TENTATIVE MEETING AGENDA. FINANCE COMMITTEE OF THE SARASOTA COUNTY PUBLIC HOSPITAL BOARD MONDAY, March 19, 2018, 10:30 a.m.

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1 TENTATIVE MEETING AGENDA FINANCE COMMITTEE OF THE SARASOTA COUNTY PUBLIC HOSPITAL BOARD MONDAY, March 19, 2018, 10:30 a.m. HARRISON Room I. Call to Order Jim Meister, Chairman II. Approval of the Minutes of the Joint Meeting of the Finance and Audit Committees of January 16, 2018 III. For Approval: Request for Funding for Design of SMH - Laurel Road Hospital David Verinder, Tom Perigo, Steve Jackson (FLAD), Keith Munson (Hammes) 60 min IV. VII. VIII. Update: Moody s 2018 Outlook for Not-for-Profit and Public Healthcare - Bill Woeltjen Other Business Adjournment 15 min Finance Committee Members: James Meister, Chair cc: David Verinder Gregory Carter Bill Woeltjen Joseph J. DeVirgilio, Jr. Carol Ann Kalish, Esq. Sharon Wetzler DePeters Lorrie Liang Darryl Henry Peter Taylor Tramm Hudson Nelson Lane William Noonan Richard Rehmeyer, MD Susan Tucker Joel Gerber, MD Ron Shapo John Steele, MD Frank Fleischer

2 MINUTES OF JOINT MEETING OF THE FINANCE COMMITTEE & AUDIT COMMITTEE OF THE SARASOTA COUNTY PUBLIC BOARD JANUARY 16, 2018 PRESENT: ABSENT: Jim Meister, Finance Committee Chairman Darryl Henry, Audit Committee Chairman Gregory Carter Joseph DeVirgilio, Jr. Tramm Hudson (attended via conference call) Richard Rehmeyer, MD Susan Tucker John Steele, MD Frank Fleischer Ron Shapo Dorothy Hill Sharon Wetzler DePeters William Noonan Joel Gerber, MD John Strausser, MD ALSO David Verinder Bill Woeltjen PRESENT: Lorrie Liang Carol Ann Kalish, Esq. Nelson Lane Peter Taylor Mark Thornton Lori Nissen, KPMG Julia Safina, KPMG David Hess, Bobbitt, Pittinger & Co. The meeting was called to order by James Meister, Finance Committee Chairman, at 9:00 a.m. Mr. Meister announced because we give citizens ample opportunity to speak at Board meetings, this committee generally does not entertain citizen comment except when considering action that may in some way bind the Hospital Board itself. Any citizen desiring to address the committee under one of these rare instances should turn in a speaker card to the Board secretary. If the citizen comment pertains to an item on the agenda today, the comment will be heard early in this meeting. Otherwise it will be heard toward the end. Speakers are asked to limit their comments to five minutes. Vendors, suppliers, or other persons seeking hospital contracts awarded on a competitive bid basis are reminded that their ability to address the committee may be restricted by the terms of the initiation for bid, request for proposal or other purchasing criteria. Whether or not you wish to speak today, you will now be given an opportunity to introduce yourself to the committee and to indicate the item of business that brings you here today.

3 Approval of the Minutes - The minutes of the meeting of the Finance Committee on November 20, 2017 were unanimously approved upon a motion by Susan Tucker, seconded by Joseph DeVirgilio. The minutes of the meeting of the Audit Committee on October 16, 2017 were unanimously approved upon a motion by Gregory Carter, seconded by Joseph DeVirgilio. KPMG Presentation Financial Statement Audit as of September 30, 2017: Mr. Meister introduced Lori Nissen and Julia Safina from KPMG. Ms. Nissen advised that Todd Webster will be the KPMG audit partner next year. Ms. Nissen and Ms. Safina presented the draft audited financial statements as of September 30, 2017 to the committee which will be issued with an unmodified opinion, and they made the required communications to the committees. Mr. DeVirgilio pointed out a few typos in the draft document and Ms. Safina said she will ensure they are fixed in the final version. Once the management representation letter is signed the statements can be issued. The committee adjourned to Executive Session, excusing management from the meeting, and then continued with Board members, community representatives, and KPMG Auditors present. There was discussion. Management was asked to rejoin the meeting. Mr. Meister, seconded by Mr. Fleischer, moved to recommend acceptance of the KPMG Financial Statement Audit. There was no discussion. The motion carried unanimously. A copy of the full report is attached to the originals of these minutes. Bobbitt, Pittenger & Co. Draft Financial Statement Audi of the SMH Retirement Plan FY2017: Mr. Meister introduced David Hess, from Bobbitt, Pittenger & Co. and stated that he was present to review and discuss the SMH Retirement Plan audit. Mr. Hess presented the draft results of the audit of the FY2017 financial statements of the SMH Health Care Retirement Plan. He reported the audit went well and he summarized the numbers as of September 30, He discussed the auditors responsibility, their required communications to the governing body and that they were issuing an unmodified opinion. He also stated there were no internal control deficiencies noted. He reported on the statement of fiduciary net position and changes in net position. Notes to the financial statements; required supplementary information; report on internal controls and required communications were provided. The Plan s Net Pension Liability decreased by $16.7 million from September 30, 2016 to September 30, The committee adjourned to Executive Session, excusing management from the meeting, and then continued with Board members, community representatives, and David Hess of Bobbitt, Pittinger & Co. present. There was discussion. Management was asked to rejoin the meeting.

4 Mr. Meister, seconded by Mr. Henry, moved to recommend full Board acceptance of the external audit of the SMH Healthcare Retirement Plan by Bobbitt Pittenger & Co. There was discussion. The motion carried unanimously. Mr. Woeltjen thanked Nelson Lane and his team for all of their work on getting the audits done. Fiscal Year 2017 Credit Profile and Financial Ratio History: William Woeltjen introduced Nelson Lane, Controller. Nelson presented the District s credit profile as of September 30, 2017 and graphs showing historical trends of our financial ratios. Our financial position is very strong. For many ratio metrics, the District is performing better than the median metric of similarly rated healthcare systems. No motion necessary, for information only. A copy of the full report is attached to the originals of these minutes. Update on Internal Audit Projects: Darryl Henry, Chairman of Audit Committee, introduced Mark Thornton, Director of Audit Services. Mark presented an update on the internal audit projects completed during the first quarter. He reviewed the Annual Audit Plan for 2016/2017, which was approved by the Board. He reported on the completed follow-up projects and the completed audit projects for the first quarter. The projects included Visitor and ID Badge, Symplr Contract and Accounts Payable Review, Safe Practices and the Drug Diversion Prevention Program, Wire Transfer Controls, SMART Plan 2016/2017, Laptop Computers Asset Inventory, Encryption and Computrace Status, and FEMA Public Assistance Application. Mark shared Audit Services observation, recommendation for each project, and management response. No motion necessary, for information only. A copy of the full report is attached to the originals of these minutes. Other Business: None There being no further business to come before this committee, the meeting was adjourned at 10:32 a.m.

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6 Laurel Road Hospital - Venice Finance Committee Presentation March 19, 2018 (Architectural design in progress NOT FINAL)

7 Agenda South County Strategy David Verinder, President & CEO Service Area Demographics & Market Data Peter Taylor, VP, Strategy & Business Development Conceptual Site Study & Design Schedule Steve Jackson, Flad Architects Project Expenses & Recommendation David Verinder, President & CEO 2

8 South County Strategy David Verinder, President & CEO

9 Sarasota Memorial Health Care System 2018 MISSION To provide health care services that excel in Caring, Quality and Innovation. VISION Our community will be served by the best health care system in America. SMHCS will be the best place to be a patient, the best place to work, and the best place to practice medicine. VALUES Caring & Compassion Excellence Teamwork & Trust Mutual Respect & Recognition Cost Effective/Ethical Behavior Strategic Road Map Geographic Reach Population Health Community Engagement Destination Programs Reputation Patient-Centered Care Innovation Quality Finance Patient Experience Areas of Focus Areas of Focus Areas of Focus Areas of Focus Primary Care Network Development Physician Recruitment - Venice - North Port - Critical Subspecialties Palliative Care Expansion South County Community Plan Community Health Initiatives Employer/Provider Delivery Model Foundation Strategic Alignment GME Implementation & Expansion Education & Research Options Laurel Road Hospital Development South County Service Growth Patient & Employee Parking Needs Comprehensive Cancer Center Development Behavioral Health Strategic Plan Freestanding Surgery Center Evaluation Talent Recruitment, Retention, Development & Culture Patient Safety Initiatives (Higher Reliability) Patient Throughput Efficiency & Discipline Clinical Space Allocation Modeling & Usage Enterprise Registration Platform Cyber Platform Security Telehealth Platform Viability Digital Consumer & Patient Applications Quality Care - Triple Aim Focus Synchronization - Value-Based Payment Initiatives - Post-Acute Clinical Effectiveness EMR Enterprise Development HCAHPS Organizational Focus Rate Optimization Labor & Supply Chain Control Balance Sheet Strength Capital Spend Discipline Tax Millage Diligence Community Programs Patients Outcomes 4

10 40% growth in ADC from Feb FY13 to Feb FY18 5

11 The Evolution of Sarasota Memorial System PRESENT FUTURE Becoming a Tertiary/Quaternary System SMH SMH Sarasota Main Campus Graduate Medical Education (Residency) H H Rehabilitation Pavilion Venice Laurel Road North Port Sumter Road Trauma Center Cardiovascular Center of Excellence Comprehensive Stroke Center Comprehensive Cancer Care Behavioral Health Trauma Center Graduate Medical Education (Residency) Cardiovascular Center of Excellence Rehabilitation Pavilion Mother/Baby NICU Ambulatory & Physician Network Skilled Nursing Facility Ambulatory & Physician Network Skilled Nursing Facility Comprehensive Stroke Center Mother/Baby NICU Behavioral Health 6

12 Serving Our Region as a Health Care System Existing Outpatient Site Future Outpatient Site N 7

13 Building our Community Care in Venice Sarasota Memorial Health Care Center at Blackburn Point Sarasota Memorial Hospital Laurel Road Sarasota Memorial Health Care and Urgent Care Center at Venice Bypass Future Hospital Site Sarasota Memorial Health Care Center at Venice Island Existing Outpatient Site Future Outpatient Site Sarasota Memorial Health Care Center at West Villages N 8

14 Healthcare History in South County 1995 Non-profit Venice Hospital is sold to Bon Secours. SMH s offer is rejected The state OKs HMA corporation s plan to build a hospital in North Port. Universal and HCA file challenges. A judge rules the facility is not needed. SMH pursues state approval to transfer 80 beds to a satellite facility in South County, but is denied. SMH ultimately does not pursue litigation. Bon Secours sells Venice and Port Charlotte hospitals to HMA. SMH s offer for Venice is rejected. Later, SMH buys 65 acres on Laurel Road SMH purchases a 32-acre parcel on Sumter Road SMH opens freestanding ER and Health Center off Toledo Blade Blvd. in North Port SMH opens health care and urgent care center on SR41 Bypass in Venice Community Health Systems (CHS) acquires Venice & Port Charlotte hospitals SMH acquires 30-acre parcel at West Villages/U.S. 41 in land swap. SMH offers to purchase Venice Regional Bayfront Health. Offer is rejected. SMH applies for CON to build a new hospital on Laurel Road in Venice. CHS applies for a replacement hospital. State preliminarily approves both SMH s & Venice Regional s plans for new hospitals. SMH offers to purchase Venice Regional Bayfront Health. Offer is rejected. Approval of SMH s plans challenged by HCA & CHS. SMH responds with challenge of its own Hearing takes place on challenges. 9

15 SMH CON Application Submission October, 2016: Filed CON application for a new hospital on Laurel Road, which is given preliminary approval by ACHA October, 2017: Submitted an updated application to the state as an extra insurance measure Early 2018: Judge expected to issue a recommended order on the 2016 application, followed by ACHA s final order Ad announcing Sarasota Memorial s plans to file letter of intent 10

16 Laurel Road Hospital to Help Ease Capacity Issues SMH s five-star care will raise the bar on hospital services in south county and ease space constraints at the main campus The new hospital will bring SMH s physician base further south and build the medical staff of a future North Port hospital 11

17 Service Area Demographics & Market Data Peter Taylor, VP, Strategy & Business Development

18 How We Define North - vs - South Sarasota County North County: Includes areas north of Osprey (US41 & Preymore Street) South County: Includes Osprey, Nokomis, Venice, Englewood, North Port communities 13

19 Sarasota County Demographic Comparison North County - vs - South County North County Demographics: Includes areas north of Osprey (US41 & Preymore Street) South County Demographics: Includes Osprey, Nokomis, Venice, Englewood, North Port DEMOGRAPHIC CHARACTERISTICS 2010 Total Population 2017 Total Population 2022 Total Population % Change Selected Area USA 213, ,745, , ,139, , ,393, % 3.8% Average Household Income $84,609 $80,853 g p y DEMOGRAPHIC CHARACTERISTICS 2010 Total Population 2017 Total Population 2022 Total Population % Change Selected Area USA 181, ,745, , ,139, , ,393, % 3.8% Average Household Income $71,790 $80,853 e e o Geog ap y POPULATION DISTRIBUTION Age Distribution Age Group 2017 % of Total 2022 % of Total USA 2017 % of Total , % 27, % 18.8% , % 6, % 3.9% , % 15, % 9.8% , % 21, % 13.4% , % 45, % 25.7% , % 35, % 12.9% , % 84, % 15.5% Total 225, % 236, % 100.0% POPULATION DISTRIBUTION Age Distribution Age Group 2017 % of Total 2022 % of Total USA 2017 % of Total , % 23, % 18.8% , % 5, % 3.9% , % 12, % 9.8% , % 17, % 13.4% , % 35, % 25.7% , % 31, % 12.9% , % 94, % 15.5% Total 204, % 219, % 100.0% 14

20 Venice Area Demographics DEMOGRAPHIC CHARACTERISTICS 2010 Total Population 2017 Total Population 2022 Total Population % Change Selected Area USA 64, ,745,538 70, ,139,271 75, ,393, % 3.8% Average Household Income $72,323 $80,853 POPULATION DISTRIBUTION Age Distribution Age Group 2017 % of Total 2022 % of Total USA 2017 % of Total , % 5, % 18.8% , % 1, % 3.9% , % 3, % 9.8% , % 4, % 13.4% , % 9, % 25.7% , % 10, % 12.9% , % 42, % 15.5% Total 70, % 75, % 100.0% 15

21 SMH South County Market Share Total Inpatient Market Share Total 1-yr Q1-Q Q1-Q yr Q1-Q Q1-Q by Hospital Change % Share % Share Change South Sarasota County 19,644 18, Venice Regional 6,112 5, % 31.5% -0.4% Sarasota Memorial Hospital 5,528 5, % 26.5% 1.6% Fawcett 1,646 1, % 8.7% -0.3% Englewood 1,581 1, % 7.9% 0.1% Bayfront Port Charlotte 1,247 1, % 7.2% -0.9% Doctors Hospital 1, % 5.2% 0.1% Bayfront Punta Gorda % 1.2% 0.1% Source: Truven 16

22 Venice Market Share Total Inpatient Market Share Total 1-yr Q1-Q Q1-Q yr Q1-Q Q1-Q by Hospital Change % Share % Share Change Venice 7,512 7, Venice Regional 4,156 4, % 55.4% -0.1% Sarasota Memorial Hospital 1,677 1, % 21.1% 1.2% Doctors Hospital % 7.5% -0.2% Englewood % 2.1% -0.5% Fawcett % 0.6% 0.2% Lakewood Ranch % 0.8% -0.2% Bayfront Punta Gorda % 0.6% -0.1% Bayfront Port Charlotte % 0.5% -0.1% Source: Truven, Venice zip codes only 17

23 Venice Business Unit Summary Venice Competitive Q1-Q Q1-Q Position 1-yr Change Q1-Q % Share Q1-Q % Share 1-yr Change SMH Venice Market Share 2nd 1,677 1, % 21.1% 1.2% Cardiovascular 2nd % 18.5% 0.1% Gastro 2nd % 13.5% -0.2% Gen Medical 2nd % 12.6% 0.2% Gen Surgery 2nd % 18.3% -2.0% Neurosciences 2nd % 25.3% 2.1% Oncology 2nd % 26.8% -7.0% Ortho 3rd % 18.3% 4.2% Psychiatry 1st % 33.1% 0.9% Rehab 2nd % 8.2% 1.0% Urology 2nd % 10.2% 0.9% Women & Children 1st % 87.4% 3.4% Source: Truven, Venice zip codes only 18

24 Summary of South County Market Analysis Area Growth: Business and residential development in South Sarasota County Patient Service Growth: In FY2017, SMH and FPG provided care for over 140,000 patients from South Sarasota County Inpatient & Outpatient (SMH & FPG services) FY2016: 137,024 FY2017: 140,623 Community Perception & Reputation: Community perception study of South County residents shows strong preference to use SMH over all other area hospitals* Sarasota Memorial 43% Venice Regional 20% Fawcett 12% Englewood 8% Bayfront - Port Charlotte 8% Doctors Hospital 4% Bayfront - Punta Gorda 2% *Source: Percy and Company

25 Services to be Provided at Laurel Road Adult inpatient medical & surgical services General Medical & Surgical Intensive Care (ICU) Cardiovascular Orthopedic Neurology Obstetrics, Labor & Delivery Emergency Care Other major specialties Outpatient and Medical Office services Ancillary services such as imaging, rehabilitation, lab, etc. Community Specialty Clinic Physician offices Oncology services 20

26 Laurel Road Conceptual Site Study Steve Jackson, Flad Architects

27 Project Components 90 Bed, 315,000 SF Acute-Care Hospital 80 Bed Adult Medical/Surgery Rooms 10 Obstetric Labor, Delivery, Recovery, Postpartum Rooms 20 Bed Observation Unit 25 Emergency Care Treatment Rooms 600 Car Parking Deck 1,050 Car Surface Parking 25,000 SF Central Energy Plant 60,000 SF Medical Office Building Pedestrian Bridges to connect all aspects 22

28 Project Drivers 23

29 Stakeholder Sessions Connie Andersen, CNO Kelly Batista, Director, Cancer Institute Andy Beaudoin, Manager, Facilities Pam Beitlich, Director, Women/Children Services Deb Bohanon, Director, Imaging Services, Radiology Administration Jim Bugyis, Director, Operation & Plant Pat Burke, Lease Administrator, Property Management Lisa Collins-Brown, ER Director, Emergency Services Maria DeCarlo, VP of Post-Acute Services David Evans, Associate Chief Legal Officer Dr. Reuben Holland, Emergency Medicine Ashley Holmes, Administrative Fellow Dave Jungst, Pharmacy Director, Pharmacy, Pharmacy Carol Ann Kalish, Chief Legal Officer Ken LeBoutillier, Manager, Pharmacy Jean Lucas, ACNO Mike Martin, Director, Info Technology Danielle Mattox, Procurement Planner Robert Milano, Executive Director, Supply Chain Frank Morgan, Executive Director, Ambulatory Services Sue Olsen, Director, Critical Care Adeana Osika, Director, Hospitality Services Tom Perigo, Director, Architecture/Construction Dr. Jack Rodman, FPG Vice Pres/Chief Medical Officer Todd Sak, Business Manager, Hospitality Services Robert Santos, Director, Biomed Services Jeff Schwartz, Anesthesiology Diane Settle, Vice President, Revenue Cycle Michelle Shirey, Exec Dir, FPG Administration Peter Taylor, VP, Strategy & Business Development Harold Vore, Director, Laboratory Chris Warber, Construction Superintendent Leigh Wilcox, Community Relations Advisor Ashlyn Wooten, Procurement Specialist Jim Young, Sr Manager, Operating Room 24

30 Project Guiding Principles - Overview Community Engagement Consistency of care, reputation, and brand Patient access Scalability Innovative technology 25

31 Community engagement. Community Get community involved in process Provide community spaces and events Help them maintain their identity 26

32 Consistency of Care, Reputation and Brand. Continued Excellence Maintain delivery excellence across all campuses Maintain SMH Brand and Look Best hospital system in the region Seamless integration to main campus services 27

33 Patient access. Patient Access Clear Front Door Easy to Navigate Campus Easy Parking Bring SMH Quality of care to South County Easy Wayfinding Intuitive Transitions 28

34 Scalability. Design & Interiors Facility to be scalable Be mindful and purposeful with the strategy for expansion, including intuitive patient wayfinding Provide options for the campus to be flexible and ready for growth 29

35 Technology Embrace New Technology Opportunities Beta Test Site for System Current with proven, cutting edge patient care trends Innovative Technology. 30

36 Visioning Summary Flexible and expandable. Focus on patient and community. Use nature to enhance patient experience. Maximize site potential. 31

37 Fixed Site Components LAUREL ROAD PINEBROOK ROAD Secondary entrances Right in / right out only Existing tree grouping Existing tree grouping Primary Entrance High Power Lines Neighborhood Existing Wetland area to remain N 32

38 Site Plan 1 LAUREL ROAD 2 3 PINEBROOK ROAD 5 P Dedicated ED entry 7 1 P P P 2 P 8 4 Inpatient (Hospital) Outpatient (MOB) Emergency Department Parking Garage Ambulance Canopy Central Energy Plant Hospital Expansion Zone Pedestrian Bridge Service Area Central Water Feature stormwater P wetland N 33

39 Scale Comparison to the Existing Campus S Tamiami Trail Waldemere Street N 34

40 Preliminary Building Siting and Image INTERSTATE 75 35

41 Animation 36

42 Hospital Growth Considerations Central Energy Plant ED Expansio n Beds Expansion Parking Expansion 37

43 Site Growth Considerations LAUREL ROAD 1 Inpatient (Hospital) 2 Outpatient (MOB) stormwater 3 Emergency Department PINEBROOK ROAD Garage MOB 1 P 2 P P Parking Garage Ambulance Canopy Central Energy Plant Expansion Pedestrian Bridge Service Area Central Water Feature stormwater MOB 2/3 P P stormwater wetland N 38

44 Next Steps: Design Schedule Q4 CY 2017 Q1 CY 2018 Q2 CY 2018 Q3 CY 2018 Visioning Site Planning Study Master Planning Programming Conceptual Design Schematic Design To be Complete: September,

45 Project Expenses & Recommendation David Verinder, President & CEO

46 Project Expenses Q4 CY 2017 Visioning Q1 CY 2018 Q2 CY 2018 Q3 CY 2018 Site Planning Study $950,000 Master Planning Programming Conceptual Design Schematic Design $7,300,000 $8,250,000 41

47 Recommendation We respectfully request Finance Committee recommendation for Board approval to produce a master plan and schematic-level design and pricing documents for an expense not to exceed $8,250,000 from the approved FY2018 capital budget to further define the Laurel Road Hospital Campus. 42

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49 Sarasota Memorial Health Care System Finance Committee March 19, 2018 Moody s 2018 Outlook for Not-for-Profit and Public Healthcare DRAFT

50 Moody s 2018 Outlook For NFP and Public Healthcare In December 2017 Moody s published an industry report changing their outlook to Negative : Our negative outlook indicates our expectations for the fundamental credit conditions driving the not-for-profit and public healthcare sector over the next months. Moody s decision was based on their projections:» Operating cash flow will contract by 2%-4% in 2018.» Low reimbursement rates drive slowed revenue growth despite consistent volumes.» Expense pressures further compress margins.» Federal policy will have marginal near term direct impact, but continued uncertainty is credit negative. Heightened operating pressure will drive additional consolidations. Source: Moody s Outlook report dated

51 Moody s 2018 Outlook For NFP and Public Healthcare Operating cash flow will contract by 2%-4% in 2018: Operating cash flow declined at a more rapid pace than expected in 2017, and we expect continued contraction of 2%-4% through The cash flow spike from insurance expansion under the ACA in 2014 and 2015 has largely worn off, but cash flow has not stabilized as we had expected because of a low revenue/high expense growth environment. Top-line revenue growth is still strong, but diminished from previous years because of constrained reimbursement rate increases. Margins and operating cash flow will compress as expenses and bad debt continue to rise. Source: Moody s Outlook report dated

52 Moody s 2018 Outlook For NFP and Public Healthcare Low reimbursement rates drive slowed revenue growth despite consistent volumes: Revenue growth is slowing.. Hospitals have not been able to translate relatively stable volumes into stable revenue growth because of lower reimbursement rate increases across all insurance providers. In 2018, inpatient volume growth will remain low as care continues to shift to less costly outpatient services, and patients defer or make alternative choices because of higher deductibles and copays. A small rise in the percentage of uninsured population (see federal policy section) will also contribute to lower inpatient volumes. Source: Moody s Outlook report dated

53 Moody s 2018 Outlook For NFP and Public Healthcare Low reimbursement rates drive slowed revenue growth despite consistent volumes: Source: Moody s Outlook report dated

54 Moody s 2018 Outlook For NFP and Public Healthcare Expense pressures further compress margins: Nursing shortages, continued physician and medical specialist hiring, as well as technological investments are accelerating expense growth. Bad debt will grow in 2018 with high deductibles, rising copays, and contracting exchange enrollment because of changes in federal marketing. Rising costs will disproportionately affect small independent hospitals (less than $400 million in revenues) which represent 23% of the hospitals that we rate. These hospitals are at a disadvantage in negotiating with vendors as well as with attracting physicians. They have fewer financial resources and therefore it is difficult to match the salaries and benefits offered by larger urban systems. Source: Moody s Outlook report dated

55 Moody s 2018 Outlook For NFP and Public Healthcare Federal policy will have marginal near term direct impact, but continued uncertainty is credit negative: Federal healthcare policy actions to date will have a negative effect on a small segment of hospitals that we rate. Uncertainty around the Affordable Care Act (ACA) makes it very difficult for hospitals to effectively plan and model long-term strategies. The recent executive orders, CMS rulings and legislative proposals are largely credit negative, but with varying effect: Repeal of individual mandate Association health plans and expansion of short-term health plans ACA advertising and promotion Reductions to 340b drug program Source: Moody s Outlook report dated

56 Moody s 2018 Outlook For NFP and Public Healthcare Heightened operating pressure will drive additional consolidations: Mergers, acquisitions and strategic alliances will continue at a rapid pace, especially for rural or community hospitals and in markets with Medicaid cuts or declining commercial insurers. Healthcare continues to be a crowded and highly regulated market, which heightens competition and revenue pressure. Operating scale and efficiency have become increasingly important as hospitals look for ways to control expenses in light of low reimbursement rates and a continued shift to outpatient services from higher margin inpatient services. Source: Moody s Outlook report dated

57 Questions and Answers 9

58 Thank you for your support! 10

59 U.S. PUBLIC FINANCE OUTLOOK Not-for-profit and public healthcare - US 4 December outlook changed to negative due to reimbursement and expense pressures TABLE OF CONTENTS Operating cash flow will contract by 2%-4% in 2018 Low reimbursement rates drive slowed revenue growth despite consistent volumes Rapid expense growth and rising bad debt will further compress margins Federal policy to date has marginal direct effect, but continued uncertainty and recent tax proposals are credit negative Heightened operating pressure will accelerate consolidation What could change the outlook Moody s related publications Contacts Eva Bogaty VP-Sr Credit Officer eva.bogaty@moodys.com Daniel Steingart, CFA VP-Senior Analyst daniel.steingart@moodys.com Lisa Goldstein Associate Managing Director lisa.goldstein@moodys.com Kendra M. Smith MD-Public Finance kendra.smith@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA Our negative outlook indicates our expectations for the fundamental credit conditions driving the not-for-profit and public healthcare sector over the next months. We revised the US not-for-profit and public healthcare outlook to negative from stable based on our projections that operating cash flow will contract by 2%-4% over the next months. Revenue growth is under pressure because of very low reimbursement rate increases, an ongoing rise in government payors and a continued shift to high deductible plans. We expect rapid expense growth to outpace revenue growth with high labor costs, nursing shortages and rising bad debt.» Operating cash flow will contract by 2%-4% in Operating pressures are accelerating at hospitals because of low revenue growth and untamed expense growth.» Low reimbursement rates drive slowed revenue growth despite consistent volumes. Hospitals are unable to translate volume increases into stronger revenue growth because of below inflationary growth of reimbursement rates and rising bad debt.» Expense pressures further compress margins. Nursing shortages, continued physician and medical specialist hiring, as well as technological investments are accelerating expense growth. Bad debt will grow in 2018 with high deductibles, rising copays, and contracting exchange enrollment because of changes in federal marketing.» Federal policy will have marginal near term direct impact, but continued uncertainty is credit negative. Federal healthcare policy actions to date will have a negative effect on a small segment of hospitals that we rate. Uncertainty around the Affordable Care Act (ACA) makes it very difficult for hospitals to effectively plan and model long-term strategies. Recent federal tax proposals will also contribute to rising costs for hospitals.» Heightened operating pressure will drive additional consolidations. We expect that mergers and acquisitions will continue at a rapid pace as smaller and more rural hospitals struggle for financial stability.» What could change the outlook. Resumed operating cash flow growth of 0%-4% over a month period, after accounting for healthcare inflation, could drive a change to stable. A positive outlook could result from expectations of accelerated operating cash flow growth of more than 4% after inflation. Long-term resolution of federal policy or positive regulatory changes could result in a change in outlook.

60 U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE Operating cash flow will contract by 2%-4% in 2018 Operating cash flow declined at a more rapid pace than expected in 2017, and we expect continued contraction of 2%-4% through The cash flow spike from insurance expansion under the ACA in 2014 and 2015 has largely worn off, but cash flow has not stabilized as we had expected because of a low revenue/high expense growth environment (see Exhibit 1). Top-line revenue growth is still strong, but diminished from previous years because of constrained reimbursement rate increases. Margins and operating cash flow will compress as expenses and bad debt continue to rise. Exhibit 1 Projections for contracting operating cash flow underscore negative outlook Source: Moody's Investors Service Low reimbursement rates drive slowed revenue growth despite consistent volumes Revenue growth is slowing, and we expect it to remain slightly above medical inflation for hospitals and systems that we rate. Growth will be largely based on expansion strategies founded upon continued acquisitions, including outpatient sites and physician practices, rather than same store revenue growth. This projected level of growth would represent a steady three-year decline in revenue growth off a recent peak in 2015, and the slowest revenue growth since Hospitals have not been able to translate relatively stable volumes into stable revenue growth because of lower reimbursement rate increases across all insurance providers (see Exhibit 2). In 2018, inpatient volume growth will remain low as care continues to shift to less costly outpatient services, and patients defer or make alternative choices because of higher deductibles and copays. A small rise in the percentage of uninsured population (see federal policy section) will also contribute to lower inpatient volumes. Because our outlooks represent our forward-looking view on credit conditions that factor into our ratings, a negative (positive) outlook suggests that negative (positive) rating actions are more likely on average. However, the outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the country or sector, but rather our assessment of the main direction of credit fundamentals within the country, region or sector. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2 4 December 2017 Not-for-profit and public healthcare - US: 2018 outlook changed to negative due to reimbursement and expense pressures

61 U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE Exhibit 2 Low reimbursement rates compress revenue growth relative to volumes 2017 is estimated based on year-to-date financials from a sample of hospitals. Source: Moody's Investors Service Growth of governmental payors will dampen revenue growth for the foreseeable future due to a rapidly aging US population and low reimbursement rates. Most reimbursement rates will hover below medical inflation, which declined to a low 1.6% in September Governmental payors, including Medicare and Medicaid, represent 61% of gross patient revenue in 2016 (see Exhibit 3). Medicare, the majority revenue source, continues its multi-year trend of very low reimbursement rate increases, with inpatient admission rates growing by just 1.3% in Medicare growth has been low, in the 1%-2% range over the last several years, and is not expected to grow substantially in the near term. Medicaid reimbursement rates will vary by state, but with burgeoning Medicaid expenses, many states have begun to make cuts or are delaying payments. Exhibit 3 Increasing reliance on government payors will temper revenue growth % of gross patient revenue by payor type Source: Moody's Investors Service We estimate that commercial insurers, which represent about one-third of gross patient revenue, will raise rates at about inflation and lower insurance coverage. Many are also cutting services or increasing denials to control costs, often squeezing hospitals' higher margin service lines. For example, Anthem, Inc. (Baa2 stable, P-2) recently announced that it will no longer reimburse for certain MRI services at hospital-based centers due to high costs. Insurers and employees continue to shift costs to the patient through growth in high-deductible plans, which increases hospitals' copay collection burdens and will likely increase bad debt. 3 4 December 2017 Not-for-profit and public healthcare - US: 2018 outlook changed to negative due to reimbursement and expense pressures

62 U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE Rapid expense growth and rising bad debt will further compress margins Expense growth will remain higher than revenue growth, a key driver of operating cash flow contraction. Median expense growth is usually at around 5%-6%, but grew to recent peak of 7.2% in fiscal The key driver of expense growth through 2018 will continue to be high labor costs. Nursing shortages remain acute especially in urban centers, medical specialist fees are rising and hospitals continue to hire additional physicians. Recent upgrades of technological platforms and electronic medical records systems are increasingly requiring additional information technology staff as hospitals adapt processes and train staff on new systems. We expect supply costs to continue on a normal growth trend, with the recent spike in pharmaceutical costs subsiding over the near term. Pension costs will continue to grow for private hospitals with the federal government's pension guarantee agency (Pension Benefit Guaranty Corporation, or PBGC) premium step ups through Rising costs will disproportionately affect small independent hospitals (less than $400 million in revenues) which represent 23% of the hospitals that we rate. These hospitals are at a disadvantage in negotiating with vendors as well as with attracting physicians. They have fewer financial resources and therefore it is difficult to match the salaries and benefits offered by larger urban systems. Academic medical centers will continue to have higher expense growth rates than other not-for-profit hospitals, offset by stronger revenue growth. Some factors contributing to elevated expenses at AMCs include: high infrastructure investments to maintain strong research, elevated recruiting costs to attract faculty and medical specialists, and financial transfers to associated medical schools. Rising bad debt adds further pressure We expect bad debt to grow 6%-7% in 2018, up from 5% in 2017, and slightly higher than revenue growth adding to margin pressures (see Exhibit 4). Reduced federal marketing and promotion of the ACA's exchange marketplaces will marginally increase the number of uninsured people, causing bad debt to grow at a somewhat faster pace than last year. Rising copays and use of high deductible plans will increase bad debt for both expansion and non expansion states. Exhibit 4 Bad debt is growing as benefits from exchanges moderate Source: Moody's Investors Service Federal policy to date has marginal direct effect, but continued uncertainty and recent tax proposals are credit negative The Trump administration has issued several executive orders that perpetuate the uncertainty around longer term stability of the individual marketplaces for health insurance, known as the exchanges. The recent actions would be largely credit negative for not-forprofit hospitals, but the immediate effect will be muted because most insurance premium rates are in place through 2018, and the populations affected by these orders are relatively small. However, although we anticipate that any changes to policy will be rolled out slowly, the prolonged uncertainty around the future of federal policy creates a difficult environment for long-term planning. The recent executive orders, CMS rulings and legislative proposals are largely credit negative, but with varying effect: 4 4 December 2017 Not-for-profit and public healthcare - US: 2018 outlook changed to negative due to reimbursement and expense pressures

63 U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE» Repeal of individual mandate: A repeal of the individual mandate has been included in tax reform legislation. A repeal would cause some individuals to forgo insurance; a larger uninsured population would raise uncompensated care costs for hospitals, which is credit negative.» Association health plans and expansion of short-term health plans: The order to consider proposing new rules or revising existing ones to ease regulations on association health plans and expand the definition of short-term health insurance, which is not subject to ACA rules, will not have an immediate effect. Any changes developed would take several months to draft and enact. However, if introduced, the 10 million to 12 million unsubsidized individuals now in the ACA marketplaces or on the exchange could be swayed to lower cost, less comprehensive health insurance plans. This would have a negative impact on hospitals, driving up uncompensated care costs as fewer services are covered by non-aca compliant plans.» ACA advertising and promotion: The shorter enrollment period and greatly reduced marketing budget for the ACA insurance exchanges will result in a modest uptick of uninsured in A larger uninsured population would raise uncompensated care costs for hospitals, which is credit negative.» Cost-sharing reduction (CSR): The administration's order would end the federal government's about $7 billion of CSR reimbursement payments to insurers that provide ACA-mandated subsidies of out-of-pocket costs and deductibles for certain lowincome exchange enrollees. About 80% of people on the exchanges are subsidized. This change would primarily affect the 20% who are not subsidized, leading to higher insurance premiums, which is credit negative for not-for-profit hospitals because individuals may chose to discontinue coverage.» Disproportionate Share Hospital (DSH) program: The Medicaid DSH program was cut by $2 billion, effective October 1, 2017, with additional cuts scheduled to take place each year over the next eight years. Medicare DSH payments are rising a very low 0.7%. The greatest impact will be felt largely by safety-net hospitals whose uncompensated care will increase.» Children's Health Insurance program (CHIP): Potential discontinuation of CHIP would impact about 9 million children and mothers. The largest impact would be to children's hospitals, which tend to have very strong fundraising and balance sheets to help offset near-term revenue loss.» Reductions to 340b drug program: The recently enacted 30% reduction to Medicare Part B drug reimbursement to 340B hospitals will not, on its own, have a material effect on most not-for-profit hospitals. However, the reductions will be a significant challenge for hospitals with low financial flexibility to absorb small revenue changes. We estimate that total 340B savings for all covered entities was about $6.9 billion in 2016.» Tax proposals: Recent tax proposals from the House and Senate would be credit negative for not-for-profit healthcare. If enacted, the changes would drive up the cost of capital, contributing to greater merger and acquisition activity. Smaller hospitals would be less able to afford higher interest rate costs in the taxable market, and in order to meet capital needs, would likely look to find partners. Heightened operating pressure will accelerate consolidation Mergers, acquisitions and strategic alliances will continue at a rapid pace, especially for rural or community hospitals and in markets with Medicaid cuts or declining commercial insurers. Healthcare continues to be a crowded and highly regulated market, which heightens competition and revenue pressure. Operating scale and efficiency have become increasingly important as hospitals look for ways to control expenses in light of low reimbursement rates and a continued shift to outpatient services from higher margin inpatient services. Large hospital systems and high-acuity academic medical centers that are associated with strong universities continue to fare better because of economies of scale and brand recognition. Rural hospitals are struggling and are likely to be increasingly acquired by major systems in nearby urban hubs. Recent consolidation among physician groups and the reentry of physician management companies that are acquiring large independent physician groups will also heighten competitive pressures. As part of a larger organization, these physician companies have greater negotiating leverage with payors and hospitals for contracted rates. Optum, a division of United Healthcare (A3 stable, P-2) has been buying physician groups and ambulatory centers across the US and in early 2017, purchased Surgical Care Affiliates, the largest operator of free-standing surgical centers in the US. 5 4 December 2017 Not-for-profit and public healthcare - US: 2018 outlook changed to negative due to reimbursement and expense pressures

64 U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE What could change the outlook Our outlook could return to stable if the operating environment improves, bringing stronger revenue growth and stabilization of expense growth. Resolution of federal healthcare policy that leads to more long-term funding certainty could also result in a stable outlook. We would consider changing the outlook to stable if we were to expect resumed operating cash flow growth of 0%-4%. We would consider changing our outlook to positive with projection of sustained strong operating cash flow growth of above 4%, robust economic expansion, and expectations of material improvement of reimbursement rates or federal policy changes that improve reimbursements. Moody s related publications Outlooks:» Cross-Sector - Global: 2018 Outlook: Credit conditions improve as healthy economic growth moderates financial stability and political risks, November 2017» Global Macroeconomic Update ( ): Broadening emerging market recovery and stable growth in advanced economies, November 2017» Sovereigns Global: 2018 outlook stable as healthy growth tempers high debt, geopolitical tensions, November 2017 Sector In-Depths:» Cross-Sector - US - FAQ on credit implications of recent executive actions on healthcare» Not-for-profit and public healthcare, Pharmaceuticals - US - Drug price increases abate, but potential 340B change would hurt hospital margins» Not-for-profit and public healthcare - US Medians - Key financial metrics underperform as pressures mount» State Government - US - Medicaid Pressures State Budgets With or Without Federal Policy Changes To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 6 4 December 2017 Not-for-profit and public healthcare - US: 2018 outlook changed to negative due to reimbursement and expense pressures

65 U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE Endnotes 1 US Bureau of Labor Statistics CPI-All Urban Consumers 2 CMS finalizes 2018 payment and policy updates for Medicare hospital admissions, Centers for Medicare & Medicaid Services, August 2, December 2017 Not-for-profit and public healthcare - US: 2018 outlook changed to negative due to reimbursement and expense pressures

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