Jefferson University Physicians (Pre-merger) Financial Statements June 30, 2014 and 2013

Transcription

1 Jefferson University Physicians (Pre-merger) Financial Statements

2 Table of Contents Pages Report of Independent Auditors 1 Financial Statements: Balance Sheets 2 Statements of Operations and Changes in Net Assets 3 Statements of Cash Flows

3 Independent Auditor s Report To the Board of Trustees Thomas Jefferson University: We have audited the accompanying financial statements of Jefferson University Physicians (JUP) which comprise the balance sheets as of June 30, 2014 and June 30, 2013, and the related statements of activities, changes in net assets and cash flows and for the years then ended. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of the combined 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 combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in the 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 combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatements of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to JUP s preparation and fair presentation of the combined 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 JUP 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 combined financial statements. We believe that the audit evidence we have obtained is significant and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of JUP at, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. September 23, 2014 PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

4 Balance Sheets Assets Current assets: Cash and cash equivalents $55,031,698 $39,446,131 Short-term investments 26,327,939 25,577,453 Patient receivables, less allowance for doubtful accounts of $4,326,800 in 2014 and $5,301,529 in ,315,507 28,853,148 Due from TJUH System 11,086,301 13,339,568 Due from Thomas Jefferson University 3,255,323 - Inventory 698,250 - Other current assets 1,233,702 1,153,996 Total current assets 126,948, ,370,296 Insurance recoverable 78,225,000 84,212,000 Non-current portion of receivable from TJUH 16,633,388 7,729,638 Investments in joint ventures 1,045, ,878 Building improvements and equipment, net 16,652,191 12,867,998 Total assets $239,505,101 $213,811,810 Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $16,463,875 $12,411,155 Accrued compensation 27,561,129 20,527,211 Due to Thomas Jefferson University - 650,097 Current portion of accrued professional liability claims 10,679,548 8,977,498 Current portion of workers compensation 430, ,342 Current portion of capital lease obligation 25,563 28,824 Accrued vacation 4,010,899 3,739,717 Total current liabilities 59,171,285 46,760,844 Accrued professional liability claims 140,729, ,860,512 Workers compensation 424, ,637 Capital lease obligation 91,525 - Total liabilities 200,416, ,082,993 Unrestricted net assets 39,088,553 24,728,817 Total liabilities and net assets $239,505,101 $213,811,810 The accompanying notes are an integral part of the financial statements. - 2-

5 Statements of Operations and Changes in Net Assets For the years ended Operating revenues: Patient service revenue, net of contractual allowance $299,714,088 $283,602,657 Provision for bad debts (20,382,722) (19,067,850) Net patient service revenue less provision for bad debts 279,331, ,534,807 Related party reimbursement for physician services and professional support 124,755, ,956,644 Grants and contracts 4,326,633 2,476,141 Investment income 164,876 83,153 Other revenues 1,977,561 2,079,518 Total operating revenues 410,555, ,130,263 Operating expenses: Salaries and employee benefits 271,168, ,064,367 Supplies 25,042,996 19,615,337 Professional liability 29,511,833 28,040,749 Operations and maintenance 13,093,150 11,514,071 Other expenses 29,338,439 28,101,446 Total operating expenses 368,154, ,335,970 Excess of revenues over expenses 42,401,080 29,794,293 TJUH System capital transfers 4,595, ,250 Transfers to Thomas Jefferson University, net (32,636,896) (33,827,282) Increase/(decrease) in unrestricted net assets 14,359,736 (3,558,739) Unrestricted net assets, beginning of year 24,728,817 28,287,556 Unrestricted net assets, end of year $39,088,553 $24,728,817 The accompanying notes are an integral part of the financial statements. - 3-

6 Statements of Cash Flows For the years ended Cash flows from operating activities: Increase/(decrease) in unrestricted net assets $14,359,736 ($3,558,739) Adjustments to reconcile changes in net assets to net cash and cash equivalents provided by operating activities: Depreciation 2,707,876 5,886,596 Provision for bad debts 20,382,722 19,067,850 Transfers to Thomas Jefferson University, net 32,636,896 33,827,282 TJUH capital transfers (4,595,552) (474,250) Equity loss on investment in joint venture, net of distribution 34, ,058 Increase (decrease) due to changes in: Patient receivables (20,845,081) (22,084,293) Insurance recoverable 5,987,000 9,406,000 Inventory (698,250) 185,908 Due from TJUH System (6,650,483) 1,693,891 Due to/from Thomas Jefferson University (3,905,420) (3,372,318) Other current assets (79,706) (457,000) Accrued compensation 7,033,918 1,376,192 Accrued professional liability claims 571,009 (14,670,132) Accounts payable and accrued expenses 2,355,074 2,510,356 Net cash and cash equivalents provided by operating activities 49,294,647 29,559,401 Cash flows from investing activities: Short-term investments, net (750,486) (2,676,091) Investment in joint venture (448,832) - Purchase of building improvements and equipment (4,419,382) (2,546,326) Net cash and cash equivalents used in investing activities (5,618,700) (5,222,417) Cash flows from financing activities: Repayment of capital lease obligation (49,036) (54,678) Transfers to Thomas Jefferson University, net (32,636,896) (33,827,282) TJUH capital transfers 4,595, ,250 Net cash and cash equivalents used in financing activities (28,090,380) (33,407,710) Net increase (decrease) in cash and cash equivalents 15,585,566 (9,070,726) Cash and cash equivalents at beginning of year 39,446,131 48,516,857 Cash and cash equivalents at end of year $55,031,698 $39,446,131 Supplemental disclosure of cash flow information: Accounts payable related to building improvements and equipment $2,011,546 $76,159 Cash paid during the year for interest $599 $4,169 The accompanying notes are an integral part of the financial statements. - 4-

7 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Jefferson University Physicians ( JUP ) is a non-profit corporation formed under the laws of the Commonwealth of Pennsylvania. It consists of 17 departments with approximately 647 physician members. Therefore, JUP was formed to allow faculty of Thomas Jefferson University (the University ) to conduct clinical practices while supporting educational and research activities of the University. The University does not provide professional physician services. JUP has been recognized as a tax-exempt organization pursuant to Section 501 (c)(3) of the Internal Revenue Code. For the years ended, the University and JUP maintained an academic affiliation with both TJUH System, Inc. ( TJUH ), an integrated healthcare organization that provides healthcare services for residents of the greater Philadelphia region, and the Jefferson Health System (JHS). JHS was the sole corporate member of TJUH. JHS was a regional integrated healthcare delivery system. The other members of JHS were Magee Rehabilitation Hospital and Main Line Health. On June 30, 2014 TJUH separated from JHS and merged with the University to form a new organization and to enhance its tripartite mission of education, research and patient care. At 10:59AM on June 30, 2014 the University became the sole corporate member of TJUH and TJUH became the sole member of JUP, thereby aggregating all clinical operations of the merged entities into one organization. This transaction was accounted for as a merger and thus the JUP post-merger balance sheet will continue to be recorded at its historical basis under the carryover method. These financial statements reflect the financial position and results of operations of JUP prior to the merger. Basis of Presentation and 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of the financial statements including, but not limited to, recognition of net patient service revenue, which includes contractual allowances and provisions for bad debt and estimates for healthcare professional and general liabilities. Management relies on historical experience and other assumptions believed to be reasonable relative to the circumstances in making judgments and estimates. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and investments in highly liquid debt instruments with an original maturity of three months or less when purchased and are carried at cost which approximates fair value except that any such investments with funds held in self-insurance trust arrangements are classified as assets whose use is limited are classified as investments. - 5-

8 Concentration of credit risk with regard to cash and short term investments is not considered to be significant due to JUP s cash management policies. These policies restrict investments to low risk, highly liquid securities (that is, commercial paper, money market instruments, etc.) outline issuer credit requirements, and limit the amount that may be invested in any one issuer. Short Term Investments Investments are stated at fair value. These securities are available for use, if needed, for current operations. Investments include cash and cash equivalents and fixed income securities. The fair value of these securities is based on quoted market prices in active markets or dealer or brokered quotations obtained from national securities exchanges. Investments in Joint Ventures For fiscal years 2014 and 2013 JUP was a 40% owner in a partnership that provides outpatient imaging services and for fiscal year 2014 JUP was a 33.9% owner in a partnership that provides comprehensive concussion services. These investments are accounted for under the equity method. Building Improvements and Equipment Building improvements and equipment are carried at cost on the date of acquisition. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the assets. Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered. Revenue from a single third-party payor accounted for approximately 23% of the net patient revenue for fiscal years 2014 and Revenue from the Medicare program accounted for approximately 17% of the net patient service revenue for the fiscal years 2014 and Provision for Bad Debts The provision for bad debt expense is based upon management s assessment of expected net collections considering economic conditions, historical experience, trends in health care coverage, and other collection indicators. Periodically throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience by payer category, including those amounts not covered by insurance and history of cash collections. The results of this review are then used to make any modifications to the provision for bad debt expense to establish an appropriate allowance for uncollectible accounts. After satisfaction of amounts due from insurance and reasonable efforts to collect from the patient have been exhausted, JUP follows established guidelines for placing certain past-due patient balances with collection agencies, subject to terms of certain restrictions on collection efforts as determined by JUP. Accounts receivable are written off after collections efforts have been followed in accordance with JUP policies. - 6-

9 Grants and Contracts The American Recovery and Reinvestment Act of 2009 established incentive payments under the Medicare and Medicaid programs for certain health care providers that meaningfully use certified electronic health record technology by JUP is accounting for these incentives using the Gain Contingency accounting model. Accordingly, when all contingencies have been met and the funds have been received, JUP recognizes these incentives as revenue. JUP recognized $4.3 million and $2.5 million in fiscal year 2014 and 2013, respectively as grants and contract revenue in the statement of operations. Compensation and Academic Contributions Compensation is paid to physicians based upon cash receipts and various qualitative factors. Contributions are made to support the education and research missions of the University. Contributions are included in the statement of operations and changes in net assets as transfers to Thomas Jefferson University. Reclassifications Certain amounts in the prior year have been reclassified to conform to the current year presentation. Charity Care Of JUP s $368.2 million and $345.3 million of total operating expenses reported for the years ended, respectively, an estimated $1.1 million and $1.2 million arose from providing services to charity patients for the years ended, respectively. The estimated costs of providing charity services are based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on JUP s total operating expenses divided by gross professional activity revenue. 2. FAIR VALUE MEASUREMENT The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the University has the ability to access at the measurement date; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; Level 3 Inputs that are unobservable. - 7-

10 Inputs are used in applying the various valuations techniques and broadly refer to the assumption that market participants use to make valuation decisions. An investments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment. The categorization of an investment within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to JUP s perceived risk of that instrument. Investments whose values are based on quoted market prices in active markets, are therefore classified within Level 1, and include certain money market securities. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. They included certain U.S. government obligations, most government agency securities, and investment-grade corporate bonds. Also, included in this category are commingled fixed income funds. As Level 2 investments, they include positions that are not traded in active markets and/or subject to transfer restrictions. JUP has no Level 3 investments at June 30, 2014 or There were no transfers between Levels 1 and 2 during 2014 or The following table presents the cash and cash equivalents and short-term investments carried on the balance sheet by level within the valuation hierarchy as of June 30, 2014 (in thousands): Level 1 Level 2 Level 3 Total Cash and cash equivalents $55,032 $6,684 - $61,716 Fixed income securities: U.S Treasuries - 19,644-19,644 Total $55,032 $26,328 - $81,360 The following table presents the cash and cash equivalents and short-term investments carried on the balance sheet by level within the valuation hierarchy as of June 30, 2013 (in thousands): Level 1 Level 2 Level 3 Total Cash and cash equivalents $39,447 $2,541 - $41,988 Fixed income securities: U.S. Treasuries - 23,036-23,036 Total $39,447 $25,577 - $65,024-8-

11 3. BUILDING IMPROVEMENTS AND EQUIPMENT Building improvements and equipment at are as follows: Building improvements $12,863,970 $7,462,787 Equipment 35,319,275 34,037,173 Construction in progress 230, ,043 Less: accumulated depreciation (31,761,880) (29,054,005) Total building improvements and equipment, net $16,652,191 $12,867,998 JUP recorded $2.7 million and $5.8 million of depreciation expense for the years ended June 30, 2014 and 2013, respectively. Depreciation expense is reflected in the line item other expenses on the statements of operations and changes in net assets. Included in depreciation expense for the fiscal year ended June 30, 2013 is additional depreciation of $3.5 million associated with an electronic medical record information system. Management has determined that it is probable that the existing system will be replaced prior to the end of its previously estimated useful life. For financial reporting purposes, JUP uses straight-line depreciation over the assets estimated lives, which are as follows: Buildings and building improvements Fixed equipment Major moveable equipment years 5-10 years 5-10 years 4. PENSION PLANS JUP has a defined contribution plan for employees who work at least 1,000 hours a year. JUP makes contributions to the plan based on a percentage of compensation and years of service within limits as established by the IRS. Employees become fully vested after one year of service. Contributions to the plan for each of the years ended were approximately $12.5 million and $11.9 million, respectively. - 9-

12 5. PROFESSIONAL LIABILITY CLAIMS JUP maintains professional liability insurance under both self-insured and alternative risk financing insurance programs. For all self-insured programs JUP accrues for estimated retained risk liability arising from both asserted and unasserted claims. The estimate of liability is based upon an analysis of historical claims data as prepared by an independent actuary. Accrued professional liability claims of $151.4 million and $150.8 million were included in the consolidated balance sheets at, respectively, using discount rates of 3% at. Included in the accrued professional liability claims is $78.2 and $84.2 million at, respectively, related to estimated liabilities that have been transferred to third parties. A corresponding receivable of $78.2 and $84.2 million is included in Insurance receivable in the balance sheet at, respectively. Professional liability expense of $29.5 million and $28.0 million is included in the statement of operations for the years ended, respectively. JUP maintains professional liability insurance through a policyholder-owned, Vermontdomiciled, risk retention group, Mountain Laurel Risk Retention Group, Inc. ( RRG ), which was exclusively owned by Jefferson Health System (JHS) until June 30, For the professional liability coverage only, the RRG is 100% reinsured by a non-profit captive protected cell insurance company, Five Pointe Insurance Company (Five Pointe), domiciled in Delaware. Until June 30, 2014, JHS held the sole common membership in Five Pointe. On June 30, 2014, in connection with the TJUH separation from JHS and merger with the University, JHS transferred 49% of the common stock of the RRG to the University. Additionally, JHS relinquished its sole common membership in Five Pointe and transferred 48% of the membership units to TJUH. JUP participates in the Medical Availability and Reduction of Error Fund ( MCARE Fund ), which is a Pennsylvania governmentally authorized entity that consists of coverage with limits of $500,000 per medical incident and a $1.5 million annual aggregate per physician. The annual assessments for MCARE Fund coverage are based on the schedule of occurrence rates approved by the Insurance Commissioner of Pennsylvania for the Pennsylvania Professional Liability Joint Underwriting Association multiplied by an annual assessment percentage. No provision has been made for any future MCARE Fund assessments in the accompanying consolidated financial statements as JUP s portion of the MCARE Fund unfunded liability cannot be reasonably estimated. While management continues to monitor the factors used in making these estimates, the ultimate liability for professional and general liability claims could differ from current estimates due to the inherent uncertainties involved in making such estimates. TJUH has agreed to partially fund JUP payments for professional liability settlements in excess of primary and MCARE coverage limits. Pursuant to these agreements, $13.6 million and $1.7 million is included in the related party reimbursement for physician services in the statement of operations and changes in net assets for the years ended, respectively

13 6. COMMITMENTS AND CONTINGENCIES JUP is involved in litigation and regulatory investigations arising in the ordinary course of business. Based on the information currently available, in the opinion of management, all such matters are adequately covered by commercial insurance or by accruals, and if not so covered, are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position or results of operations of JUP. 7. LINES OF CREDIT JUP has available an unsecured line of credit of $5.0 million at June 30, 2014, under which there were no borrowings as of June 30, This arrangement does not have a termination date and is reviewed periodically. No compensating balance is required or maintained. 8. RELATED PARTY JUP and the University provide TJUH with physician and non-physician personnel and other support necessary to preserve and maintain the tertiary care capacity of TJUH. As a result, JUP receives funds from the University and TJUH. In 2014 and 2013, TJUH agreed to partially fund JUP payments for professional liability settlements. Refer to Note 5. Additionally, in 2014 and 2013, TJUH agreed to fund certain clinical practice renovations of $4.6 million and $474,000 respectively. The amounts recognized for the years ended were $124.8 million and $106.0 million, respectively. Included in due from TJUH on the balance sheet is $27.7 million and $21.1 million at respectively. JUP supports the education and research missions of the University. For the years ended June 30, 2014 and 2013 the amounts were $35.8 million and $37.4 million, respectively and are included in transfers to Thomas Jefferson University, net. The University provides support to certain clinical programs in JUP. The amounts provided for the years ended were $3.2 and $3.6 million, respectively. These amounts are included in transfers to Thomas Jefferson University, net. The University provides JUP the following services: administrative, finance, legal, human resources, internal audit, information systems, maintenance, and security services. The amounts charged to JUP were $6.5 million and $5.7 million, respectively and are recorded as part of other expenses on the statement of operations and changes in net assets for the years ended June 30, 2014 and SUBSEQUENT EVENTS JUP has monitored subsequent events from the date of the balance sheet through September 23, At 10:59AM on June 30, 2014 TJUH separated from Jefferson Health System and merged with the University. No material items were noted that would require an adjustment to or disclosure in the financial statements