Lucile Salter Packard Children s Hospital at Stanford Consolidated Financial Statements and Accompanying Consolidating Information August 31, 2017

Transcription

1 Lucile Salter Packard Children s Hospital at Stanford Consolidated Financial Statements and Accompanying Consolidating Information

2 Index Page(s) Report of Independent Auditors... 1 Consolidated Financial Statements Consolidated Balance Sheets... 2 Consolidated Statements of Operations and Changes in Net Assets... 3 Consolidated Statements of Cash Flows Report of Independent Auditors on Accompanying Consolidating Information Consolidating Balance Sheets Consolidating Statements of Operations and Changes in Net Assets Note to Accompanying Consolidating Information... 42

3 To the Board of Directors Lucile Salter Packard Children s Hospital at Stanford Report of Independent Auditors We have audited the accompanying consolidated financial statements of Lucile Salter Packard Children s Hospital at Stanford ( LPCH ), which comprise the consolidated balance sheets as of August 31, 2017 and 2016, and the related consolidated statements of operations and changes in net assets and of cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to LPCH's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of SHC's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lucile Salter Packard Children s Hospital at Stanford as of August 31, 2017 and 2016, and the results of its operations and changes in net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. December 5, 2017 PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA T: (415) , F: (415) ,

4 Consolidated Balance Sheets Assets Current assets Cash and cash equivalents $ 406,683 $ 532,900 Patient accounts receivable, net of allowance for doubtful accounts of $13,214 and $11,670 in 2017 and 2016, respectively 287, ,174 Contributions receivable 49,132 32,944 Other receivables 29,634 34,060 Prepaid expenses, inventory and other 19,255 17,497 Total current assets 792, ,575 Investments 86,565 70,642 Investments in University managed pools 669, ,151 Board designated funds in University managed pools and other 124,148 9,214 Assets limited as to use, held by trustee 33, Property and equipment, net 1,730,108 1,429,316 Beneficial interest in trusts, net 24,052 15,048 Contributions receivable, net of current portion 113,193 82,707 Equity method investments and other assets 67,838 58,601 Total assets $ 3,641,113 $ 3,150,473 Liabilities and Net Assets Current liabilities Accounts payable and accrued liabilities $ 151,713 $ 151,224 Accrued salaries and related benefits 59,132 62,712 Due to related parties 79,718 34,189 Third-party payor settlements 2,443 1,849 Current portion of long-term debt and capital leases 5,800 5,695 Self-insurance reserves and other liabilities 9,579 8,612 Total current liabilities 308, ,281 Self-insurance reserves and other liabilities, net of current portion 33,327 32,837 Long-term debt, net of current portion 875, ,455 Total liabilities 1,217, ,573 Commitments and contingencies (Note 16) Net assets Unrestricted 1,545,390 1,411,433 Temporarily restricted 651, ,119 Permanently restricted 227, ,348 Total net assets 2,424,064 2,196,900 Total liabilities and net assets $ 3,641,113 $ 3,150,473 The accompanying notes are an integral part of these consolidated financial statements. 2

5 Consolidated Statements of Operations and Changes in Net Assets Years Ended The accompanying notes are an integral part of these consolidated financial statements Operating revenues Net patient service revenue before provision for doubtful accounts $ 1,392,486 $ 1,310,951 Provision for doubtful accounts, net (7,657) 2,433 Net patient service revenue after provision for doubtful accounts 1,384,829 1,313,384 Other revenue 77,666 65,089 Net assets released from restrictions used for operations 24,363 23,829 Total operating revenues 1,486,858 1,402,302 Operating expenses Salaries and benefits 659, ,503 Professional services 17,831 18,655 Supplies 119, ,386 Purchased services 509, ,459 Other 127, ,223 Depreciation and amortization 66,635 56,454 Total operating expenses 1,499,564 1,363,680 (Loss)/Income from operations (12,706) 38,622 Interest income 2,953 2,351 Income and gains from University managed pools and other 55,848 9,076 Loss on extinguishment of long term debt - (1,114) Other (500) (500) Excess of revenues over expenses 45,595 48,435 Net assets released from restrictions used for purchases of property and equipment Transfer of net investment loss on certain endowments - (10) Adjustment for minimum pension liability (721) 1,385 Transfers to University and other (20,866) (15,447) Contribution received in acquisition 109,794 - Increase in unrestricted net assets 133,957 34,390 Changes in temporarily restricted net assets Contributions and other 67, ,868 Income and gains from University managed pools 34,764 9,987 Change in value of beneficial interest in remainder trusts Net assets released from restrictions for operations (24,363) (23,829) Purchase of property and equipment (155) (27) Transfers to University and other (1,132) (283) Increase in temporarily restricted net assets 77, ,880 Changes in permanently restricted net assets Contributions and other 14,256 7,669 Change in value of beneficial interest in remainder trusts 400 1,255 Transfers from/(to) University and other 1,125 (1,981) Increase in permanently restricted net assets 15,781 6,943 Increase in net assets 227, ,213 Net assets Beginning of year 2,196,900 2,039,687 End of year $ 2,424,064 $ 2,196,900

6 Consolidated Statements of Cash Flows Years Ended Cash flows from operating activities Change in net assets $ 227,164 $ 157,213 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization 64,433 55,001 Loss on extinguishment of long term debt - 1,114 Premium received related to bond issuance 29,069 14,447 Provision for doubtful accounts 7,657 (2,433) (Gains)/Loss from University managed pools (57,761) 5,274 (Gains) from Investments (13,012) (1,460) Contributions and investment income restricted by donors (92,085) (30,043) Distributions more than undistributed earnings from investees 2,197 1,437 Contribution received in acquisition (109,794) - Changes in operating assets and liabilities Patient accounts receivable, net (26,976) 6,027 Contributions receivable 76,673 (82,880) Due to/from related parties (68,132) 15,429 Other receivables, inventory, other assets, prepaid expenses and other (7,376) (14,739) Accounts payable and accrued liabilities 4,015 8,855 Accrued salaries and related benefits (5,786) (2,567) Third-party payor settlements 594 (118) Self-insurance and other liabilities 1,457 (477) Cash provided by operating activities 32, ,080 Cash flows from investing activities Cash received in acquisition 13,290 - Purchases of investments in University managed pools and other (37,148) - Sales of investments in University managed pools and other 37, ,000 Purchase of investment for assets limited as to use (226,886) (113,458) Decrease in assets limited as to use 194, ,871 Purchases of property and equipment (383,719) (373,743) Cash used in investing activities (403,178) (14,330) Cash flows from financing activities Payment of long term debt (5,695) (5,705) Cost of issuance related to debt issuance (2,183) (1,188) Proceeds from issuance of long term debt 200, ,000 Contributions and investment income restricted by donors 73,839 24,280 Transfers to related parties (21,337) (36,138) Cash provided by financing activities 244,624 81,249 Net (decrease)/increase in cash and cash equivalents (126,217) 196,999 Cash and cash equivalents Beginning of year 532, ,901 End of year $ 406,683 $ 532,900 Supplemental disclosures of cash flow information Interest paid, net of amounts capitalized $ 9,278 $ 10,950 Noncash activities Accounts payable related to purchases of property and equipment 17,104 33,071 Transfer of permanent restricted contribution from related party - 5,985 Accrual of net assets transfer to related parties - 2,718 Issuance of refunding bonds - 91,931 Defeasance of 2008 Notes - (90,290) Donated securities received 7,891 - Net assets received in acquisition 96,503 - Net earnings allocated to accounts payable and accrued expenses The accompanying notes are an integral part of these consolidated financial statements. 4

7 1. Organization Lucile Salter Packard Children s Hospital at Stanford ( LPCH ) operates a licensed acute care pediatric and obstetric hospital on the Leland Stanford Junior University ( University ) campus in Palo Alto, California and operates several inpatient care units on its license in nearby community hospitals. LPCH also operates outpatient physician clinics in its facilities and other community settings. The Board of Trustees of the University is the sole corporate member of LPCH and Stanford Health Care ( SHC ). LPCH has 4,069 full time and part time employees as of August 31, LPCH and SHC are the primary clinical affiliates of the Stanford University School of Medicine (the Stanford School of Medicine ) for internship and residency programs, clinical research and other programs that support the Stanford School of Medicine s academic mission. Within the Stanford School of Medicine, the Pediatric and Obstetrics Faculty Practice Organization ( FPO ) exists to advance the missions of the Stanford School of Medicine and LPCH where they intersect in the delivery of professional medical services. The related party transactions between LPCH, SHC, the University and the Stanford School of Medicine are described further in Note 14. In 2011, LPCH, together with the Stanford School of Medicine, formed Packard Children s Health Alliance ( PCHA ), a non-profit medical foundation corporation, which affiliated with Packard Medical Group, Inc. (the Packard Medical Group ), a physician-owned for-profit California professional corporation. The Stanford School of Medicine and LPCH are the members of PCHA, and appoint directors to the governing board. The bylaws of PCHA afford control of PCHA to LPCH and therefore, the activities of PCHA have been included in the consolidated financial statements of LPCH. LPCH has recorded PCHA s results of operations as an investment in PCHA and it is eliminated in consolidation. There is a professional services agreement between PCHA and Packard Medical Group. Physicians who provide services through PCHA are all and must be employees of the Packard Medical Group and PCHA assumes responsibility for all aspects of the physicians practice, including employee practice staff. PCHA has been organized to operate community based pediatric specialty and subspecialty and obstetrics practices throughout the Bay Area. The objectives of PCHA are to support the overall network by building a presence in growing service areas, expanding education and clinical research programs and enhancing the quality and coordination of care across different care settings. As of August 31, 2017, PCHA includes approximately 166 physicians and other providers in 25 practices located around the San Francisco Bay Area. PCHA also operates five specialty services centers in Capitola, Emeryville, Fremont, Monterey and Walnut Creek. LPCH has entered into a sponsorship agreement with PCHA, wherein LPCH has agreed to provide funding for the development and the operation of PCHA s physician practices. LPCH, together with PCHA, the Packard Medical Group and the FPO, comprise and are known in the marketplace as Stanford Children s Health. Effective September 1, 2016, LPCH became the sole member of Lucile Packard Foundation for Children s Health ( LPFCH ), a public charity, founded in 1996, whose mission is to elevate the priority of children s health and increase the quality and accessibility of children s healthcare through leadership and direct investment. LPFCH pursues its mission through two distinct and 5

8 complementary programs: (1) fundraising (development) for LPCH and the pediatric programs at the Stanford School of Medicine and (2) grant-making and public information and educational programs to promote the health and well-being of children through statewide and local partnerships and to raise awareness about children s health issues. The bylaws of LPFCH afford control of LPFCH to LPCH and therefore, the activities of LPFCH in FY17 are included in the consolidated financial statements and footnotes of LPCH. Effective September 1, 2002, LPCH and SHC entered into an agreement whereby LPCH became a member of the Stanford University Medical Indemnity Trust ( SUMIT ), a not-for-profit, tax-exempt corporation that is a captive insurance carrier. SUMIT Holding International, LLC ( SHI ) is the sole owner of SUMIT Insurance Company Ltd. ( SUMIT ) and Stanford University Medical Network Risk Authority, LLC ( SRA ). SHC and LPCH are the owners of SHI. LPCH s share of SUMIT net assets was approximately 20.3% and 21.6% for the years ended, respectively. LPCH s ownership in SUMIT is accounted for using the equity method. As of, LPCH had an investment of $16,269 and $16,244 in SUMIT, respectively, which is reflected on the Consolidated Balance Sheets in equity method investments and other assets. SRA was formed on September 19, 2012 and began operations on December 1, SRA provides risk management services to SHI, the owners of SHI and other affiliated and unaffiliated parties and serves as attorney-in-fact to Professional Exchange Insurance Company ( PEAC ). LPCH s ownership interest in SRA was 18% for the year ended. LPCH s ownership in SRA is accounted for using the equity method. LPCH s investment in SRA was a loss of $110 and $59 for year ended, respectively, which is reflected on the consolidated balance sheets in other assets. Professional Exchange Insurance Company ( PEAC ), a captive insurance carrier that entered into business with SRA on October 18, 2012, provides professional liability insurance coverage for physicians and other licensed healthcare practitioners of PCHA, University Healthcare Alliance (a subsidiary of SHC) and other affiliated parties. PCHA s share of net assets in PEAC was 28.6% and 29.4% for the year ended, respectively. PCHA s ownership in PEAC is accounted for using the equity method. PCHA had an investment of $1,309 and $856 or the years ended, respectively, which is reflected on the Consolidated Balance Sheets in equity method investments and other assets. On September 1, 2006, LPCH and the University entered into a Professional Services Agreement ( PSA ) pursuant to which the University assigned to LPCH the right to bill and collect all revenue related to pediatric and obstetric practices on behalf of the Stanford School of Medicine. The latest amendment was adopted as of September 1, Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements are prepared on the accrual basis of accounting. Certain reclassifications and changes in presentation were made in the 2016 consolidated financial statements to conform to the 2017 presentation as a result of adoption of recent accounting pronouncements. 6

9 Net assets of LPCH and subsidiaries and changes therein have been classified and are reported as follows: Unrestricted net assets Unrestricted net assets represent those resources of LPCH and subsidiaries that are not subject to donor-imposed stipulations. The only limits on unrestricted net assets are broad limits resulting from the nature of LPCH and subsidiaries and the purposes specified in its articles of incorporation or bylaws and limits resulting from contractual agreements, if any. Temporarily restricted net assets Temporarily restricted net assets represent contributions, which are subject to donor-imposed restrictions that can be fulfilled by actions of LPCH pursuant to those stipulations or by the passage of time. Permanently restricted net assets Permanently restricted net assets represent contributions that are subject to donor-imposed restrictions that they be maintained by LPCH in perpetuity. Generally, the donors of these assets permit LPCH to use all or part of the investment return on these assets. Expenses are reported as decreases in unrestricted net assets. Donor-imposed restrictions expire when the stipulated time period has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. Temporarily restricted contributions are recorded as temporarily restricted net assets when received and when the restriction expires, the net assets are shown as released from restriction in the Consolidated Statements of Operations and Changes in Net Assets. Income earned on temporarily restricted or permanently restricted net assets for which that income is restricted for a stipulated purpose is recorded in temporarily restricted net assets. When income is made available for release and when the restriction is deemed to have been met, those amounts are included in net assets released from restrictions in the Consolidated Statements of Operations and Changes in Net Assets. Transfers to Related Parties Certain amounts previously received from donors have been transferred to related parties. Cash and Cash Equivalents Cash and cash equivalents consist primarily of demand deposits and money market mutual funds with an original maturity of three months or less when purchased. These amounts are carried at cost which approximates fair value. The Federal Deposit Insurance Corporation, or FDIC, insures a corporation s funds deposited in a bank up to a maximum of $250 in the event of a bank failure. As of August 31, 2017, our cash and cash equivalents held in bank deposits exceeded the FDIC insured amount. We have not experienced any losses in relation to cash and cash equivalents in excess of FDIC insurance limits. Assets Limited as to Use, Held by Trustee Assets limited as to use primarily include assets held by trustees under bond indenture agreements. The bond indenture terms require that the trustee control the disbursement of bond proceeds for capital projects. Assets limited as to use consist of money market funds for the year ended, respectively. Fair values are based on quoted market prices or broker or dealer price quotations on a specific identification basis. 7

10 Contributions Receivable Contributions are recorded at fair value at the date the promise is received. Donations for specific purposes are reported as either temporary or permanently restricted net assets and are included as restricted contributions. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved and applicable to the years in which the promises are received, and recorded in their respective net asset category. The discount rates used during the year ended were determined using the average corporate AAA bond rate as of the fund s gift date. Amortization of the discount is included in contribution revenue in the Consolidated Statements of Operations and Changes in Net Assets. Conditional promises to give are recognized when the condition is substantially met. Other Receivables Other receivables are comprised of nonpatient related receivables for medical services provided. Investments Investments held directly by LPCH and its subsidiaries consist primarily of mutual funds classified as trading securities and are stated at fair value. Investment earnings (including realized gains and losses on investments, interest, dividends and impairment loss on investment securities) are included in income and gains from University managed pools and other in the Consolidated Statements of Operations and Changes in Net Assets unless the income or loss is restricted by donor or law. Income on investments of donor restricted funds is added to or deducted from the appropriate net asset category based on the donor s restriction. Investments in University Managed Pools Investments in University managed pools consist of funds invested in the University s Merged Pool ( MP ). The value of its share of the MP is determined by the University, and is based upon the fair value of the underlying assets held in the MP. Earnings include distributions and increases or decreases in the value of LPCH s share of the pool. LPCH may deposit funds in the MP at its discretion; however, withdrawals require advance notice. All investment gains and losses and the increases or decreases in the share value are treated as unrealized and included in the excess of revenues over expenses, unless the income is restricted by donor or law. Board Designated Funds LPCH s board of directors approved designating $213,111 in 2014 for future investment in facilities, programs, and services over which the Board retains control and may at its discretion subsequently use for other purposes. As of August 31, 2017, the remaining balance of board designated funds was $10,736. These funds are primarily invested in the MP and were funded from cash and cash equivalents. In accordance with the instructions of the Board, investment returns earned on board designated funds are treated as unrestricted income with the principal to remain intact until required for future investment in facilities, programs, and services. LPFCH has board designated funds approved by LPFCH s board of directors for long term investments. As of August 31, 2017, the balance of LPFCH board designated funds was $113,412. These funds are invested in a manner that is intended to provide an inflation-adjusted total return, net of investment management fees, at least equal to the contemplated spending rate of 5% over time. 8

11 Beneficial Interest in Trusts Beneficial interest in trust represent gifts for which LPCH or LPFCH is the trustee and the remainder beneficiary of certain charitable remainder trusts, where the trust assets are invested and administered by outside trustees. Beneficiaries sustain a lifetime interest in a portion of the trust income. Investments held in these trusts are carried at fair value. The discount rate used during the year ended were determined using the T-bill rate. The related liabilities are based on estimated future cash receipts discounted at 2.14% and 1.46% for the year ended, respectively. Additionally, LPCH is the sole beneficiary of a perpetual trust that is carried at the fair market value of the trust. Income from the trust (interest, net of fees) is distributed to LPCH and included in interest income. Property and Equipment Property and equipment are stated at cost except for donated assets, which are recorded at fair market value at the date of donation. LPCH and its subsidiaries capitalize certain internal costs of computer software developed or obtained for internal use. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives, which are as follows: Land improvements Buildings and improvements Equipment Ground leases 5 to 20 years 5 to 40 years 3 to 20 years 57 years Significant replacements and improvements are capitalized, while maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. Upon sale or disposal of property and equipment, the cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the Consolidated Statements of Operations and Changes in Net Assets. Assets under capital leases are recorded at the present value at the inception of the lease and are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. The amortization of assets recorded under capital leases is included in depreciation and amortization expense in the accompanying Consolidated Statements of Operations and Changes in Net Assets. LPCH and its subsidiaries hold several ground leases, also classified as property and equipment. These ground leases are amortized on a straight-line basis over the term of the leases and are reflected as depreciation and amortization in the Consolidated Statements of Operations and Changes in Net Assets. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized, net of any interest earned, as a component of the cost of acquiring the asset. Impairment and Disposition of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at 9

12 the lower of the carrying amount or fair value less costs to sell. There were no impairment losses for the years ended. Equity Method Investments and Other Assets Equity method investments and other assets includes ownership interest in SUMIT, SRA, PEAC, and four third-party investments in hospital related joint ventures, deposits with vendors, and goodwill. Investments in hospital related joint ventures where LPCH owns between 20 and 50 percent are accounted for under the equity method as LPCH has the ability to exercise significant influence over operating and financial policies of the joint venture. Equity method investments comprises $48,596 and $41,271 of equity method investments and other assets on the Consolidated Balance Sheets as of, respectively. Earnings from equity method investments were $10,074 and $11,837 in other revenue in the Consolidated Statements of Operations and Changes in Net Assets in the periods ended. In relation to goodwill, LPCH performs an impairment analysis at the reporting unit level when events occur that require an evaluation to be performed, or at least annually in the fourth quarter. If the carrying value of goodwill or indefinite lived intangible assets are determined to be impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, then the carrying value is reduced, including any allocated goodwill, to fair value. Estimates of fair value are based on appraisals, established market prices for comparative assets or internal estimates of future net cash flows based on projected performance, depending on circumstances. No impairment of goodwill is included in the accompanying Consolidated Statement of Operations and Changes in Net Assets for the years ended August 31, 2017 or Compensated Absences In accordance with formal policies concerning vacation and other compensated absences, accruals of $42,747 and $40,305 were recorded as of, respectively, and are included in accrued salaries and related benefits. Long-Term Debt Premiums arising from the original issuance of long-term debt are amortized on a straight-line basis, which approximates the effective interest method, over the life of the debt. The unamortized portion of these premiums is included in long-term debt. Deferred debt issuance costs represent costs incurred in conjunction with the issuance of LPCH s long-term debt. These costs are amortized on a straight-line basis, which approximates the effective interest method, over the life of the debt. Excess of Revenues Over Expenses The Consolidated Statements of Operations and Changes in Net Assets include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses include permanent transfers of assets to and from affiliates for other than goods and services, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets), adjustment for minimum pension liability, and transfer of funds related to underwater endowments. Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors including Medi-Cal and others for services rendered. The contractual 10

13 commitments and laws and regulations governing the payment for services for government (Medi- Cal and Medicare) and commercial payors are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. The process for estimating the ultimate collectability of receivables involves historical collection experience, changes in contracts with payors, and significant assumptions and judgment. LPCH and its subsidiaries have implemented a standardized approach to this estimation based on the payor classification and age of outstanding receivables. Account balances are written off against the allowance when management believes it is probable the receivable will not be recovered. The use of historical collection experience is an integral part of the estimation of the reserve for doubtful accounts. Revisions in the reserve for doubtful accounts are recorded as adjustments to the provision for doubtful accounts. Charity Care and Community Benefits LPCH provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Amounts determined to qualify as charity care are not reported as net patient service revenue. LPCH also provides services to patients under Medi-Cal and other publicly sponsored programs, which reimburse at amounts less than the cost of the services provided to the recipients. Such amounts are considered community benefits. Self-Insurance Reserves and Other Liabilities LPCH self-insures for professional liability risks, postretirement medical benefits, health, dental and vision, and workers compensation. These liabilities are reflected as self-insurance reserves on the Consolidated Balance Sheets. Professional Liability LPCH is self-insured through SUMIT (LPCH and SHC Captive Insurance Company) for medical malpractice and general liability losses under claims-made coverage. LPCH also maintains professional liability reserves for claims not covered by SUMIT which totals $1,828 and $1,761 for the years ended, respectively. For the policy years September 1, 2016 to September 1, 2017, SUMIT retains 100% of the risk related to the first $15,000 per occurrence subject to $25,000 aggregate. In FY2017, SUMIT purchased a "buffer" that reduces SUMIT's liability for the first claim from $15,000 to $10,000 and reduces the aggregate from $25,000 to $20,000. The next $165,000 is transferred to various reinsurance companies rated A or better by AM Best rating agency. For the policy years September 1, 2014 to September 1, 2015, SUMIT retained 100% of the risk related to the first $15,000 per occurrence subject to $25,000 aggregate. The next $150,000 was transferred to various reinsurance companies rated A or better by AM Best rating agency. Postretirement Medical Benefits Liabilities for post-retirement medical claims for current and retired employees are actuarially determined by SHC and allocated to LPCH. Health, Dental and Vision Liabilities for health, dental and vision claims for current employees are based on estimated costs. Workers Compensation LPCH purchases insurance for workers compensation claims with a $750 deductible per occurrence. Workers compensation insurance provides statutory limits 11

14 for the State of California. An actuarial estimate of retained losses (or losses retained within the deductible) has been used to record a liability. Fair Value of Financial Instruments Due to the short-term nature of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and accrued salaries and related benefits, their carrying value approximates their fair value. Transactions with the University LPCH enters into various transactions with the University. LPCH records expense transactions where direct and incremental economic benefits are received by LPCH. Certain expenses are allocated from the University to LPCH. Allocated expenses reported as operating expenses in the Consolidated Statements of Operations and Changes in Net Assets are management s best estimates of LPCH s arms-length payment of such amounts for its market specific circumstances. To the extent that payments to the University exceed an arms-length estimated amount relative to the benefit received by LPCH, they are recorded as transfers to the University. Concentration of Credit Risk Financial instruments, which potentially subject LPCH and its subsidiaries to concentrations of credit risk, consist principally of cash and cash equivalents, patient accounts receivable, and investments in University managed pools and other (Note 9). LPCH and its subsidiaries invest its cash and cash equivalents in highly rated financial instruments including insured deposits. As of August 31, 2017, LPCH and its subsidiaries have invested its cash and cash equivalents with a financial institution in excess of federal depository insurance limits. LPCH and its subsidiaries concentration of credit risk relating to patient accounts receivable is limited by the diversity and number of the patients and payers. Patient accounts receivable consists of amounts due from governmental programs, commercial insurance companies, private pay patients, and other group insurance programs. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to patient accounts receivable allowances and self-insurance reserves. Actual results may differ from those estimates. Income Taxes LPCH, PCHA, and LPFCH are California not-for-profit corporations and have been recognized as tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code. Recent Accounting Pronouncements LPCH and its subsidiaries adopt new standards on a consolidated basis. The Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) is the sole source of authoritative nongovernmental U.S. generally accepted accounting principles. 12

15 Pension services costs - In March 2017, the FASB issued an ASC update which requires that an employer report the service cost component of pension costs in the same line item as employee compensation costs within operating income. The other components of net benefit cost are required to be presented in the Consolidated Statement of Operations and Changes in Net Assets separately from the service cost component and outside a subtotal of income from operations, and will not be eligible for capitalization. The guidance is effective for LPCH during the fiscal year ending August 31, LPCH is currently evaluating the impact that this guidance will have on the consolidated financial statements. Consolidation - In January 2017, the FASB issued an ASC update which reinstates the presumption that a not-for-profit ( NFP ) entity that is a general partner controls a limited partnership. The amendments in this update also add guidance on when an NFP limited partner should consolidate a for-profit limited partnership. The guidance is effective for LPCH and its subsidiaries during the fiscal year ending August 31, LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on the consolidated financial statements. Statement of cash flows - In November 2016, the FASB issued an ASC update which requires that the amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-ofperiod total amounts shown on the statement of cash flows. The new guidance is effective for fiscal year LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on the consolidated financial statements. In August 2016, the FASB issued an ASC update which intends to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance is effective for fiscal year LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on the consolidated financial statements. Non-for-profit reporting - In August 2016, the FASB issued an update to the ASC which makes several modifications to the current reporting requirements for not-for-profit (NFP) entities. The ASC update changes the way NFPs classify net assets and results in significant changes to financial reporting and disclosures for NFPs. The new guidance is effective for fiscal year 2019 for LPCH and its subsidiaries. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. Leases - In February 2016, the FASB issued an update to the ASC which requires lessees to recognize operating and financing lease liabilities and corresponding right-of use assets on the balance sheet. The new guidance is effective for fiscal year 2020 for LPCH and its subsidiaries. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. Revenue recognition - In March 2016, the FASB issued an update to the ASC which clarifies the implementation guidance on principal versus agent considerations. This guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new guidance is effective for fiscal year 2019 for LPCH and its subsidiaries. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. In May 2014, the FASB issued an update to the ASC to improve the consistency of revenue recognition practices across industries for economically similar transactions. Subsequently, the FASB has issued several amendments and updates to the original standard. The core principle is 13

16 that an entity recognizes revenue for goods or services to customers in an amount that reflects the consideration it expects to receive in return. The guidance is effective for fiscal year LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. Debt issuance costs - In April 2015, the FASB issued an update to the ASC which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The new guidance is effective for fiscal year 2017 for LPCH. LPCH has adopted this guidance in fiscal year

17 3. Business Acquisitions Effective September 1, 2016, LPCH became the sole member of Lucile Packard Foundation for Children s Health ( LPFCH ), a public charity, founded in 1996, whose mission is to elevate the priority of children s health and increase the quality and accessibility of children s healthcare through leadership and direct investment. LPFCH pursues its mission through two distinct and complementary programs: (1) fundraising (development) for LPCH and the pediatric programs at the Stanford School of Medicine and (2) grant-making and public information and educational programs to promote the health and well-being of children through statewide and local partnerships and to raise awareness about children s health issues. The bylaws of LPFCH afford control of LPFCH to LPCH and therefore, the activities of LPFCH are included in the consolidated financial statements of LPCH. As a result of LPCH becoming the sole corporate member in LPFCH, LPCH recognized a contribution of $109,794 in the Consolidated Statements of Operations and Changes in Net Assets. No consideration was paid as part of the transaction. Summarized consolidated balance sheet information for LPFCH at September 1, 2016 is shown below: September 1, 2016 Assets Current assets Cash and cash equivalents $ 13,290 Contributions receivable 33,113 Other receivables 2 Prepaid expenses, inventory and other 727 Total current assets 47,132 Investments 18,221 Board designated funds in other assets 112,453 Property and equipment, net 657 Beneficial interest in trusts, net 8,696 Contributions receivable, net of current portion 90,075 Other assets 660 Total assets $ 277,894 Liabilities and Net Assets Current liabilities Accounts payable and accrued liabilities $ 13,964 Accrued salaries and related benefits 2,207 Due to related parties 151,929 Total liabilities 168,100 Net assets Unrestricted 109,794 Total net assets 109,794 Total liabilities and net assets $ 277,894 15

18 For the year ended August 31, 2017, LPFCH reported revenue of $20,288 and excess of revenue over expenses of $7,160 in the Consolidated Statement of Operations and Changes in Net Assets. These amounts represent twelve months of operations since being acquired by LPCH. 4. Net Patient Service Revenue LPCH and PCHA have agreements with third-party payors that provide for payments at amounts different from LPCH s established rates. A summary of payment arrangements with major thirdparty payors are as follows: Medi-Cal Inpatient services rendered to State and Managed Medi-Cal program beneficiaries through June 30, 2013 were reimbursed under contracts with negotiated per diem rates. On July 1, 2013, the State began reimbursing for Medi-Cal program beneficiaries using an All Patient Refined-Diagnosis Related Group (APR-DRG) methodology. Outpatient services are reimbursed based upon prospectively determined fee schedules. In addition, Disproportionate Share ( DSH ) is another Medi-Cal program that provides for supplemental funding when a hospital is considered by the State to have relatively more Medi- Cal utilization than the norm. LPCH must re-qualify for DSH annually. LPCH did not qualify for DSH in 2017 and CCS The California Children's Services ( CCS ) Program is a partnership between state and counties that provides medical case management for children in California diagnosed with serious chronic diseases. Currently, approximately 70 percent of CCS-eligible children are also Medi-Cal eligible. The Medi-Cal program reimburses their care. The cost of care for the other 30 percent of children is split equally between CCS Only and CCS Healthy Families. Reimbursement from these programs to providers is through an All Patient Refined-Diagnosis Related Group (APR-DRG) methodology for inpatient services. Outpatient services are reimbursed based upon prospectively determined fee schedules. A portion of the CCS Only children also have other forms of coverage, such as commercial insurance. For these children, CCS is secondary to the commercial insurance or other form of coverage, and is intended to limit the financial burden on families and children with chronic conditions HMO/PPO and Other Managed care contracts such as those with HMOs and PPOs reimburse LPCH at per diem rates or a percent of charges basis, which are less than full charges. Net patient service revenue by major payor before the provision for doubtful accounts for the years ended August 31 is as follows: LPCH PCHA Total LPCH PCHA Total Medi-Cal $ 263,575 $ 6,466 $ 270,041 $ 254,028 $ 6,340 $ 260,368 HMO/PPO 963,369 67,626 1,030, ,987 61, ,809 Other 87,611 3,839 91,450 79,247 3,527 82,774 $ 1,314,555 $ 77,931 $ 1,392,486 $ 1,239,262 $ 71,689 $ 1,310,951 16

19 Included above in the Medi-Cal net patient services revenue is $40,976 and $51,793 for Medi- Cal Fee-For-Service and Managed Care payments for fiscal years 2017 and 2016, respectively, under the hospital provider fee program. Amounts due from Blue Cross, Blue Shield and the State of California s Medi-Cal program represent 21%, 10% and 17%, and 28%, 12% and 15%, of LPCH net patient accounts receivable at, respectively. Amounts due from Blue Cross, Blue Shield and the State of California s Medi-Cal program represent 24%, 10% and 6%, and 24%, 10% and 9%, of PCHA net patient accounts receivable at, respectively. LPCH and PCHA do not believe significant credit risks exist with these payors. Hospital Quality Assurance Fee Program The State of California enacted SB 239 in October 2013 which established the Hospital Quality Assurance Fee ( QAF ) and Hospital Fee programs for January 1, 2014 through December 31, Centers for Medicare and Medicaid Services ( CMS ) has approved, and LPCH has recognized as revenue on the date of approval, supplemental payments related to the following programs and periods: o Fee-for-service programs for January 1, 2014 through December 31, 2016 o o Managed care programs for the expansion population for January 1, 2014 through December 31, 2014 Managed care programs for the non-expansion population for January 1, 2014 through June 30, For the years ended, respectively, LPCH recognized $40,976 and $51,793 in net patient service revenue for Medi-Cal Fee-For-Service ( FFS ) and Managed Care supplemental payments provided for under the California provider fee programs. Remaining programs awaiting CMS approval for which revenues have not been reflected in the consolidated financial statements, include: o o Managed care programs for the expansion population for January 1, 2015 through December 31, 2016 Managed care programs for the non-expansion population for July 1, 2015 through December 31, For the years ended, respectively, LPCH recognized $22,011 and $24,196, in other expense for QAF paid to California Department of Health Care Services ( DHCS ). Expenses were paid for the same CMS approved programs noted above. Additionally, included in other expense for the year ended August 31, 2017 is $4,371 for the QAF fee collection for the period July 1, 2015 through June 30, CMS approved the collection of this fee in December 2014, and the State has submitted to CMS for approval of the managed care supplemental payments for the same period. Accordingly, the potential payments will be recognized in net patient service revenue when CMS approval is obtained. 17

20 California s participation in a provider fee program, as authorized under federal regulations, has been made permanent by the passage of Proposition 52, an initiative on the November 2016 ballot. However, the first iteration of the hospital provider fee program under the permanent legislation covering the period from January 1, 2017 to December 31, 2019, has not yet been approved by CMS. Accordingly, any potential activity under this program related to January 1, 2017 through August 31, 2017 has not been recorded in the consolidated financial statements. 5. Charity Care and Community Benefits LPCH and its subsidiaries are committed to advocacy, outreach, education, and research to improve the health status of children and pregnant women. LPCH and its subsidiaries continually reaffirm its commitment to its community by developing innovative programs to enhance its own and the community s capacity to care for children and pregnant women. These programs include: Health Professions Education Graduate Medical Education Social Services Internships Community Programs Mobile Adolescent Health Services Pediatric Weight Control Programs CareAVan Community Health Education Perinatal Outreach Programs Support to Ravenswood Family Health Center Child Safety & Inquiry Presentation Programs Family and Children Health Advocacy LPCH and its subsidiaries direct charity care and uncompensated costs of medical services to government-covered patients for the years ended August 31 is as follows: Charity care at established rates $ 7,362 $ 5,758 Estimated cost of charity care 2,050 1,555 Estimated cost of medical services provided to government covered patients (not including Medicare) 237, ,717 $ 239,514 $ 214,272 18

21 The increase in the estimated cost of Medi-Cal services provided to government covered patients (not including Medicare) in 2017 was due to higher volume of Medi-Cal utilization. The estimated uncompensated cost of Medi-Cal services provided to government covered patients does not include offset of funds from the QAF program. Additionally, LPCH invests in improving the health of children of San Mateo and Santa Clara counties primarily by providing health professional education and community health services. 6. Meaningful Use Funds LPCH is participating in the Medicare and Medicaid Electronic Health Records Incentive Programs (EHR), which provides payments to eligible professionals, eligible hospitals and critical access hospitals as they adopt, implement, upgrade or demonstrate meaningful use of certified Electronic Health Records technology. LPCH recognized $3,594 in other revenue and $600 in expense in the Consolidated Statements of Operations and Changes in Net Assets under these programs for the years ended August 31, 2017 and August 31, 2016, respectively. 7. Contributions Receivable Contributions receivable and contribution revenue are included in the financial statements in the appropriate net asset category. Contributions are recorded at the discounted net present value of the future cash flows, using discount rates ranging from 2.5% to 5.3% for 2017 and 3.2% to 5.3% for Contributions receivable at August 31 are expected to be realized in the following periods: In one year or less $ 49,367 $ 33,182 Between one year and five years 102,743 55,921 More than five years 28,050 45, , ,472 Less: Discount/allowance (16,551) (18,484) Less: Reserves for uncollectible pledges (1,284) (337) Total contributions receivable, net 162, ,651 Less: Current portion (49,132) (32,944) Contributions receivable, net of current portion $ 113,193 $ 82,707 Contributions receivable at August 31 are to be utilized for the following purposes: Plant replacement and equipment $ 135,798 $ 108,552 Clinical services 1,500 7,099 Education 10,491 - Research 14,536 - $ 162,325 $ 115,651 19

22 Conditional pledges depend on the occurrence of a specified future or uncertain event. There were no conditional pledges as of, respectively. 8. Investments and Investments in University Managed Pools and Other The composition of investments held directly by LPCH and its subsidiaries at August 31 is as follows: Cost Fair Value Cost Fair Value Board designated funds $ 112,453 $ 113,412 $ - $ - Board designated funds in in University managed pools 10,736 10,736 9,214 9,214 Board designated funds - subtotal 123, ,148 9,214 9,214 Mutual funds 90,819 86,565 71,389 70,642 Beneficial interest in investments in University managed pools 408, , , ,151 Investments and investments in University managed pools and other $ 622,127 $ 880,629 $ 476,351 $ 679,007 LPFCH has board designated funds approved by LPFCH s board of directors for long term investments. As of August 31, 2017, the balance of LPFCH board designated funds was $113,412. LPCH board designated funds, short-term investments and other noncurrent investment funds are invested in University Merged Pool ( MP ), holding a variety of investments, which consist of cash and cash equivalents, government and corporate debt securities, equity securities and mutual funds, real estate, investment in partnerships, and other. Gains and losses on LPCH s beneficial interest in investments in University Merged Pool of $57,761 and ($5,274) for the years ended, respectively, represent the change in the fair value of LPCH s share of the MP. The MP is the primary investment pool in which funds are invested. The MP is invested with the objective of maximizing long-term total return. It is a unitized pool in which the fund holders purchase investments and withdraw funds based on a monthly share value. The composition of investments in MP at consist of the following: 20

23 Assets Cash and cash equivalents 3 % 4 % Fixed income 7 6 Public equities Real estate 8 9 Natural resources 9 9 Absolute return Private equities Fair Value Measurements 100 % 100 % U.S. Generally Accepted Accounting Principles (GAAP) defines fair value as the price received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants and establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from independent sources. In contrast, unobservable inputs reflect the entity s assumptions about how market participants would value the financial instrument. Valuation techniques used under U.S. GAAP must maximize the use of observable inputs to the extent available. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used for financial instruments measured at fair value on a recurring basis: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities, at the reporting date, without adjustment. Market price data is generally obtained from relevant exchange or dealer markets. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Inputs are obtained from various sources including market participants, dealers and brokers. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. A financial instrument s categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table summarizes LPCH and its subsidiaries assets and liabilities measured at fair value as of August 31, 2017, based on the inputs used to value them. 21

24 NAV Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ - $ 406,683 $ - $ - $ 406,683 Assets limited as to use, held by trustee - 33, ,096 Investments (mutual funds) 2,225 84, ,565 Board designated funds 97,735 11,257 4, ,412 Board designated funds in University managed pools 10, ,736 Beneficial interest in trusts - 8,004-16,048 24,052 Investments in University managed pools 669, ,916 Total assets $ 780,612 $ 543,380 $ 4,420 $ 16,048 $ 1,344,460 There were no transfers of assets or liabilities between Level 1 and Level 2 during the year ended August 31, The following table presents the 2017 activities of financial instruments of which fair value measurement is using Level 3 inputs: Balance at September 1, 2016 $ 15,048 Realized gains (losses) (134) Unrealized gains (losses) 645 Charitable trusts 489 Balance at August 31, 2017 $ 16,048 The following table summarizes LPCH and its subsidiaries assets and liabilities measured at fair value as of August 31, 2016, based on the inputs used to value them. NAV Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ - $ 532,900 $ - $ - $ 532,900 Assets limited as to use, held by trustee Investments (mutual funds) - 70, ,642 Beneficial interest in trusts ,048 15,048 Investments in University managed pools 608, ,365 Total assets $ 608,365 $ 603,761 $ - $ 15,048 $ 1,227,174 There were no transfers of assets or liabilities between Level 1 and Level 2 during the year ended August 31, The following table presents the 2016 activities of financial instruments of which fair value measurement is using Level 3 inputs: 22

25 Balance at September 1, 2015 $ 16,079 Realized gains (losses) (321) Unrealized gains (losses) 1,419 Charitable trusts (2,129) Balance at August 31, 2016 $ 15, Property and Equipment Property and equipment consist of the following as of : LPCH PCHA LPFCH Consolidated LPCH PCHA Consolidated Land and improvements $ 32,246 $ - $ - $ 32,246 $ 32,246 $ - $ 32,246 Buildings and improvements 466,905 3, , ,050 3, ,945 Equipment 355,405 10,542 1, , ,298 7, ,498 Ground leases 59, ,384 59,384-59, ,940 14,495 2, , ,978 11, ,073 Less: Accumulated depreciation (477,353) (9,650) (1,645) (488,648) (414,916) (5,815) (420,731) Construction-in-progress 1,285,865 2,308-1,288, ,143 4, ,974 Property and equipment, net $ 1,722,452 $ 7,153 $ 503 $ 1,730,108 $ 1,419,205 $ 10,111 $ 1,429,316 Ground lease accumulated amortization totals $12,153 and $11,113 for the years ended, respectively. Total depreciation and amortization expense for the years ended, is $66,635 and $56,454, respectively. Capitalized interest expense, net of interest income was $15,954 and $10,897 for the years ended, respectively. 11. Long-Term Debt and Capital Leases LPCH s outstanding debt at August 31 is summarized below: 23

26 Effective Year of Interest Outstanding Principal Maturity 2017/ California Health Facilities Financing Authority Variable rate bonds Series 2014B %/0.73% 100, ,000 Fixed rate bonds Series 2017A % 200,000 - Series 2017A Premium 29,058 - Series 2016A %/2.10% 70,415 73,675 Series 2016A Premium 13,287 14,470 Series 2016B % 100, ,000 Series 2016B Premium 14,208 14,382 Series 2014A % 100, ,000 Series 2014A Premium 7,434 7,720 Series 2012A % 200, ,000 Series 2012A Premium 9,729 10,016 Series 2012B %/2.63% 39,760 42,195 Series 2012B Premium 5,407 5, , ,406 Less: Current portion of long term debt (5,800) (5,695) Less: Debt issuance costs (8,161) (6,256) Long term debt $ 875,337 $ 656,455 The fair value of the bonds are estimated based on the current borrowing rates for similar issues, and amounted to approximately $911,301 and $711,846 at August 31, 2017 and August 31, 2016, respectively. All bonds held at August 31, 2017 are considered to be Level 2 fair value measurements. In 2003, LPCH entered into a master indenture of trust (the LPCH Master Indenture ) as the sole initial member of an obligated group ( LPCH Obligated Group ), the purpose of which is to provide for issuance of obligations ( Obligations ) to secure indebtedness of the members of the LPCH Obligated Group on a joint and several basis. Obligations issued under the LPCH Master Indenture are collateralized by a lien on the gross revenues of LPCH. The LPCH Master Indenture also includes various covenants, the most restrictive of which include maintenance of a minimum annual debt service coverage ratio, limitations on additional indebtedness, restrictions on the disposition or transfer of assets, mergers and entry into and withdrawal from the LPCH Obligated Group. During the year ended August 31, 2017, LPCH was in compliance with its covenants. In July 2003, California Health Facilities Financing Authority ( CHFFA ) issued, on behalf of LPCH, revenue bonds in the aggregate par amount of $115,000 (collectively, the 2003 Bonds ). The 2003 Bonds were comprised of $60,000 of Series A and B auction rate revenue bonds and $55,000 of Series C fixed rate revenue bonds. 24

27 In August 2008, CHFFA issued, on behalf of LPCH, three series of revenue bonds in the aggregate par amount of $93,450 (collectively, the 2008 Bonds ). The 2008 Bonds were comprised of Series A, B and C variable rate revenue bonds. Proceeds of the 2008 Bonds were used to redeem the 2003 Series A and B bonds, refinance an outstanding bank loan and pay a portion of the costs of issuance. The 2008 Bonds initially bore interest at a weekly rate, which reset every 7 days. In March 2012, LPCH converted the 2008 Bonds from short term variable rate bonds into five-year fixed rate put bonds with no gain or loss. In March 2012, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate par amount of $251,045 (collectively, the 2012 Bonds ). The 2012 Bonds were comprised of $200,000 Series A bonds (at a premium of $11,288) and $51,045 Series B bonds (at a premium of $8,351), each series issued as fixed rate bonds. The rates for the Series B bonds are fixed, however range from 3-5% over the life of the bonds. Proceeds of the 2012 Series A bonds primarily were used for financing the acquisition, construction, and expansion of the hospital and to pay a portion of the costs of issuance. Proceeds of the 2012 Series B bonds were used for the legal defeasance and redemption of 2003 Series C bonds and to pay a portion of the costs of issuance. In May 2014, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate par amount of $200,000 (collectively, the 2014 Bonds ). The 2014 Bonds were comprised of $100,000 Series A bonds and $100,000 Series B bonds. Proceeds of the 2014 Bonds primarily will be used for financing the acquisition, construction, and expansion of the hospital and to pay a portion of the costs of issuance. The 2014 Series A bonds were issued as fixed rate bonds. The rates for the Series A bonds are fixed, however range from 4-5% over the life of the bonds. The 2014 Series B bonds were issued in a floating index mode with monthly interest rate resets and were directly placed with The Northern Trust Company. The 2014 Series B bonds are not subject to remarketing or tender until May 8, 2024 and are classified as long-term liabilities. In March 2016, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate par amount of $176,975 (collectively, the 2016 Bonds ). The 2016 bonds were comprised of Series A and B revenue bonds. Proceeds of the 2016 Series A were used for the legal defeasance and redemption of the 2008 Series A, B and C revenue bonds. Proceeds of the 2016 Series B were used to finance a portion of the ongoing construction, and expansion of the hospital, and to pay for the cost of issuance. In May 2017, LPCH entered into a $200,000 revolving credit agreement with Bank of America which expires in May There have been no withdrawals on the revolving credit agreement. In August 2017, CHFFA issued, on behalf of LPCH, a series of revenue bonds in the aggregate par amount of $200,000, with a premium of $29,069 (collectively, the 2017 Bonds ). The 2017 bonds were comprised of Series A revenue bonds. Proceeds of the 2017 Series A were used to finance a portion of the ongoing construction, equipment purchases, and improvement of the hospital, and to pay for the cost of issuance. In addition, the proceeds of the bonds may be used to finance costs of routine capital and the acquisition of the long-term ground lease interest in land and improvements of a parcel located adjacent to the existing facility. 25

28 All the bonds issued by CHFFA on behalf of LPCH are a limited obligation of the CHFFA and are payable solely from payments made by LPCH and secured by an Obligation issued pursuant to the LPCH Master Indenture. Scheduled principal payments on long-term debt are summarized below: Scheduled Principal Maturities Interest Year ending August 31, 2018 $ 5,800 $ 37, ,920 37, ,245 36, ,635 36, ,045 36,002 Thereafter 770, , Retirement Plans $ 810,175 $ 989,360 LPCH and its subsidiaries provide retirement benefits through defined benefit and defined contribution retirement plans covering substantially all benefit eligible employees and previously leased employees. Defined Contribution Pension Plan Employer contributions to the defined contribution retirement plan are based on a percentage of participant annual compensation. Employer contributions to this plan which are vested immediately to participants totaling $33,915 and $28,978 for the years ended, respectively, are included in salaries and benefits expense in the Consolidated Statements of Operations and Changes in Net Assets. LPFCH participates in a defined contribution retirement plan covering substantially all LPFCH employees. Participants are fully vested in LPFCH s contributions after five years. LPFCH contributions for the year ended August 31, 2017 was $1,041. Postretirement Medical Benefit Plan LPCH currently provides health insurance coverage for certain of its employees and previously leased employees, through the SHC plan, upon retirement as early as age 55, with years of service as defined by specific criteria. The health insurance coverage for retirees who are under age 65 is the same as that provided to active employees. A Medicare supplement option is provided for retirees over age 65. For purposes of the August 31, 2017 benefit plan liability valuations, LPCH has assumed future mortality according to the RP 2014 White Collar mortality table and MSS 2017 projection table (actuarial developed scale based on the rates published in 2017 by the Social Security Administration). 26

29 LPCH has recorded a liability totaling $18,356 and $16,749 for the years ended August 31, 2017 and 2016, respectively, included in self-insurance reserves on the Consolidated Balance Sheets. This represents the obligation for its employees and previously leased employees. LPCH reimburses SHC for costs related to this plan on a periodic basis, and in 2017 has recorded expense of $856 and a decrease of $751 to net assets to increase the minimum benefit liability. Defined Benefit Pension Plans Certain LPCH employees and previously leased employees are covered by a noncontributory defined benefit pension plan held by SHC. SHC s defined benefit pension plan benefits are based on years of service and the employee s compensation. Contributions to the plans are based on actuarially determined amounts sufficient to meet the benefits to be paid to plan participants. SHC and LPCH have an arrangement whereby SHC assumes the pension liability of the LPCH employees and previously leased employees. However, LPCH is required to reimburse SHC for the annual expense incurred for these employees and previously leased employees. LPCH paid $203 and $195 in cash for the years ended, respectively, which represented current year pension expenses related to LPCH employees and previously leased employees. The remainder of certain other LPCH employees and previously leased employees not covered by the previously described plans are covered by a frozen noncontributory defined benefit pension plan (the LPCH Frozen Pension Plan ). Benefits are based on years of service and the employee s compensation. Contributions to the plan are based on actuarially determined amounts sufficient to meet the benefits to be paid to plan participants. The following tables present information on plan assets and obligations, costs, and actuarial assumptions for the LPCH Frozen Pension Plan for the years ended, respectively. The change in pension assets and the related change in benefit obligations, using a measurement date as of and for the years ended are as follows: 27

30 Change in plan assets Fair value of plan assets at beginning of year $ 6,390 $ 5,664 Actual return on plan assets Employer contributions Benefits paid (530) (516) Fair value of plan assets at end of year $ 6,086 $ 6,390 Change in benefit obligation Projected benefit obligation at beginning of year $ 8,700 $ 8,046 Interest cost Actuarial loss Benefits paid (530) (516) Projected benefit obligation at end of year $ 8,447 $ 8,700 Funded status at end of year and net amount recognized in balance sheet $ (2,361) $ (2,310) Net amount recognized in balance sheet $ (2,361) $ (2,310) Amounts not yet reflected in net periodic benefit cost and included in other changes in net assets Accumulated net (loss) (2,656) (2,686) Adjustment for minimum pension liability (2,656) (2,686) Cumulative employer contributions in excess of net periodic benefit cost Net amount recognized in balance sheet $ (2,361) $ (2,310) The estimated net loss that will be amortized from other changes in net assets into net periodic benefit cost over the next fiscal year is $121. Due to the LPCH pension plan being frozen, the accumulated benefit obligation is the same as the projected benefit obligation at the end of the year. 28

31 Net benefit expense related to the plan for the years ended August 31 includes the following components: Interest cost $ 266 $ 311 Expected return on assets (303) (295) Amortization of net loss Total net periodic benefit cost $ 81 $ 121 Changes recognized in other changes in net assets for the years ended August 31 include the following components: Prior service cost (credit) arising during period $ - $ - Net loss (gain) arising during period Amortization of net (loss) (118) (105) Total recognized in unrestricted net assets $ (30) $ 229 Total recognized in net periodic benefit cost and unrestricted net assets $ 51 $ 350 The increase to net assets to adjust the minimum pension liability of $30 is included in the Consolidated Statements of Operations and Changes in Net Assets for the year ended August 31, The respective decrease to net assets for the year ended August 31, 2016 was $229. Actuarial Assumptions The weighted-average assumptions used to determine benefit obligations are as follows for the years ended August 31: Weighted-average assumptions to determine benefit obligations Discount rate 3.46 % 3.18 % Rate of compensation increase N/A N/A 29

32 The discount rate, expected rate of return on plan assets, and the projected covered payroll growth rates used in determining the above accrued benefit costs are as follows for the years ended August 31: Weighted average assumptions to determine net periodic benefit costs Discount rate 3.18 % 4.03 % Rate of compensation increase N/A N/A Expected return on assets 5.00 % 5.50 % LPCH utilizes an independent investment consulting firm to provide an estimate of the future expected returns for each asset class based on LPCH s asset allocation targets. The evaluation of the future expected returns resulted in the use of 5.00% as the assumption for the expected return on plan assets. Plan Investments The investments of the LPCH Frozen Pension Plan have been invested to ensure stability of returns as well as to preserve the asset base of investments. Changing market cycles require flexibility in asset allocation to allow movement of capital within the asset classes for the purpose of increasing investment return and/or reducing risk. The plan asset allocation for the LPCH Frozen Pension Plan as of the measurement date August 31 is 69% fixed income, 30% equity, and 1% cash as of. Fair Value of Plan Assets The plan assets measured at fair value are as follows for the year ended August 31, 2017: Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 43 $ - $ - $ 43 Public equities 1, ,808 Fixed income 4, ,235 Other Total plan assets $ 6,086 $ - $ - $ 6,086 The plan assets measured at fair value are as follows for the year ended August 31, 2016: Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 65 $ - $ - $ 65 Public equities 1, ,894 Fixed income 4, ,431 Other Total plan assets $ 6,390 $ - $ - $ 6,390 30

33 Concentration of Risk LPCH manages a variety of risks, including market, credit, and liquidity risks, across plan assets through our investment managers. Concentration of risk is defined as an undiversified exposure to one of the above mentioned risks that increases the exposure of the loss of plan assets unnecessarily. LPCH management minimizes risk by diversifying exposure to such risks across a variety of instruments, markets, and counterparties. Plan Contributions LPCH expects to contribute $200 to the LPCH Frozen Pension Plan during the fiscal year ending August 31, Estimated Future Benefit Payments The following table presents the expected benefit payments: Year ending August 31, 2018 $ Next 5 Years 2, Temporarily and Permanently Restricted Net Assets The endowment is intended to generate investment income that can be used to support their current operating and strategic initiatives. LPCH invests the majority of the endowments in the University s managed pool. LPCH s Board of Directors has adopted the University s investment and spending policies for its permanently restricted assets that provide for annual amounts (payout) to be distributed to appropriate temporarily restricted funds supporting operating and strategic activities of LPCH. Through the combination of investment strategy and payout policy, the hospital is striving to provide a reasonably consistent payout from the endowment to support operations, while preserving the purchasing power of the endowment adjusted for inflation. Consistent with the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ), when determining the appropriate payout, the Board considers the purposes of the endowment, the duration and preservation of the endowment, general economic conditions, the possible effect of inflation or deflation, the expected return from income and the appreciation of investments, and investment policy. The current University Board of Trustees approved targeted spending rate is 5.5%, which was adopted by the Board of Directors of LPCH. The payout amount is determined by applying a smoothing rule that limits payout in a given year to the sum of 70% of the previous year s actual rate and 30% of the long-term spending target rate applied to the projected per share value of the endowment. The smoothing rule and the diversification of the investment asset allocation attempt to mitigate the impact of short-term market volatility on the flow of funds to support LPCH s operations. 31

34 LPCH classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are authorized for expenditure. Net unrealized losses on permanently restricted endowment funds are classified as a reduction to unrestricted net assets until such time as the fair value equals or exceeds historic value. The aggregate amount by which fair value was below historic value was approximately $0 and $10 as of, respectively. Changes in LPCH s endowment, for the years ended, are as follows: 2017 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment at beginning of year $ - $ 94,936 $ 211,348 $ 306,284 Investment returns Earned income - 16,202-16,202 Unrealized and realized gains - 18, ,563 Total investment returns - 34, ,765 Amounts distributed for operations - (15,669) - (15,669) Contributions received from donors ,186 14,186 Other - (1,939) 655 (1,284) Net increase in endowment - 17,217 15,781 32,998 Endowment at end of year $ - $ 112,153 $ 227,129 $ 339,282 32

35 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment at beginning of year $ - $ 103,166 $ 204,405 $ 307,571 Investment returns Earned income - 16,134-16,134 Unrealized and realized gains/(losses) - (8,746) 1,255 (7,491) Total investment returns/(losses) - 7,388 1,255 8,643 Amounts distributed for operations - (15,462) - (15,462) Contributions received from donors - - 5,763 5,763 Other - (156) (75) (231) Net (decrease) increase in endowment - (8,230) 6,943 (1,287) Endowment at end of year $ - $ 94,936 $ 211,348 $ 306,284 All of LPCH s endowments are classified as donor-restricted. Return Objectives and Risk Parameters LPCH has adopted endowment investment and spending policies that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of endowment assets. Under this policy, the return objective for the endowment assets is to generate optimal total return while maintaining an appropriate level of risk for LPCH. LPCH expects its endowment funds over time, to provide at least an average rate of return of approximately 5% annually. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Investment Objectives To achieve its long-term rate of return objectives, LPCH relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends). LPCH targets a diversified asset allocation that places greater emphasis on types of investments as described in Note 8 to achieve its long-term objectives within prudent risk constraints. Portfolio asset allocation targets as well as expected risk, return and correlation amongst the asset classes are reevaluated annually by the asset manager and reported to the Board of Directors. Permanently restricted net assets consist of investments to be held in perpetuity and invested to generate income to support the following purposes at August 31: Permanently restricted Education $ 27,009 $ 27,009 Plant replacement and equipment 4,598 4,598 Clinical services 160, ,006 Indigent care and other 35,233 32,735 $ 227,129 $ 211,348 33

36 Temporarily restricted net assets consist of the following at August 31: Temporarily restricted Education $ 15,691 $ 13,042 Plant replacement and equipment 517, ,689 Clinical services 98,454 84,812 Indigent care and other 19,841 15, Related-Party Transactions $ 651,545 $ 574,119 Transactions with SHC LPCH and SHC share certain functions, including various information systems, human resources, managed care contracting, and materials management. The costs for these shared services, which are included in purchased services in the Consolidated Statements of Operations and Changes in Net Assets, are allocated between SHC and LPCH based on management s best estimates. LPCH s total cost for shared services was $31,360 and $30,416 for the years ended, respectively. LPCH also purchases various services from SHC. These services include cardiac catheterization, interventional radiology, radiation oncology, and laboratory. The cost of these services, which is included in purchased services in the Consolidated Statements of Operations and Changes in Net Assets, is charged back to LPCH based on a percentage of charges intended to approximate costs or a cost per procedure. LPCH s total cost for services purchased from SHC was $44,845 and $47,214 for the years ended, respectively. In addition to the services described above, LPCH purchases services from SHC that include services provided by interns and residents, maintenance and certain operating expenses, including utilities and capital projects. These services totaled $40,681 and $33,371 for the years ended, respectively, and are included in purchased services and other expenses in the Consolidated Statements of Operations and Changes in Net Assets or in property and equipment, net, in the Consolidated Balance Sheets. Transactions with the University LPCH records operating expense or equity transfers to account for transactions with the University. LPCH purchases services from the University including telecommunications, transportation, certain utilities, rent, legal, and internal audit. Costs incurred by LPCH for these services purchased from the University were approximately $25,644, and $23,261 for the fiscal years ended August 31, 2017 and 2016, respectively, and are recorded as professional services, purchased services, and other expenses in the Consolidated Statements of Operations and Changes in Net Assets for those fiscal years or as property and equipment, net, in the Consolidated Balance Sheets. The total recoveries from the University, including rent and certain salary and benefits, was $3,406 and $3,537 as of, respectively. 34

37 Transactions with Stanford School of Medicine (SoM) Services purchased from the University and specifically, the Stanford School of Medicine, include clinical services that benefit LPCH, including hospital based physicians, medical direction, and medical library services. Payment for these services is based on management s best estimate of market value. On September 1, 2006, LPCH and the University entered into a Professional Services Agreement ( PSA ) which assigned to LPCH the right to bill and collect all revenue related to pediatric and obstetric clinical services on behalf of the Stanford School of Medicine. In return, LPCH reimburses the University for the services provided by the physician faculty. The PSA is revised periodically, most recently as of September 1, The expense recorded related to payments and accruals for all of these services amounted to approximately $254,066 and $209,132 for the fiscal years ended, respectively. The collections received from external parties by LPCH as agent on behalf of SoM was recorded in other revenue and purchased services. The amounts were $8,571 and $16,737 as of August 31, 2017 and August 31, 2016, respectively. Effective September 1, 2016, the activities of LPFCH are included in LPCH consolidated financial statements and LPFCH also serves as a fundraising agent for SOM. LPFCH has received a total of $5,955 from SOM in Purchased Services for development fees. 15. Operating Leases LPCH and its subsidiaries lease various equipment and facilities under operating leases expiring at various dates. Total rental expense (included in other operating expenses in the Consolidated Statements of Operations and Changes in Net Assets) under these leases for the years ended was $27,682 and $27,512, respectively. Net minimum future operating lease payments for periods subsequent to August 31, 2017 are as follows: Net Minimum Future Operating Leases Payments LPCH PCHA LPFCH Total Year ending August 31, 2018 $ 19,729 $ 3,675 $ 1,100 $ 24, ,214 2,666 1,133 21, ,691 1,834 1,167 15, , , , ,642 Thereafter 8, , Commitments and Contingencies $ 62,207 $ 9,874 $ 4,295 $ 76,376 LPCH is aware of certain asserted and unasserted legal claims. While the outcome cannot be determined at this time, management is of the opinion that the liability, if any, from these actions will not have a material effect on LPCH s financial position. 35

38 As with many medical centers across the country, information security and privacy is a growing risk area based on developments in the law and expanding mobile technology practices. LPCH has policies, procedures, and training in place to safeguard protected information, but select incidents have occurred in the past and may occur in the future involving potential or actual disclosure of such information (including, for example, certain identifiable information relating to patients). In most cases, there has been no evidence of unauthorized access to, or use/disclosure of, such information, yet laws may require reporting to potentially affected individuals and federal and state governmental agencies. Governmental agencies have the authority to investigate and request further information about an incident or safeguards, to cite LPCH for a deficiency or regulatory violation, and/or require payment of fines, corrective action, or both. California law also allows a private right to sue for a breach of medical information. The cost of such possible consequences has not been material to date to LPCH, and LPCH management does not believe that any future consequences of these incidents will be material to its consolidated financial statements. The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to future government review and interpretation, as well as to regulatory actions unknown or unasserted at this time. Government activity with respect to investigations and allegations concerning possible violations of regulations by healthcare providers could result in the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. LPCH is subject to similar regulatory reviews, and while such reviews may result in repayments and/or civil remedies that could have a material effect on LPCH s financial results of operations in a given period, management believes that such repayments and/or civil remedies would have a material effect on LPCH s financial position. Effective May 1, 2011, LPCH entered into a seven year agreement with Dell Marketing L.P., a Texas limited partnership ( Dell ), pursuant to which Dell will provide certain information technology services to LPCH. In March 2016, NTT DATA Corporation ( NTT ) acquired Dell s information technology services unit, and Dell assigned its rights and agreements to NTT. Under the terms of the agreement, LPCH will be charged a fixed annual service charge plus expenses, payable monthly, for core services, as defined, and additional fees plus expenses for special projects. The annual fixed service charges are subject to adjustment under certain conditions, but unless so adjusted, amount to approximately $12,000 for each year through to Adjustments are expected for variations in the number of devices, user demand, and project specific work that may increase the amount above the baseline in any given period. LPCH has signed several other information technology contracts with commitments from fiscal year 2015 to fiscal year The total commitment for these information technology contracts was approximately $26 million as of August 31, California s Hospital Seismic Safety Act requires licensed acute care functions to be conducted only in facilities that meet specified seismic safety standards. Facilities classified by the State of California as noncompliant in the event of an earthquake must be retrofitted, replaced or removed from acute-care service by applicable deadlines prior to 2020 or There are separate and distinct seismic safety standards for structural frame performance and for nonstructural element performance. LPCH complies with the structural frame requirements for the existing hospital building allowing its use indefinitely past LPCH will be retrofitting discrete areas of the existing hospital for compliance to the nonstructural standards by

39 LPCH relies upon services located in the SHC hospital facility. Through the construction of a New Stanford Hospital, as well as through planned retrofits of the existing SHC facility, SHC services that support LPCH will be compliant to seismic safety regulations within available deadlines. Amendments of the Hospital Seismic Safety Act via SB 90, permit the Office of Statewide Health Planning and Development (OSHPD) to extend the structural compliance deadline for SHC until January 1, 2020 due to its status as a trauma center. At this time, SHC has approval from OSHPD for extensions under SB 90 for all subject buildings to July These extensions will allow sufficient time to construct the new hospital, and mitigate deficiencies of the existing facility. In June 2011, the Palo Alto City Council certified the Final Environmental Impact Report, land use changes, permits and a Development Agreement with Stanford Hospital, LPCH and Stanford University as part of the Renewal Project. In July 2011, the Palo Alto City Council provided final approval for the Renewal Project at the second reading of the Development Agreement. The Renewal Project will rebuild Stanford Hospital and expand LPCH to assure adequate capacity, meet State-mandated earthquake safety standards, and provide modern, technologically-advanced hospital facilities. The Renewal Project also includes replacement of outdated laboratory facilities at the Stanford School of Medicine and remodeling of Hoover Pavilion. The cost of LPCH s project has exceeded its originally estimated amount of $1.2 billion because of cost increases related to changes in technology, change orders, and market availability of subcontractors such as electricians, among other factors. LPCH management believes that sources of funding are adequate to cover remaining costs. LPCH has recorded $1,289,737 in construction in progress related to this project as of August 31, Based on current estimated schedules, management currently projects that the Renewal Project construction will be essentially completed in calendar year As of August 31, 2017, the remaining commitment on all contracts, including the Project Renewal was approximately $69,632. LPCH is directly liable under irrevocable letters of credit totaling $11,615 at August 31, 2017, including $7,693 required as security for the workers compensation deductible plan as described in Note 2, $1,422 for security for construction, operation and maintenance of certain utility facilities, and $2,500 deposit for the acquisition of the long-term ground lease interest in land and improvements of a parcel located adjacent to the existing facility. No amounts have been drawn on these letters of credit as of August 31, LPCH also serves as guarantor for $1,000 loan of South County Community Health Center in East Palo Alto. Approximately 41% of LPCH employees are covered by collective bargaining arrangements. These employees are members of two unions; approximately 32% are covered by an agreement which expires on March 31, 2019; the other 9% are covered by an agreement which expires on September 6, In 2013, LPCH became the guarantor on a ten year building lease under which the total rent payments over the life of the lease will be approximately $5,193 as of August 31,

40 17. Functional Expenses Expenses incurred comprise the following program services for the years ended August 31: LPCH PCHA LPFCH ELIM Total LPCH PCHA Total Patient services $ 1,235,800 $ 87,455 $ - $ - $ 1,323,255 $ 1,148,607 $ 83,604 $ 1,232,211 Management and general 144,262 10,457 4, , ,122 6, ,601 Fundraising 11,996-20,167 (15,501) 16,662 10,868-10,868 Total functional expenses $ 1,392,058 $ 97,912 $ 25,095 $ (15,501) $ 1,499,564 $ 1,273,597 $ 90,083 $ 1,363, Subsequent Events In November 2017, a portion of the proceeds of the 2017 bonds were used to fund the acquisition of the long-term ground lease interest in land and improvements of a parcel located adjacent to the existing facility. LPCH and its subsidiaries have evaluated subsequent events occurring between the end of the most recent fiscal year and December 5, 2017, the date the financial statements were issued. 38

41 Report of Independent Auditors On Accompanying Consolidating Information To the Board of Directors Lucile Salter Packard Children s Hospital at Stanford We have audited the consolidated financial statements of Lucile Salter Packard Children s Hospital at Stanford ( LPCH ) as of and for the years then ended and our report thereon appears on page one of this document. That audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual companies and is not a required part of the consolidated financial statements. Accordingly, we do not express an opinion on the financial position, results of operations and changes in net assets and cash flows of the individual companies. December 5, 2017 PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA T: (415) , F: (415) ,