Ochsner Health System Annual Financial Information Disclosure

Transcription

1 Ochsner Health System Annual Financial Information Disclosure For the Twelve Months Ended December 31, 2012

2 Forward Looking Information: This Financial Information Disclosure contains disclosures, which contain forward looking statements within the meaning of the Federal securities laws. Forward looking statements include all statements that do not relate solely to historical or current fact and can be identified by the use of words expect, anticipate, intend, project, likely, may, might, estimate, budget and similar words or expressions. These forward looking statements are based on the current plans and expectations of Ochsner Health System ( OHS ) as of the date of this report and are subject to a number of known and unknown risks and uncertainties inherent in the operation of health care facilities, many of which are beyond OHS's control, that could significantly affect current plans and expectations and OHS's future financial position and results of operations. Important factors that could cause results to differ materially from those expected by management include, but are not limited to, general, economic and business, competition from other healthcare facilities in the service areas, an unfavorable pricing environment, inability to achieve expected efficiencies in operations or effectively control health care costs, the efforts of insurers and others to contain health care costs, changes in Medicare or Medicaid reimbursement formulas, the risk that managed care provider arrangements will not be negotiated or renewed on acceptable terms, future divestitures or acquisitions which may have a financial impact, availability and terms of capital to fund future expansion and ongoing capital needs, new laws or regulations, the possible enactment of federal or state health care reform, fines or penalties related to regulatory matters, changes in accounting standards and practices, the outcome of pending and future litigation and government investigations, labor issues and the ability to attract and retain qualified management and other personnel, including physicians, nurses and medical support personnel. Given these uncertainties, bondholders and prospective bondholders are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report. OHS disclaims any obligation, and make no promise, to update any such factors or forward looking statements or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward looking statement, whether as a result of changes in underlying factors, to reflect new information, as a result of the occurrence of events or developments or otherwise. 2

3 MANAGEMENT S DISCUSSION OF FINANCIAL RESULTS INTRODUCTORY STATEMENT Ochsner Health System ( OHS or the System ) is a Louisiana nonprofit corporation exempt from federal income taxation as an organization described in Section 501(c)(3) of the Code. OHS was formed in July 2006 and became the sole corporate member of Ochsner Clinic Foundation ( OCF ) in September OHS is also the sole corporate member of Ochsner Community Hospitals ( OCH ), a Louisiana nonprofit corporation, exempt from federal income taxation as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ). OCF is a Louisiana nonprofit corporation, exempt from federal income taxation as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ). OCF, headquartered in New Orleans, Louisiana, either directly or through its fully owned affiliates, owns and operates a 547 bed acute care hospital known as Ochsner Medical Center( OMC ), an 11-story clinic building, a 143- room hotel and related medical facilities located on a main campus in Jefferson Parish at the western end of New Orleans (the Main Campus ). It operates Ochsner Medical Center Westbank, a 165 bed acute care hospital, as a remote campus of Ochsner Medical Center. It also owns and operates 53 health centers throughout southeast Louisiana, owns a hospital in Baton Rouge that operates as Ochsner Medical Center Baton Rouge, owns a hospital in Slidell, Louisiana that operates as Ochsner Medical Center Northshore, operates a hospital in Raceland, Louisiana known as Ochsner St. Anne General Hospital, and several fitness centers that operate as Elmwood Fitness Center. OCH was formed on July 17, 2006 and owns and operates Ochsner Medical Center Kenner and Ochsner Baptist Medical Center. It also owns Ochsner Medical Center Westbank which is leased to Ochsner Clinic Foundation and operates as a remote campus of Ochsner Medical Center. OCF is the only Obligated Group Member under the Master Indenture. Certain affiliates of OCF have been designated as Designated Affiliates and Credit Group Members under the Master Indenture. Under the Master Indenture, Obligated Group Members are jointly and severally liable to make payments with respect to Obligations issued under the Master Indenture. Obligated Group Members may designate entities as Designated Affiliates under the Master Indenture, and may rescind such designation at any time. Designated Affiliates include Brent House Corporation, Ochsner Clinic L.L.C., Ochsner Bayou, L.L.C., East Baton Rouge Medical Center, LLC DBA Ochsner Medical Center Baton Rouge, Ochsner Medical Center Northshore, LLC, Ochsner Home Medical Equipment, LLC, Ochsner Community Hospitals, Ochsner Baptist Medical Center, LLC, Ochsner Medical Center Westbank, LLC and Ochsner Medical Center Kenner, LLC. OCF and the other Credit Group Members constituted 91.1% of the consolidated total assets of OHS as of December 31, 2012 and 99.9% of the consolidated total revenue of OHS for the twelve months ended December 31,

4 FINANCIAL RESULTS The System had an Excess of Revenues over Expenses of $10.6 million for 2012 compared to $35.9 million for OHS had a Loss from Operations of $35.0 million for 2012 compared to Income from Operations of $24.9 million for $43.0 million of the year over year decrease is related to the installation of EPIC, an integrated clinical and patient billing software that is being installed across the system. The $43 million decrease includes $8.1 million of increased operating expenses related to the implementation, $10.9 million of depreciation and $24.0 million of physician productivity declines during conversion. OHS implemented EPIC on an accelerated schedule to minimize the length of the operational impact. As of December 2012 three of the seven hospitals and 44 of the 53 health centers, which make up 76% of Total Revenue, completed the transition. Ochsner Baptist Medical Center and Ochsner Medical Center Kenner converted in March Ochsner Medical Center Baton Rouge and the 9 remaining health centers will convert in June $4.7 million of the year over year decrease is due to reductions in Medicaid and uncompensated care payments. OHS has experienced a cumulative annual impact of $50.0 million in Medicaid and uncompensated care payment cuts since the State of Louisiana started payment reductions in February $7.3 million of the year over year decrease is related to the increase in the funding of partially owned subsidiaries formed exclusively for charitable, educational and scientific purposes. Additionally, Ochsner experienced the negative financial effects of Hurricane Isaac that made landfall in the New Orleans area on August 29, Hurricane Isaac created widespread power outages and disrupted operations throughout southeast Louisiana for over a week. Ochsner Clinic locations were closed several days due to the storm and while the hospitals remained open they did experience reduced volumes. The estimated financial impact related to Hurricane Isaac is approximately $16 million. Summary of Prior Year Variances Start Up Costs Related to EPIC $43.0 Million Hurricane Isaac $16.0 Million Reduction to Medicaid and Uncompensated Care $4.7 Million Funding of Charitable, Educational and Scientific Subsidiaries $7.3 Million The System achieved total operating revenue of $1.8 billion for 2012, an increase of $45.2 million or 2.5% over $36.8 million of the growth was in net patient service revenue less provision for bad debts, primarily due to increased patient activity. When comparing 2012 to 2011, OHS experienced a 2.5% increase in inpatient days and a 9.0% increase in emergency room visits. This was offset by a 2.0% reduction in outpatient surgical procedures and a 0.5% decrease in clinic visits. Discharges decreased 1.2% primarily due to an increase in observation cases, which increased 11.8%. Discharges and observation cases combined were up 1.1%. Inpatient surgical procedures were flat. Physician schedules were reduced during the post go live period of the EPIC implementation which generated an approximate $24.0 million reduction in net patient service. Also, Hurricane Isaac created a disruption in patient activity at the end of August and beginning of September. The provision for bad debt for Ochsner Health System, as a percentage of Net Patient Service Revenue and Net Premium Revenue, was 4.3% for 2012 compared to 4.9% for The decrease in bad debt is due to improved efforts in the revenue cycle and in the classification of patients as charity care when they meet charity care policy guidelines. Bad debt and charity care combined accounted for 8.5% of Net Patient Service Revenue and Net Premium Revenue for 2012 compared to 7.1% for Other Operating Revenue includes $9.1 million for a refund of the employer portion of FICA taxes paid on medical residents between January 1995 and March This refund is a result of claims filed with 4

5 the IRS since 1995 on the basis that medical residents are exempt from FICA taxes based on their status as a student. Salaries and wages for 2012 were $872.4 million, a $50.5 million or 6.1% increase over Total providers increased by 8.5% or 80 FTES. That includes a 5.7% increase in physicians or 42 FTEs and a 18.1% increase in the number of other providers or 38 FTEs. Also, resources were added in the information technology, revenue cycle and medical management areas to enhance capabilities in each of these areas. Depreciation and Amortization for 2012 increased by $13.8 million over $10.9 million of the increase relates to the amortization of acquisition costs for EPIC, an integrated clinical and patient billing software being installed across the system. Interest Expense for 2012 increased by $2.7 million over 2011 primarily due to the Series 2011 bonds issued in May of Medical services to outside providers expense for 2012 increased by $11.8 million over In recent years there has been an increased emphasis on medical management processes designed to reduce inflation and improve utilization. The System currently manages almost 30,000 Medicare Advantage members under a capitated arrangement. Medical Supplies and Services increased by $5.5 million or 2.0% when comparing 2012 to Medical Supplies and Services as a percentage of Net Patient Service Revenue and Net Premium Revenue was 16.5% for 2012 and 16.3% for Supply chain initiatives targeting waste reduction and cost reduction such as physician preference item pricing, product standardization and utilization have been put in place and continue to offset inflation and reduce medical supply costs. Other operating expenses which includes building and equipment, insurance, professional services and general and administrative expenses for 2012 increased by $10.1 million or 3.0% over $7.3 million of the difference is due to an increase in the funding of partially owned subsidiaries formed exclusively for charitable, educational and scientific purposes. These subsidiaries work in collaboration with other hospitals and government entities to improve access to health care for low income and needy persons. Non Operating gains for 2012 were $45.6 million compared to $11.1 million for The majority of the increase is due to realized gains that were the result of restructuring the pooled investment portfolio into a global structure. Market appreciation that was previously recorded as unrealized gains was recorded as realized gains upon liquidation of the investment. 5

6 LIQUIDITY AND CASH POSITION At December 31, 2012, Ochsner Health System had unrestricted cash and investments of $368.8 million which equates to 75 days cash on hand. The $68.3 million decrease from December 2011 includes a $38.0 million increase in unrestricted investments due to an increase in market valuations. This was offset by approximately $121.1 million use of cash related to EPIC, an integrated clinical and patient billing software that is being installed across the system. Components of the $121.1 million include $8.1 million of increased operating expenses related to the implementation, $24.0 million of physician productivity declines during conversion, $60.0 million of capital expenditures and a $29.0 million increase in accounts receivable. Cumulatively through 2012 OHS has incurred $113.0 million of capital expenditures related to EPIC, which is approximately 90% complete. Cumulatively through 2012 OHS has received $9.2 million of meaningful use funds which is about 20% of the total proceeds expected. The majority of meaningful use funds are expected to be received in 2013 and Accounts Receivable is expected to return to normal levels as the legacy system is sunset and as processes and procedures related to the new system become more efficient. Additionally, as of December 31, 2012 OHS has restricted investments that include $58.6 million remaining in the 2011 bond construction fund and $47.1 million of donor restricted investments. The 2011 bond construction fund will be used in 2013 on the remaining 2011 bond projects. OHS also maintains $44.0 million in debt service reserve funds related to the 2007 and 2011 bonds. DEBT & ANNUAL DEBT SERVICE COVERAGE RATIO As of December 31, 2012, OHS had $656.0 million in total long term debt outstanding compared to $666.6 million at December 31, The long term debt to capitalization ratio for OHS was 62.1% versus 61.1% in Debt Service Coverage Calculation: Income Available for Debt Service 117, ,092 Annual Debt Service 40,220 30,060 Annual Debt Service Coverage Ratio 2.9x 4.2x 6

7 OCHSNER HEALTH SYSTEM EXCESS OF (DEFICIENCY IN) REVENUES OVER EXPENSES For the Twelve Months Ended December 31, 2012 and December 31, 2011 (Thousands) DIFF NET PATIENT REVENUE 1,558,383 1,530,148 28,235 PROVISION FOR BAD DEBTS (74,457) (83,069) 8,612 NET PATIENT SERVICE REVENUE LESS PROVISION FOR BAD DEBTS 1,483,926 1,447,079 36,847 PREMIUM REVENUE 292, ,222 (5,277) RESTRICTED FUNDS TRANSFER 3,217 3,581 (364) OTHER OPERATING REVENUE 61,540 47,505 14,035 TOTAL OPERATING REVENUE 1,841,628 1,796,387 45,241 SALARIES AND WAGES 872, ,948 (50,454) BENEFITS 132, ,820 (10,728) DEPRECIATION AND AMORTIZATION 75,884 62,085 (13,799) INTEREST 30,802 28,059 (2,743) MEDICAL SERVICES TO OUTSIDE PROVIDERS 134, ,019 (11,774) MEDICAL SUPPLIES AND SERVICES 283, ,136 (5,481) OTHER OPERATING EXPENSES 346, ,444 (10,121) TOTAL OPERATING EXPENSES 1,876,611 1,771,511 (105,100) INCOME FROM OPERATIONS (34,983) 24,876 (59,859) NON-OPERATING GAINS AND LOSSES 45,626 11,072 34,554 EXCESS OF <DEFICIENCY IN> REVENUE OVER EXPENSES 10,643 35,948 (25,305) 7

8 OCHSNER HEALTH SYSTEM CONSOLIDATED BALANCE SHEET As of December 31, 2012 and December 31, 2011 (Thousands) ASSETS Dec 31, 2012 Dec 31, 2011 CASH AND CASH EQUIVALENTS 47, ,974 ASSETS LIMITED AS TO USE REQUIRED FOR CURRENT LIABILITIES 3,898 3,732 PATIENT ACCOUNTS RECEIVABLE - NET 192, ,319 ACCOUNTS RECEIVABLE - OTHER 35,851 32,731 PLEDGES RECEIVABLE - NET 1,036 1,517 INVENTORY 35,234 34,672 PREPAID EXPENSES AND OTHER CURRENT ASSETS 21,655 22,279 ESTIMATED THIRD PARTY PAYOR SETTLEMENTS - NET 15,104 13,886 TOTAL CURRENT ASSETS 353, ,110 ASSETS LIMITED AS TO USE BY BOARD FOR CAPITAL IMPROVEMENTS, CHARITY, AND RESEARCH 320, ,146 UNDER BOND INDENTURE AGREEMENTS 102, ,899 UNDER LOAN AGREEMENT 4,193 3,311 UNDER SELF INSURANCE TRUST FUND 11,253 10,224 DONOR RESTRICTED LONG TERM INVESTMENTS 47,130 43,820 TOTAL ASSETS LIMITED AS TO USE 486, ,400 LESS ASSETS LIMITED FOR CURRENT LIABILITY (3,898) (3,732) TOTAL NON-CURRENT ASSETS LIMITED AS TO USE 482, ,668 INVESTMENTS IN UNCONSOLIDATED AFFILIATES, REAL ESTATE AND OTHER 7,707 7,620 PROPERTY NET OF ACCUM DEP 672, ,246 GOODWILL - NET 43,077 43,077 OTHER INTANGIBLE ASSETS - NET 11,433 11,433 DUE FROM RELATED PARTIES 0 0 NOTES RECEIVABLE - RELATED PARTY 0 0 OTHER ASSETS 14,252 16,510 TOTAL ASSETS 1,584,478 1,587,664 8

9 OCHSNER HEALTH SYSTEM CONSOLIDATED BALANCE SHEET As of December 31, 2012 and December 31, 2011 (Thousands) LIABILITIES AND NET ASSETS Dec 31, 2012 Dec 31, 2011 ACCOUNTS PAYABLE 70,706 72,469 ACCRUED INTEREST 4,161 4,195 ACCRUED SALARY AND WAGES 62,098 58,625 ACCRUED COMPENSATION FOR ABSENCES 36,595 34,642 DEFERRED REVENUE 14,349 10,109 ESTIMATED THIRD PARTY PAYOR SETTLEMENTS - NET 12,812 14,318 RESERVES FOR LOASS AND LOSS ADJUSTMENT EXPENSES 12,030 11,026 OTHER 12,479 12,023 PENSION OBLIGATIONS - CURRENT PORTION BONDS PAYABLE - CURRENT 5,635 5,360 NOTES PAYABLE 52,969 52,969 LONG TERM DEBT - CURRENT PORTION 6,230 5,634 TOTAL CURRENT LIABILITIES 290, ,714 PENSION AND POST RETIREMENT OBLIGATIONS 154, ,614 BONDS PAYABLE - NON CURRENT 577, ,085 LONG TERM DEBT 78,283 83,521 OTHER LONG TERM LIABILITIES 22,214 16,560 TOTAL LIABILITIES 1,123,537 1,109,494 UNRESTRICTED FUND BALANCE 404, ,825 TEMPORARILY RESTRICTED FUND BALANCE 33,797 30,792 PERMANENTLY RESTRICTED FUND BALANCE 22,664 22,553 TOTAL NET ASSETS 460, ,170 TOTAL LIABILITIES AND NET ASSETS 1,584,478 1,587,664 9

10 OCHSNER HEALTH SYSTEM UTILIZATION STATISTICS Average Licensed Beds (1) 1,091 1,079 1,078 1,246 1,252 Average Number of Beds in Use (2) 1,084 1,111 1,113 1,293 1,308 Discharges 50,090 52,995 55,246 62,463 61,706 Patient Days (3) 232, , , , ,017 Average Daily Census (3) Percent Occupancy (3) 58.78% 59.34% 59.93% 56.89% 57.44% Average Length of Stay (3) Adjusted Patient Days (3) 403, , , , ,382 Ochsner OMC OMC Ochsner Medical OMC Ochsner Baton North OMC Baptist Center WestBank St Anne Rouge Shore Kenner Med Ctr TOTAL Average Licensed Beds (1) ,252 Average Number of Beds in Use (2) ,308 Discharges 27,720 8,696 2,074 7,590 5,266 7,052 3,308 61,706 Patient Days (3) 154,747 30,925 7,404 25,275 21,754 21,945 12, ,017 Average Daily Census (3) Percent Occupancy (3) 73.66% 46.68% 57.80% 50.78% 36.02% 44.69% 42.69% 57.44% Average Length of Stay (3) Adjusted Patient Days (3) 266,925 56,711 26,537 61,888 39,427 42,556 33, ,382 (1) Data excludes NICU and Nursery Beds (2) Data excludes Nursery beds, but includes NICU beds, a large number of beds in use will yield an amount greater than the number of licensed beds. (3) Data excludes Normal Newborn Days. OCHSNER HEALTH SYSTEM GROSS REVENUE BY PAYOR FYE FYE Payor Groupings 12/31/ /31/2011 Managed Care and Commercial 38% 39% Medicare Managed Care 21% 21% Medicare - Traditional 22% 22% Medicaid 15% 14% Other 4% 4% TOTAL 100% 100% 10

11 Ochsner Health System and Subsidiaries Consolidated Financial Statements as of and for the Years Ended December 31, 2012 and 2011, and Independent Auditors Report

12 OCHSNER HEALTH SYSTEM AND SUBSIDIARIES TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011: Balance Sheets 2 3 Statements of Operations 4 Statements of Changes in Net Assets 5 Statements of Cash Flows 6 Page Notes to Consolidated Financial Statements 7 40

13 INDEPENDENT AUDITORS REPORT To the Board of Directors of Ochsner Health System and Subsidiaries Jefferson, Louisiana We have audited the accompanying consolidated financial statements of Ochsner Health System and subsidiaries (OHS), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these 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 these 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 the auditor s 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, the auditor considers internal control relevant to OHS 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 OHS 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 Ochsner Health System and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. April 29, 2013

14 OCHSNER HEALTH SYSTEM AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 47,863 $ 123,974 Assets limited as to use required for current liabilities 3,898 3,732 Patient accounts receivable net 192, ,319 Accounts receivable other 35,851 32,731 Pledges receivable net 1,036 1,517 Inventories 35,234 34,672 Prepaid expenses and other current assets 21,655 22,279 Estimated third-party payor settlements net 15,104 13,886 Total current assets 353, ,110 ASSETS LIMITED AS TO USE: By Board for capital improvements, charity, research, and other 320, ,146 Under bond indenture agreements 102, ,899 Under loan agreements 4,193 3,311 Under self-insurance trust fund 11,253 10,224 Donor-restricted long-term investments 47,130 43,820 Total assets limited as to use 486, ,400 Less assets limited as to use required for current liabilities (3,898) (3,732) Noncurrent assets limited as to use 482, ,668 INVESTMENTS IN UNCONSOLIDATED AFFILIATES, REAL ESTATE AND OTHER 7,707 7,620 PROPERTY Net 672, ,246 GOODWILL Net 43,077 43,077 INTANGIBLE ASSETS Net 11,433 11,433 OTHER ASSETS 14,252 16,510 TOTAL $ 1,584,478 $ 1,587,664 See notes to consolidated financial statements.

15 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable $ 70,706 $ 72,469 Accrued interest 4,161 4,195 Accrued salaries, wages, and benefits 62,098 58,625 Accrued compensation for absences 36,595 34,642 Deferred revenue 14,349 10,109 Estimated third party payor settlements net 12,812 14,318 Reserves for lossses and loss adjustment expenses 12,030 11,026 Other 12,479 12,023 Pension and postretirement obligations current portion Bonds payable current portion 5,635 5,360 Notes payable current portion 52,969 52,969 Long-term debt current portion 6,230 5,634 Total current liabilities 290, ,714 PENSION AND POSTRETIREMENT OBLIGATIONS 154, ,614 BONDS PAYABLE 577, ,085 LONG-TERM DEBT 78,283 83,521 OTHER LONG-TERM LIABILITIES 22,214 16,560 Total liabilities 1,123,537 1,109,494 COMMITMENTS AND CONTINGENCIES (Notes 4 and 13) NET ASSETS: Unrestricted 404, ,825 Temporarily restricted 33,797 30,792 Permanently restricted 22,664 22,553 Total net assets 460, ,170 TOTAL $ 1,584,478 $ 1,587,

16 OCHSNER HEALTH SYSTEM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands) UNRESTRICTED REVENUES: Patient service revenue net of contractual allowances and discounts $ 1,558,383 $ 1,530,148 Provision for bad debts (74,457) (83,069) Net patient service revenue, less provision for bad debts 1,483,926 1,447,079 Premium revenue 292, ,222 Other operating revenue 61,540 47,505 Net assets released from restrictions used for operations 3,217 3,581 Total unrestricted revenues 1,841,628 1,796,387 EXPENSES: Salaries and wages 872, ,948 Benefits 132, ,820 Depreciation and amortization 75,884 62,085 Interest 30,802 28,059 Medical services to outside providers 134, ,019 Medical supplies and services 283, ,136 Other operating expenses 346, ,444 Total expenses 1,876,611 1,771,511 OPERATING (LOSS) INCOME (34,983) 24,876 NONOPERATING GAINS AND LOSSES Investment and other gains and losses net 45,626 11,072 EXCESS OF REVENUES OVER EXPENSES 10,643 35,948 CHANGE IN NET UNREALIZED LOSSES (7,648) (21,126) NET ASSETS RELEASED FROM RESTRICTIONS USED FOR CAPITAL ACQUISITIONS 685 1,461 INCREASE IN UNRESTRICTED NET ASSETS BEFORE EFFECT OF PENSION RELATED CHANGES OTHER THAN NET PERIODIC PENSION COSTS 3,680 16,283 PENSION RELATED CHANGES OTHER THAN NET PERIODIC PENSION COSTS (24,025) (70,998) DECREASE IN UNRESTRICTED NET ASSETS $ (20,345) $ (54,715) See notes to consolidated financial statements

17 OCHSNER HEALTH SYSTEM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands) UNRESTRICTED NET ASSETS: Excess of revenues over expenses $ 10,643 $ 35,948 Change in net unrealized losses (7,648) (21,126) Net assets released from restrictions used for capital acquisitions 685 1,461 Pension related changes other than net periodic pension costs (24,025) (70,998) Decrease in unrestricted net assets (20,345) (54,715) TEMPORARILY RESTRICTED NET ASSETS: Contributions 4,952 4,534 Investment income (loss) net of payments to beneficiaries 1,955 (1,132) Net assets released from restrictions: Operations (3,217) (3,581) Capital acquisitions (685) (1,461) Increase (decrease) in temporarily restricted net assets 3,005 (1,640) PERMANENTLY RESTRICTED NET ASSETS Contributions Increase in permanently restricted net assets DECREASE IN NET ASSETS (17,229) (56,167) NET ASSETS Beginning of year 478, ,337 NET ASSETS End of year $ 460,941 $ 478,170 See notes to consolidated financial statements

18 OCHSNER HEALTH SYSTEM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Decrease in net assets $ (17,229) $ (56,167) Adjustments to reconcile decrease in net assets to net cash provided by operating activities: Pension related changes other than net periodic pension costs 24,025 70,998 Depreciation and amortization 77,457 62,085 Provision for bad debts 74,457 83,069 Contributions restricted for long-term investments (111) (132) Contributions restricted for capital acquisitions (187) Net realized and unrealized (losses) gains on investments (30,831) 13,895 Loss on disposal of fixed assets net Changes in operating assets and liabilities: Patient accounts receivable (99,607) (52,506) Other current and noncurrent assets (2,369) (20,331) Accounts payable (13,031) 489 Accrued interest and other liabilities (3,990) 11,806 Net cash provided by operating activities 8, ,146 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of assets whose use is limited and other investments (12,069) (217,555) Sales and maturities of assets whose use is limited and other investments 62, ,107 Capital expenditures (123,676) (96,329) Proceeds from asset disposal 179 1,384 Net cash used in investing activities (73,386) (209,393) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of bonds payable and long-term debt (11,318) (20,152) Proceeds from long-term borrowings ,757 Payments of bond issue costs (2,564) Payments on capital lease obligations (542) Proceeds from contributions restricted for long-term investments Proceeds from contributions restricted for capital acquisitions 187 Net cash (used in) provided by financing activities (11,691) 126,360 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (76,111) 30,113 CASH AND CASH EQUIVALENTS Beginning of year 123,974 93,861 CASH AND CASH EQUIVALENTS End of year $ 47,863 $ 123,974 SUPPLEMENTAL DISCLOSURE Cash paid for interest (net of amounts capitalized) $ 30,226 $ 25,015 SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES: Property purchases included in accounts payable $ 16,859 $ 5,591 Property purchases financed by capital leases and note payable $ 7,589 $ 26,620 Reduction in cost of previously financed property purchases $ 2,055 $ - See notes to consolidated financial statements

19 OCHSNER HEALTH SYSTEM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Ochsner Health System (OHS or Ochsner ) is a not-for-profit, non stock membership corporation formed during 2006 as the parent company of Ochsner Clinic Foundation (OCF) and Ochsner Community Hospitals (OCH). OCF (formerly Alton Ochsner Medical Foundation or Foundation), located in New Orleans, Louisiana, is a not-for-profit institution reporting its activities in the following net asset categories: Unrestricted: Foundation Activities Ochsner Foundation Hospital ( Hospital ) Ochsner Foundation Hospital Westbank Campus Research Education Elmwood Fitness Center Brent House Corporation Ochsner Clinic LLC ( Clinic ) Gulf Cost Physician Network LLC (GCPN) Ochsner Bayou LLC East Baton Rouge Medical Center LLC ( Ochsner Medical Center Baton Rouge ) Ochsner HME LLC Ochsner System Protection Company Ochsner Medical Center Northshore LLC Temporarily restricted: Foundation Activities Research Education Permanently restricted: Foundation Activities Research Education On August 31, 2001, the Foundation and the Clinic effected a merger transaction resulting in the net assets of the Clinic being acquired by Alton Ochsner Medical Foundation. The Clinic is a multi-specialty group physician practice operating out of three primary locations and several satellite clinics in the New Orleans and Baton Rouge areas. In connection therewith, the name of Alton Ochsner Medical Foundation was changed to Ochsner Clinic Foundation (OCF), and the Clinic became a wholly owned subsidiary of OCF. As part of the merger transaction, the Foundation purchased the membership interests of the former members of the Clinic and the Foundation became the sole member of the Clinic

20 The Hospital s medical and teaching staffs consist of physicians associated with the Clinic, a group practice of almost 900 physicians. OCF also engages in a wide range of medical research, which is conducted by the Clinic s physicians. OCF established the Brent House Corporation to acquire and operate the Brent House Hotel for the general benefit of the patients of OHS. In September 2006, OCF amended its articles of incorporation and by-laws to provide that OHS is the sole member of OCF with the authority to appoint the community directors of OCF, constituting a majority of its OCF board of directors. In 2009, OCF formed Southeast Louisiana Homecare, LLC (SLH), a joint venture with a third party. Coincident therewith, OCF sold 100% of the assets of Ochsner Home Health Corporation and St. Anne Home Health, including related licenses, to SLH and a 25% membership interest in SLH. SLH operates as a home health agency and, subsequent to the sale, is being accounted for on the equity method of accounting by OCF subsequent to the sale. Also in 2009, Ochsner HME LLC and OSPC were established. Ochsner HME LLC was formed for the purpose of selling and leasing durable medical equipment and OSPC operates as a wholly-owned captive insurance company domiciled in the state of Louisiana. In 2010, OCF purchased Northshore Regional Medical Center from Tenet Healthcare Corporation and Healthcare Property Partners. The facility operates as Ochsner Medical Center Northshore LLC. OHS is also the sole member of OCH, a not-for-profit entity formed in July 2006 to acquire three former Tenet hospitals in the greater New Orleans area. The acquisition of the hospitals took place on October 1, The individual hospitals were formed as not-for-profit, wholly owned limited liability subsidiaries of OCH and were as follows: Ochsner Medical Center Kenner, LLC formerly Kenner Regional Medical Center in Kenner, Louisiana Ochsner Medical Center Westbank, LLC formerly Meadowcrest Hospital in Gretna, Louisiana (until the facility s operations were transferred to OCF on September 14, Ochsner Baptist Medical Center, LLC formerly Memorial Medical Center in New Orleans, Louisiana Basis of Presentation and Principles of Consolidation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of OCF, OCH, and their wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. The assets of any member of the consolidated group may not be available to meet the obligations of other members in the group, except as disclosed in Notes 6, 7, and 8. 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 consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Of particular significance to OHS consolidated financial statements are pension assumptions, other post-retirement obligations, allowances for doubtful accounts, insurance recoveries, and estimates of amounts to be received under government healthcare and other provider contracts. Actual results could differ from those estimates

21 Cash and Cash Equivalents Cash and cash equivalents include investments with a maturity of three months or less when purchased, excluding amounts whose use is limited by board designation, under bond indenture agreements, or under self-insurance agreements. Inventories Inventories are stated at the lower of first-in, first-out cost or market. Pledges Receivable Unconditional promises to give are recognized as revenues at their fair values in the period received. Pledges receivable are recorded net of necessary discounts and allowances. The non-current portion of pledges receivable is recorded in other assets in the consolidated balance sheets. Pledges receivable as of December 31, 2012 and 2011 are expected to be realized as follows (in thousands): In one year or less $ 1,111 $ 1,634 Between one and five years 2,353 2,995 Greater than five years 1,125 1,125 4,589 5,754 Less discount (ranging from and 0.13% 4.5% and 1.25% 4.50% at December 31, 2012 and 2011, respectively) and allowance for uncollectible pledges (471) (645) Pledges receivable net $ 4,118 $ 5,109 Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated balance sheets. Investments also include investments in private equity funds, hedge funds, real estate funds, offshore fund vehicles, funds of funds and common/collective trust funds structured as limited liability corporations or partnerships or trusts. These investments are termed alternative investments in the notes to the consolidated financial statements and those without readily marketable fair values are accounted for under the equity method, which approximates fair value. Investment income or loss (including realized gains and losses on investments, interest and dividends) is included in the excess of revenues over expenses in unrestricted net assets (performance indicator) unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from the excess of revenues over expenses. If management believes a decline in the value of a particular investment is temporary, the decline is included in unrealized losses on the consolidated statements of operations. If the decline is evaluated as being other than temporary, the carrying value of the investment is written down and a realized loss is recorded in nonoperating gains and losses in the consolidated statements of operations. OHS recorded impairment charges on investment securities of approximately $68,000 and $3,301,000 for the years ended December 31, 2012 and 2011, respectively. Assets Limited as to Use Assets limited as to use primarily include assets held by trustees under indenture agreements, investments restricted by donors, and designated assets set aside by the Board of Trustees (the Board ) primarily for future capital improvements, over which the Board retains control and may at its discretion subsequently use for other purposes. Amounts required to meet current liabilities of OHS have been classified in the consolidated balance sheets as current assets

22 Property Net Property improvements and additions are recorded at cost and capitalized and depreciated on the straight-line basis over the following estimated useful lives of the assets, as follows: Years Land improvements 5 25 Buildings and building improvements Leasehold improvements Equipment, furniture, and fixtures 2 20 Impairment of Long-Lived Assets OHS evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. There were no impairment charges for the years ended December 31, 2012 and Capitalization of Interest OHS capitalizes interest expense on qualifying construction in progress expenditures based on an imputed interest rate estimating OHS average cost of borrowed funds for the project. Such capitalized interest becomes part of the cost of the related asset and is depreciated over its estimated useful life. Capitalized interest costs totaled approximately $5,275,000 and $4,126,000 for the years ended December 31, 2012 and 2011, respectively. Goodwill and Intangible Assets Goodwill and intangible assets, consisting primarily of trade name and employment contracts, were recorded as a result of the Foundation s merger with the Clinic in Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired. Goodwill arising from business combinations is not amortized. Goodwill and indefinite-lived intangible assets are required to be evaluated for impairment at the same time every year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. OHS has selected December 31 as its annual testing date. Deferred Revenue OHS, through OCF, engages in research activities funded by contracts from U.S. Government agencies and other private sources. Revenue related to grants and contracts is recognized as the related costs are incurred. Amounts received from grant and contract sponsors for which OCF has not yet fulfilled its obligations are recognized in future periods once the obligations have been satisfied. Deferred Financing Costs In connection with the issuance of the OCF Series 2007-A, OCH Series 2007-B, and OCF Series 2011 bonds and notes payable (see Notes 6 and 7), financing costs in the aggregate of approximately $8,241,000 were capitalized, are being amortized over the respective lives of the bonds and notes payable, and are included in other assets in the consolidated balance sheets. Accumulated amortization of these deferred financing costs approximated $1,003,000 and $753,000 at December 31, 2012 and 2011, respectively. Estimated Workers Compensation, Professional Liability, and Employee Health Claims OHS is self-insured for workers compensation, professional liability, and employee health claims. The provisions for estimated workers compensation, professional liability, and employee health claims include estimates for the ultimate costs for both reported claims and claims incurred but not reported in

23 accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450, Contingencies. These estimates incorporate OCF s past experience, as well as other considerations, including the nature of claims, industry data, relevant trends, and the use of actuarial information. Accounting for Pension and Other Postretirement Plans OHS recognizes the overfunded or underfunded status of its pension and other postretirement plans as an asset or liability in its consolidated balance sheets. Changes in the funded status of the pension and other postretirement plans are reported as a change in unrestricted net assets presented below the excess of revenues over expenses financial statement line item in the consolidated statements of operations in the year in which the changes occur. Reinsurance OSPC relies on reinsurance to limit its retained insurance risk. In entering into reinsurance agreements, management considers a variety of factors including the creditworthiness of reinsurers. In preparing its financial statements, management makes estimates of amounts receivable from reinsurers which includes consideration of amounts, if any, estimated to be uncollectible by management based on an assessment of factors including an assessment of the creditworthiness of the reinsurers. OSPC cedes 100% of the underlying risk and as a result, OSPC retains no insurance risk. Included in accounts receivable other in the consolidated balance sheets is reinsurance receivable on unpaid losses which includes estimated amounts of unpaid losses and loss adjustment expenses which are expected to be recoverable from reinsurers pursuant to reinsurance agreements. Such amounts have been estimated using actuarial assumptions consistent with those used in establishing the related liability for losses and loss adjustment expenses. As of December 31, 2012 and 2011, reinsurance receivables totaled approximately $10,030,000 and $9,026,000, respectively. Insurance Liabilities OSPC s liability for losses and loss-adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. The reserve for losses and loss-adjustment expenses, reported net of receivables for salvage and subrogation, totaled approximately $12,030,000 and $11,026,000 at December 31, 2012 and 2011, respectively. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually. Developed case law and adequate claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by OHS has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by OHS in perpetuity. Consolidated Statement of Operations For purposes of presentation, all revenues and expenses are reported as operating except for investment income and other gains and losses net, which is reported as nonoperating

24 Net Patient Service Revenue Net patient service revenue is recognized as services are performed and is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Amounts OHS receives for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as health maintenance organizations, preferred provider organizations and other private insurers are generally less than the OHS established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future, OHS establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements and collection letters. Patients that express an inability to pay are reviewed for potential sources of financial assistance including our charity care policy. If the patient is deemed unwilling to pay, the account is written-off as bad debt and transferred to an outside collection agency for additional collection effort. Accordingly, the revenues and accounts receivable reported in OHS consolidated financial statements are recorded at the net amount expected to be received. Retroactively calculated contractual adjustments arising under reimbursement agreements with third-party payors are accrued on an estimated basis in the period the related services are rendered and are adjusted as final settlements are determined. Charity Care OHS provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Records of charges foregone for services and supplies furnished under the charity care policy are maintained to identify and monitor the level of charity care provided. Because OHS does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. OHS estimates its costs of care provided under its charity care programs by applying a ratio of direct and indirect costs to charges to gross uncompensated revenue associated with providing care to charity patients. OHS gross charity care revenue includes only services provided to patients who are unable to pay and qualify under OHS charity care policies. The ratio of cost to charges is calculated based on OHS total expenses divided by gross patient revenue. During the years ended December 31, 2012 and 2011, OHS gross uncompensated charity revenue was approximately $72,125,000 and $37,301,000, respectively, and the estimated costs incurred by OHS to provide care to patients who met certain criteria under its charity care policy were approximately $52,580,000 and $23,937,000 in 2012 and 2011, respectively. In 2010, OHS revised its charity care policy to include a graduated scale which allows partial charity care for the patient based on the patient s income level and family size as a percentage of the Federal Poverty Guidelines. During the fourth quarter of 2010 and the first quarter of 2011, procedures were implemented that improved the identification of patients qualifying as charity care within the revised charity care policy guidelines, while providing enhanced supporting documentation with respect to the patient. In 2012, additional efforts were made to further identify patients qualifying as charity care. These efforts resulted in an increase in the classification of charity care provided with a corresponding reduction in bad debt expense in 2012 and Estimated amounts of charity care services included in patient accounts receivable total approximately $17,314,000 as of December 31, Community Benefit Since December 2010, Ochsner and four other health care providers have formed collaborations with the State and several units of local government in Louisiana (Jefferson Parish Hospital Service District No. 1, Jefferson Parish Hospital Service District No. 2, Natchitoches Hospital District No. 1, Jefferson Parish Human Services Authority) to more fully fund the Medicaid program (the Program ) by forming five non-profit organizations with the purpose to create a vehicle to provide services to low income and needy patients. Expenditures recorded by OHS to fund the Program for the