January 2, Re: Dartmouth-Hitchcock Obligated Group- Annual Continuing Disclosure Requirements - EMMA

Transcription

1 Dartmouth-Hitchcock Dartmouth-Hitchcock Medical Center One Medical Center Drive Lebanon, NH Phone 1603) Fax 1603) Dartmouth-Hitchcock.org January 2, 2013 Re: Dartmouth-Hitchcock Obligated Group- Annual Continuing Disclosure Requirements - EMMA Dear Interested Party: In follow up to the Dartmouth-Hitchcock Obligated Group Annual Continuing Disclosure filing made on November 26, 2012 and for reasons outlined in the cover letter to that filing the Obligated Group filed the individual audited statements ofthe members of the Obligated Group, in lieu of Special-Purpose Combined Financial Statements. At that time the most recent audited financial statements of (CDH) were for the fiscal year ended September 30, Since November 26, 2012, CDH has completed and issued their audit for the fiscal year ended September 30, Therefore, in accordance with the Disclosure Agreements, the Obligate Group hereby submits CDH' s most recent audited financial statements within 150 days after its fiscal year end. If you have any questions or would like further detail regarding the forgoing, please do not hesitate to call Bruce Adams ( ) or myself. TEN/baa Enclosures Cc: Bruce Adams v er truly yours, c::}/~~- Ct Tina E. Naimie Vice President, Corporate Finance Dartmouth-Hitchcock Clinic I Mary Hitchcock Memorial Hospital I The Geisel School of Medicine at Dartmouth I VA Medical Center, White River junction, VT

2 Financial Statements

3 Index Page(s) Report of Independent Auditors... 1 Financial Statements Balance Sheets... 2 Statements of Operations... 3 Statements of Changes in Net Assets... 4 Statements of Cash Flows

4 Report of Independent Auditors To the Board of Trustees of In our opinion, the accompanying balance sheets and the related statements of operations, of changes in net assets and of cash flows present fairly, in all material respects, the financial position of Cooley Dickinson Hospital, Inc. (the Hospital, a subsidiary of Cooley Dickinson Health Care Corporation) at, and the results of its operations, its changes in net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Hospital s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. December 18, 2012 PricewaterhouseCoopers LLP, 185 Asylum Street, Suite 2400, Hartford, CT T: (860) , F: (860) ,

5 Balance Sheets Assets Current assets Cash and cash equivalents $ 3,366,800 $ 2,888,922 Investments 33,931,946 35,391,010 Patient accounts receivable, net of allowance for doubtful accounts of $4,440,225 and $4,688,018 respectively 14,674,729 12,525,454 Current portion of contributions receivable, net 25,940 45,233 Inventories 1,565,286 1,720,627 Other current assets 9,723,300 6,542,258 Estimated settlements due from third party payors 341, ,941 Due from affiliates 95,243 58,788 Total current assets 63,724,816 59,318,233 Assets whose use is limited or restricted: Board-designated investments 78,329,802 58,542,214 Assets held by trustee under lease agreements 8,722 8,722 Total assets whose use is limited or restricted 78,338,524 58,550,936 Property and equipment, net 71,101,756 76,090,348 Contributions receivable, net - 8,169 Deferred financing costs, net 316, ,966 Other assets 274, ,682 Interest in net assets of Cooley Dickinson Health Care Corporation 8,298,717 6,813,389 Total assets $ 222,054,854 $ 201,453,723 Liabilities Current liabilities Current portion of long-term debt $ 3,366,236 $ 3,238,312 Accrued interest payable 132, ,803 Accounts payable and other accrued liabilities 19,800,530 15,582,493 Accrued compensation and related withholdings 7,243,930 7,107,794 Estimated settlements due to third-party payors 10,893,735 8,433,178 Total current liabilities 41,437,392 34,507,580 Long-term debt, net of current portion 59,092,899 62,456,083 Accrued pension liability 42,524,977 38,605,468 Asset retirement obligations 515, ,847 Other liabilities 3,173,713 2,995,862 Total liabilities 146,744, ,081,840 Net assets Unrestricted 67,011,492 55,558,494 Temporarily restricted 7,788,536 6,303,208 Permanently restricted 510, ,181 Total net assets 75,310,209 62,371,883 Total liabilities and net assets $ 222,054,854 $ 201,453,723 The accompanying notes are an integral part of these financial statements. 2

6 Statement of Operations Years Ended Operating revenues Net patient service revenue $ 162,561,026 $ 156,876,536 Other revenue 3,738,906 3,228,157 Total operating revenues 166,299, ,104,693 Operating expenses Salaries, wages and employee benefits 81,566,033 80,995,858 Supplies and other expenses 47,194,899 47,570,520 Physician services 4,823,057 4,705,685 Depreciation and amortization 11,159,396 12,236,883 Interest 1,234,016 2,431,309 Provision for bad debts 3,591,651 3,182,317 Total operating expenses 149,569, ,122,572 Income from operations 16,730,880 8,982,121 Nonoperating gains (losses) Investment income 1,577, ,101 Loss on bond refinancing - (1,197,235) Total nonoperating gains (losses) 1,577,680 (470,134) Excess of revenues over expenses 18,308,560 8,511,987 Unrealized (depreciation) appreciation of investments, net (102,628) 140,707 Pension related changes other than net periodic benefit cost (3,787,865) (9,946,366) Net assets released from restriction used for capital assets - 165,000 Transfer to Cooley Dickinson Health Care Corporation for operations of CD Practice Associates, Inc. (3,085,328) (2,846,621) Transfer from Cooley Dickinson Health Care Corporation to finance property and equipment additions 120,259 54,266 Change in unrestricted net assets $ 11,452,998 $ (3,921,027) The accompanying notes are an integral part of these financial statements. 3

7 Statement of Changes in Net Assets Years Ended Unrestricted net assets Excess of revenues over expenses $ 18,308,560 $ 8,511,987 Unrealized (depreciation) appreciation of investments, net (102,628) 140,707 Pension related changes other than net periodic benefit cost (3,787,865) (9,946,366) Net assets released from restriction used for capital assets - 165,000 Transfer to Cooley Dickinson Health Care Corporation for operations of CD Practice Associates, Inc. (3,085,328) (2,846,621) Transfer from Cooley Dickinson Health Care Corporation to finance property and equipment additions 120,259 54,266 Change in unrestricted net assets 11,452,998 (3,921,027) Temporarily restricted net assets Contributions - 165,000 Net assets released from restriction used for capital assets - (165,000) Change in interest in net assets of Cooley Dickinson Health Care Corporation 1,485,328 1,418,912 Change in temporarily restricted net assets 1,485,328 1,418,912 Permanently restricted net assets Change in interest in net assets of Cooley Dickinson Health Care Corporation Change in permanently restricted net assets Change in net assets 12,938,326 (2,502,015) Net assets Beginning of year 62,371,883 64,873,898 End of year $ 75,310,209 $ 62,371,883 4

8 Statement of Cash Flows Years Ended Cash flows from operating activities Change in net assets $ 12,938,326 $ (2,502,015) Adjustments to reconcile change in net assets to net cash provided by operating activities Provision for bad debts 3,591,651 3,182,317 (Gain) loss on disposal of equipment (146,698) 70,668 Loss on debt refinancing - 1,197,235 Depreciation and amortization 11,159,396 12,236,883 Accretion of bond discount 3,051 3,258 Change in unrealized depreciation (appreciation) on investments 102,628 (140,707) Transfer to Cooley Dickinson Health Care Corporation for operations of CD Practice Associates, Inc. 3,085,328 2,846,621 Transfer from Cooley Dickinson Health Care Corporation to finance property and equipment additions (120,259) (54,266) Change in interest in net assets of Cooley Dickinson Health Care Corporation (1,485,328) (1,419,012) Changes in operating assets and liabilities: Patient accounts receivable (5,740,926) (1,448,197) Contributions receivable 7,077 26,177 Inventories 155,341 (71,728) Other current assets (3,181,042) (4,749,362) Other assets 31,500 9,424 Due from affiliates (36,455) (61,560) Accrued interest payable (12,842) (379,003) Accounts payable and other accrued liabilities 4,324,690 4,130,105 Accrued compensation and related withholdings 136,136 64,702 Accrued pension liability 3,919,509 9,521,168 Estimated settlements with third-party payors, net 2,264, ,346 Asset retirement obligations (1,183) 24,612 Other liabilities 177,851 1,233,548 Net cash provided by operating activities 31,172,677 23,989,214 Cash flows from investing activities Purchases of investments and assets whose use is limited (119,352,400) (76,227,916) Use of assets held by trustee - 855,232 Proceeds from maturities and sales of investments and assets whose use is limited 100,921,248 39,106,263 Purchases of property and equipment (6,246,612) (3,932,243) Proceeds from disposal of property and equipment 165,960 63,093 Transfer to Cooley Dickinson Health Care Corporation for start-up operations of CD Practice Associates, Inc. (3,085,328) (2,846,621) Net cash used in investing activities (27,597,132) (42,982,192) Cash flows from financing activities Payments on long-term debt (3,238,311) (51,799,369) Refinancing costs - (115,818) Transfer from Cooley Dickinson Health Care Corporation to finance property and equipment additions 120,259 54,266 Contributions restricted for long-term investment 20, ,970 Proceeds from notes payable and long term debt - 49,089,000 Net cash used in financing activities (3,097,667) (2,343,951) Net change in cash and cash equivalents 477,878 (21,336,929) Cash and cash equivalents Beginning of year 2,888,922 24,225,851 End of year $ 3,366,800 $ 2,888,922 Supplemental disclosure of cash flow information Cash paid during the year for interest $ 1,246,858 $ 2,810,312 Noncash transaction Construction in progress included in accounts payable and other accrued liabilities 267, ,810 The accompanying notes are an integral part of these financial statements. 5

9 1. Summary of Significant Accounting Policies Organization (the Hospital ) is an acute care, not-for-profit 140-bed community hospital located in Northampton, Massachusetts and a wholly owned subsidiary of Cooley Dickinson Health Care Corporation (the Corporation ). The Hospital provides a broad range of patient services and a number of health related community services, including acute and critical medicine, surgery, psychiatry, and rehabilitation. The Corporation provides fund raising support and maintains donor-restricted funds for the benefit of the Hospital. Other related entities of the Hospital include CD Practice Associates, Inc. ( CDPA ), a not-for-profit organization established to own and manage operating groups of physicians; and VNA and Hospice of Cooley Dickinson, Inc. ( VNA/Hospice ), a not-for-profit organization established to provide home health and hospice care services. The Hospital is a member of the Dartmouth-Hitchcock Obligated Group (the Obligated Group, see Note 8), formerly known as the Mary Hitchcock Memorial Hospital Obligated Group ( Mary Hitchcock ). Effective January 1, 2009, Mary Hitchcock established NEAH, a New Hampshire limited liability company of which Mary Hitchcock is the sole member, as a successor organization to Dartmouth Hitchcock Alliance (DHA). By contract, NEAH provides a range of consulting, group purchasing and other services to a number of community hospitals and other health care organizations located throughout New Hampshire and Vermont, including Basis of Presentation The financial statements have been prepared on the accrual basis of accounting and in accordance with generally accepted accounting principles in the United States. Resources are reported for accounting purposes in separate classes of net assets based on the existence or absence of donor-imposed restrictions. In the accompanying financial statements, net assets have been combined into the following categories: Permanently Restricted Net assets subject to explicit donor-imposed stipulations that they be maintained by the Hospital in perpetuity are classified as permanently restricted. Generally, the donors of these assets permit the Hospital to use all or part of the investment return on these assets for operating purposes. The Hospital s permanently restricted net assets consist of the original corpus in the assets held by the Corporation for the benefit of the Hospital. Temporarily Restricted Net assets whose use by the Hospital is subject to explicit donor-imposed stipulations that can be fulfilled upon incurrence of expenses by the Hospital pursuant to those stipulations or that expire by the passage of time are classified as temporarily restricted. The Hospital s temporarily restricted net assets consist of contributions receivable and the appreciation in the assets held by the Corporation for the benefit of the Hospital. Unrestricted Net assets that are not subject to explicit donor-imposed stipulations are classified as unrestricted. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees (the Board ) or may otherwise be limited by contractual agreements with outside parties. 6

10 Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets, unless their use is restricted by explicit donor stipulations. Expirations of temporary restrictions on net assets, that is, the donor-imposed stipulated purpose has been accomplished and/or stipulated time period has elapsed, are reported as reclassifications between the applicable classes of net assets. Nonoperating gains (losses) consist primarily of realized investment income and other peripheral or incidental activity. Contributions, including unconditional promises to give, are recognized as revenues at the date the promise is received. Contributions of assets other than cash are recorded at their estimated fair value. Contributions that are expected to be collected in future years are recorded at the present value of the estimated future cash flows. The discount rates used were 2.4% and 2.6% for, respectively. Amortization of the discount is included in contribution revenue. Contributions restricted for the acquisition of land, buildings and equipment are reported as temporarily restricted support. These contributions are reclassified to unrestricted net assets when the capital asset is acquired and placed into service. Assets received as donations or bequests are recorded as contributions on the date received at their estimated fair value. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid instruments with a maturity of three months or less at the date of purchase, excluding amounts whose use is limited or restricted by Board designation or other arrangements under trust agreements or by donors. Most of the Hospital s banking activity, including cash and cash equivalents, is maintained with several regional banks and, from time-to-time, exceeds federal insurance limits. It is the Hospital s policy to monitor these banks financial strength on an ongoing basis. Investments Investments are generally recorded at fair value. The cost of cash equivalents included in investments approximates its fair value. Fair values for mutual funds and fixed income investments are generally based on published market values. Investment income or expense (including realized gains and losses on investments, interest and dividends) is included in excess of revenues over expenses unless the income or expense is restricted by donor or law. The Hospital accounts for all investments, except U.S. Treasury obligations, as trading securities. Unrealized gains and losses on trading securities are included in excess of revenues over expenses. Investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investments, it is at least reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. Inventories Inventories consist of medical supplies, pharmaceutical products and other supplies and are stated at the lower of cost, determined on the first-in, first-out method, or market. 7

11 Assets Whose Use is Limited or Restricted Assets whose use is limited or restricted primarily include assets held by trustees under indenture agreements and designated assets set aside by the Board for future capital improvements, over which the Board retains control and may at its discretion subsequently use for other purposes. Investment income on proceeds of borrowings that are held by a trustee, to the extent not capitalized, is reported as an offset to interest expense. Investment income on Board designated investments is classified as nonoperating income. In accordance with the Hospital s policy of providing for future plant renewal and replacement, $18,300,000 in fiscal 2012 and $8,500,000 in fiscal 2011 were designated by the Board for the Plant/Equipment Replacement Fund. Property and Equipment Property and equipment are stated at cost or, in the case of donated property, at its fair value at the date of the gift, less accumulated depreciation. Major improvements and betterments to existing plant and equipment are capitalized. Expenditures for maintenance and repairs which do not extend the lives of the applicable assets are charged to expense as incurred. Upon disposition or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is included in the results of operations. Depreciation expense is computed on a straight-line basis over the asset s estimated useful life beginning in the year of acquisition. Uniform useful lives assigned to assets are based upon the American Hospital Association guidelines and range from 3 to 40 years. Deferred Financing Costs Financing costs associated with the issuance of long-term debt are being amortized using the effective interest rate method over the life of the related debt. Interest in Net Assets of Cooley Dickinson Health Care Corporation The Corporation holds certain assets, including investments and contributions receivable, which were raised or received by the Corporation from donors which benefit or are ultimately distributable for the Hospital. Accordingly, the Hospital has recorded its interest in these net assets of the Corporation on its balance sheet. Excess of Revenues Over Expenses The statement of operations includes excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments that are not categorized as trading, operating subsidies to related entities, permanent transfers of assets to and from affiliates for other than goods and services, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets) and pension related changes other than net periodic benefit cost. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Hospital s significant estimates include its estimated net realizable value of receivables from patients and third-party payors, settlements of third-party reimbursement cost reports with Medicare and Medicaid, investments valuation, useful lives of buildings and equipment, asset retirement obligations and actuarial calculations for accrued 8

12 pension liabilities and workers compensation loss reserves. Actual results could differ from those estimates. Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established and contractual rates. The Hospital does not pursue collection of amounts determined to qualify as charity care, and, as such, these amounts are not reported as net revenue. Charity care, which consists of Hospital charges for care, amounted to approximately $4,633,000 and $4,833,000 for the years ended, respectively. Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, thirdparty payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Income Taxes The Hospital is a not-for-profit organization, exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes has been made in the accompanying financial statements. Asset Retirement Obligations An asset retirement obligation ( ARO ) is a legal obligation associated with the retirement of longlived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the Hospital records period-to-period changes in the ARO liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Hospital derecognizes ARO liabilities when the related obligations are settled. Fair Value The Hospital follows the established framework for measuring fair value under generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value standards establish a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Hospital for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows: 9

13 Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 10

14 The following table presents the Hospital s financial instruments recorded at fair value as of, utilizing the valuation hierarchy defined above: September 30, 2012 Quoted Significant Prices in Other Significant Active Observable Unobservable Markets Inputs Inputs Total Cost (Level 1) (Level 2) (Level 3) Fair Value Assets Investments Certificates of deposit $ 5,923,933 $ - $ 5,923,933 $ - $ 5,923,933 Mutual funds 158, , ,620 FDIC guaranteed notes 2,500,000 2,528,412 2,528,412 US Treasury obligations 25,000,000 25,320,981 25,320,981 Total investments 33,582,553 28,008,013 5,923,933-33,931,946 Assets whose use is limited Cash and cash equivalents 24,306,122 24,306,122 24,306,122 Mutual funds 8,722 8,722 8,722 FDIC guaranteed notes 2,500,000 2,524,874 2,524,874 U.S. Treasury obligations 50,659,000 51,498,806 51,498,806 Total assets whose use is limited 77,473,844 78,329,802 8,722-78,338,524 Total investments and assets whose use is limited $ 111,056,397 $ 106,337,815 $ 5,932,655 $ - $ 112,270,470 September 30, 2011 Quoted Significant Prices in Other Significant Active Observable Unobservable Markets Inputs Inputs Total Cost (Level 1) (Level 2) (Level 3) Fair Value Assets Investments Certificates of deposit $ 5,849,954 $ - $ 5,849,954 $ - $ 5,849,954 Mutual funds 161, , ,003 FDIC guaranteed notes 2,500,000 2,571, ,571,914 US Treasury obligations 26,500,000 26,808,139 26,808,139 Total investments 35,010,957 29,541,056 5,849,954-35,391,010 Assets whose use is limited Cash and cash equivalents 29,404,558 29,404, ,404,558 Mutual funds 8,722-8,722-8,722 FDIC guaranteed notes 2,500,000 2,569, ,569,290 U.S. Treasury obligations 26,000,000 26,568, ,568,366 Total assets whose use is limited 57,913,280 58,542,214 8,722-58,550,936 Total investments and assets whose use is limited $ 92,924,237 $ 88,083,270 $ 5,858,676 $ - $ 93,941,946 There were no transfers between levels for the years ended. Following is a description of the Hospital s valuation methodologies for assets and liabilities measured at fair value. Fair value for Level 1 is based upon quoted prices for identical instruments in active markets that the Hospital has the ability to access. Market price data is generally obtained from exchange or dealer markets. The Hospital does not adjust the quoted price for such assets and liabilities. 11

15 Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are less active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources including market participants, dealers, and brokers. Fair value for Level 3 is based on valuation techniques that use significant inputs that are unobservable as they trade infrequently or not at all. The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Hospital believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Subsequent Events The Hospital has performed an evaluation of subsequent events through December 18, 2012, which is the date the financial statements were issued. 2. Third-Party Reimbursement The Hospital has mandated reimbursement agreements with the Commonwealth of Massachusetts for the Medicaid program and with the Centers for Medicare and Medicaid Services for the Medicare program. These legislatively directed agreements provide for reimbursement to the Hospital for services rendered to patients covered by these programs in accordance with the reimbursement regulations and contracts. The Hospital has agreements with other third-party payors that provide for payments to the Hospital at amounts different from its established rates. A summary of the payment arrangements with major third-party payors is as follows: Medicare Inpatient acute care services rendered to Medicare program recipients are paid at prospectively determined rates per discharge. These rates, which are based on a diagnosis-related group ( DRG ), vary according to the intensity of service required by the patient. Outpatient services are reimbursed by Medicare on an Ambulatory Payment Classification ( APC ) basis and fee schedules. Hospital claims for reimbursement are subject to review and audit. The Hospital s Medicare cost reports have been audited by its Medicare fiscal intermediary through Other Payor Agreements The Hospital has entered into payment agreements with BlueCross BlueShield of Massachusetts, certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Hospital under these agreements varies and includes prospectively determined rates per discharge, discounts from established charges, capitated rates, and prospectively determined daily rates. Health Safety Net The Commonwealth of Massachusetts operates a program called the Health Safety Net ( HSN ). This program, which became effective October 1, 2007, effectively replaces the Uncompensated Care Pool. Like its predecessor, the Health Safety Net is a program that is designed to reimburse hospitals for a portion of the uncompensated care provided to patients subject to certain eligibility rules. Hospitals are required to contribute to the Health Safety Net trust fund and are assessed a uniform allowance based upon estimates of the statewide cost of uncompensated care. The 12

16 hospital has recorded its gross obligation to the HSN, net of reimbursement received as part of its net patient service revenue in the accompanying financial statements. Health Care Industry The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Hospital is in compliance with fraud and abuse regulations as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to further government review and interpretation as well as regulatory actions unknown or unasserted at this time. 3. Net Patient Service Revenue Net patient service revenue consists of the following for the years : Gross patient service charges $ 345,208,504 $ 338,251,477 Contractual adjustments (182,647,478) (181,374,941) Net patient service revenue $ 162,561,026 $ 156,876, Concentrations of Credit Risk The Hospital grants credit without collateral to its patients, many of whom are local residents and are insured under third-party payor agreements. The mix of receivables from patient and third party payors before allowance for doubtful accounts consists of the following at September 30, 2012 and 2011: Medicare 30 % 31 % Medicaid 8 6 HMO Blue 4 4 Blue Cross 7 8 Commercial 5 4 Free care 5 5 Health New England 6 5 Harvard Pilgrim 4 4 Patients 7 10 Other third-party payors % 100 % 13

17 5. Contributions Receivable Contributions receivable are expected to be realized in the following years as of September 30, 2012 and 2011: In one year or less $ 28,350 $ 49,766 Between one and five years - 9,000 28,350 58,766 Less: Allowance for doubtful contributions and discount to present value (2,410) (5,364) $ 25,940 $ 53, Property and Equipment Property and equipment consists of the following at : Land $ 1,783,897 $ 1,783,897 Buildings and improvements 112,043, ,065,996 Equipment 83,119,465 78,814, ,947, ,664,227 Less: Accumulated depreciation (126,520,980) (115,838,937) 70,426,339 75,825,290 Construction in progress 675, ,058 $ 71,101,756 $ 76,090,348 Depreciation expense was $11,109,289 and $12,141,673 for the year ended September 30, 2012 and 2011, respectively. The Hospital has outstanding purchase commitments of approximately $821,000 and $568,000 as of, respectively. 7. Deferred Financing Costs Deferred financing costs consist of the following at : Deferred financing costs $ 834,186 $ 834,186 Less: Accumulated amortization (517,995) (475,220) $ 316,191 $ 358,966 Amortization expense was $42,775 and $87,878 for the years ended September 30, 2012 and 2011, respectively. 14

18 8. Long-Term Debt Long-term debt consists of the following at September 30, 2012 and, 2011: MHEFA revenue bonds payable, Dartmouth-Hitchcock Obligated Group (Cooley Dickinson Hospital Issue) Series 2002, subject to optional redemption on or after August 1, 2012, consisting of $13,250,000 of serial bonds due through August 1, 2017 at fixed rates of 2.0% to 4.9% and $6,750,000 of term bonds due August 1, 2018 to August 1, 2022 at a fixed rate of 5.1%, collateralized by gross receipts of the Hospital. $ 12,065,000 $ 12,995,000 Dartmouth-Hitchcock Obligated Group (Cooley Dickinson Hospital, Series 2011 Note) with principal payments of $1,125,000, commencing on August 1, 2011 and increasing to $1,915,000 on August 1, 2035, and interest at LIBOR plus the applicable margin (0.84% at September 30, 2012), collateralized by gross receipts of the Hospital. 46,489,000 47,964,000 Capital lease maturing December 23, Interest rate of 4.6%. 2,344,088 2,665,507 Capital lease maturing August 20, Interest rate of 4.37%. 1,577,728 2,089,620 62,475,816 65,714,127 Less: Unamortized original issue discount (16,681) (19,732) Less: Current portion (3,366,236) (3,238,312) $ 59,092,899 $ 62,456,083 In April 2011, the Hospital refinanced its Series 2006 MHEFA revenue bonds, remaining principal of $48,975,000 through the private placement of the Series 2011 Note issued by the Obligated Group. The note bears interest at a variable rate equal to LIBOR plus the applicable margin based on the Hospital's credit rating, as defined in the loan agreement. As a result of the refinancing, the Hospital wrote-off $1,197,235 of previously deferred financing costs. The Series 2011 Note is callable by the bank prior to each three-year anniversary date of the loan agreement with the first three-year anniversary date being April 20, Capitalized interest for the year ended was approximately $5,300 and $5,700, respectively. Annual principal payments on bonds payable at June 30, 2012, assuming the Series 2011 Note was called in 2014, are as follows: 2013 $ 2,495, ,979, ,060, ,110, ,160,000 Thereafter 6,750,000 $ 58,554,000 15

19 The Obligated Group is subject to a debt service coverage ratio covenant related to the Series 2002 and Series 2011 bonds. The ratio must be at least 1.10 to 1.0 as of September 30, The Obligated Group was in compliance with this covenant at September 30, 2012 with a ratio of 3.44 to 1.0 (unaudited). The Hospital has joint and several liability for certain obligations issued on behalf of the Obligated Group. As of, the Obligated Group had outstanding indebtedness of approximately $621,808,000 (unaudited) and $516,898,000 (unaudited), respectively. The Hospital leases certain equipment under capital lease agreements which extend through Future minimum payments under capital leases at September 30, 2012 are as follows: 2013 $ 1,030, ,030, , , ,299 Thereafter 510,180 Total minimum lease payments 4,376,972 Less: Amounts representing interest (455,156) Present value of minimum lease payments $ 3,921, Workers Compensation The Hospital provides for workers compensation coverage on a self-insured basis. Workers compensation expense includes a provision for incurred but not reported claims. This provision is actuarially determined based on past claims experience and other related factors. Accrued loss reserves at were approximately $2,984,000 and $2,541,000 respectively, including a reserve for incurred but not reported claims. The Hospital s potential obligations for coverage are collateralized by a surety bond in the amount of $4,130,000 in 2012 and $4,100,000 in The Hospital has purchased excess insurance coverage to limit its exposure in the event of adverse claims experience and has recorded a related receivable of $693,000 and $539,000 as of, respectively, for anticipated insurance recoveries. 10. Benefit Plans The Corporation has a qualified defined contribution retirement plan. Hospital employees are eligible to participate if they work more than 20 hours per week and have attained age 21. The plan was amended as of January 1, 2010 for a partial Hospital match of employee savings under the plan. Hospital contributions under the plan were approximately $1,342,000 and $1,288,000 in 2012 and 2011, respectively. The Corporation also has a contributory defined benefit pension plan covering substantially all employees of the Hospital and its affiliates. The plan, which may be terminated at any time by the Board, provides benefits to employees upon retirement. The benefits under the plan are based on years of service and the employee s compensation. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Corporation s policy is to fund pension costs 16

20 incurred to the ERISA minimum funding limitations. In conformity with this policy, the Hospital made contributions to the plan of $3,770,067 and $3,564,184 in 2012 and 2011, respectively. On September 17, 2009, the Corporation board approved the freezing of the pension plan for substantially all participants. Effective January 1, 2010, participants no longer accrued benefits under the plan. On July 7, 2010, a voluntary labor arbitration tribunal ruled the Corporation violated the collective bargaining agreement of certain employees by freezing the pension plan on January 1, The Corporation was required to unfreeze the defined benefit plan for these employees, restore the contributions to the plan retroactive to the date on which the plan was frozen and continue to fund the plan through the remainder of the term of the parties collective bargaining agreement. Effective February 6, 2012, registered nurses at the Hospital who are represented by the Massachusetts Nursing Association and who are hired after February 6, 2012 are not eligible members of the defined benefit pension plan. Effective July 1, 2012 all registered nurses who are represented by the Massachusetts Nursing Association and active members in the defined benefit pension plan need to elect no later than June 30, 2012 to either continue to accrue benefits under the Plan or to receive employer contributions to the 403(b) Plan sponsored by the Hospital. The Corporation uses a September 30 measurement date for its defined benefit pension plan. For purposes of preparing the September 30, 2012 interim financial statements, the Corporation remeasured its defined benefit pension plan as of September 30,

21 Pertinent information relating to the plan is as follows: Change in projected benefit obligation Benefit obligation at beginning of year $ 83,494,554 $ 73,992,479 Service cost 1,640,806 1,817,106 Interest cost 3,884,899 3,800,720 Participation contributions 220, ,621 Benefits paid (3,153,875) (2,731,347) Actuarial loss 9,381,495 6,399,975 Projected benefit obligation at end of year $ 95,468,467 $ 83,494,554 Change in plan assets Fair value of plan assets at beginning of year $ 44,889,086 $ 44,908,179 Actual return on plan assets 7,217,624 (1,067,551) Employer contributions 3,770,067 3,564,184 Participant contributions 220, ,621 Benefits paid (3,153,875) (2,731,347) Fair value of plan assets at end of year $ 52,943,490 $ 44,889,086 Funded status (42,524,977) $ (38,605,468) Amounts recognized in unrestricted net assets Net actuarial loss $ 37,176,895 $ 33,389,030 Pension related changes other than net periodic benefit cost Actuarial loss $ 5,838,608 $ 11,212,618 Amortization of actuarial loss (2,050,743) (1,266,252) Decrease in net assets $ 3,787,865 $ 9,946,366 Components of net periodic pension cost Service cost $ 1,640,806 $ 1,817,106 Interest cost 3,884,899 3,800,720 Expected return on plan assets (3,674,737) (3,745,092) Amortization of actuarial loss 2,050,743 1,266,252 Net periodic pension cost $ 3,901,711 $ 3,138,986 The Hospital s accumulated benefit obligation was $90,321,225 and $78,823,586 at September and, 2011, respectively. 18

22 The estimated actuarial loss that will be amortized into net periodic pension cost in fiscal year 2013 is $2,292,950. Weighted average assumptions used to determine net periodic pension cost Discount rate 4.75 % 5.25 % Rate of compensation increase 4.00 % 4.00 % Expected long-term rate of return on plan assets 7.75 % 8.25 % Weighted average assumptions used to determine benefit obligation Discount rate 3.70 % 4.75 % Rate of compensation increase 4.00 % 4.00 % The discount rate is the assumed rate at which the plan s obligations could be effectively settled. The basis for determining the discount rate is a pension yield curve which is more reflective of the expected pension plan cash flows and the average yield on high quality, fixed-income investments. The rate of compensation increase is a long-term rate based on current expectations of future pay increases. The expected long-term rate of return on plan assets is determined by considering historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. The following table summarizes the fair value of investments by major type held by the pension plan at September : Level 1 Level 2 Level 3 Total Investments, at fair value Equities $ 26,963,824 $ 4,594,452 $ - $ 31,558,276 Fixed income 17,543,701 2,526,113-20,069,814 Cash and cash equivalents 1,315,400-1,315,400 Total investments, at fair value $ 45,822,925 $ 7,120,565 $ - $ 52,943,490 The following table summarizes the fair value of investments by major type held by the pension plan at September 30, 2011: Level 1 Level 2 Level 3 Total Investments, at fair value Equities $ 24,458,556 $ 3,697,531 $ - $ 28,156,087 Fixed income 13,234,356 2,309,118-15,543,474 Cash and cash equivalents 1,189, ,189,525 Total investments, at fair value $ 38,882,437 $ 6,006,649 $ - $ 44,889,086 The defined benefit plan assets are valued utilizing the same fair value hierarchy as the Hospital s investments as described in Note 1. 19

23 The weighted average asset allocations at September and 2011 of the defined benefit plan are as follows: Equities 60 % 63 % Fixed income Cash and cash equivalents % 100 % The investment objective for the plan is to obtain a favorable relative return for the entire fund, consistent with the preservation of capital and emphasizing some income generation and long-term growth. Target asset allocations range from 50% to 75% equities, 25% to 50% fixed income and 0% to 10% cash equivalents. Contributions The Hospital expects to contribute approximately $6,919,000 to the plan the year ended September 30, Estimated Future Benefit Payments Benefit payments, which reflect expected future service, are estimated to be paid as follows: 2013 $ 3,804, ,213, ,495, ,685, ,896, ,173,000 $ 49,266, General and Professional Liability Insurance Coverage Effective January 1, 2009, the Hospital is insured through a comprehensive general liability and professional liability policy written on a claims-made basis with prior acts coverage. The policy is renewable on an annual basis, and has been renewed through October 1, All known significant asserted and unasserted claims alleging malpractice have been communicated to the insurer who is responsible for resolving the claim and the related costs of litigation. There were no known claims outstanding at September 30, 2012, which in the opinion of management, will be settled for amounts in excess of insurance coverage, nor are there any unasserted claims or incidents which require loss accrual. Prior to January 1, 2009, the Hospital insured its comprehensive general liability and professional liability exposures on a claims-made basis through the DHA captive insurance program. The policy was comprised of primary and excess coverage. The primary coverage was written on a retrospective rating basis, based on the experience of the program. As of December 31, 2008, all known significant asserted and unasserted claims alleging malpractice had been communicated to the insurer who was responsible for resolving the claim and the related costs of litigation. The program had the ability to assess its members additional premiums based on their experience. However, based on the program s actual experience and the funded status of the program, management did not consider an assessment material to the Hospital s balance sheet or the related statements of operations, changes in net assets or cash flows to be likely. 20

24 12. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are available for the following purposes as of September and 2011: Purchase of equipment and healthcare services $ 5,849,524 $ 4,867,492 Interest in unspent income and appreciation of the Corporation's endowment 1,939,012 1,435,716 $ 7,788,536 $ 6,303,208 Permanently restricted net assets at September and 2011 are comprised of the Hospital s interest in the permanently restricted net assets of the Corporation s endowment, the income of which is expendable to support healthcare services and nursing scholarships. 13. Related Party Transactions The Hospital provides financial support to the Corporation and its other subsidiaries. Amounts due from (to) affiliates consisted of the following at September and 2011: VNA and Hospice of Cooley Dickinson, Inc. $ 47,486 $ 39,922 Cooley Dickinson Health Care Corporation 47,757 18,866 Cooley Dickinson Practice Associates - - $ 95,243 $ 58,788 The Hospital purchases certain rental space from VNA/Hospice. Total charges to the Hospital were approximately $34,000 and $31,000 for the years ended, respectively. VNA/Hospice purchases various services from the Hospital. Total charges to VNA/Hospice for purchased services were approximately $172,000 and $159,000 for the years ended, respectively. The Hospital provides various services to CDPA. Total revenues received by the Hospital were approximately $2,639,000 and $2,549,000 for the years ended, respectively. 21

25 14. Functional Expenses The Hospital provides general health care services to residents within its geographic location. Expenses related to providing these services for the year ended September and 2011 are as follows: Healthcare services General and administrative $ 118,577,114 $ 120,786,681 30,991,938 30,335,891 $ 149,569,052 $ 151,122, Fair Values of Financial Instruments The following methods and assumptions were used by the Hospital in estimating the fair value of its financial instruments: Receivables and Payables The fair value of receivables and payables approximates the carrying amount reported in the balance sheet as of September and Long-Term Debt Fair values of the Hospital s bonds are estimated using yields for securities with similar types of borrowing arrangements. The fair value of the Hospital s bonds is approximately $58,554,000 and $61,159,000 at September and 2011, respectively. The fair value of the remaining long-term debt approximates the carrying value. 16. Commitments and Contingencies The Hospital is involved in various legal matters arising from the normal course of activities. Although the ultimate outcome is not determinable at this time, management, after taking into consideration advice of legal counsel, believes that the resolution of these pending matters will not have a material adverse effect, individually or in the aggregate, upon the Hospital s balance sheet, or the related statements of operations, changes in net assets, or cash flows. 17. Operating Leases The Hospital is committed under operating leases for office facilities and medical equipment as of September 30, 2012, that have initial or remaining lease terms in excess of one year. In addition to the monthly lease payments for the medical equipment leases, the Hospital is also accruing expense over the original terms of the leases such that at the end of the terms, a liability will have been accrued for the minimum lease termination cost. The amounts accrued as of were $3,173,713 and $2,995,862, respectively. 22