 2,321,540 2,206,331 Temporarily restricted 155,263 140,388 Permanently restricted 141,771 126,329
Total net assets 2,618,574 2,473,048
Total liabilities and net assets 4,701,684$ 4,441,138$
See accompanying notes to consolidated financial statements.
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Northwestern Memorial HealthCare and Subsidiaries
Consolidated Statements of Operations
(In Thousands)
Year Ended August 31 2012 2011
Revenue Patient service revenue 1,614,123$ 1,593,596$ Provision for uncollectible accounts 32,072 33,196 Net patient revenue 1,582,051 1,560,400 Rental and other revenue 100,996 101,792 Net assets released from donor restrictions
and federal and state grants 18,493 21,466 Total revenue 1,701,540 1,683,658
Expenses Salaries and professional fees 587,971 563,583 Employee benefits 186,633 188,614 Supplies 268,197 263,831 Purchased services 173,545 170,876 Depreciation 145,686 138,249 Insurance 59,711 75,766 Rent and utilities 41,486 40,978 Repairs and maintenance 45,581 44,327 Interest 29,701 28,824 Illinois Hospital Assessment 41,395 41,395 Other 33,326 34,812 Total expenses 1,613,232 1,591,255 Operating income 88,308 92,403
Nonoperating gains (losses) Investment return 150,762 237,074 Change in fair value of interest rate swaps (30,533) 4,527 Grants and academic support provided (106,708) (55,560) Other 19,970 9,432 Total nonoperating gains, net 33,491 195,473 Excess of revenue over expenses 121,799 287,876
Continued on next page.
and Changes in Net Assets
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Northwestern Memorial HealthCare and Subsidiaries
Consolidated Statements of Operations
(In Thousands)
Year Ended August 31 2012 2011
Unrestricted net assets Excess of revenue over expenses 121,799$ 287,876$ Net assets released from restrictions used for
property and equipment additions 1,579 380 Postretirement-benefit-related changes other than net
periodic pension cost (8,044) 40,165 Other (125) (127) Increase in unrestricted net assets 115,209 328,294
Temporarily restricted net assets Contributions 34,021 22,578 Investment return 9,715 16,146 Net assets released from restrictions used for:
Operating expenses, charity care, and research and education (27,232) (22,118)
Property and equipment additions (1,579) (380) Change in fair value of split-interest agreements 81 (192) Other (131) (146) Increase in temporarily restricted net assets 14,875 15,888
Permanently restricted net assets Contributions 16,347 19,683 Change in fair value of split-interest agreements (1,025) 993 Other 120 (250) Increase in permanently restricted net assets 15,442 20,426
Change in total net assets 145,526 364,608 Net assets, beginning of year 2,473,048 2,108,440 Net assets, end of year 2,618,574$ 2,473,048$
See accompanying notes to consolidated financial statements.
and Changes in Net Assets (continued)
1207-1377461 5
Northwestern Memorial HealthCare and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended August 31 2012 2011
Operating activities Change in total net assets 145,526$ 364,608$ Adjustments to reconcile change in total net assets to net
cash provided by operating activities: Postretirement-benefit-related changes other than net periodic pension cost 8,044 (40,165) Change in fair value of interest rate swaps 30,658 (4,402) Net investment return and net change in
unrealized investment gains/losses (153,602) (246,873) Restricted contributions and realized investment return (56,299) (49,409) Depreciation and amortization 145,356 137,639 Provision for uncollectible accounts 32,164 33,296 Change in operating assets and liabilities:
Patient accounts receivable (79,479) (47,610) Due to third-party payors 29,790 22,255 Grants and academic support payable 70,524 (4,972) Other operating assets and liabilities 11,649 55,697
Net cash provided by operating activities 184,331 220,064
Investing activities Purchases of trading securities (589,584) (410,539) Sales of trading securities 410,091 296,581 Unrestricted realized investment return 124,061 95,477 Capital expenditures, net (163,456) (178,886) Net cash used in investing activities (218,888) (197,367)
Financing activities Payments of long-term debt (13,710) (13,140) Restricted contributions and realized investment return 56,299 49,409 Net cash provided by financing activities 42,589 36,269
Net increase in cash and cash equivalents 8,032 58,966 Cash and cash equivalents, beginning of year 131,311 72,345 Cash and cash equivalents, end of year 139,343$ 131,311$
See accompanying notes to consolidated financial statements.
(In Thousands)
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Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (In Thousands)
Years Ended August 31, 2012 and 2011
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1. Organization and Summary of Significant Accounting Policies
Northwestern Memorial HealthCare (NMHC) serves as the sole corporate member of
Northwestern Memorial Hospital (NMH), Northwestern Lake Forest Hospital (NLFH), and
Northwestern Memorial Foundation (the Foundation). NMH’s subsidiary corporations are
Northwestern HealthCare Corporation (NHC), Northwestern Memorial Physicians Group
(NMPG), and Northwestern Memorial Insurance Company (NMIC). NLFH’s subsidiary
corporation is Lake Forest Health and Fitness Institute (HFI). NMH and NLFH are both
members of the obligated group (Obligated Group) for all of the outstanding bonds of NMH and
NLFH.
NMH is a major academic medical center located in the Streeterville neighborhood of Chicago,
providing a complete range of adult inpatient and outpatient services, primarily to residents of
Chicago and surrounding areas, in an educational and research environment. It is licensed for
894 beds. NMH, whose origins date back to 1849, is the primary teaching hospital for
Northwestern University’s Feinberg School of Medicine (FSM).
NLFH is a community hospital located in Lake Forest, Illinois, providing a complete range of
adult inpatient and outpatient services, as well as skilled nursing care, primarily to residents of
Lake Forest and the surrounding area. It is licensed for 117 acute care beds and 84 skilled
nursing care beds.
The Foundation carries out fund-raising and other related development activities to promote and
support the tax-exempt interests and purposes of NMH and NLFH.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of NMHC, the
Foundation, NMH and its subsidiaries, and NLFH and its subsidiary (collectively referred to
herein as Northwestern Memorial). All significant intercompany transactions and balances have
been eliminated in consolidation.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 8
1. Organization and Summary of Significant Accounting Policies (continued)
Charity Care and Community Benefit
Northwestern Memorial provides care to patients regardless of their ability to pay. Northwestern
Memorial developed a Free and Discounted Care Policy (the Policy) for both the uninsured and
the underinsured. Under the Policy, patients are offered discounts of up to 100% of charges on a
sliding scale, which is based on income as a percentage of the Federal Poverty Level guidelines
(up to 600%). The Policy also contains provisions that are responsive to those patients subject to
catastrophic healthcare expenses and uninsured patients not covered by the provisions above.
Since Northwestern Memorial does not pursue collection of these amounts, they are not reported
as net patient revenue, and the cost of providing such care is recognized within operating
expenses.
Northwestern Memorial estimates the direct and indirect costs of providing charity care by
applying a cost to gross charges ratio to the gross uncompensated charges associated with
providing charity care to patients. Northwestern Memorial also receives certain funds to offset or
subsidize charity care services provided. These funds are primarily received from investment
return on free care endowment funds. The cost of providing charity care was $57,738 and
$50,105 for the years ended August 31, 2012 and 2011, respectively. In addition, funds received
to offset or subsidize charity care were $491 and $496 for the years ended August 31, 2012 and
2011, respectively. In filing the Annual Non Profit Hospital Community Benefits Plan Report to
the Illinois Attorney General for the year ended August 31, 2011, Northwestern Memorial
reported total community benefit of $279,435 (unaudited), including unreimbursed cost of
charity care of $51,787 (unaudited), which is calculated using a different methodology than that
used for the consolidated financial statements. Management is currently collecting the
information needed to file the 2012 report.
Use of Estimates
The preparation of financial statements in conformity 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 financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with maturities of
90 days or less from the date of purchase.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 9
1. Organization and Summary of Significant Accounting Policies (continued)
Patient Accounts Receivable
Patient accounts receivable are stated at net realizable value. Northwestern Memorial maintains
allowances for uncollectible accounts and for estimated losses resulting from a payor’s inability
to make payments on accounts. Northwestern Memorial estimates the allowance for uncollectible
accounts based on management’s assessment of historical and expected net collections
considering historical and current business and economic conditions, trends in healthcare
coverage, and other collection indicators. Accounts receivable are charged to the allowance for
uncollectible accounts when they are deemed uncollectible.
Assets Limited as to Use
Assets limited as to use consist primarily of investments designated by the appropriate board of
directors (the Board) for certain medical education and healthcare programs. The appropriate
Board retains control of these investments and may, at its discretion, subsequently use them for
other purposes. In addition, assets limited as to use include investments held by trustees under
debt agreements and for self-insurance and collateral related to interest rate swaps.
Investments
Investments in equity securities with readily determinable fair values and all investments in debt
securities are reported at fair value based on quoted market prices. Unless in pension plan assets,
alternative investments are reported using the equity method. Alternative investments include
common collective trusts, commingled funds, 103-12 entities and other limited partnership
interests in hedge funds, private equity, venture capital and real estate funds. Alternative
investments in the pension plan are reported at fair value based on net asset value (NAV) per
share or equivalent.
Derivative Instruments
Derivative instruments, specifically interest rate swaps, are recorded on the consolidated balance
sheets at fair value. The change in the fair value of derivative instruments is recorded in
nonoperating gains (losses).
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 10
1. Organization and Summary of Significant Accounting Policies (continued)
Inventories
Inventories, consisting primarily of pharmaceuticals and other medical supplies, are stated at the
lower of cost on the first-in, first-out method or fair value.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets. Typical useful lives are 5 to 40 years for buildings and
building service equipment and 3 to 20 years for equipment and furniture. Interest cost incurred
on borrowed funds during the period of construction of capital assets is capitalized as a
component of the cost of acquiring those assets.
Asset Impairment
Northwestern Memorial considers whether indicators of impairment are present and performs the
necessary tests to determine if the carrying value of an asset is appropriate. Impairment write-
downs are recognized in operating income at the time the impairment is identified. There was no
impairment of long-lived assets in 2012 or 2011.
Deferred Charges
Deferred finance charges and bond discount or premium are amortized or accreted using the
effective interest method or the bonds outstanding method, which approximates the effective
interest method, over the life of the related debt.
Net Assets
Resources are classified for reporting purposes into four net asset categories as general
unrestricted, board-designated unrestricted, temporarily restricted, and permanently restricted,
according to the absence or existence of board designations or donor-imposed restrictions.
Board-designated net assets are unrestricted net assets that have been set aside by the Board for
specific purposes. Temporarily restricted net assets are those assets, including contributions and
accumulated investment returns, whose use has been limited by donors for a specific purpose or
time period. Permanently restricted net assets are those for which donors require the principal of
the gifts to be maintained in perpetuity to provide a permanent source of income.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 11
1. Organization and Summary of Significant Accounting Policies (continued)
Any changes in donor restrictions that change the net asset category of previously recorded
contributions are recorded as other in the accompanying consolidated statements of operations
and changes in net assets in the period communicated by the donor.
Net Patient Revenue
Northwestern Memorial has agreements with third-party payors that provide for payments to
Northwestern Memorial at amounts different from its established rates. Payment arrangements
include prospectively determined rates per admission or visit, reimbursed costs, discounted
charges, and per diem rates. Net patient revenue is reported at the estimated net amount due from
patients and third-party payors for services rendered, including estimated adjustments under
reimbursement agreements with third-party payors, certain of which are subject to audit by
administering agencies. These adjustments are accrued on an estimated basis and are adjusted, as
needed, in future periods.
EHR Incentive Payments
The American Recovery and Reinvestment Act of 2009 included provisions for implementing
health information technology under the Health Information Technology for Economic and
Clinical Health Act (HITECH). The provisions were designed to increase the use of electronic
health record (EHR) technology and establish the requirements for a Medicare and Medicaid
incentive payment program beginning in 2011 for eligible providers that adopt and meaningfully
use certified EHR technology. Eligibility for annual Medicare incentive payments is dependent
on providers demonstrating meaningful use of EHR technology in each period over a four-year
period. Initial Medicaid payments are available to providers that adopt, implement, or upgrade
certified EHR technology. Providers must demonstrate meaningful use of such technology innm
subsequent years to qualify for additional Medicaid incentive payments.
Northwestern Memorial recognizes HITECH incentive payments as revenue under the grant
accounting model when it is reasonably assured that the meaningful use objectives have been
achieved. Northwestern Memorial recognized incentive payments totaling $5,422 and $0 for the
years ended August 31, 2012 and 2011, respectively, as net assets released from donor
restrictions and federal and state grants in the accompanying consolidated statements of
operations and changes in net assets. Northwestern Memorial’s compliance with the meaningful
use criteria is subject to audit by the federal government.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 12
1. Organization and Summary of Significant Accounting Policies (continued)
Contributions
Unrestricted gifts, other than long-lived assets, are recorded as a component of other
nonoperating gains in the accompanying consolidated statements of operations and changes in
net assets. Unrestricted gifts of long-lived assets such as land, buildings, or equipment are
recorded at fair value as an increase in unrestricted net assets. Contributions are reported as
either temporarily or permanently restricted net assets if they are received with donor
restrictions. When a donor restriction expires, that is, when a stipulated time restriction ends or
purpose restriction is accomplished, temporarily restricted net assets are reclassified as
unrestricted net assets and reported in the accompanying consolidated statements of operations
and changes in net assets as net assets released from restrictions.
Unconditional promises to give cash or other assets are reported as pledges receivable and
contributions within the appropriate net asset category. An allowance for uncollectible pledges
receivable is estimated based on historical experience and other collection indicators. Pledges
receivable with payment terms extending beyond one year are discounted using market rates of
return reflecting the terms and credit of the pledges at the time a pledge is made.
Northwestern Memorial is a beneficiary of several split-interest agreements, primarily perpetual
trusts held by others. The Foundation recognizes its interest in these perpetual trusts as
temporarily or permanently restricted net assets based on the Foundation’s percentage of the fair
value of the trusts’ assets.
Nonoperating Gains (Losses)
Nonoperating gains (losses) consist primarily of investment returns (including realized gains and
losses; net change in unrealized investment gains and losses; changes in Northwestern
Memorial’s proportionate share of its equity interest in alternative investments, interest, and
dividends), unrestricted contributions received, grants and academic support provided to external
organizations, net assets released from restriction and used for grants and academic support, and
changes in fair value of interest rate swaps.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 13
1. Organization and Summary of Significant Accounting Policies (continued)
Excess of Revenue Over Expenses
The accompanying consolidated statements of operations and changes in net assets include the
excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from the
excess of revenue over expenses, consist primarily of contributions of long-lived assets
(including assets acquired using contributions, which, by donor restriction, are to be used for the
purposes of acquiring such assets), transfers between net asset categories based on changes in
donor restrictions, and postretirement-benefit-related changes other than net periodic pension
cost.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements
(ASU 2010-06). ASU 2010-06 amends Accounting Standards Codification (ASC) 820, Fair
Value Measurement, to require a number of additional disclosures regarding fair value
measurements. These disclosures include the amounts of significant transfers between Level 1
and Level 2 of the fair value hierarchy and the reasons for these transfers; the reasons for any
transfer in or out of Level 3; and information in the reconciliation of recurring Level 3
measurements about purchases, sales, issuances, and settlements on a gross basis, as well as
clarification on previous reporting requirements. This new guidance is effective for the first
reporting period, including interim periods, beginning after December 15, 2009, for all
disclosures except the requirement to separately disclose purchases, sales, issuances, and
settlements of recurring Level 3 measurements, which was effective for Northwestern Memorial
in fiscal year 2012. Northwestern Memorial adopted this guidance in fiscal year 2010, with the
exception of the additional Level 3 disclosures, which were adopted in fiscal year 2012. The
adoption of ASU 2010-06 had no effect on the consolidated financial statements of Northwestern
Memorial.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 14
1. Organization and Summary of Significant Accounting Policies (continued)
In August 2010, the FASB issued ASU 2010-23, Measuring Charity Care for Disclosure
(ASU 2010-23). The provisions of ASU 2010-23 are intended to reduce the diversity in how
charity care is calculated and disclosed across healthcare entities that provide it. Charity care is
required to be measured at cost, defined as the direct and indirect costs of providing the charity
care. Funds received to offset or subsidize the cost of charity care provided, for example from
gifts or grants restricted for charity care, should be separately disclosed. As a healthcare entity
does not recognize revenue when charity care is provided, this update only requires enhanced
disclosures and has no effect on the consolidated statements of operations and changes in net
assets. This new guidance is effective for fiscal years beginning after December 15, 2010, with
retrospective application required and with early application permitted. Northwestern Memorial
adopted this guidance in fiscal year 2012. The adoption of ASU 2010-23 had no effect on the
consolidated financial statements of Northwestern Memorial.
In August 2010, the FASB issued ASU 2010-24, Presentation of Insurance Claims and Related
Insurance Recoveries (ASU 2010-24). ASU 2010-24 prohibits the netting of insurance
recoveries against a related claim liability and requires the claim liability to be reported without
consideration of insurance recoveries unless a right of setoff exists. This guidance is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010, with
early application permitted. Northwestern Memorial has adopted this guidance in fiscal year
2012. The effect of the adoption of ASU 2010-24 resulted in an increase in current portion of
insurance recoverable of $836 and an increase in insurance recoverable, less current portion of
$1,686, with offsetting increases in current accrued liabilities under self-insurance programs of
$836 and in accrued liabilities under self-insurance programs, less current portion of $1,686 as of
September 1, 2011. There was no effect on the consolidated statements of operations and
changes in net assets or consolidated statements of cash flows.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations (ASU 2010-29). ASU 2010-29 clarifies the disclosure
requirement for pro forma revenue and earnings for comparative current and prior reporting
periods. Pro forma information should be disclosed as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior fiscal
year only. ASU 2010-29 also expands the disclosures to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to the business
combination(s). This guidance is effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 15
1. Organization and Summary of Significant Accounting Policies (continued)
December 15, 2010, with early adoption permitted. This guidance was effective for and adopted
by Northwestern Memorial in fiscal year 2012. The adoption of ASU 2010-29 had no effect on
the consolidated financial statements of Northwestern Memorial.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU
2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements. This update
was issued to improve the comparability of fair value measurements presented and disclosed in
financial statements prepared in accordance with U.S. GAAP and International Financial
Reporting Standards (IFRS). ASU 2011-04 includes amendments that clarify the FASB’s intent
about the application of existing measurement and disclosure and changes certain principles and
requirements for measuring fair value and for disclosing information about fair value
measurements. This new guidance is effective for interim and annual periods beginning after
December 15, 2011. Early application is not permitted. This guidance was effective for and
adopted by Northwestern Memorial in the third quarter of fiscal year 2012. This adoption had no
effect on the consolidated financial position and the consolidated results of their operations and
changes in net assets.
In July 2011, the FASB issued ASU 2011-07, Presentation and Disclosure of Patient Service
Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health
Care Entities (ASU 2011-07). ASU 2011-07 requires healthcare entities that recognize
significant amounts of patient service revenue at the time of service, even though they do not
assess the patient’s ability to pay, to present the provision for bad debts related to patient service
revenue as a deduction from patient service revenue on the statement of operations. In addition,
enhanced disclosure about the entity’s policies for recognizing revenue and assessing bad debts,
including disclosures of patient service revenue (net of contractual allowances and discounts) as
well as qualitative and quantitative information about changes in the allowance for doubtful
accounts, is required. This new guidance is effective for fiscal years and interim periods within
those fiscal years beginning after December 15, 2011, with early adoption permitted.
Northwestern Memorial adopted this guidance as of and for the year ended August 31, 2012,
with retrospective application to all periods presented. The adoption of ASU 2011-07 had the
effect of reducing net patient revenue by $33,196 with offsetting reduction in operating expenses
for the year ended August 31, 2011, on the consolidated statements of operations and changes in
net assets of Northwestern Memorial. There was no effect on operating income. The provision
for non-patient related doubtful accounts of $100 is included in other operating expenses.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 16
1. Organization and Summary of Significant Accounting Policies (continued)
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and
Liabilities (ASU 2011-11). ASU 2011-11 enhances disclosures about financial and derivative
instruments that are either offset on the statement of financial position or subject to an
enforceable master netting agreement or similar agreement, irrespective of whether they are
offset on the statement of financial position. This new guidance is effective for fiscal years and
interim periods within those years beginning on or after January 1, 2013. This guidance will be
effective for Northwestern Memorial in fiscal year 2014. Northwestern Memorial is evaluating
the effect this guidance will have on its consolidated financial statement disclosures.
2. Investments and Other Financial Instruments
The composition of investments and cash and cash equivalents at August 31 is as follows:
2012 2011
Measured at fair value:
Cash and short-term investments $ 304,586 $ 235,892
Equity securities 50,496 43,510
Mutual funds 736,486 608,099
Common collective trusts 72,893 192,900
Commingled funds 199,661 212,726
103-12 entities 123,182 131,546
Corporate bonds 60,861 37,403
U.S. government and agency issues 818 Foreign government issues 1,388 573
1,550,371 1,462,649
Accounted for under the equity method:
Alternative investments 1,221,495 1,092,151
$ 2,771,866 $ 2,554,800
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 17
2. Investments and Other Financial Instruments (continued)
Investments and other financial instruments consist of the following:
2012 2011
Assets limited as to use:
Trustee-held funds $ 26,296 $ 7,247
Self-insurance programs 540,796 498,098
Board-designated funds 138,600 130,618
Total assets limited as to use 705,692 635,963
Donor-restricted funds 245,498 215,594
Unrestricted, undesignated funds 1,568,408 1,486,744
Total investments, excluding short-term investments 2,519,598 2,338,301
Other financial instruments:
Cash and cash equivalents and short-term investments 252,268 216,499
$ 2,771,866 $ 2,554,800
The composition and presentation of investment returns are as follows for the years ended
August 31:
2012 2011
Interest and dividend income $ 14,935 $ 40,682
Investment expenses (4,547) (3,988)
Realized gains on alternative investments, net 34,925 21,266
Realized gains on other investments, net 85,622 43,338
Net increase in unrealized gains on alternative investments 30,680 86,883
Net increase in unrealized gains on other investments (1,138) 65,039
$ 160,477 $ 253,220
Reported as:
Nonoperating investment return $ 150,762 $ 237,074
Temporarily restricted – investment return 9,715 16,146
$ 160,477 $ 253,220
Northwestern Memorial’s investments measured at fair value include mutual funds; common
equities; corporate and U.S. government debt issues; state, municipal, and foreign government
debt issues; commingled funds; common collective trusts; and 103-12 entities.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 18
2. Investments and Other Financial Instruments (continued)
Commingled investments, common collective trusts, and 103-12 investment entities are
commingled investment funds formed from the pooling of investments under common
management. Unlike a mutual fund, these investments are not a registered investment company
and, therefore, are exempt from registering with the Securities and Exchange Commission.
The investment strategy for the mutual funds, commingled funds, common collective trusts, and
103-12 investment entities involves maximizing the overall returns by investing in a wide variety
of assets, including domestic large cap equities, domestic small cap equities, international
developed equities, natural resources, and private equity limited partnerships (LPs).
Northwestern Memorial’s non-pension plan investments measured under the equity method of
accounting include absolute return hedge funds, equity long/short hedge funds, real estate,
natural resources, and private equity limited partnerships, collectively referred to as alternative
investments. Alternative investments in the pension plan assets are measured at fair value.
Absolute return hedge funds include funds with the ability to opportunistically allocate capital
among several strategies. The funds typically diversify across strategies in an effort to deliver
consistently positive returns regardless of the movement within global markets. These funds
generally exhibit relatively low volatility and are generally redeemable quarterly with a 60-day
notice period. Equity long/short hedge funds include hedge funds that invest both long and short
in U.S. and international equities. These funds typically focus on diversifying or hedging across
particular sectors, regions, or market capitalizations and are generally redeemable quarterly with
a 60-day notice period.
Real estate includes LPs that invest in land and buildings and seek to improve property level
operations by increasing lease rates, recapitalizing properties, rehabilitating aging/distressed
properties, and repositioning properties to attract higher-quality tenants. Real estate LPs typically
use moderate leverage. Natural resources include a diverse set of LPs that invest in oil and
natural gas-related companies, commodity-oriented companies, and timberland. Private equity
includes LPs formed to make equity and debt investments in operating companies that are not
publicly traded. These LPs typically seek to influence decision-making within the operating
companies. Investment strategies in this category may include venture capital, buyouts, and
distressed debt. These three categories of investments can never be redeemed with the funds.
Distributions from each fund will be received as the underlying assets of the fund are expected to
be liquidated periodically over the lives of the LPs, which generally run 10 to 12 years.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 19
2. Investments and Other Financial Instruments (continued)
Certain alternative investments are subject to various redemption restrictions. As of
August 31, 2012, $631,905 of these alternative investments cannot be redeemed for at least one
year from the balance sheet date. In addition, $520,753 is subject to redemption limits and
lockup provisions that expire within one year of the balance sheet date.
At August 31, 2012, Northwestern Memorial had commitments to fund an additional $244,234 to
alternative investment entities, which is expected to occur over the next 12 years.
3. Fair Value Measurements
Northwestern Memorial follows the requirements of ASC 820 in regards to measuring the fair
value of certain assets and liabilities as well as disclosures about fair value measurements. ASC
820 defines fair value as the price that would be received for an asset or paid for a transfer of a
liability in an orderly transaction on the measurement date.
The methodologies used to determine fair value of assets and liabilities reflect market participant
objectives and are based on the applications of a three-level valuation hierarchy that prioritizes
observable market inputs over unobservable inputs. The three levels are defined as follows:
• Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
• Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Examples
of Level 2 inputs are quoted prices for similar assets or liabilities in nonactive markets or
pricing models with inputs that are observable for substantially the full term of the asset
or liability.
• Level 3 – Inputs to the valuation methodology are significant to the fair value of the asset
or the liability and less observable. These inputs reflect the assumptions market
participants would use in the estimation of the fair value of the asset or the liability.
Fair Values
A financial instrument’s categorization within the valuation hierarchy is based on the lowest
level of input that is significant to the fair value measurement.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 20
3. Fair Value Measurements (continued)
The following table presents the financial instruments measured at fair value on a recurring basis as of
August 31, 2012:
Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 139,343 $ $ $ 139,343
Investments:
Short-term investments:
Currency 7,592 7,592
Fixed income 105,333 105,333
Total short-term investments 7,592 105,333 112,925
Mutual funds:
Fixed income 346,876 346,876
International equities 84,175 84,175
U.S. equities 305,435 305,435
Total mutual funds 736,486 736,486
Common collective trusts:
International equities 39,892 39,892
U.S. equities 33,001 33,001
Total common collective trusts 72,893 72,893
Commingled funds:
International equities 21,321 21,321
Natural resources 26,495 26,495
Global equities 151,845 151,845
Total commingled funds 199,661 199,661
Bonds:
Corporate bonds 60,861 60,861
U.S. government and agencies issue 818 818
Foreign government issues 1,388 1,388
Total bonds 63,067 63,067
Equity securities 50,443 53 50,496
103-12 entities international equities 123,182 123,182
Cash equivalents in investment accounts 52,318 52,318
Total investments 846,839 564,189 1,411,028
Beneficial interests in trusts 11,594 11,594
Total assets $ 986,182 $ 575,783 $ $ 1,561,965
Liabilities
Interest rate swaps $ $ 104,503 $ $ 104,503
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 21
3. Fair Value Measurements (continued)
The following table presents the financial instruments measured at fair value on a recurring basis as of
August 31, 2011:
Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 131,311 $ $ $ 131,311
Investments:
Short-term investments:
Currency 12,174 12,174
Fixed income 73,014 73,014
Total short-term investments 12,174 73,014 85,188
Mutual funds:
Fixed income 376,590 376,590
International equities 68,748 68,748
U.S. equities 162,761 162,761
Total mutual funds 608,099 608,099
Common collective trusts:
International equities 40,065 40,065
U.S. equities 152,835 152,835
Total common collective trusts 192,900 192,900
Commingled funds:
International equities 74,106 74,106
Natural resources 22,439 22,439
Global equities 116,181 116,181
Total commingled funds 212,726 212,726
Bonds:
Corporate bonds 37,403 37,403
Foreign government issues 573 573
Total bonds 37,976 37,976
Equity securities 43,461 49 43,510
103-12 entities international equities 131,546 131,546
Cash equivalents in investment accounts 19,393 19,393
Total investments 683,127 648,211 1,331,338
Beneficial interests in trusts 12,010 12,010
Total assets $ 814,438 $ 660,221 $ $ 1,474,659
Liabilities
Interest rate swaps $ $ 73,845 $ $ 73,845
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 22
3. Fair Value Measurements (continued)
There were no transfers into or out of Level 2 or Level 1 during the year ended August 31, 2012.
Reconciliation to the Consolidated Balance Sheets
A reconciliation of the fair value of assets to the consolidated balance sheets at August 31, 2012
and 2011, is as follows:
2012 2011
Short-term investments measured at fair value $ 112,925 $ 85,188
Investments, including assets limited as to use
measured at fair value 1,298,103 1,246,150
Total investments at fair value 1,411,028 1,331,338
Alternative investments accounted for under equity
method included in investments, including assets limited
as to use 1,221,495 1,092,151
Total investments $ 2,632,523 $ 2,423,489
Other long-term assets:
Beneficial interests in trusts at fair value $ 11,594 $ 12,010
Other long-term assets, net 88,157 86,485
Total other long-term assets $ 99,751 $ 98,495
Valuation Techniques and Inputs
Beneficial Interests in Trusts – The fair value of beneficial interests in trusts is based on either
the Foundation’s percentage of the fair value of the trusts’ assets or the Foundation’s percentage
of the fair value of the trusts’ assets adjusted for any outstanding liabilities (discounted using a
rate per IRS regulations), based on each trust arrangement.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 23
3. Fair Value Measurements (continued)
Interest Rate Swaps – The fair value of interest rate swaps is based on generally accepted
valuation techniques, including discounted cash flow analysis on the expected cash flows of each
derivative and quoted prices from dealer counterparties and other independent market sources.
The valuation incorporates observable interest rates and yield curves for the full term of the
swaps. The valuation is also adjusted to incorporate nonperformance risk for NMH or the
respective counterparty. The adjustment is based on the credit spread for entities with similar
credit characteristics as NMH or market-related data for the respective counterparty.
Northwestern Memorial pays fixed rates ranging from 3.3% to 3.9% and receives cash flows
based on rates equal to 63% of London Interbank Offered Rate (LIBOR) plus 28 basis points.
Investments – The fair value of Level 1 investments, which consist of equity securities and
certain mutual funds, is based on quoted market prices that are valued on a daily basis. Level 2
investments consist of U.S. government securities, corporate bonds, commingled funds, common
collective trusts, interest in 103-12 entities, and fixed income instruments issued by
municipalities and foreign government agencies. The fair value of the U.S. government securities
and corporate bonds is established based on values obtained from nationally recognized pricing
services that value the investments based on similar securities and matrix pricing of similar
quality and maturity securities. The fair values of commingled funds, common collective trusts,
and 103-12 entities are based on either the fair value of the underlying investments of the fund,
as determined by the fund, or based on the ownership interest in the NAV per share or its
equivalent, of the respective fund.
Northwestern Memorial’s investments are exposed to various kinds and levels of risk. Equity
securities and equity mutual funds expose Northwestern Memorial to market risk, performance
risk, and liquidity risk. Market risk is the risk associated with major movements of the equity
markets. Performance risk is that risk associated with a company’s operating performance. Fixed
income securities and fixed income mutual funds expose Northwestern Memorial to interest rate
risk, credit risk, and liquidity risk. As interest rates change, the value of many fixed income
securities is affected, including those with fixed interest rates. Credit risk is the risk that the
obligor of the security will not fulfill its obligations. Liquidity risk is affected by the willingness
of market participants to buy and sell particular securities. Liquidity risk tends to be higher for
equities related to small capitalization companies and certain alternative investments. Due to the
volatility in the capital markets, there is a reasonable possibility of subsequent changes in fair
value, resulting in additional gains and losses in the near term.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 24
3. Fair Value Measurements (continued)
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current liabilities, and short-term borrowings are reasonable estimates of their
fair values due to the short-term nature.
The estimated fair value of the long-term debt portfolio, including the current portion, was
$871,382 and $874,400 at August 31, 2012 and 2011, respectively. The fair value of this Level 2
liability is based on quoted market prices for the same or similar issues and the relationship of
those bond yields with various market indices. The market data used to determine yield and
calculate fair value represents Aa/AA-rated tax-exempt municipal healthcare bonds. The effect
of third-party credit valuation adjustments, if any, is immaterial.
The fair value of pledges receivable, a Level 2 asset, is based on discounted cash flow analysis
and approximated the carrying value at August 31, 2012 and 2011.
4. Self-Insurance Liabilities and Related Insurance Recoverables
NMH retains certain levels of professional and general liability risks covering itself and NMPG.
NMH also retains certain levels of workers’ compensation risks. For those risks, NMH has
established trust funds to pay claims and related costs.
NMIC provides coverage, on a claims-made basis, in excess of the amounts retained by NMH
for professional and general liability claims occurring and reported between October 1, 2002 and
November 1, 2004. NMIC is fully reinsured for these risks.
Effective November 1, 2004, NMIC provides, on a claims-made basis, professional and general
liability coverage to NMH and professional liability coverage to Northwestern Medical Faculty
Foundation, Inc. (NMFF) under a joint indemnification program. NMFF is an unconsolidated,
not-for-profit, multi-specialty group practice, which serves as the clinical faculty practice plan
arm of FSM and is one of the faculty components of the academic medical center. NMIC also
provides excess general liability coverage to otherwise commercially insured NMHC
subsidiaries. NMIC receives funding from the covered entities for the risk it covers under its
indemnity policies. Under the terms of a mutual funding agreement, NMH is required to
maintain cash and investments, and NMFF is required to maintain a deposit at NMIC sufficient
to fund actuarially determined tail liabilities, to be covered by NMIC upon any cancelation,
nonrenewal, or other termination for any reason of NMIC’s ongoing joint coverage of both NMH
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 25
4. Self-Insurance Liabilities and Related Insurance Recoverables (continued)
and NMFF. NMFF also maintains a deposit at NMIC at a level deemed actuarially sufficient to
fund its premium obligations under a premium funding arrangement. Total NMFF deposits at
NMIC, which are reported as due to insureds in the accompanying consolidated balance sheets,
amounted to $62,415 and $45,303 at August 31, 2012 and 2011, respectively.
NLFH retains certain levels of professional and general liability risks for occurrences on or after
January 1, 2003. Prior to June 1, 2011, NLFH purchased commercial insurance for risks in
excess of its self-insured retention levels. For the period June 1, 2011 to June 1, 2012, NMIC
provides professional and general liability coverage to NLFH in excess of its self-insured
retention levels. NMIC is fully reinsured for these risks. Effective June 1, 2012, NMIC provides,
on a claims-made basis, professional and general liability coverage to NLFH through an
integrated program shared by NMH and NMFF. NLFH purchased tail coverage for claims
incurred but not reported as of December 31, 2002.
Northwestern Memorial’s self-insurance liability and related amounts recoverable from
reinsurers are reported in the accompanying consolidated balance sheets at present value based
on a discount rate of 1.5% and 3.0% as of August 31, 2012 and 2011, respectively. This discount
rate is based on several factors, including rolling averages of risk-free rates based on estimated
payment patterns of the underlying liability. The undiscounted gross liabilities for the self-
insured programs were $520,866 and $549,206 at August 31, 2012 and 2011, respectively. The
estimated undiscounted amounts recoverable from reinsurers were $93,708 and $96,907 at
August 31, 2012 and 2011, respectively. Provisions for the professional and general liability
risks are based on an actuarial estimate of losses using actual loss data adjusted for industry
trends and current conditions and on an evaluation of claims by Northwestern Memorial’s legal
counsel. The provision for estimated self-insured claims includes estimates of ultimate costs for
both reported claims and claims incurred but not reported.
NMH purchased tail coverage for risks in excess of its self-insured retentions following the
expiration of the claims-made professional and general liability program covering the period
from October 1, 1999 to October 1, 2002. In conjunction with this transaction, NMH recorded a
deferred gain that is being amortized over the estimated runoff period. The balance of the
deferred gain was $3,121 and $4,582 at August 31, 2012 and 2011, respectively.
In the opinion of management, based in part on the advice of outside legal counsel, adequate
provision has been made at August 31, 2012, for all claims incurred to date. Management further
believes that the ultimate disposition of these claims will not have a material adverse effect on
the financial position of Northwestern Memorial.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 26
5. Employee Benefits Obligations
There are two noncontributory defined benefit pension plans (the Plans) maintained within the
Northwestern Memorial HealthCare controlled group that covered specified employees of
controlled group organizations. The sponsors for the Plans approved resolutions to amend the
Plans effective at the end of the day on December 31, 2012. The amendments implement a hard
freeze, such that no participant will earn any additional or new benefits under the Plans on and
after January 1, 2013, and no compensation earned or service performed by any Plan participant
on and after January 1, 2013, will count for any purpose other than continued vesting under the
Plans in benefits earned prior to 2013.
The following table summarizes the change in the projected benefit obligation:
NMH NLFH
2012 2011 2012 2011
Projected benefit obligation,
beginning of year $ 414,020 $ 398,443 $ 101,995 $ 93,853
Service cost 17,426 18,509 4,135 4,111
Interest cost 21,306 20,532 5,285 4,859
Curtailment gain (43,638) (5,106) Net actuarial loss (gain) 46,983 (6,241) 17,157 1,599
Expenses paid (927) Benefits paid (13,711) (17,223) (2,739) (2,427)
Projected benefit obligation,
end of year $ 441,459 $ 414,020 $ 120,727 $ 101,995 The following table summarizes the changes in the Plans’ assets:
NMH NLFH
2012 2011 2012 2011
Plan assets at fair value,
beginning of year $ 456,904 $ 422,507 $ 112,327 $ 97,917
Actual return on the
Plans’ assets, net of
expenses 29,080 51,620 7,276 11,837
Employer contribution 5,000
Benefits paid (13,711) (17,223) (2,739) (2,427)
Plan assets at fair value,
end of year $ 472,273 $ 456,904 $ 116,864 $ 112,327
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 27
5. Employee Benefits Obligations (continued)
The following table sets forth the Plans’ funded status, as well as recognized amounts in the
consolidated balance sheets as of August 31:
NMH NLFH
2012 2011 2012 2011
Plan assets at fair value $ 472,273 $ 456,904 $ 116,864 $ 112,327
Projected benefit obligation 441,459 414,020 120,727 101,995
Funded status recognized as
prepaid pension cost/
(pension payable) $ 30,814 $ 42,884 $ (3,863) $ 10,332
The accumulated benefit obligations of the Plans are $562,003 and $480,742 as of
August 31, 2012 and 2011, respectively.
Included in unrestricted net assets are the Plans’ amounts that have not yet been recognized in
net periodic pension cost at August 31 as follows:
NMH NLFH
2012 2011 2012 2011
Unrecognized prior service
cost $ (13) $ (648) $ $
Unrecognized actuarial loss (117,037) (117,449) (19,784) (6,709)
$ (117,050) $ (118,097) $ (19,784) $ (6,709)
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 28
5. Employee Benefits Obligations (continued)
Changes in the Plans’ assets and benefit obligations recognized in unrestricted net assets during
2012 and 2011 include the following:
NMH NLFH
2012 2011 2012 2011
Current year actuarial (loss)
gain $ (50,541) $ 26,818 $ (13,075) $ 3,017
Effect of curtailment
accounting on gain 43,638 Recognized actuarial loss 7,315 11,501 Current year amortization of
prior service cost 125 125 Current year amortization of
curtailment accounting
credit 510
$ 1,047 $ 38,444 $ (13,075) $ 3,017 The Plans’ prior service cost and actuarial loss included in unrestricted net assets expected to be
recognized in net periodic pension cost during 2013 are $125 and $7,315, respectively.
Net periodic pension cost included in operating results for the years ended August 31 consists of
the following:
NMH NLFH
2012 2011 2012 2011
Service cost of benefits
earned during the year $ 17,426 $ 18,509 $ 4,135 $ 4,111
Interest cost of projected
benefit obligation 21,306 20,532 5,285 4,859
Expected return on the
Plans’ assets (33,564) (31,044) (8,301) (7,221)
Recognized actuarial loss 7,315 11,501 Amortization of prior
service costs 125 125 Recognized loss due to
curtailment 510
Net periodic pension cost $ 13,118 $ 19,623 $ 1,119 $ 1,749
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 29
5. Employee Benefits Obligations (continued)
The following table sets forth the weighted-average assumptions used to determine the projected
benefit obligation and benefit cost as of August 31:
2012 2011
Used to determine projected benefit obligation
Discount rate 4.25% 5.25%
Rate of compensation increase 3.50 3.50
2012 2011
Used to determine benefit cost
Discount rate 5.25% 5.25%
Expected long-term rate of return on the Plans’ assets 7.50 7.50
Rate of compensation increase 3.50 3.50 The expected long-term rate of return on assets is determined based on a capital market asset
model, which assumes that future returns are based on long-term, historical performance as
adjusted for contemporary dividend yields. The adjusted historical returns were weighted by the
current long-term asset allocation targets and reduced by 100 basis points to produce a more
normal risk premium. Northwestern Memorial’s investment advisor assisted with the analysis.
The Plans’ asset allocation and investment strategies are designed to earn returns on plan assets
consistent with a reasonable and prudent level of risk. Investments are diversified across classes,
sectors, and manager style to minimize the risk of loss. Northwestern Memorial uses investment
managers specializing in each asset category and, where appropriate, provides the investment
manager with specific guidelines that include allowable and/or prohibited investment types.
Northwestern Memorial regularly monitors manager performance and compliance with
investment guidelines.
The target allocation of the Plans’ assets as of August 31 is as follows:
2012 2011
Cash and cash equivalents –% –%
Equity securities 42 42
Alternative investments 44 44
Fixed income 14 14
100% 100%
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 30
5. Employee Benefits Obligations (continued)
The following table presents the Plans’ financial instruments as of August 31, 2012, measured at
fair value on a recurring basis by the valuation hierarchy described in Note 4:
Level 1 Level 2 Level 3 Total 103-12 investment entities:
International equities $ $ 35,169 $ $ 35,169
Private equity 1,910 1,910
Total 103-12 investment entities 35,169 1,910 37,079 Common collective trusts:
Fixed income 5,965 5,965 International equities 21,815 21,815 Private equity 2,961 2,961
U.S. equities 12,928 12,928
Total common collective trusts 40,708 2,961 43,669 U.S. government debt:
Treasury notes 1,257 1,257 Corporate debt:
Corporate debt instruments other 8,020 8,020
Corporate debt instruments
preferred 8,043 8,043
Total corporate debt 16,063 16,063 Equity securities:
U.S. equities 15,018 16 15,034 Hedge funds and other:
Absolute return hedge fund 8,222 63,681 71,903 Equity long/short hedge fund 7,821 75,986 83,807 Fixed income 1,377 1,377 Natural resources 3,387 3,579 6,966
Total hedge funds and other 20,807 143,246 164,053 Interest in limited partnerships:
Natural resources 17,807 17,807 Private equity 36,866 68,249 105,115 Real estate 21,846 21,846
Total interest in limited partnerships 36,866 107,902 144,768 Mutual funds:
Fixed income 57,694 57,694 International equities 30,607 30,607 U.S. equities 78,913 78,913
Total mutual funds 167,214 167,214
Grand total $ 182,232 $ 150,886 $ 256,019 $ 589,137
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 31
5. Employee Benefits Obligations (continued)
The following table presents the Plans’ financial instruments as of August 31, 2011, measured at
fair value on a recurring basis by the valuation hierarchy described in Note 4:
Level 1 Level 2 Level 3 Total
103-12 investment entities: International equities $ $ 42,949 $ $ 42,949 Private equity 2,223 2,223
Total 103-12 investment entities 42,949 2,223 45,172
Common collective trusts:
Fixed income 5,782 5,782 International equities 23,659 23,659 Private equity 3,593 3,593 U.S. equities 44,081 44,081
Total common collective trusts 73,522 3,593 77,115
Corporate debt:
Corporate debt instruments other 2,922 2,922 Corporate debt instruments
preferred 6,903 6,903
Total corporate debt 9,825 9,825
Equity securities:
U.S. equities 12,641 15 12,656
Hedge funds and other:
Absolute return hedge fund 65,649 65,649 Equity long/short hedge fund 66,573 66,573 Fixed income 1,551 1,551 Natural resources 10,591 10,591
Total hedge funds and other 1,551 142,813 144,364
Interest in limited partnerships:
Natural resources 17,009 17,009 Private equity 25,247 71,825 97,072 Real estate 18,857 18,857
Total interest in limited partnerships 25,247 107,691 132,938
Mutual funds:
Fixed income 66,592 66,592 International equities 23,739 23,739 U.S. equities 56,830 56,830
Total mutual funds 147,161 147,161
Grand total $ 159,802 $ 153,109 $ 256,320 $ 569,231
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 32
5. Employee Benefits Obligations (continued)
The fair value of Level 1 investments, which consist of equity securities and certain mutual
funds, is based on quoted market prices and are valued on a daily basis. Level 2 investments
consist of U.S. government securities, corporate bonds, commingled funds, common collective
trusts, interest in 103-12 entities, and fixed income instruments issued by municipalities or
foreign government agencies. Included in Level 2 investments are certain hedge funds and
limited partnerships that can be liquidated without restrictions. The fair value of the U.S.
government securities and corporate bonds is established based on values obtained from
nationally recognized pricing services that value the investments based on similar securities and
matrix pricing of similar quality and maturity securities. The fair values of the commingled
funds, common collective trusts, and 103-12 entities are based on either the fair value of the
underlying investments of the fund, as determined by the fund, or based on the Master Trust’s
ownership interest in the NAV per share of its equivalent of the respective fund. The Plans
utilize the NAV as the practical expedient for the fair value estimate as permitted. All Level 2
investments can be redeemed without restrictions on the financial statement date or shortly
thereafter.
The fair value of Level 3 investments, which primarily consist of alternative investments
(principally limited partnership interests in hedge, private equity, real estate, and natural
resources funds) and certain common collective trusts and 103-12 investments, are based on
NAV. The fair values of the securities held by limited partnerships that do not have readily
determinable fair values are determined by the general partner taking into consideration, among
other things, the financial performance of underlying investments, recent sales prices of
underlying investments, and other pertinent information. In addition, actual market exchanges at
period-end provide additional observable market inputs of the exit price. NAV is calculated by
the investment’s management monthly for all of the Master Trust’s alternative investments other
than limited partnerships, whose NAV is calculated on a quarterly basis. 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 Plans believe 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.
All financial instruments with redemption restrictions in the near future or early withdrawal fees
are categorized as Level 3 investments. Some of the redemption restrictions are temporary in
nature. If restrictions expire and an investment can be redeemed at NAV, such investment is
reclassified from Level 3 to Level 2 of the fair value hierarchy. During the years ended
August 31, 2012 and 2011, $28,405 and $0 was transferred from Level 3 to Level 2,
respectively.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 33
5. Employee Benefits Obligations (continued)
Investments in LPs, which cannot be redeemed on request, totaled $100,971 as of
August 31, 2012. Certain marketable alternative investments are subject to various redemption
restrictions. As of August 31, 2012, $38,481 of these alternative investments cannot be redeemed
for at least one year. In addition, $156,774 is subject to redemption limits and lockup provisions
that expire within one year of the balance sheet date.
The table below sets forth a summary of changes in the fair value of the Plans’ Level 3 assets for
the period from September 1, 2010 to August 31, 2012:
103-12
Investment
Entities
Common
Collective
Trusts
Hedge Funds
and Other
Interest in
Limited
Partnerships Total
Value at September 1, 2010 $ 2,237 $ 3,802 $ 121,375 $ 84,874 $ 212,288
Gain (loss) realized on assets
sold during the period 239 642 (2,219) 6,333 4,995
Change in unrealized (loss) gain
related to holdings at
August 31, 2011 (119) (697) 11,310 4,514 15,008
Purchases at cost 51 165 24,400 21,742 46,358
Sales at cost (185) (319) (12,053) (9,772) (22,329)
Value at August 31, 2011 2,223 3,593 142,813 107,691 256,320
Gain realized on assets sold
during the period 299 512 5 6,470 7,286 Change in unrealized (loss)
gain related to holdings at
August 31, 2012 (477) (874) 6,520 992 6,161 Purchases at cost 64 65 15,227 19,027 34,383 Sales at cost (199) (335) (1,889) (17,303) (19,726)
Transfers to Level 2 (19,430) (8,975) (28,405)
Value at August 31, 2012 $ 1,910 $ 2,961 $ 143,246 $ 107,902 $ 256,019
The Plans’ assets are managed solely in the interest of the Plans’ participants and their
beneficiaries. The assets are invested with the investment objective of funding the accumulated
and projected retirement benefit obligations of the Plans consistent with the Plans’ long-term
rate-of-return assumption. A time horizon of greater than five years is assumed, and therefore,
interim volatility in returns is regarded with appropriate perspective.
Northwestern Memorial has no current plans to contribute to the Plans during the year ending
August 31, 2013.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 34
5. Employee Benefits Obligations (continued)
Benefit payments, which reflect future service, as appropriate, are expected to be paid as follows:
NMH NLFH
Year ending August 31:
2013 $ 16,223 $ 3,167
2014 17,149 3,561
2015 19,773 4,018
2016 20,905 4,466
2017 21,054 4,917
2018 2022 123,135 29,926
Northwestern Memorial also maintains defined contribution plans covering substantially all of its
full-time and part-time employees. For 2012, contributions are limited to 80% of each covered
employee’s salary and a matching portion of 50% of the first 6% of the employee’s contribution
per pay period, with an annual maximum of $7.5 per employee. In addition, a non-elective
provision for those employees who are not participants in the defined benefit plans provides for
employer contributions of 1% to 2% of each employee’s salary provided they are employed as of
December 31 of the plan year and have one thousand hours of service in the plan year. Effective
January 1, 2013, the employer matching portion will be 100% of the first 6% of the employee’s
contribution per pay period, subject to the 2013 IRS limits. The non-elective provision will be
eliminated and the final 2012 contribution will be made in early 2013. Employer contributions
related to these defined contribution plans included in employee benefits expense in the
accompanying consolidated statements of operations and changes in net assets totaled $13,220
and $10,862 in 2012 and 2011, respectively.
NMHC also maintains other noncontributory postretirement benefit plans (the Noncontributory
Plans) for certain executive employees.
Included in unrestricted net assets are unrecognized actuarial gain of $787 at August 31, 2012,
and an unrecognized actuarial loss of $3,376 at August 31, 2011, respectively, for the
Noncontributory Plans that have not yet been recognized in net periodic pension cost.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 35
5. Employee Benefits Obligations (continued)
Changes in the Noncontributory Plans’ assets and benefit obligations recognized in unrestricted
net assets during 2012 and 2011 include the following:
2012 2011
Current year actuarial gain (loss) $ 1,313 $ (2,811)
Recognized actuarial net loss 2,850 1,515
$ 4,163 $ (1,296)
As of August 31, 2012 and 2011, the Noncontributory Plans’ unfunded projected benefit
obligation amounted to $19,376 and $18,814, respectively, and is included in other long-term
liabilities in the accompanying consolidated balance sheets. The weighted-average discount rate
utilized in determining the actuarial present value was 4.25% and 5.25% in 2012 and 2011,
respectively. The Noncontributory Plans’ actuarial loss included in unrestricted net assets
expected to be recognized in net periodic pension cost during 2013 is $1,371.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 36
6. Long-Term Debt
Long-term debt consists of the following at August 31:
2012 2011
Revenue Bonds, Series 2009A, payable in annual
installments through August 15, 2039 (fixed coupon
rates range from 5.00% to 6.00%) $ 342,260 $ 353,470
Revenue Bonds, Series 2009B, payable in annual
installments through August 15, 2039 (fixed coupon
rates range from 5.00% to 6.00%) 96,100 96,100
Variable-Rate Demand Revenue Bonds, Series 2008A,
payable in annual installments through August 15, 2038
(weighted-average interest rate was 0.13% in 2012 and
0.18% in 2011) 78,775 78,775
Variable-Rate Demand Revenue Bonds, Series 2007A,
payable in annual installments through August 15, 2042
(weighted-average interest rate was 0.14% in 2012 and
0.21% in 2011) 210,600 211,600
Revenue Bonds, Series 2003 (Lake Forest Hospital),
payable in annual installments through July 1, 2033
(fixed coupon rates range from 4.50% to 6.00%) 25,950 26,250
Variable-Rate Demand Revenue Bonds, Series 2002C,
payable in annual installments beginning
August 15, 2026 through August 15, 2032 (weighted-
average interest rate was 0.13% in 2012 and 0.18% in
2011) 33,000 33,000
Revenue Bonds, Series 2002A (Lake Forest Hospital),
payable in annual installments through July 1, 2029
(fixed coupon rates range from 5.75% to 6.25%) 40,850 42,050
827,535 841,245
Less:
Unamortized discount, net 6,880 6,181
Current maturities 14,500 13,710
$ 806,155 $ 821,354
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 37
6. Long-Term Debt (continued)
NMH currently has a line of credit available for operations in the amount of $50,000, which
expires in July 2015. Under this committed line of credit, NMH has the option to borrow at
various rates expressed as an adjustment to the LIBOR, prime rate, or other bank-offered rates.
At August 31, 2012 and 2011, no amount was borrowed under the available line of credit.
NMH has standby bond purchase agreements (SBPAs) with multiple banks that cover all of its
variable-rate demand revenue bonds (VRDBs). The short-term credit rating for each series of
VRDBs is based on the respective bank’s short-term credit rating. The long-term credit rating for
each series of VRDBs is based on NMH’s long-term credit rating. Changes in credit ratings may
impact the interest paid on or remarketing of the VRDBs. The banks provide liquidity support in
the event of a failed remarketing as follows:
Par Value Expiration Date
Series 2008A $ 78,775 July 2014
Series 2002C 33,000 July 2014
Series 2007A 210,600 December 2014
The SBPAs require NMH to maintain reporting, financial, and other covenants. If an SBPA is
not renewed or replaced prior to its expiration, or if some portion, or all, of the related VRDBs
are not successfully remarketed (“failed remarketing”) during the term of the SBPAs, the related
VRDBs convert to a term loan at the earlier of the expiration date of the related SBPA or after 90
consecutive days of failed remarketing. Principal payments on the term loan would then be
payable over a three-year term. The earliest principal payment on any term loan associated with
the bonds is 367 days from the failed remarketing date. Therefore the VRDBs, less any current
portion, are classified as long-term debt in the accompanying consolidated balance sheets.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 38
6. Long-Term Debt (continued)
Scheduled principal repayments for the next five years, assuming remarketing of VRDBs, on
long-term debt are as follows:
Year ending August 31:
2013 $ 14,500
2014 15,220
2015 15,985
2016 16,785
2017 17,645
The provisions under the respective debt agreements require the Obligated Group to maintain
reporting, financial, and other covenants. At August 31, 2012, the Obligated Group was in
compliance with these provisions.
Northwestern Memorial paid interest of $40,012 in 2012 and $41,418 in 2011 (which includes
$10,570 and $10,639, respectively, for net swap payments included in other operating expense in
the accompanying consolidated statements of operations and changes in net assets).
Northwestern Memorial capitalized interest of $2,452 and $3,299 in 2012 and 2011, respectively.
7. Derivatives
Northwestern Memorial’s only derivative financial instruments are interest rate swaps, which
NMH maintains on its VRDBs for the sole purpose of risk management. These bonds expose
NMH to variability in interest payments due to changes in interest rates. Management believes
that it is prudent to limit the variability of its interest payments. To meet this objective and to
take advantage of low interest rates, NMH entered into various interest rate swap agreements to
manage fluctuations in cash flows resulting from interest rate risk. These swaps limit the
variable-rate cash flow exposure on the VRDBs to synthetically fixed cash flows. By using
interest rate swaps to manage the risk of changes in interest rates, NMH exposes itself to credit
risk and market risk. Credit risk is the risk that a counterparty will fail to perform under the terms
of a derivative contract. When the fair value of a swap is positive, the counterparty owes NMH,
which creates credit risk for NMH. When the fair value of a swap is zero or negative, the
counterparty does not owe NMH. NMH minimizes the credit risk in its swap contracts by
entering into transactions that require the counterparty to post collateral for the benefit of NMH
based on the credit rating of the counterparty and the fair value of the swap contract. The
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 39
7. Derivatives (continued)
aggregate fair value of the swaps on the consolidated balance sheets as of August 31, 2012 and
2011, reflects a reduction of $9,497 and $6,858, respectively, for nonperformance risk. Market
risk is the adverse effect on the value of a financial instrument that results from a change in
interest rates. The market risk associated with interest rate changes is managed by establishing
and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Management also mitigates risk through periodic reviews of their swap positions in the context
of their total blended cost of capital.
The following is a summary of the outstanding positions under existing interest rate swap
agreements at August 31, 2012 and 2011:
Notional Amount Maturity
2012 2011 Date Rate Paid Rate Received
$ 35,250 $ 35,250 May 2035 3.310% 63% of LIBOR + 28 bps
35,250 35,250 May 2035 3.310 63% of LIBOR + 28 bps
43,200 43,200 May 2035 3.313 63% of LIBOR + 28 bps
105,300 105,800 August 2042 3.889 63% of LIBOR + 28 bps
105,300 105,800 August 2042 3.889 63% of LIBOR + 28 bps
$ 324,300 $ 325,300
The fair value of derivative instruments at August 31 is as follows:
Balance Sheet Liabilities
Location 2012 2011
Derivatives not designated as
hedging instruments:
Interest rate contracts
Interest rate swaps
liabilities $ 104,503 $ 73,845
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 40
7. Derivatives (continued)
The effects of derivative instruments on the consolidated statements of operations and changes in
net assets for 2012 and 2011 are as follows:
Amount of Gain (Loss)
Recognized in Excess of
Revenue Over Expenses
on Derivatives
Interest Rate Contracts 2012 2011
Derivatives not designated as hedging instruments:
Operating expense – other $ (10,570) $ (10,639)
Nonoperating change in fair value of interest
rate swaps (30,533) 4,527
NMH’s derivative instruments contain provisions that require NMH’s debt to maintain an
investment-grade credit rating from certain major credit rating agencies. If NMH’s debt were to
fall below investment grade, it would be in violation of these provisions, and the counterparties
to the derivative instruments could request immediate payment or demand immediate and
ongoing collateralization on derivative instruments in net liability positions. NMH has posted
collateral of $20,451 and $1,172 as of August 31, 2012 and 2011, respectively. If the credit risk-
related contingent features underlying these agreements were triggered to the fullest extent on
August 31, 2012, NMH would be required to post $114,000 of collateral to its counterparties.
8. Income Tax Status
NMHC, NMH, NLFH, the Foundation, HFI, and NMPG are qualified under the Internal
Revenue Code (the Code) as tax-exempt organizations and are exempt from tax on income
related to their tax-exempt purposes under Section 501(a) of the Code. Accordingly, no income
taxes are provided for the majority of the income in the accompanying consolidated financial
statements for these corporations. NMHC, NMH, NLFH, HFI, and the Foundation had unrelated
business income (UBI) generated primarily through limited partnerships within the investment
portfolio and the sale of certain services that are not directly related to patient care. NMHC,
NMH, NLFH, HFI, and the Foundation have unused net operating loss carryforwards available
to offset the UBI tax. The net operating loss carryforwards expire through 2029. The deferred tax
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 41
8. Income Tax Status (continued)
assets associated with these net operating loss carryforwards of $4,708 and $5,395
at August 31, 2012 and 2011, respectively, are offset by valuation allowances on the
consolidated balance sheets of $4,708 and $5,395, respectively.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent on the generation of future taxable income during
the periods in which those temporary differences become deductible.
NMIC is incorporated under the laws of the Cayman Islands. The Cayman Islands government
imposes no tax on income or capital gains, and NMIC has received an undertaking from the
Cayman Islands government exempting it from future income and capital gains taxes until
March 25, 2023. However, NMIC is subject to U.S. federal corporate taxation to the extent that it
generates net income that is effectively connected with a U.S. trade or business. NMIC is not
engaged in any such trade or business in the U.S. In addition, distributions that NMH receives
from NMIC are treated as dividends and, as such, are not taxable to NMH. Therefore, no income
tax provision has been recorded related to NMIC and its operations.
Interest and penalties on income taxes, when incurred, are included in operating expenses.
9. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are available for the following purposes at August 31, 2012 and
2011:
2012 2011
Healthcare services:
Purchase of property and equipment $ 15,287 $ 16,313
Operating expenses and charity care 49,820 74,251
Research, education, and other 90,156 49,824
$ 155,263 $ 140,388
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 42
9. Temporarily and Permanently Restricted Net Assets (continued)
Net assets were released from donor restrictions by incurring expenditures for the following
purposes:
2012 2011
Healthcare services:
Purchase of property and equipment $ 1,579 $ 380
Operating expenses and charity care 8,286 10,493
Research, education, and other 18,946 11,625
$ 28,811 $ 22,498
Permanently restricted net assets at August 31, 2012 and 2011, are summarized below, the
income from which is expendable to support:
2012 2011
Healthcare services:
Purchase of property and equipment $ 13,415 $ 15,408
Operating expenses and charity care 68,754 78,828
Research, education, and other 59,602 32,093
$ 141,771 $ 126,329
Northwestern Memorial’s endowment consists of individual donor-restricted funds established
for a variety of purposes. Net assets associated with endowment funds are classified and reported
based on the donor-imposed restrictions.
Northwestern Memorial has interpreted the Uniform Prudent Management of Institutional Funds
Act of 2006 (UPMIFA), as adopted by the State of Illinois, as requiring the preservation of the
fair value of the original gift as of the gift date of the donor-restricted endowment funds absent
explicit donor stipulations to the contrary. As a result of this interpretation, Northwestern
Memorial classifies as permanently restricted net assets the original value of gifts donated to the
permanent endowment, the original value of subsequent gifts to the permanent endowment, and
accumulations to the permanent endowment made in accordance with the direction of the
applicable donor gift instrument at the time the accumulation is added to the fund. The remaining
portion of the donor-restricted endowment fund that is not classified in permanently restricted
net assets is classified as temporarily restricted net assets until those amounts are appropriated
for expenditure by the organization in a manner consistent with the donor intent or, where silent,
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 43
9. Temporarily and Permanently Restricted Net Assets (continued)
standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, Northwestern
Memorial considers the following factors in making a determination to appropriate or
accumulate donor-restricted funds:
• The duration and preservation of the fund
• The purposes of Northwestern Memorial and the endowment fund
• General economic conditions
• The possible effects of inflation and deflation
• The expected total return from income and the appreciation of investments
• Other resources of Northwestern Memorial
• The investment policies of Northwestern Memorial
Northwestern Memorial has adopted investment and spending policies for endowment assets that
attempt to provide a predictable stream of funding to programs supported by its endowment
while seeking to maintain purchasing power of the endowment assets. Endowment assets include
those assets of donor-restricted funds that must be held in perpetuity or for a donor-specified
period. Under this policy, the endowment assets are invested in a manner that is intended to
produce a real return, net of inflation and investment management costs, of at least 6% over the
long term. Actual returns in any given year may vary from this amount.
To satisfy its long-term rate-of-return objectives, Northwestern Memorial relies on a total return
strategy in which investment returns are achieved through both capital appreciation (realized and
unrealized) and current yield (interest and dividends). Northwestern Memorial targets a
diversified asset allocation that places an emphasis on equity-based and alternative investments
to achieve its long-term objective within prudent risk constraints.
Northwestern Memorial has a policy of appropriating for distribution each year no more than 4%
of the endowment fund balance at the midpoint of the preceding fiscal year. In establishing this
policy, Northwestern Memorial considered the long-term expected return on its endowment with
the objective of maintaining the purchasing power of the endowment assets.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 44
9. Temporarily and Permanently Restricted Net Assets (continued)
The changes in endowment net assets for the years ended August 31, 2012 and 2011, are
summarized below:
Temporarily
Restricted
Permanently
Restricted Total
Endowment net assets,
September 1, 2010 $ 43,406 $ 105,903 $ 149,309
Contributions 1,573 19,683 21,256
Change in value of trusts 44 993 1,037
Investment return 12,968 12,968
Appropriation for expenditure (5,035) (5,035)
Other (123) (250) (373)
Endowment net assets,
August 31, 2011 52,833 126,329 179,162
Contributions (535) 16,347 15,812 Change in value of trusts (62) (1,025) (1,087)
Investment return 8,269 8,269
Appropriation for expenditure (5,199) (5,199) Other (322) 120 (202)
Endowment net assets,
August 31, 2012 $ 54,984 $ 141,771 $ 196,755
10. Pledges Receivable
As of August 31, 2012, donor-restricted pledges are expected to be realized as follows:
Less than one year $ 2,366
One to five years 19,813
Thereafter 4,683
Total pledges receivable 26,862
Less discount and allowance (4,247)
Net pledges receivable $ 22,615
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 45
11. Net Patient Revenue
Northwestern Memorial recognizes patient revenue associated with services provided to patients
who have third-party payor coverage with Medicare, Medicaid, Blue Cross, other managed care
programs, and other third-party payors on the basis of the contractual rates for the services
rendered at the time services are provided. Payment arrangements with those payors include
prospectively determined rates per admission or visit, reimbursed costs, discounted charges, and
per diem rates. Reported costs and/or services provided under certain of the arrangements are
subject to retroactive audit and adjustment. Net patient revenue decreased by $1,605 in 2012 and
increased by $7,366 in 2011 as a result of changes in estimates due to final cost report
settlements and the disposition of other payor audits and settlements. Changes in Medicare and
Medicaid programs and reduction in funding levels could have an adverse effect on
Northwestern Memorial.
Northwestern Memorial also provides care to self-pay patients. Under its Free and Discounted
Care Policy (the Policy), Northwestern Memorial provides medically necessary care to patients
in its community with inadequate financial resources at discounts of up to 100% of charges using
a sliding scale that is based on patient household income as a percentage (up to 600%) of the
Federal Poverty Level guidelines. The Policy also contains a catastrophic financial assistance
provision that limits a patient’s total financial responsibility to Northwestern Memorial. Since
Northwestern Memorial does not pursue collection of these amounts, they are not reported as
patient revenue. The Policy has not changed in fiscal year 2012 or 2011. NLFH adopted this
policy in June 2011. Northwestern Memorial recognizes patient revenue on services provided to
these patients at the discounted rate at the time services are rendered.
Patient revenue, net of contractual allowances and discounts, is reduced by the provision for bad
debts, and net patient accounts receivable are reduced by an allowance for uncollectible
accounts. These amounts are based primarily on management’s assessment of historical and
expected write-offs and net collections along with the aging status for each major payor source.
Management regularly reviews data about these major payor sources of revenue in evaluating the
sufficiency of the allowance for uncollectible accounts. Based on historical experience, a portion
of Northwestern Memorial’s self-pay patients who do not qualify for charity care will be unable
or unwilling to pay for the services provided. Thus, a provision is recorded for bad debts in the
period services are provided related to these patients. After all reasonable collection efforts have
been exhausted in accordance with Northwestern Memorial’s policies, accounts receivable are
written off and charged against the allowance for uncollectible accounts.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 46
11. Net Patient Revenue (continued)
Northwestern Memorial has determined, based on an assessment at the reporting-entity level,
that patient service revenue is primarily recorded prior to assessing the patient’s ability to pay,
and as such, the entire provision for bad debts is recorded as a deduction from patient service
revenue in the accompanying consolidated statements of operations and changes in net assets.
For the years ended August 31, 2012 and 2011, patient service revenue (including patient copays
and deductibles), net of contractual allowances and discounts (but before the provision for
uncollectible accounts) by primary payor source was as follows:
2012 2011
Medicare $ 365,081 $ 347,610
Medicaid 151,854 153,627
Other third-party payors 1,081,831 1,073,666
Patients 15,357 18,693
$ 1,614,123 $ 1,593,596
Medicaid patient service revenue includes revenue received through the Illinois Hospital
Assessment Program (see Note 12).
Northwestern Memorial grants credit without collateral to its patients, most of who are local
residents and are insured under third-party payor agreements. At August 31, 2012 and 2011,
patient accounts receivable, including patient copays and deductibles by major primary payor
source, before deducting estimated uncollectibles, was as follows:
2012 2011
Medicare 14% 16%
Medicaid 21 15
Blue Cross 21 23
Other managed care 30 29
Other third-party payors 7 10
Patients 7 7
100% 100%
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 47
11. Net Patient Revenue (continued)
Patient accounts receivable net of contractual adjustments were $318,811 and $264,798 as of
August 31, 2012 and 2011, respectively, or 19.8% and 16.6% of patient revenue for the fiscal
years then ended. The related allowance for uncollectible accounts was $39,036 and $32,338, or
12.2% and 12.2% of the related patient accounts receivable net of contractual adjustments as of
August 31, 2012 and 2011, respectively. The allowance for uncollectible accounts remained
consistent as a percent of the related accounts receivable net of contractual allowances between
August 31, 2012 and 2011.
12. Illinois Hospital Assessment Program
In December 2008, the Illinois Hospital Assessment Program (HAP) was approved by the
Federal Centers for Medicare and Medicaid Services for the period July 1, 2008 through June 30,
2013. Under HAP, the state receives additional federal Medicaid funds for the state’s healthcare
system, administered by the Illinois Department of Healthcare and Family Services. HAP
includes both a payment to NMH and NLFH from the state and an assessment (the provider tax)
against NMH and NLFH, which is paid to the state in the same year. Included in the
accompanying consolidated statements of operations and changes in net assets for the years
ended August 31, 2012 and 2011, respectively, are $57,915 and $58,255 of patient service
revenue and $41,395 and $41,395 of assessment.
13. Functional Expenses
Northwestern Memorial provides general healthcare services primarily to residents within its
geographic location and supports research and education programs. For the years ended
August 31, 2012 and 2011, expenses related to providing these services were as follows:
2012 2011
Healthcare services $ 1,259,815 $ 1,254,836
Research and education 64,030 64,471
Fund-raising 7,532 5,842
General, administrative, and other 281,855 266,106
$ 1,613,232 $ 1,591,255
The research and education costs include $7,553 and $3,448 of expenses supported by federal,
state, and corporate grants and $11,393 and $8,178 of expenses supported by other donor-
restricted funds in 2012 and 2011, respectively.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 48
14. Commitments and Contingencies
Consistent with its mission, Northwestern Memorial from time to time provides academic,
program, and other support to other not-for-profit entities. The present value of the total
remaining commitments related to this support are $134,842 and $64,318 at August 31, 2012 and
2011, respectively, which are reported as grants and academic support payable in the
accompanying consolidated balance sheets.
As of August 31, 2012, approximately 15% of Northwestern Memorial employees were
represented by a collective bargaining agreement. This collective bargaining agreement does not
expire within one year.
Various capital projects are currently being constructed that are expected to open over the
next three years. The total estimated cost of these projects is approximately $496,000. As of
August 31, 2012, project commitments totaled $322,857, of which $113,555 has been incurred.
As part of the affiliation agreement with Lake Forest Hospital in 2010, Northwestern Memorial
committed to a plan to refurbish or replace existing inpatient and outpatient facilities on the Lake
Forest Campus within ten years of the affiliation date (“Replacement Project”). The planning
process for the Replacement Project is progressing on schedule. Any Replacement Project plans
will be subject to obtaining a certificate of need along with other governmental approvals.
Certain Northwestern Memorial buildings are located on land leased from Northwestern
University under various lease agreements. The principal lease requires annual payments of $314
through 2074. At August 31, 2012, minimum future rental payments under other noncancelable
operating leases, which consist primarily of leases for office space and equipment, some of
which include renewal options, are as follows:
Year ending August 31:
2013 $ 10,546
2014 9,705
2015 8,996
2016 8,779
2017 8,526
Thereafter 39,827
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 49
14. Commitments and Contingencies (continued)
Laws and regulations governing the Medicare and Medicaid programs are extremely complex
and subject to interpretation. As a result, there is a reasonable possibility that recorded amounts
will change by a material amount in the near term. During the last few years, as a result of
nationwide investigations by governmental agencies, various healthcare organizations have
received requests for information and notices regarding alleged noncompliance with those laws
and regulations, which, in some instances, have resulted in organizations entering into significant
settlement agreements. Compliance with such laws and regulations may also be subject to future
government review and interpretation, as well as significant regulatory action, including fines,
penalties, and potential exclusion from the Medicare and Medicaid programs. In addition, an
increasing number of the operations or practices of not-for-profit healthcare providers has been
challenged or questioned to determine if they are consistent with the regulatory requirements for
nonprofit tax-exempt organizations. These challenges are broader than concerns about
compliance with federal and state statutes and regulations of core business practices of the
healthcare organizations. Areas that have come under examination have included pricing
practices, billing and collection practices, charitable care, community benefit, executive
compensation, exemption of property from real property taxation, and others. Northwestern
Memorial expects that the level of review and audit to which it and other healthcare providers are
subject will increase. There can be no assurance that regulatory authorities will not challenge
Northwestern Memorial’s compliance with these laws and regulations, and it is not possible to
determine the effect, if any, such claims or penalties would have on Northwestern Memorial.
In August 2011, the Illinois Department of Revenue (the Department) denied property tax
exemption applications submitted by NMH and two other unaffiliated hospitals. The NMH
denial related to its application for an exemption for the Prentice Women’s Hospital pavilion
(Prentice pavilion) for the 2007 tax year.
NMH also filed property tax exemption applications for the Prentice pavilion for the 2009 and
2010 tax years. Nevertheless, in October 2011, NMH received from the Cook County Assessor’s
Office (the Assessor) notices of intent to list omitted assessments for the Prentice pavilion for
2008, 2009, and 2010, and the Assessor issued proposed assessments for the Prentice pavilion
for 2011. On March 30, 2012, NMH filed a property tax exemption application for the Prentice
pavilion for the 2011 tax year. On July 5, 2012, NMH received tax bills for the Prentice pavilion
for 2008 through 2011.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 50
14. Commitments and Contingencies (continued)
On June 14, 2012, Illinois Governor Pat Quinn signed legislation (Public Act 97-688)
establishing clear criteria for property, sales, and use tax exemptions for not-for-profit hospitals.
The legislation expressly applies to exemption applications, such as those filed by NMH
regarding the Prentice pavilion and other Illinois hospitals, that have either not been decided by
the Illinois Department of Revenue or for which such Department decisions are not final and
non-appealable. NMH sought and received property tax exemptions for the Prentice pavilion for
2007 and subsequent years pursuant to the recent legislation. As a result, no property tax will be
due for the Prentice pavilion for tax years 2007-2011.
On February 8, 2010, NMH and NMHC were served as defendants in a lawsuit filed by a former
NMH clinical coordinator alleging that employees were not compensated for all time worked.
The former employee seeks to represent a class of all NMH hourly employees in over 20
different job classifications. In August 2011, NMHC was dismissed from the case, and the court
conditionally certified a narrower-than-petitioned-for collective action consisting of NMH non-
union, direct patient care employees. The opt-in period has closed, with approximately 132 of
4,360 (approximately 3%) eligible current and former employees opting in as plaintiffs. On
October 24, 2012, the parties mediated the claims outlined in the aforementioned lawsuit. The
mediation resulted in a settlement (subject to Court approval), pursuant to which NMH has
agreed to settle and release all outstanding claims related to the litigation. The settlement is made
without any admission of liability by NMH. Management has accrued amounts estimated to be
payable under the proposed settlement as of August 31, 2012; any changes in the final settlement
amount will be accrued at the time of final settlement.
On October 25, 2012, NMH received a copy of the complaint in the lawsuit captioned, United
States of America Ex Rel. Audra Soulias v. Northwestern University and Northwestern Memorial
Hospital, 10-cv-07233 (N.D. Il.). Plaintiff Soulias originally filed the lawsuit in November,
2010, but the case remained under seal until July 9, 2012, at which time the United States
Department of Justice declined to intervene in the suit. The complaint alleges that NMH violated
the False Claims Act by submitting Medicare claims for services that were part of federally
funded clinical research, and thus caused the Federal Government to pay twice for the same
patient care services. The case is currently pending in the United States District Court for the
Northern District of Illinois Eastern Division. NMH has yet to respond to the complaint or to
conduct any formal discovery, and accordingly at this time management is unable to determine
what effects, if any, this matter may have on the consolidated financial statements.
Northwestern Memorial HealthCare and Subsidiaries
Notes to Consolidated Financial Statements (continued) (In Thousands)
1207-1377461 51
14. Commitments and Contingencies (continued)
Northwestern Memorial is a defendant in other various lawsuits arising in the ordinary course of
business. Although the outcome of these lawsuits cannot be predicted with certainty,
management believes the ultimate disposition of such matters will not have a material effect on
Northwestern Memorial’s financial condition or operations.
15. Elmhurst Memorial Healthcare
In February 2012, NMHC and Elmhurst Memorial Healthcare (EMHC), the corporate parent of
Elmhurst Memorial Hospital, executed a non-binding letter of intent that provided for a period of
exclusive discussions regarding a potential affiliation. On June 28, 2012, NMHC and EMHC
announced they had terminated the letter of intent, ending the period of exclusive discussions.
16. Subsequent Events
Northwestern Memorial evaluated events and transactions occurring subsequent to
August 31, 2012 through November 29, 2012, the date of issuance of the consolidated financial
statements. During this period, there were no subsequent events requiring recognition in the
consolidated financial statements that have not been recorded. In September 2012, Northwestern
Memorial signed an Alignment Agreement with NMFF and Northwestern University (NU) that
furthers the mutual purpose and mission of the entities. This alignment agreement provides for a
one-time grant for research of $167,000 by Northwestern Memorial to NU and provides for
ongoing funding to NU toward clinical program development called for in the shared strategic
plan. This ongoing funding consists of 0.5% of Northwestern Memorial’s net patient revenue
(excluding HAP revenue) and 10% of Northwestern Memorial operating income up to a 5%
operating margin and 20% of operating income that exceeds a 5% operating margin. There were
no other unrecognized subsequent events requiring disclosure except as previously disclosed in
Note 14.
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