OBLIGATED GROUP MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 2018

Transcription

1 OBLIGATED GROUP MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 2018 For additional information please visit For past quarterly and annual disclosures please visit or EMMA

2 Table of Contents Page I. Essentia Health Overview 1 II. Business Description 3 III. Management s Discussion and Analysis of Results 7 Fiscal Year 2018

3 Section I Essentia Health Overview I. Essentia Health Overview Introduction Essentia Health is an integrated health system serving patients in Minnesota, Wisconsin, North Dakota and Idaho. Headquartered in Duluth, Minn., Essentia Health combines the strengths and talents of 15,000 employees, including more than 2,300 providers in more than 55 specialties, who serve our patients and communities through the mission of being called to make a healthy difference in people s lives. Essentia Health, which includes many Catholic facilities, is guided by the values of Quality, Hospitality, Respect, Joy, Justice, Stewardship and Teamwork. The organization delivers on its promise to be Here With You in 15 hospitals, more than 70 clinics, six skilled nursing facilities, three assisted living facilities, three independent living facilities and several rehabilitation centers, six ambulance services, one research institute, home health services and one Durable Medical Equipment company. A key strategy of the System is to collaborate with community based health care organizations where local and regional identity is preserved, yet supported by the knowledge, experience and resources of a strong, values oriented organization. Essentia serves an area with a population of more than 1 million people. In 2018, Essentia had nearly 42,000 hospital patient discharges, approximately 675,000 outpatient visits and more than 1.7 million clinic patient encounters. Essentia Health has held Level 3 ACO Accreditation status, the highest level of such accreditation, from the National Committee for Quality Assurance since Fiscal Year

4 Section I Essentia Health Overview Essentia Health provides services in three main markets: Essentia Health East, consisting of Duluth, Minnesota and the surrounding area, Essentia Health Central, consisting of Brainerd, Minnesota and the surrounding area, and Essentia Health West, consisting of the Fargo Moorhead, North Dakota and Minnesota region and extending to Detroit Lakes, Minnesota and surrounding areas. The following map shows the locations and markets of Essentia Health. Fiscal Year

5 Section II Business Description II. Business Description The Obligated Group is composed of Essentia Health, St. Mary s Duluth Clinic Health System, St. Joseph s Medical Center, St. Mary s Regional Health Center, St. Mary s Medical Center, SMDC Medical Center, Polinsky Medical Rehabilitation Center, St. Mary s Hospital of Superior, Brainerd Medical Center, Inc., Brainerd Lakes Integrated Health System, St. Mary s Innovis Health, and Critical Access Group, each Minnesota nonprofit corporations, The Duluth Clinic, Ltd., a Minnesota business corporation, and Innovis Health, LLC, a Delaware limited liability company (collectively, the Obligated Group and each individually a Member ). Each of the Members of the Obligated Group has been determined to be exempt from federal income tax under Section 501(a) of the Internal Revenue Code of 1986, as amended (the Code ), as an organization described in Section 501(c)(3) of the Code. [Remainder of Page Intentionally Left Blank] Fiscal Year

6 Section II Business Description The following table shows the Members of the Obligated Group and their operating names. Legal Entity Operating Name, if applicable Corporate Parent Essentia Health (Essentia) n/a n/a St. Mary s Duluth Clinic Health System (SMDC) St. Mary s Medical Center (SMMC) Essentia Health East (EH East) Essentia Health St. Mary s Medical Center Essentia SMDC SMDC Medical Center Essentia Health Duluth (EH Duluth) SMDC Polinsky Medical Rehabilitation Center (Polinsky) St. Mary s Hospital of Superior (SMHS) Brainerd Lakes Integrated Health System (BLIHS) St. Joseph s Medical Center (SJMC) Brainerd Medical Center, Inc. (BMC) Essentia Health Polinsky Medical Rehabilitation Center Essentia Health St. Mary s Hospital Superior Essentia Health Central Essentia Health St. Joseph s Medical Center Essentia Health Brainerd Specialty Clinic SMMC SMMC Essentia BLIHS BLIHS Innovis Health, LLC (Innovis) Essentia Health West Essentia St. Mary s Regional Health Center (SMRHC) Essentia Health St. Mary s Detroit Lakes Innovis St. Mary s Innovis Health (SMIH) n/a Innovis Critical Access Group n/a Essentia The Duluth Clinic, Ltd. (Clinic) n/a SMDC Fiscal Year

7 Section II Business Description The following table identifies the current Members of the Obligated Group, the primary services provided by each Member, and their location. Member Primary Services Location Essentia Health Corporate Parent Duluth, Minnesota St. Mary s Duluth Clinic Health System St. Mary s Medical Center Parent of the Clinic, SMMC, SMDC Medical Center and Affiliates Tertiary Care Hospital 380 licensed beds Duluth, Minnesota Duluth, Minnesota The Duluth Clinic, Ltd. Multi Specialty Group Physician Practice Duluth, Minnesota* SMDC Medical Center Acute Care Hospital 165 licensed beds Duluth, Minnesota Polinsky Medical Rehabilitation Center Outpatient Rehabilitation Facility Duluth, Minnesota St. Mary s Hospital of Superior Critical Access Hospital 25 licensed beds Superior, Wisconsin Brainerd Lakes Integrated Health System Parent of SJMC, BMC and Affiliates Brainerd, Minnesota St. Joseph s Medical Center Brainerd Medical Center, Inc. Innovis Health LLC St. Mary s Regional Health Center St. Mary s Innovis Health Critical Access Group Acute Care Hospital 162 licensed beds Multi Specialty Group Physician Practice Tertiary Care Hospital with 133 licensed beds, Multi Specialty Group Physician Practice, and Parent of SMRHC, SMIH and Affiliates Acute Care Hospital with 87 licensed beds, 96 bed Skilled Nursing Facility, and three Senior Living facilities totaling 88 units Owns and operates the pharmacy on the SMRHC campus Parent of Idaho Non Obligated Group Affiliates Brainerd, Minnesota Brainerd, Minnesota Fargo, North Dakota* Detroit Lakes, Minnesota Detroit Lakes, Minnesota Duluth, Minnesota *Denotes main headquarters. There are multiple clinic sites across Minnesota, North Dakota and Wisconsin. Fiscal Year

8 Section II Business Description The Obligated Group posts certain financial and operating information, including official statements relating to outstanding bonded indebtedness of Essentia Health and material updates to Essentia Health s bond disclosures with the Municipal Securities Rulemaking Board (the MSRB ) on its Electronic Municipal Market Access system ( EMMA ). Such information is available without charge at This Disclosure Statement incorporates by reference certain information posted by the Obligated Group with the MSRB. Business Operations In addition to staffing hospitals and clinics, Essentia Health supports the health of the communities it serves through an active outreach program that provides access to specialists including oncologists, cardiologists, neurologists and others to the smaller communities in its service area. This outreach eliminates barriers to care for many patients, particularly those who are elderly, living on low incomes or are faced with other challenges that make it difficult to travel long distances for care. Essentia Health s size and integrated structure allows it to offer services often found only in larger urban settings. Services ranging from chemotherapy to congestive heart failure management and hospice care are available to patients in many of the rural communities Essentia Health serves. All Essentia Health s Obligated Group hospitals and clinics use a fully integrated Epic electronic health record (EHR) for patient care. The EHR and telehealth allow health clinicians to share test results and consult with colleagues in real time across great distances. Medical information is no longer lost in the shuffle of paper records an important consideration in an area where patients must often be transferred to a larger Essentia facility for complex surgeries or medical care. Essentia is also actively working with government agencies and insurers to develop innovative, cost effective approaches to care that will improve health outcomes while reducing overall costs to patients and insurers. Essentia was one of the first ACOs accredited by the National Committee for Quality Assurance at the highest level. It participates as an ACO in the Medicare Shared Savings Program; Minnesota Medicaid ACO and commercial ACOs with major carriers. Clinical operations with support from population health experts are focused on achieving the Triple Aim of improving the patient experience, improving population health and reducing the cost per capita. Patient centered medical homes staffed by care teams of physicians, advanced practice clinicians, registered nurses, care coordinators and medical assistants effectively manage patient panels, especially focusing on prevention and chronic disease management. Fiscal Year

9 Section III Management s Discussion and Analysis of Results III. Management s Discussion and Analysis of Results Operating Results Consolidated Essentia Health s consolidated operating margin was 0.5% in fiscal year 2018 compared to 1.7% in fiscal year Income from operations was $11 million in fiscal year 2018, down from $33 million earned in fiscal year Operating income in fiscal year 2018 includes higher net patient revenue than fiscal year 2017, $2,010 million compared to $1,937 million, an increase of nearly 4%. Total operating expense in fiscal year 2018 increased over fiscal year 2017 by more than the revenue increase, $2,055 million compared to $1,957 million, resulting in lower income from operations. During 2018, the System incurred expenses related to the Medical Campus Project and certain other costs totaling $12 million. In addition, there were several other significant events that occurred during 2018 in which the related expense exceeded $19 million, for a total of $31 million in fiscal year 2018, which negatively impacted operating performance. Excluding these, the Corporation s operating income would have been $42 million in A summary of these expenses is presented below: Fiscal Year

10 Section III Management s Discussion and Analysis of Results Utilization Physician work relative value units (RVUs) increased over 2% in 2018 compared to 2017 due to added capacity driven by initiatives to increase access and provider recruitment. Outpatient visits increased nearly 3% and patient days decreased over 1.5% from fiscal year 2018 compared to 2017 due to initiatives to lower the average length of stay and to perform surgeries on an outpatient basis instead of inpatient. Emergency room visits decreased 1% in 2018 compared to 2017 as more patients are utilizing urgent care and primary care options, which is frequently a lower cost and more appropriate setting. Total FTEs are lower in 2018 compared to 2017 due to workforce optimization efforts to reduce nonprovider staff. Fiscal Year

11 Section III Management s Discussion and Analysis of Results Operating Revenue Total Obligated Group revenue increased in fiscal year 2018 compared to fiscal year Net patient service revenue less provision for bad debt, driven by an average price increase as well as increased outpatient volumes, grew by over 4% for the year. Operating Expense Expense control continues to be a primary focus for the Obligated Group. Total operating expense increased 4% in fiscal year 2018 when compared to fiscal year 2017, from $1,736 million to $1,806 million. Excluding campus replacement and other costs, expenses increased only 3% in fiscal year 2018 compared to fiscal year Salaries, wages and related benefits have risen from $1,117 million in fiscal 2017 to $1,158 million in fiscal 2018 reflecting almost a 4% increase. This increase is in line with net revenue increase of 4% and planned annual salary and benefit adjustments in addition to planned provider growth. The year over year increase in supplies of 8% was due to high inflation on drug pricing and increased volumes. Repairs and maintenance expense increased 10% due to rising software maintenance costs and costs related to a new Human Resources enterprise software tool. Expense control initiatives are ongoing and are designed to ensure that operating expense levels are appropriate given the level of patient volumes. These initiatives include the following: Workforce optimization effort to reduce non provider staff and flex to volumes. Supply chain and purchased service initiatives to reduce costs. Reduce use of locums. Decrease expenses associated with treatment of chronic diseases through disease management and EMR technology. Reduce health insurance expense through leveraged Clinic expertise in chronic disease management. Fiscal Year

12 Section III Management s Discussion and Analysis of Results Non operating Gains and Losses Non operating gains and losses reflect the volatility in the investment environment. In fiscal year 2018 the Obligated Group Members had $77.8 million in non operating gains compared to $87.6 million in nonoperating gains in fiscal year The investment market during 2018 produced a net investment income of $76.1 million recorded by the Obligated Group compared to a net investment income of $90.4 million during The fiscal year 2018 net investment income included realized gains and investment income of $30.7 million and net change in unrealized gains and losses on trading securities of $45.4 million. Essentia recognized a gain on swap agreements of $3.5 million during fiscal year 2018 and $3.9 million in fiscal year To date, Essentia has not been required to post collateral on its swap agreements. See Note 9 of consolidated financial statements for a description of Essentia s swaps as of June 30, Other non operating losses in 2017 include a loss on refinancing of nearly $5 million as well as other pension cost components of approximately $2 million. Fiscal Year

13 Section III Management s Discussion and Analysis of Results Balance Sheet The Obligated Group s long term investments are managed pursuant to an investment policy and the use of professional outside money managers. The Essentia Investment Committee maintains responsibility for selection of an investment advisor and outside money managers. For the twelve months ended June 30, 2018, the total gain on the long term investment portfolio was 10%. As of June 30, 2018, the actual asset allocation compared to the target established by the Investment Committee is shown in the table below. Investments designated above as Equity Hedged and Absolute Return consist of funds of hedge funds. The Investment Committee meets on a quarterly basis to review investment performance and make changes as needed per the Investment Policy. Traditionally, Essentia has not liquidated these investments for shortterm gain or liquidity purposes, but rather has held them over a long term horizon until market conditions justify the sale or liquidation of such investments. Fiscal Year

14 Section III Management s Discussion and Analysis of Results Liquidity Total patient accounts receivable, less allowances for uncollectible accounts, decreased slightly, from $195.9 million at fiscal year end June 30, 2017 to $193.5 million at fiscal year end June 30, Days in accounts receivable improved further from 43 days in 2017 to 40 days in Total cash and investments increased from $867.2 million at fiscal year end June 30, 2017 to $930.3 million at fiscal year end June 30, 2018, an increase of over 7%. The increase is largely attributed to investment gains. Liquidity position as measured by days cash on hand for the Obligated Group Members was 197 days at fiscal year end 2018 compared 190 days to at fiscal year end Fiscal Year

15 Section III Management s Discussion and Analysis of Results Cautionary Statements Regarding Forward Looking Statements in this Discussion Certain statements included or incorporated by reference in this discussion constitute forward looking statements within the meaning of the United State Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, anticipate, forecast, budget, or other similar words. The achievement of certain results or other expectations contained in such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Neither the Obligated Group nor any other party plans to issue any updates or revisions to those forwardlooking statements if or when their expectations, or events, conditions or circumstances upon which such statements are based occur. Fiscal Year

16 OBLIGATED GROUP MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 2017 For additional information please visit For past quarterly and annual disclosures please visit or EMMA

17 Table of Contents Page I. Essentia Health Overview 1 II. Business Description 3 III. Management s Discussion and Analysis of Results 7 Fiscal Year 2017

18 Section I Essentia Health Overview I. Essentia Health Overview Introduction Essentia Health is an integrated health system serving patients in Minnesota, Wisconsin, North Dakota and Idaho. Headquartered in Duluth, Minn., Essentia Health combines the strengths and talents of 15,000 employees, including more than 1,900 physicians and advanced practitioners, who serve our patients and communities through the mission of being called to make a healthy difference in people s lives. Essentia Health, which includes many Catholic facilities, is guided by the values of Quality, Hospitality, Respect, Justice, Stewardship and Teamwork. The organization delivers on its promise to be Here With You in 15 hospitals, 75 clinics, six long-term care facilities, three assisted living facilities, three independent living facilities, five ambulance services and one research institute. Essentia serves an area with a population of more than 1 million people. In 2017, Essentia had nearly 42,000 hospital patient discharges, more than 660,000 outpatient visits and nearly 1.7 million clinic patient encounters. Essentia Health is accredited as an Accountable Care Organization by the National Committee for Quality Assurance. Fiscal Year

19 Section I Essentia Health Overview Essentia Health provides services in three main markets: Essentia Health East, consisting of Duluth, Minnesota and the surrounding area, Essentia Health Central, consisting of Brainerd, Minnesota and the surrounding area, and Essentia Health West, consisting of the Fargo-Moorhead, North Dakota and Minnesota region and extending to Detroit Lakes, Minnesota and surrounding areas. The following map shows the locations and markets of Essentia Health. Fiscal Year

20 Section II Business Description II. Business Description The Obligated Group is composed of Essentia Health, St. Mary s Duluth Clinic Health System, St. Joseph s Medical Center, St. Mary s Regional Health Center, St. Mary s Medical Center, SMDC Medical Center, Polinsky Medical Rehabilitation Center, St. Mary s Hospital of Superior, Brainerd Medical Center, Inc., Brainerd Lakes Integrated Health System, St. Mary s Innovis Health, and Critical Access Group, each Minnesota nonprofit corporations, The Duluth Clinic, Ltd., a Minnesota business corporation, and Innovis Health, LLC, a Delaware limited liability company (collectively, the Obligated Group and each individually a Member ). Each of the Members of the Obligated Group has been determined to be exempt from federal income tax under Section 501(a) of the Internal Revenue Code of 1986, as amended (the Code ), as an organization described in Section 501(c)(3) of the Code. [Remainder of Page Intentionally Left Blank] Fiscal Year

21 Section II Business Description The following table shows the Members of the Obligated Group and their operating names. Legal Entity Operating Name, if applicable Corporate Parent Essentia Health (Essentia) n/a n/a St. Mary s Duluth Clinic Health System (SMDC) St. Mary s Medical Center (SMMC) Essentia Health East (EH East) Essentia Health St. Mary s Medical Center Essentia SMDC SMDC Medical Center Essentia Health Duluth (EH Duluth) SMDC Polinsky Medical Rehabilitation Center (Polinsky) St. Mary s Hospital of Superior (SMHS) Brainerd Lakes Integrated Health System (BLIHS) St. Joseph s Medical Center (SJMC) Brainerd Medical Center, Inc. (BMC) Essentia Health Polinsky Medical Rehabilitation Center Essentia Health St. Mary s Hospital- Superior Essentia Health Central Essentia Health St. Joseph s Medical Center Essentia Health Brainerd Specialty Clinic SMMC SMMC Essentia BLIHS BLIHS Innovis Health LLC (Innovis) Essentia Health West Essentia St. Mary s Regional Health Center (SMRHC) Essentia Health St. Mary s-detroit Lakes Innovis St. Mary s Innovis Health (SMIH) n/a Innovis Critical Access Group n/a Essentia The Duluth Clinic, Ltd. (Clinic) n/a SMDC Fiscal Year

22 Section II Business Description The following table identifies the current Members of the Obligated Group, the primary services provided by each Member, and their location. Member Primary Services Location Essentia Health Corporate Parent Duluth, Minnesota St. Mary s Duluth Clinic Health System St. Mary s Medical Center Parent of the Clinic, SMMC, SMDC Medical Center and Affiliates Tertiary Care Hospital 380 licensed beds Duluth, Minnesota Duluth, Minnesota The Duluth Clinic, Ltd. Multi-Specialty Group Physician Practice Duluth, Minnesota* SMDC Medical Center Acute Care Hospital 165 licensed beds Duluth, Minnesota Polinsky Medical Rehabilitation Center Outpatient Rehabilitation Facility Duluth, Minnesota St. Mary s Hospital of Superior Critical Access Hospital 25 licensed beds Superior, Wisconsin Brainerd Lakes Integrated Health System Parent of SJMC, BMC and Affiliates Brainerd, Minnesota St. Joseph s Medical Center Brainerd Medical Center, Inc. Innovis Health LLC St. Mary s Regional Health Center St. Mary s Innovis Health Critical Access Group Acute Care Hospital 162 licensed beds Multi-Specialty Group Physician Practice Tertiary Care Hospital with 145 licensed beds, Multi-Specialty Group Physician Practice, and Parent of SMRHC, SMIH and Affiliates Acute Care Hospital with 87 licensed beds, 96-bed Skilled Nursing Facility, and three Senior Living facilities totaling 88 units Owns and operates the pharmacy on the SMRHC campus Parent of Idaho Non-Obligated Group Affiliates Brainerd, Minnesota Brainerd, Minnesota Fargo, North Dakota* Detroit Lakes, Minnesota Detroit Lakes, Minnesota Duluth, Minnesota *Denotes main headquarters. There are multiple clinic sites across Minnesota, North Dakota and Wisconsin. Fiscal Year

23 Section II Business Description The Obligated Group posts certain financial and operating information, including official statements relating to outstanding bonded indebtedness of Essentia Health and material updates to Essentia Health s bond disclosures with the Municipal Securities Rulemaking Board (the MSRB ) on its Electronic Municipal Market Access system ( EMMA ). Such information is available without charge at This Disclosure Statement incorporates by reference certain of the information posted by the Obligated Group with the MSRB, which means that important information is disclosed by referring to these documents. Business Operations In addition to staffing hospitals and clinics, Essentia Health supports the health of the communities it serves through an active outreach program that provides access to specialists including oncologists, cardiologists, neurologists and others to the smaller communities in its service area. This outreach eliminates barriers to care for many patients, particularly those who are elderly, living on low incomes or are faced with other challenges that make it difficult to travel long distances for care. Essentia Health s size and integrated structure allows it to offer services often found only in larger urban settings. Services ranging from chemotherapy to congestive heart failure management and hospice care are available to patients in many of the rural communities Essentia Health serves. All Essentia Health s Obligated Group hospitals and clinics use a fully-integrated Epic electronic health record (EHR) for patient care. The EHR and telehealth allow health clinicians to share test results and consult with colleagues in real time across great distances. Medical information is no longer lost in the shuffle of paper records an important consideration in an area where patients must often be transferred to a larger Essentia facility for complex surgeries or medical care. Essentia is also actively working with government agencies and insurers to develop innovative, cost-effective approaches to care that will improve health outcomes while reducing overall costs to patients and insurers. Essentia was one of the first ACOs accredited by the National Committee for Quality Assurance at the highest level. It participates as an ACO in the Medicare Shared Savings Program; Minnesota Medicaid ACO and commercial ACOs with major carriers. Clinical operations with support from population health experts are focused on achieving the Triple Aim of improving the patient experience, improving population health and reducing the cost per capita. Patient-centered medical homes staffed by care teams of physicians, advanced practice clinicians, registered nurses, care coordinators and medical assistants effectively manage patient panels, especially focusing on prevention and chronic disease management. Fiscal Year

24 Section III Management s Discussion and Analysis of Results III. Management s Discussion and Analysis of Results Operating Results - Consolidated Essentia Health s consolidated operating margin was nearly 2% in fiscal year 2017 compared to 3% in fiscal year Income from operations was $33 million in fiscal year 2017, down from $62 million earned in fiscal year Essentia Health s consolidated operating income in fiscal year 2017 includes higher net patient revenue than fiscal year 2016, $1,937 million compared to $1,894 million, an increase of over 2%. Total operating expense in fiscal year 2017 increased over fiscal year 2016 by more than the revenue increase, $1,957 million compared to $1,893 million, resulting in lower income from operations. Investment earnings of over $100 million in fiscal year 2017 generated the increase in excess of revenue and gains over expenses compared to fiscal year Fiscal Year

25 Section III Management s Discussion and Analysis of Results Utilization Acute patient days (excluding newborns) increased 3% in 2017 compared to 2016 due to growth in the Essentia Health West market. This was driven by additional providers that have come on line as a result of the investments that have been made in this market, including the hospital expansion and a new primary care clinic. Physician work relative value units (RVUs) increased from fiscal year 2016 to fiscal year 2017 as a result of the addition of several clinics in the Essentia Health West market and hiring of radiologists and psychologists. Emergency room visits decreased 1% in 2017 compared to 2016 as more patients are utilizing urgent care, which is frequently a lower cost and more appropriate setting. Outpatient visits increased over 3% in 2017 compared to 2016 primarily in the areas of surgery, pediatric psychology, adult occupational, physical and speech therapies. Fiscal Year

26 Section III Management s Discussion and Analysis of Results Operating Revenue Total Obligated Group revenue increased in fiscal year 2017 compared to fiscal year Net patient service revenue less provision for bad debt, driven by increased volumes, grew by over 2% for the year. Other operating revenue decreased slightly in 2017 compared to 2016 due to lower electronic health record incentive program revenue. Operating Expense Expense control continues to be a primary focus for the Obligated Group. Total operating expense increased 3% in fiscal year 2017 when compared to fiscal year 2016, from $1,679 million to $1,736 million. Salaries, wages and related benefits have risen from $1,067 million in fiscal 2016 to $1,117 million in fiscal 2017 reflecting almost a 5% increase. This increase is in line with annual planned salary and benefit adjustments and planned FTE growth related to the Essentia Health West expansion. The year-over-year increase in purchased services of 8% was due to additional costs for digital marketing and cost report consulting services. Repairs and maintenance expense increased 10% due to rising software maintenance costs. Expense control initiatives are ongoing and are designed to ensure that operating expense levels are appropriate given the level of patient volumes. These initiatives include the following: Improve productivity through use of Lean-Six Sigma management techniques. Strive for clinical excellence through disease management and the EMR technology in an attempt to reduce expenses associated with treatment of chronic diseases. Reduce health insurance expense through leveraged Clinic expertise in chronic disease management. Contract aggressively in Supply Chain to reduce supply costs. Use flexible budget. Design high reliability processes to support the right person, right place, right task and right outcome through workforce optimization, using a common system throughout Essentia Health. Fiscal Year

27 Section III Management s Discussion and Analysis of Results Non-operating Gains and Losses Non-operating gains and losses reflect the volatility in the investment environment. In fiscal year 2017 the Obligated Group Members had $87.6 million in non-operating gains compared to $41.3 million in nonoperating losses in fiscal year The investment market during 2017 produced a net investment income of $90.4 million recorded by the Obligated Group compared to a net investment loss of $35.1 million during The fiscal year 2017 net investment income included realized gains and investment income of $34.7 million and net change in unrealized gains and losses on trading securities of $55.7 million. The realized investment gains in fiscal year 2017 were the result of rebalancing within the portfolio target allocation ranges during the fiscal year. Essentia recognized a gain on swap agreements of $3.9 million during fiscal year 2017 and a swap loss of $4.0 million in fiscal year To date, Essentia has not been required to post collateral on its swap agreements. See Note 9 of consolidated financial statements for a description of Essentia s swaps as of June 30, Other non-operating losses in 2017 include a loss on refinancing of nearly $5 million as well as other pension cost components of approximately $2 million. Fiscal Year

28 Section III Management s Discussion and Analysis of Results Balance Sheet The Obligated Group s long-term investments are managed pursuant to an investment policy and the use of professional outside money managers. The Essentia Investment Committee maintains responsibility for selection of an investment advisor and outside money managers. For the twelve months ended June 30, 2017, the total gain on the long-term investment portfolio was over 13%. As of June 30, 2017, the actual asset allocation compared to the target established by the Investment Committee is shown in the table below. Investments designated above as Equity Hedged and Absolute Return consist of funds of hedge funds. The Investment Committee meets on a quarterly basis to review investment performance and make changes as needed per the Investment Policy. Traditionally, Essentia has not liquidated these investments for shortterm gain or liquidity purposes, but rather has held them over a long-term horizon until market conditions justify the sale or liquidation of such investments. Fiscal Year

29 Section III Management s Discussion and Analysis of Results Liquidity Total patient accounts receivable, less allowances for uncollectible accounts, increased slightly, from $194.2 million at fiscal year end June 30, 2016 to $195.9 million at fiscal year end June 30, Days in accounts receivable remained flat at 43 days as of June 30, 2016 compared to June 30, Total cash and investments increased from $807.2 million at fiscal year end June 30, 2016 to $867.2 million at fiscal year end June 30, 2017, an increase of over 7%. The increase is largely attributed to investment gains. Liquidity position as measured by days cash on hand for the Obligated Group Members was 190 days at fiscal year-end 2017 compared 184 days to at fiscal year-end Fiscal Year

30 Section III Management s Discussion and Analysis of Results Cautionary Statements Regarding Forward-Looking Statements in this Discussion Certain statements included or incorporated by reference in this discussion constitute forward-looking statements within the meaning of the United State Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, anticipate, forecast, budget, or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Neither the Obligated Group nor any other party plans to issue any updates or revisions to those forwardlooking statements if or when their expectations, or events, conditions or circumstances upon which such statements are based occur. Fiscal Year