Fiscal Quarterly Financial Report. Second Quarter Ended December 31, 2017

Transcription

1 Fiscal 2018 Quarterly Financial Report Second Quarter Ended December 31, 2017 Notice to Readers The quarterly financial reports of MedStar Health, Inc. (MedStar) are intended to reasonably reflect the financial condition of MedStar Health as of the end of each quarter of the fiscal year. THE QUARTERLY REPORTS ARE NOT BASED UPON AUDITED FINANCIAL INFORMATION. Each quarterly report includes all known adjustments to present a fair statement of MedStar s results of operations, financial position and cash flows at the end of the quarter. While MedStar makes reasonable good faith efforts to prepare these reports to reflect the financial condition at the end of each quarter, the reader must be aware that there may be subsequent adjustments made at the end of the fiscal year, including any adjustments made during MedStar s annual audit, that relate back to prior quarters. Certain of the discussions included in the Management Discussion and Analysis of Financial Condition and Results of Operations section of the quarterly report may include forward-looking statements which involve known and unknown risks and uncertainties inherent in the operation of healthcare facilities. In particular, statements preceded by, followed by or that include the words expected, anticipated, or possible or other similar expressions are or may constitute forward-looking statements. No information or statement in this report is intended to suggest or guarantee any future performance or results in future quarters. MedStar does not intend to update any forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. Any questions concerning MedStar Health s quarterly financial report should be addressed to: Susan K. Nelson, Executive Vice President and Chief Financial Officer, MedStar Health, Inc., Grantchester Way, Columbia, Maryland

2 MedStar Health, Inc. Table of Contents Page Quarterly Financial Statements Consolidated Statements of Operations and Changes in Net Assets For the Three and Six Months Ended December 31, 2017 and Consolidated Balance Sheets As of December 31, 2017, June 30, 2017 and December 31, Consolidated Statements of Cash Flows For the Six Months Ended December 31, 2017 and Management Discussion and Analysis of Financial Condition and Results of Operations 8 Selected Other Information 15 2

3 MedStar Health, Inc. Consolidated Statements of Operations and Changes in Net Assets For the Three and Six Months Ended December 31, 2017 and 2016 (Dollars in millions) 2017 Actual Three Months Ended Six Months Ended December 31, December 31, Budget Actual Actual Budget 2016 Actual Operating revenues: Net patient service revenue $1,242.4 $1,200.6 $1,169.5 $2,410.7 $2,398.6 $2,321.3 Provision for bad debts (55.1) (56.3) (54.1) (108.8) (112.3) (111.4) Total net patient service revenue, net of provision for bad debts 1, , , , , ,209.9 Premium revenue Other operating revenue Net operating revenues 1, , , , , ,704.2 Operating expenses: Personnel , , ,449.2 Supplies Purchased services Other operating Interest expense Depreciation and amortization Total operating expenses 1, , , , , ,657.2 Earnings from operations Non-operating gains (losses): Investment income Net realized gains on sale of investments Unrealized gains on derivative instruments Unrealized gains (losses) on investments (13.2) Other (3.2) (0.1) (0.1) (6.6) (0.1) (0.1) Total non-operating gains (losses) Excess of revenue over expenses $80.4 $39.9 $18.4 $174.2 $86.8 $

4 MedStar Health, Inc. Consolidated Statements of Operations and Changes in Net Assets For the Three and Six Months Ended December 31, 2017 and 2016 (Dollars in millions) Three Months Ended Six Months Ended December 31, December 31, Unrestricted net assets: Excess of revenue over expenses $80.4 $18.4 $174.2 $113.3 Change in unrealized losses on investments (2.7) - (2.7) - Net assets released from restrictions used for purchase of property and equipment Increase in unrestricted net assets Temporarily restricted net assets: Contributions Realized net gains on restricted investments Change in unrealized gains (losses) on investments 0.7 (0.2) Increase in net assets of foundation Net assets released from restrictions (2.7) (1.6) (5.6) (2.9) Increase in temporarily restricted net assets Permanently restricted net assets: Net realized gains on investments Change in unrealized gains (losses) on investments 0.2 (0.1) Increase in permanently restricted net assets Increase in net assets Net assets, beginning of period 1, , , ,300.9 Net assets, end of period $1,854.2 $1,423.3 $1,854.2 $1,

5 MedStar Health, Inc. Consolidated Balance Sheets As of December 31, 2017, June 30, 2017, and December 31, 2016 (Dollars in millions) December 31, 2017 June 30, 2017 December 31, 2016 Assets Current assets: Cash and cash equivalents $662.6 $674.7 $484.8 Investments (Note 1) Assets whose use is limited or restricted Receivables: From patient services (less allowances for uncollectible accounts of $181.8 million in December 2017, $175.2 million in June 2017 and $198.4 million in December 2016) Other Inventories Prepaids and other current assets Total current assets 1, , ,500.5 Investments (Note 1) 1, , Assets whose use is limited or restricted , , ,492.9 Property and equipment, net 1, , ,302.7 Goodwill and other intangibles, net Interest in net assets of foundation Other assets Total assets $5,630.7 $5,508.3 $4,

6 MedStar Health, Inc. Consolidated Balance Sheets As of December 31, 2017, June 30, 2017, and December 31, 2016 (Dollars in millions) December 31, 2017 June 30, 2017 December 31, 2016 Liabilities and net assets Current liabilities: Accounts payable and accrued expenses $456.7 $481.3 $476.8 Accrued salaries, benefits and payroll taxes Amounts due to third-party payors, net Current portion of long-term debt (Note 1) Current portion of self-insurance liabilities Other current liabilities Total current liabilities 1, , ,172.2 Long-term debt, net of current portion (Note 1) 1, , ,215.2 Self-insurance liabilities, net of current portion Pension liabilities Other long-term liabilities, net of current portion Total liabilities 3, , ,304.0 Net assets: Unrestricted 1, , ,231.0 Unrestricted noncontrolling interest Total unrestricted net assets 1, , ,249.4 Temporarily restricted Permanently restricted Total net assets 1, , ,423.3 Total liabilities and net assets $5,630.7 $5,508.3 $4,727.3 Note 1: The current portion of long-term debt includes amounts associated with credit agreements that expire within 12 months from the balance sheet date and principal payments related to outstanding indebtedness due within 12 months of the balance sheet date. In January 2018, the Company replaced a letter of credit supporting certain variable rate demand obligations, and accordingly, reclassified $36.4 million from current to long-term debt at December 31, A corresponding amount was also reclassified from current to long-term investments. 6

7 MedStar Health, Inc. Consolidated Statements of Cash Flows For the Six Months Ended December 31, 2017 and 2016 (Dollars in millions) Six Months Ended December 31, December 31, Cash flows from operating activities Change in net assets $183.9 $122.4 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization (Gain) loss on sale of property and equipment and other (4.8) 0.1 Realized net gains on marketable investments (25.8) (15.4) Change in unrealized gains on investments (85.5) (41.4) Increase in net assets of foundation (3.5) (1.9) Change in unrealized gain on derivative instrument (1.4) (4.3) Net settlement payment on derivative instrument Provision for bad debts Temporarily and permanently restricted contributions (9.1) (7.8) Changes in operating assets and liabilities: Receivables (139.8) (123.8) Accounts payable and accrued expenses (5.9) (64.8) Other (24.8) (17.2) Net cash provided by operating activities Cash flows from investing activities Sales of investments and assets whose use is limited or restricted, net Purchases of alternative investments (Note 2) Proceeds from sales of alternative investments 71.8 (89.9) 15.4 Net settlement payment on derivative instrument (1.1) (1.5) Purchases of property and equipment and other, net (87.1) (139.6) Net cash used in investing activities (90.9) (121.9) Cash flows from financing activities Repayment of long-term borrowings Payment of deferred issuance costs (28.3) (0.1) (27.9) (0.1) Temporarily and permanently restricted contributions Net cash used in financing activities (19.3) (20.2) Decrease in cash and cash equivalents (12.1) (87.3) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period $662.6 $484.8 Supplemental disclosure of cash flow information: Cash paid for interest $32.0 $25.3 Noncash investing and financing activities: Noncash purchases of property, plant and equipment $1.2 $ (0.9) 1.4 Note 2: Includes the investment of $85.0 million in a long-only commingled international equity fund, whose underlying securities are actively traded. 7

8 MedStar Health, Inc. Management Discussion and Analysis of Financial Condition and Results of Operations Overview MedStar Health, Inc. (the Company) is a tax-exempt Maryland corporation which, through its controlled entities and other affiliates, provides and manages healthcare services in the region encompassing Maryland, Washington D.C. and Northern Virginia. The Company operates ten hospitals which include MedStar Franklin Square Medical Center, MedStar Good Samaritan Hospital, MedStar Harbor Hospital, MedStar Union Memorial Hospital, MedStar Georgetown University Hospital, MedStar Montgomery Medical Center, MedStar National Rehabilitation Network, MedStar Southern Maryland Hospital Center, MedStar St. Mary s Hospital and MedStar Washington Hospital Center. At December 31, 2017, the Company has 3,103 licensed beds. In addition, the Company provides urgent care and other healthcare services, education and research through numerous affiliates including, but not limited to MedStar PromptCare, MedStar Ambulatory Services, MedStar Medical Group, LLC, MedStar Health Research Institute, MedStar Health Visiting Nurse Association and Parkway Venture Companies ( Other Businesses ). MedStar Family Choice provides Medicaid and Medicare insurance services to approximately 100,000 members in select areas within the region. See Other Disclosures section below for additional information. Financial Performance Three Months Ended December 31, 2017 Results of Operations Earnings from operations for the three months ended December 31, 2017 of $26.1 million exceeded the budget of $18.3 million and prior year earnings of $16.3 million. The operating margin of 1.9% exceeded the budgeted operating margin of 1.3% and the prior year operating margin of 1.2%. The favorable operating results were driven by higher-than-budgeted growth in net patient service revenue and favorable-to-budget expenses, partially offset by unfavorable premium revenue (see Other Disclosures section below). Operating earnings before interest, depreciation and amortization (EBIDA) for the three months ended December 31, 2017, was $90.1 million compared to the budget of $87.0 million and $76.5 million in the prior year. The EBIDA margin of 6.5% exceeded the budgeted margin of 6.2% and the prior year of 5.6%. Net operating revenue for the three months ended December 31, 2017 was $1,394.2 million, $12.6 million or 0.9% below the budget of $1,406.8 million; however, $25.4 million or 1.9% above the prior year of $1,368.8 million. Net patient service revenue, net of bad debt, was $1,187.3 million compared to a budget of $1,144.3 million, a favorable variance of $43.0 million or 3.8%, and $71.9 million or 6.4% above the prior year of $1,115.4 million. The variance from budget was primarily due to favorable outpatient service mix and favorable inpatient case mix in the Washington, D.C. hospitals, favorable physician services revenue, and $7.0 million of gains on prior year third party cost report settlements, partially offset by unfavorable volumes. Hospital admissions (excluding sub-acute) for the second quarter ended 8

9 December 31, 2017 totaled 33,591, which were 1,084 or 3.1% below the budget of 34,675 and 328 or 1.0% below the prior year of 33,919. For the Maryland hospitals under the Global Budget Revenue (GBR) model, revenue is no longer recognized based on volumes alone. Total outpatient visits for the quarter totaled 1,163,857, which were 9,400 or 0.8% below the budget of 1,173,257; however, 18,859 or 1.6% above the prior year of 1,144,998. See schedule on page 15 for additional outpatient data. Premium revenue for the three months ended December 31, 2017 was $142.7 million compared to a budget of $209.9 million, an unfavorable variance of $67.2 million or 32.0%, and was $60.0 million or 29.6% below the prior year of $202.7 million. The unfavorable budget variance was due to the unbudgeted reduction in covered lives associated with the expiration of MedStar Family Choice s (MFC s) contract with the District of Columbia (DC) Medicaid program on September 30, 2017 (see Other Disclosures section below). MFC covered lives of 100,363 were unfavorable to the budget of 153,355 by 52,992 or 34.6% and were 46,280 or 31.6% below the prior year covered lives of 146,643. Other operating revenue for the three months ended December 31, 2017 was $64.2 million compared to a budget of $52.6 million, favorable by $11.6 million or 22.1%, and $13.5 million or 26.6% above the prior year of $50.7 million. The favorable budget variance is primarily attributable to favorable unrestricted contributions, realized gains on investments held in the self-insurance trust, and other income. Personnel expenses for the three months ended December 31, 2017 were $774.3 million compared to a budget of $748.2 million, an unfavorable variance of $26.1 million or 3.5%. The unfavorable budget variance is due to nursing and other agency usage, overtime, and physician compensation. These variances are partially attributable to the increased outpatient service mix and inpatient case mix noted above. Supply costs for the three months ended December 31, 2017 were $203.3 million compared to a budget of $191.8 million, an unfavorable variance of $11.5 million or 6.0%, primarily due to the increased outpatient service mix and inpatient case mix discussed above. Purchased services for the three months ended December 31, 2017 were $207.9 million compared to a budget of $245.2 million, a favorable variance of $37.3 million or 15.2%. The favorable budget variance was primarily due to lower health care services costs associated with the expiration of MFC s DC Medicaid contract (see premium revenue above and Other Disclosures section below). Other operating expenses for the three months ended December 31, 2017 were $118.6 million compared to a budget of $134.6 million, a favorable variance of $16.0 million or 11.9%. The variance from budget is primarily related to the timing of consulting, advertising and marketing, and facilities expenses. Interest expense for the three months ended December 31, 2017 was $11.5 million compared to a budget of $12.5 million, a favorable variance of $1.0 million or 8.0%, due to lower-than-budgeted interest rates on the Company s variable rate debt. Depreciation and amortization for the three months ended December 31, 2017 were $52.5 million compared to a budget of $56.2 million, a favorable variance of $3.7 million or 6.6%. The variance from budget is due to the timing of the completion of certain capital projects. 9

10 Non-Operating Activity Non-operating gains for the three months ended December 31, 2017 totaled $54.3 million compared to budgeted gains of $21.6 million and prior year gains of $2.1 million. The variance from budget is due to the investment markets above-budgeted performance for the three months ended December 31, For the three months ended December 31, 2017, realized and unrealized gains on investments were $50.8 million, investment income was $5.8 million and there was a $0.9 million unrealized gain on the Company s interest rate hedging derivative. Excess of Revenue Over Expenses Excess of revenue over expenses for the three months ended December 31, 2017 of $80.4 million was $40.5 million above the budgeted excess of revenue over expenses of $39.9 million, and $62.0 million above the excess of revenue over expenses of $18.4 million in the prior year as a result of the nonoperating gains and positive earnings from operations discussed above. Six Months Ended December 31, 2017 Results of Operations Earnings from operations for the six months ended December 31, 2017 of $58.6 million exceeded the budget of $43.5 million and prior year earnings of $47.0 million. The operating margin of 2.1% exceeded the budgeted operating margin of 1.5% and the prior year operating margin of 1.7%. The favorable operating results were driven by favorable-to-budget expenses and higher-than-budgeted growth in net patient service revenue, partially offset by unfavorable premium revenue (see Other Disclosures section below). Operating earnings before interest, depreciation and amortization (EBIDA) for the six months ended December 31, 2017, was $186.3 million compared to the budget of $180.1 million and $165.4 million in the prior year. The EBIDA margin of 6.7% was above the budgeted margin of 6.4% and above the prior year of 6.1%. Net operating revenue for the six months ended December 31, 2017 was $2,778.2 million, $32.2 million or 1.1% below the budget of $2,810.4 million; however, $74.0 million or 2.7% above the prior year of $2,704.2 million. Net patient service revenue, net of bad debt, was $2,301.9 million compared to a budget of $2,286.3 million, a favorable variance of $15.6 million or 0.7% and $92.0 million or 4.2% above the prior year of $2,209.9 million. The variance from budget was primarily due to favorable inpatient case mix in the Washington, D.C. hospitals, favorable outpatient service mix, $10.4 million of gains on prior year third party cost report settlements and favorable physician services revenue, partially offset by unfavorable volumes. Hospital admissions (excluding sub-acute) for the six months ended December 31, 2017 totaled 67,255, which were 2,233 or 3.2% below the budget of 69,488 and 1,166 or 1.7% below the prior year of 68,421. For the Maryland hospitals under the GBR model, revenue is no longer recognized based on volumes alone. Total outpatient visits for the year totaled 2,310,393, which were 25,733 or 1.1% below the budget of 2,336,126; however, 10,726 or 0.5% above the prior year of 2,299,667. See schedule on page 15 for additional outpatient data. Premium revenue for the six months ended December 31, 2017 was $363.1 million compared to a budget of $422.0 million, an unfavorable variance of $58.9 million or 14.0%, and $36.5 million or 9.1% below the prior year of $399.6 million. The unfavorable budget variance was due to the unbudgeted 10

11 reduction in covered lives associated with the expiration of MFC s contract with the District of Columbia (DC) Medicaid program on September 30, 2017 (see Other Disclosures section below). MFC covered lives of 100,363 were unfavorable to the budget of 153,355 by 52,992 or 34.6% and were 46,280 or 31.6% below the prior year covered lives of 146,643. Other operating revenue for the six months ended December 31, 2017 was $113.2 million compared to a budget of $102.1 million, favorable by $11.1 million or 10.9%, and was $18.5 million or 19.5% above the prior year of $94.7 million. The favorable budget variance is primarily attributable to favorable unrestricted contributions and other income. Personnel expenses for the six months ended December 31, 2017 were $1,509.3 million compared to a budget of $1,488.7 million, an unfavorable variance of $20.6 million or 1.4%. The unfavorable budget variance is due to nursing and other agency usage, overtime, and physician compensation. These variances are partially attributable to the increased outpatient service mix and inpatient case mix noted above. Supply costs for the six months ended December 31, 2017 were $392.7 million compared to a budget of $385.3 million, an unfavorable variance of $7.4 million or 1.9%, primarily due to the increased inpatient case mix and outpatient service mix discussed above. Purchased services for the six months ended December 31, 2017 were $447.5 million compared to a budget of $489.0 million, a favorable variance of $41.5 million or 8.5%. The favorable budget variance was primarily due to lower health care services costs associated with the expiration of MFC s DC Medicaid contract (see premium revenue above and Other Disclosures section below). Other operating expenses for the six months ended December 31, 2017 were $242.4 million compared to a budget of $267.3 million, a favorable variance of $24.9 million or 9.3%. The variance from budget is primarily related to the timing of consulting, facilities, and advertising and marketing expenses. Interest expense for the six months ended December 31, 2017 was $22.8 million compared to a budget of $24.9 million, a favorable variance of $2.1 million or 8.4%, due to lower-than-budgeted interest rates on the Company s variable rate debt. Depreciation and amortization for the six months ended December 31, 2017 was $104.9 million compared to a budget of $111.7 million, a favorable variance of $6.8 million or 6.1%. The variance from budget is due to the timing of the completion of certain capital projects. Non-Operating Activity Non-operating gains for the six months ended December 31, 2017 totaled $115.6 million compared to budgeted gains of $43.3 million and prior year gains of $66.3 million. The favorable variance from budget is due to the investment markets better-than-budgeted performance. For the six months ended December 31, 2017, realized and unrealized gains on investments were $110.4 million, investment income was $10.4 million and there was a $1.4 million unrealized gain on the Company s interest rate hedging derivative. Excess of Revenue Over Expenses Excess of revenue over expenses for the six months ended December 31, 2017 of $174.2 million was $87.4 million above the budgeted excess of revenue over expenses of $86.8 million, and $60.9 million 11

12 above the excess of revenue over expenses of $113.3 million in the prior year as a result of the nonoperating gains and positive earnings from operations discussed above. Liquidity and Capital Resources The Company maintains a $250.0 million revolving credit agreement that has a three-year term expiring April The outstanding balance on the facility was $129.8 million at December 31, 2017, June 30, 2017, and December 31, As of December 31, 2017, the Company is in compliance with all covenants under the agreement noted above and there have been no events of default. The Company s total unrestricted cash and investments (including board-designated funds) were $2,079.3 million at December 31, 2017, $1,998.1 million at June 30, 2017 and $1,726.2 million at December 31, Days cash on hand was 145 days at December 31, 2017, 141 days at June 30, 2017 and 125 days at December 31, Days in accounts payable were 74 days at December 31, 2017, compared to 77 days at June 30, 2017 and 78 days at December 31, Days in accounts receivable were 44 days at December 31, 2017 compared to 42 days at June 30, 2017 and 47 days at December 31, Other Disclosures The healthcare industry is subject to numerous laws and regulations from federal, state and local governments, and the government has increased enforcement of Medicare and Medicaid anti-fraud and abuse laws, as well as the physician self referral law (Stark Law). The Company s compliance with these laws and regulations is subject to periodic governmental inquiries, and the Company has responded appropriately to any such inquiries. The Company is aware of certain asserted and unasserted legal claims by the government, and from time to time, the Company may agree to resolve certain legal claims asserted by the government. The Company will continue to monitor all government inquiries and respond appropriately. The final outcomes of these government investigations cannot be determined at this time. Recent government initiatives have focused on curtailing fraud, waste, and abuse in government-funded healthcare programs. To this end, the federal government and many states, have implemented programs to audit and recover potential overpayments to providers from the Medicare and Medicaid programs. The Company s hospitals and providers have periodically received audit requests from Medicare and Medicaid audit contractors, as well as the Office of Inspector General of the U.S. Department of Health & Human Services (OIG). These audit requests have targeted, among other things, medical necessity of inpatient admissions and provider documentation and coding practices. The Company s hospitals and providers have cooperated with each of these audit requests and implemented a program to track and manage their effect. The Company, in the normal course of business, is a party to a number of other legal and regulatory proceedings. In June 2008, the OIG served a subpoena requesting documents relating to MedStar Union Memorial Hospital s (MUMH) business arrangements with a private cardiology group. The U.S. Attorney s Office for the District of Maryland (USAO) subsequently indicated to the Company that MUMH s business arrangements with the cardiology group were under investigation for potential violations of laws and regulations governing Federal health care programs. After extensive periods of government inactivity, beginning in February 2016 the USAO issued civil investigative demands compelling production of additional documents and witness interviews. The Company has cooperated with this investigation. 12

13 On April 26, 2016, the Company was notified of a whistleblower lawsuit filed in the U.S. District Court in Northern District of Illinois alleging False Claims Act violations against Accretive Health and MedStar Health. The unsealing of the complaint was the result of the federal government s decision not to intervene in the lawsuit at the time, which decision permits the whistleblower to proceed with the lawsuit against the defendants. The Company is defending against the lawsuit. At the present time, management cannot conclude, based on the preliminary nature of these matters, how these matters will be resolved or whether such resolutions will have a material adverse financial impact on the Company. As a result of federal healthcare reform legislation, rules and regulations, substantial changes are occurring in the United States healthcare system. These include numerous provisions affecting the delivery of healthcare services, the financing of healthcare costs, reimbursement to healthcare providers, the privacy and security of health information, and the legal obligations of health insurers, providers and employers. In January 2014, the Centers for Medicare and Medicaid Services (CMS) approved Maryland s waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The waiver ties hospital per capita revenue growth to the state s economic growth of 3.58% and will require growth in Medicare spending per beneficiary in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The waiver also imposes quality measures and encourages population health management. In connection with the waiver, the Health Services Cost Review Commission (HSCRC) introduced the GBR model, which covers the Company s seven Maryland hospitals. This model moves payment to hospitals from each individual service to a total revenue for each hospital (or a combination of hospitals) to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. The model removes the financial incentive from increasing volume and provides incentive to work with partners to provide care in the appropriate setting. Additionally, the GBR model has the potential of including both prospective and retrospective rate adjustments. Management believes the impact of such adjustments would not be material to the consolidated financial statements. The GBR arrangement has been renewed for fiscal year 2018, although it can be terminated by either party with 180 days prior notice. The State of Maryland and CMS are in discussions on Phase 2 of the waiver. Initially, Phase 2 was to go into effect January 1, 2019, but there is a potential one year delay and extension of the current Waiver Agreement. Phase 2 would add additional population health metrics to include total cost of care benchmarks and savings. On January 1, 2016, MedStar Accountable Care, LLC (ACO) became active as a Medicare Shared Savings Program Track 3 ACO to improve the quality of care for Medicare Fee-For-Service (FFS) beneficiaries and reduce unnecessary costs. Under this three-year agreement with CMS, the ACO is eligible for annual bonus payments from CMS if it is able to achieve certain quality and savings benchmarks. Conversely, the ACO is at financial risk to the extent that costs exceed the CMS established benchmarks. The agreement includes a provision allowing cancellation with 60 days written notification. The ACO currently has approximately 43,500 attributed members tied to the Corporation s primary care network. The results of the ACO s operations did not have a material impact on the Company s financial results for the six months ended December 31, MFC s contract with the District of Columbia s Medicaid program expired September 30, In fiscal year 2017, MFC was notified that it was not selected to continue to provide services under this program after the conclusion of its existing contract. As a result of this decision, the Company filed a 13

14 formal protest of the proposed contract awards with the District s Contract Appeals Board (CAB). Notwithstanding its protest, MFC worked with the District to transition its members to a new managed care organization effective October 1, In November 2017, the District s CAB administrative law judge sustained the protest and ordered the District to re-evaluate all of the previously submitted managed care proposals and submit the results to the CAB for its review. The District submitted those results to the CAB in a sealed filing on February 7, and the CAB has not yet released the results to the parties. MFC continues to pursue its legal rights under the protest, and to prepare contingency plans based on possible outcomes. However, management cannot conclude how this matter will be resolved or estimate the impact on the Company s consolidated financial position or results of operations at this time. As a large healthcare provider in the District, the Company continues to provide medical care at our facilities for many of these Medicaid participants. Subsequent Events On January 17, 2018, the Company replaced the letter of credit supporting its District of Columbia Series 1998A Tranche II bonds, which trade as variable rate demand notes. The new letter of credit, which is for a three year term, continues with TD Bank, N.A. As of December 31, 2017, the Company reclassified $36.4 million from current to long-term debt and a corresponding amount from current to long-term investments to reflect this change. 14

15 MedStar Health, Inc. Selected Other Information FY18 Actual Quarter Ended December 31 % Variance FY18 Budget FY17 Actual % Variance Admissions (excluding sub-acute) 33,591 34,675 (3.1%) 33,919 (1.0%) Observations 9,796 10,323 (5.1%) 9,929 (1.3%) Emergency Room visits 121, ,747 (4.4%) 124,830 (3.0%) Home Health visits 76,913 75, % 71, % Physician Office visits 502, , , % Other Outpatient visits 453, ,049 (1.1%) 451, % Total Outpatient Visits 1,163,857 1,173,257 (0.8%) 1,144, % MedStar Family Choice Covered Lives 100, ,355 (34.6%) 146,643 (31.6%) FY18 Actual Year-To-Date December 31 % Variance FY18 Budget FY17 Actual % Variance Admissions (excluding sub-acute) 67,255 69,488 (3.2%) 68,421 (1.7%) Observations 19,713 20,766 (5.1%) 20,348 (3.1%) Emergency Room visits 244, ,423 (4.2%) 253,682 (3.5%) Home Health visits 151, , % 146, % Physician Office visits 990, ,905 (1.0%) 969, % Other Outpatient visits 904, ,783 (0.5%) 909,504 (0.5%) Total Outpatient Visits 2,310,393 2,336,126 (1.1%) 2,299, % MedStar Family Choice Covered Lives 100, ,355 (34.6%) 146,643 (31.6%) 15

16 KEY LIQUIDITY INDICATORS December June December Days cash on hand * Maximum Annual Debt Service coverage Days revenue in accounts receivable Days expense in accounts payable * Under the Company s bank agreements, the Company is required to maintain certain covenants, including days cash on hand of 70 (measured semi-annually at each June 30 and December 31) and a maximum annual debt service coverage of 1.25 (measured quarterly on a rolling four quarters basis). The Company is in compliance with these covenants as of December 31, 2017, June 30, 2017 and December 31, Similar covenants are also included under the Company s Master Trust Indenture, although they are measured annually and required covenant levels are lower. CASH AND INVESTMENTS (in millions) December June December Cash and cash equivalents $ $ $ Investments 1, , ,069.7 Assets whose use is limited or restricted Funds held by trustees Funds restricted by donors for specific purposes and endowment Funds designated by board and management Total assets whose use is limited or restricted 1, Total cash and cash equivalents, investments and assets whose use is limited or restricted $ 2,914.2 $ 2,809.2 $ 2,119.5 Less cash and cash equivalents, and current portion of investments and assets whose use is limited or restricted (757.9) (813.4) (626.6) Total long-term investments and long-term assets whose use is limited or restricted $ 2,156.3 $ 1,995.8 $ 1,