TIFT COUNTY HOSPITAL AUTHORITY (A Component Unit of Tift County, Georgia) FINANCIAL STATEMENTS. for the years ended September 30, 2012 and 2011

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1 TIFT COUNTY HOSPITAL AUTHORITY FINANCIAL STATEMENTS for the years ended

2 C O N T E N T S Independent Auditor s Report 1-2 Pages Management s Discussion and Analysis 3-9 Financial Statements: Balance Sheets Statements of Revenues, Expenses and Changes in Net Assets 12 Statements of Cash Flows Notes to Financial Statements Independent Auditor s Report on Supplemental Information 47 Balance Sheets Individual Facilities Statements of Revenues, Expenses and Changes in Net Assets Individual Facilities 50-51

3 Member: THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT Board of Trustees Tift County Hospital Authority Tifton, Georgia We have audited the accompanying balance sheets of Tift County Hospital Authority (Authority) (a component unit of Tift County, Georgia) as of, and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Authority's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tift County Hospital Authority as of and the results of its operations, changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 1 P.O. Box Gillionville Road Albany, Ga Tel. (229) Fax (229) Five Concourse Parkway Suite 1250 Atlanta, GA Tel. (404) Fax (229)

4 Accounting principles generally accepted in the United States of America require that Management's Discussions and Analysis on pages 3 through 9 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Atlanta, Georgia January 8,

5 TIFT REGIONAL MEDICAL CENTER 901 East 18th Street P.O. Box 747 Tifton, Georgia TIFf COUNTY HOSPITAL AUTHORITY William T. Richardson, FACHE President/CEO Management's Discussion and Analysis Our discussion and analysis of Tift County Hospital Authority's (Authority) financial performance provides an overview of the Authority's financial activities for the fiscal years ended September 30, 2012, 2011 and Please read it in conjunction with the Authority's financial statements, which begin on page 10. Financial Highlights The Authority's net assets increased $41,856,000 or 14% this fiscal year. Total assets increased $41,813,000 or 11 %. Total liabilities decreased $43,000. The Authority reported an operating income of $22,387,000, which is 15% less than 2011 's operating income. The Authority experienced an investment gain of $21,861,000 in 2012 versus an investment loss of $1,97 5, 000 in On July 1, 2012, the Authority purchased the assets of Memorial Hospital of Adel and Memorial Convalescent Center from HealthMont and SunLink Health Systems, Inc. The results of operations for the acquired facilities have been included in this report. Using This Annual Report The Authority's financial statements consist of three statements- a balance sheet; a statement of revenues, expenses and changes in net assets; and a statement of cash flows. These financial statements and related notes provide information about the activities of the Authority. The Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets Our analyses of the Authority's finances are presented on the following pages. The balance sheet arid statement of revenues, expenses, and changes in net assets report in summary the outcome of this year's activity. These statements are presented on the accrual basis of accounting. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. 3

6 Management s Discussion and Analysis For the Year Ending September 30, 2012 These two statements report the Authority s net assets and changes in them. One way to measure the Authority s financial health or financial position is to review the Authority s net assets. Net assets are the difference between assets and liabilities. Over time, increases or decreases in the Authority s net assets are one indicator of whether its financial health is improving or deteriorating. You will need to consider other nonfinancial factors, however, such as changes in the payor mix, the quality of service provided to the community, Medicare and Medicaid reimbursement policies and local economic factors to assess the overall health of the Authority. The Statement of Cash Flows The final required statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing, and financing activities. It provides answers to such questions as Where did cash come from? What was cash used for? and What was the change in cash balance during the reporting period? The Authority s Net Assets The Authority s net assets are the difference between its assets and liabilities reported in the balance sheet. The Authority s net assets increased by $41,856,000 or 14% this fiscal year as you can see from Table 1. Table 1: Assets, Liabilities, and Net Assets Assets: Current assets $ 90,291,000 $ 91,394,000 $ 102,275,000 Noncurrent cash and investments 200,393, ,620, ,019,000 Capital assets, net 137,090, ,927, ,622,000 Other noncurrent assets 6,907,000 6,927,000 6,947,000 Total assets $ 434,681,000 $ 392,868,000 $ 341,863,000 Liabilities: Current liabilities $ 33,022,000 $ 30,403,000 $ 27,193,000 Long-term debt 65,935,000 68,597,000 41,688,000 Total liabilities $ 98,957,000 $ 99,000,000 $ 68,881,000 Net assets: Invested in capital assets net of related debt $ 78,223,000 $ 65,204,000 $ 66,549,000 Unrestricted 257,501, ,664, ,433,000 Total net assets $ 335,724,000 $ 293,868,000 $ 272,982,000 4

7 Management s Discussion and Analysis For the Year Ending September 30, 2012 There was a decrease of $1,103,000 (1%) in the Authority s current assets. Cash and cash equivalents decreased $13,432,000 (24%). Short-term investments increased $2,601,000 (108%). Accounts receivable increased $8,731,000 (29%) over the prior year. The days of net patient revenue in accounts receivable increased eleven days to 54. Noncurrent cash and investments had an increase of $25,773,000 (15%) over the prior year. Internally designated assets for capital acquisition increased $32,457,000 resulting from investment gains and transfers from the Authority s current cash and short-term investments. The balance held by trustee for capital acquisitions decreased $6,694,000 which relates to funds being used for purchase of certain medical equipment and various construction projects relating to the promissory note issued November 18, There was $32,859,000 in capital additions during 2012 which relates to the Authority s commitment to provide current and up-to-date facilities and equipment such as the renovation of the cardiovascular areas, purchase of buildings in various locations for expansion of physician practices, renovation of the six bed observation unit, computer systems necessary for meaningful use and various improvements to the building and equipment. Included in the $32,859,000 of capital additions, the Authority purchased the assets of Memorial Hospital of Adel and Memorial Convalescent Center in July 2012 for $8,350,000. In total, capital assets, net of accumulated depreciation, increased $17,163,000. Total liabilities decreased $43,000 during 2012 due to payments on long term debt, reduction in amounts due to third-party payors, and increases relating to accrued expenses and payables. Operating Results and Changes in the Authority s Net Assets In 2012, the Authority s net assets increased by $41,856,000 or 14%, as shown in Table 2. The major components of the increase in net assets are an increase in net patient service revenue of $7,611,000 (3%) and an increase in operating expenses of $13,961,000 (6%). The Authority experienced an investment gain of $21,861,000 in 2012 as compared to 2011 s loss of $1,975,000. All of the above contributed to the overall excess of revenues over expenses of $41,531,000, which is 104% more than

8 Management s Discussion and Analysis For the Year Ending September 30, 2012 Table 2: Operating Results and Changes in Net Assets Operating revenues: Net patient service revenue $ 262,903,000 $ 255,292,000 $ 227,209,000 EHR meaningful use incentive revenue 2,191, Other revenue 2,922,000 2,812,000 2,957,000 Total operating revenue 268,016, ,104, ,166,000 Operating expenses: Salaries and wages 98,149,000 91,327,000 78,874,000 Employee benefits 27,201,000 23,130,000 19,899,000 Supplies and drugs 48,408,000 48,573,000 45,790,000 Contract and purchased services 14,656,000 14,929,000 11,363,000 Physician services 17,678,000 14,882,000 13,046,000 Depreciation and amortization 15,522,000 15,107,000 13,738,000 Other expense 24,015,000 23,720,000 19,511,000 Total operating expenses 245,629, ,668, ,221,000 Operating income 22,387,000 26,436,000 27,945,000 Nonoperating revenues (expenses): Investment income (loss) 21,861,000 ( 1,975,000) 8,841,000 Interest expense ( 2,717,000) ( 2,723,000) ( 1,958,000) Grant expense - ( 1,400,000) - Total nonoperating revenues (expenses) 19,144,000 ( 6,098,000) 6,883,000 Excess of revenues over expenses 41,531,000 20,338,000 34,828,000 Transfer from affiliated entities, net 325, , ,000 Increase in net assets $ 41,856,000 $ 20,886,000 $ 35,497,000 Net assets, end of year $ 335,724,000 $ 293,868,000 $ 272,982,000 6

9 Management s Discussion and Analysis For the Year Ending September 30, 2012 Operating Income The first component of the overall change in the Authority s net assets is its operating income generally, the difference between net patient service revenue and the expenses incurred to perform those services. The primary components of this operating income relate to: Net patient service revenue experienced an increase over the prior year of $7,611,000 (3%) due to an increase in volume of services provided by employed physician practices and the addition of Cook Medical Center which accounted for $4,121,000 or 54% of the increase. Operating expenses increased $13,961,000 (6%) in 2012 of which $4,738,000 related to the addition of Cook Medical Center. Expenses relating to the physician practices increased $7,183,000 over The Authority experienced an increase of 8% in gross patient service revenue during the 2012 fiscal year. With this increase in gross patient service revenue was an increase in contractual allowances and bad debts of 10%, resulting in a 3% increase in net patient service revenue. For Tift Regional Medical Center, hospital inpatient days decreased 4% from 2011, adjusted patient days increased 3% and adjusted discharges increased 3%. Adjusted patient days and discharges include inpatient services plus outpatient equivalent services. There was an increase in observation patient discharges for Tift Regional Medical Center of 26% which more than offset the 4% decline in hospital inpatient days. Salaries and wages expense increased $6,822,000 (7%) from 2011 to The increase in salary expense from 2011 to 2012 relating to physician services was $5,509,000 and the amount relating to Cook Medical Center was $2,082,000. Employee benefits expense had an increase of $4,071,000 (18%) over Group health insurance experienced an increase of $3,656,000 (26%). Workers compensation expense increased $469,000 and retirement expense decreased $129,000 (2%) from Retirement expense is the Authority s portion of the contribution to the employee s tax deferred annuity fund. Supplies and drug expense decreased $165,000 and contract and purchased services decreased $273,000 or (2%) as a result of cost initiatives throughout the fiscal year. Physician services increased $2,796,000 (19%) over 2011 with the majority of this relating to the expansion of the hospitalist program, call pay for coverage by the medical staff and locum tenens physician services which increased $1,047,000. The Authority continues to meet the medical needs of the hospital and community by recruiting physicians to our area. 7

10 Management s Discussion and Analysis For the Year Ending September 30, 2012 Operating Income, Depreciation and amortization increased $415,000 (3%) in Other expense showed a $295,000 (1%) increase over prior year. The provider payment increased $83,000 in response to the passing of Georgia Provider Payment Agreement Act in The hospital provider payment program was established with this bill and requires the Authority to pay approximately $2,700,000 annually. The Authority showed an increase in maintenance contracts of $114,000 and $665,000 in due diligence cost relating to the Cook Medical Center purchase. Nonoperating Revenues and Expenses Nonoperating revenues consist primarily of earnings on investments internally designated for capital acquisition. During 2012 the Authority experienced investment income of $21,861,000 as compared to a loss of $1,975,000 in This fiscal year gain is attributed to the net of other investment income of $6,067,000 and an unrealized gain on investments of $15,794,000. The Authority s Cash Flow Net cash flow provided by operating activities decreased from 2011 by $12,770,000 (29%). Receipts from and on behalf of patients decreased $2,798,000 (1%), payments to suppliers increased $1,802,000 (2%) and payments to employees increased $10,248,000 (9%). The Authority received $2,191,000 from Medicare relating to the Authority s attestation to becoming a meaningful user of electronic health record (EHR) technology. Cash provided by investing activities decreased in The decrease is primarily due to a reduction in the purchase of debt and equity securities and a reduction in proceeds from short-term investments. Cash used by capital and related financing was $38,051,000 in fiscal year 2012, which is primarily due to the net of purchases of capital assets including the acquisition of Cook Medical Center and interest and principal paid on long-term debt. In summary, cash and cash equivalents decreased from $75,071,000 in fiscal year 2011 to $54,647,000 in fiscal year Capital Asset and Debt Administration Capital Assets At September 30, 2012, the Authority had $137,090,000 invested in capital assets, net of accumulated depreciation as detailed in Note 8 to the financial statements. In 2012, the Authority renovated the cardiovascular areas, purchased buildings in various locations for expansion of physician practices, renovated the six bed observation unit, upgraded computer systems necessary for meaningful use and made various improvements to the building and equipment. In total, capital assets, net of accumulated depreciation, increased $17,163,000. The Authority purchased the assets of Memorial Hospital of Adel and Memorial Convalescent Center in July 2012 for $8,350,000. The investment in land increased $516,000; buildings increased $8,402,000 and equipment increased $15,876,000. These capital outlays are examples of the Authority s dedication to continuing to provide the best health care in the region. 8

11 Management s Discussion and Analysis For the Year Ending September 30, 2012 Capital Asset and Debt Administration, Debt At September 30, 2012, the Authority had $68,566,000 in revenue bonds and other loans outstanding as detailed in Note 12 to the financial statements. Contacting the Authority s Management This financial report is designed to provide our patients, suppliers, creditors and other stakeholders with a general overview of the Authority s finances and to show the Authority s accountability for the money it receives. Any questions about this report or request for additional information should be directed to the Chief Financial Officer s office at Tift Regional Medical Center, P.O. Box 747, Tifton, GA

12 TIFT COUNTY HOSPITAL AUTHORITY Balance Sheets Assets Current assets: Cash and cash equivalents $ 41,552,000 $ 54,984,000 Short-term investments 5,001,000 2,400,000 Patient accounts receivable, net of estimated uncollectibles of $52,366,000 in 2012 and $43,957,000 in ,935,000 30,204,000 Supplies, at lower of cost (first-in, first-out) or market 1,308, ,000 Other current assets 3,495,000 2,874,000 Total current assets 90,291,000 91,394,000 Noncurrent cash and investments: Internally designated for capital acquisitions 187,277, ,820,000 Internally designated for malpractice self-insurance 3,824,000 3,814,000 Held by trustee for capital acquisitions 9,292,000 15,986,000 Total noncurrent cash and investments 200,393, ,620,000 Capital assets: Land 5,886,000 5,370,000 Construction in progress 8,557,000 1,849,000 Depreciable capital assets, net of accumulated depreciation 122,647, ,708,000 Total capital assets, net of accumulated depreciation 137,090, ,927,000 Other assets: Deferred financing costs 407, ,000 Goodwill 6,500,000 6,500,000 Total other assets 6,907,000 6,927,000 Total assets $ 434,681,000 $ 392,868,000 10

13 Liabilities and Net Assets Current liabilities: Current maturities of long-term debt $ 2,631,000 $ 2,539,000 Accounts payable 11,551,000 9,366,000 Accrued expenses 16,262,000 14,518,000 Estimated third-party payor settlements 2,578,000 3,980,000 Total current liabilities 33,022,000 30,403,000 Long-term debt, net of current maturities 65,935,000 68,597,000 Total liabilities 98,957,000 99,000,000 Net assets: Invested in capital assets net of related debt 78,223,000 65,204,000 Unrestricted 257,501, ,664,000 Total net assets 335,724, ,868,000 Total liabilities and net assets $ 434,681,000 $ 392,868,000 See accompanying notes to financial statements. 11

14 TIFT COUNTY HOSPITAL AUTHORITY Statements of Revenues, Expenses and Changes in Net Assets Years Ended Operating revenues: Net patient service revenue (net of provision for bad debts of $32,994,000 in 2012 and $25,677,000 in 2011) $ 262,903,000 $ 255,292,000 EHR meaningful use incentive revenue 2,191,000 - Other revenue 2,922,000 2,812,000 Total operating revenues 268,016, ,104,000 Operating expenses: Salaries and wages 98,149,000 91,327,000 Employee benefits 27,201,000 23,130,000 Supplies and drugs 48,408,000 48,573,000 Contract and purchased services 14,656,000 14,929,000 Physician services 17,678,000 14,882,000 Depreciation and amortization 15,522,000 15,107,000 Other expense 24,015,000 23,720,000 Total operating expenses 245,629, ,668,000 Operating income 22,387,000 26,436,000 Nonoperating revenues (expenses): Investment income (loss) 21,861,000 ( 1,975,000) Interest expense ( 2,717,000) ( 2,723,000) Grant expense - ( 1,400,000) Total nonoperating revenues (expenses) 19,144,000 ( 6,098,000) Excess of revenues over expenses 41,531,000 20,338,000 Transfers from affiliated entities, net 325, ,000 Increase in net assets 41,856,000 20,886,000 Net assets, beginning of year 293,868, ,982,000 Net assets, end of year $ 335,724,000 $ 293,868,000 See accompanying notes to financial statements. 12

15 TIFT COUNTY HOSPITAL AUTHORITY Statements of Cash Flows Years Ended Cash flows from operating activities: Receipts from and on behalf of patients $ 252,770,000 $ 255,568,000 Payments to suppliers and contractors (103,244,000) (101,442,000) Payments to employees (123,931,000) (113,683,000) EHR meaningful use receipts 2,191,000 - Other receipts 2,922,000 2,812,000 Transfers from affiliated entities 325, ,000 Net cash provided by operating activities 31,033,000 43,803,000 Cash flows from non-capital financing activities: Grant made - ( 1,400,000) Cash flows from capital and related financing activities: Proceeds from long-term debt - 30,000,000 Principal paid on long-term debt ( 2,538,000) ( 2,353,000) Interest paid on long-term debt ( 2,729,000) ( 2,734,000) Purchase of capital assets, net of retirements ( 32,784,000) ( 25,493,000) Net cash used by capital and related financing activities ( 38,051,000) ( 580,000) Cash flows from investing activities: Proceeds from sale of debt and equity securities 61,920,000 68,827,000 Purchase of debt and equity securities ( 78,891,000) (125,028,000) Proceeds from sale of short-term investments - 9,002,000 Purchase of short-term investments ( 2,601,000) - Investment income 6,166,000 8,202,000 Net cash used by investing activities ( 13,406,000) ( 38,997,000) Net increase (decrease) in cash and cash equivalents ( 20,424,000) 2,826,000 Cash and cash equivalents, beginning of year 75,071,000 72,245,000 Cash and cash equivalents, end of year $ 54,647,000 $ 75,071,000 13

16 TIFT COUNTY HOSPITAL AUTHORITY Statements of Cash Flows, Years Ended Reconciliation of cash and cash equivalents to the balance sheets: Cash and cash equivalents in current assets $ 41,552,000 $ 54,984,000 Cash and cash equivalents in noncurrent cash and investments: Internally designated for capital acquisitions 3,079,000 3,387,000 Internally designated for malpractice self-insurance 724, ,000 Held by trustee for capital acquisitions 9,292,000 15,986,000 Total cash and cash equivalents $ 54,647,000 $ 75,071,000 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 22,387,000 $ 26,436,000 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 15,522,000 15,107,000 Provision for bad debts 32,994,000 25,677,000 Transfers from affiliated entities 325, ,000 Changes in: Patient accounts receivable (41,725,000) (26,553,000) Supplies ( 376,000) ( 98,000) Other current assets ( 621,000) 183,000 Accounts payable 2,185, ,000 Accrued expenses 1,744, ,000 Estimated third-party payor settlements ( 1,402,000) 1,152,000 Net cash provided by operating activities $ 31,033,000 $ 43,803,000 Noncash investing activities: The Authority held investments at with a fair value of $187,277,000 and $154,820,000, respectively. During 2012 and 2011, the net increase (decrease) in the fair value of these investments was $15,793,000 and $(10,096,000), respectively. See accompanying notes to financial statements. 14

17 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies Reporting entity. Tift County Hospital Authority (Authority), created pursuant to the Hospital Authorities Law of the State of Georgia, is governed by a nine-member board of trustees appointed by the Tift County Commissioners from residents of Tift County. Tift County has guaranteed debt of the Authority. For this reason, the Authority is considered to be a component unit of Tift County, Georgia. The Authority owns and operates Tift Regional Medical Center, which provides short-term medical, surgical, obstetrical, pediatric, and emergency care to residents of Tift County and the surrounding area. Effective July 1, 2012, the Authority also owns and operates Cook Medical Center, which provides short-term medical, surgical, obstetrical, geriatric psychiatry, pediatric, and emergency care to residents of Cook County and the surrounding area, and Cook Senior Living Center, a longterm care facility. Use of estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the determination of the allowances for uncollectible accounts and contractual adjustments, estimated third-party payor settlements, and the evaluation of goodwill impairment. In particular, laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates associated with these programs will change by a material amount in the near term. 15

18 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies, Enterprise fund accounting. The Authority uses enterprise fund accounting. Revenues and expenses are recognized on the accrual basis using the economic resources measurement focus. Based on Governmental Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, as amended, the Authority has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB), including those issued after November 30, 1989, that do not conflict with or contradict GASB pronouncements. Risk Management. The Authority is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; medical malpractice; and employee health, dental, and accident benefits. Commercial insurance coverage is purchased for claims arising from such matters. Settled claims have not exceeded this commercial coverage in any of the three preceding years. The Authority is self-insured for employee health insurance and for the deductible portion of its general and professional insurance policy as discussed in Note 14. Cash and cash equivalents. Cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less. Allowance for doubtful accounts. The Authority provides an allowance for doubtful accounts based on the evaluation of the overall collectability of the accounts receivable. As accounts are known to be uncollectible, the accounts are charged against the allowance. Noncurrent cash and investments. Noncurrent cash and investments include assets held by trustees for capital acquisitions and assets internally designated for capital improvements and malpractice self-insurance, over which the Board retains control and may at its discretion subsequently use for other purposes. Investments in debt and equity securities. Investments in debt and equity securities are reported at fair value. Interest, dividends, and gains and losses, both realized and unrealized, on investments in debt and equity securities are included in nonoperating revenue when earned. 16

19 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies, Fair value measurements. FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement and Disclosures defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., 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. FASB ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820 describes the following three levels of inputs that may be used: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs. Restricted resources. When the Authority has both restricted and unrestricted resources available to finance a particular program, it is the Authority s policy to use restricted resources before unrestricted resources. Capital assets. The Authority s capital assets are reported at historical cost. Contributed capital assets are reported at their estimated fair value at the time of their donation. All capital assets other than land are depreciated or amortized (in the case of capital leases) using the straight-line method of depreciation using these asset lives: Land improvements Buildings and building improvements Equipment, computers and furniture 15 to 20 Years 20 to 40 Years 3 to 10 Years Capital assets also include certain intangible assets. Intangible assets of the Authority that are reported in capital assets include physician and employee work forces that were acquired in the purchase of Affinity Health Group, LLC. The work forces are amortized over ten years. 17

20 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies, Goodwill. The Authority reviews goodwill for impairment annually at the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is the condition that exists when the carrying value of goodwill exceeds its implied fair value. The review of goodwill for impairment is a two-step test. The first step compares the fair value of the reporting unit to its carrying value. The Authority determines the fair value of its reporting unit based on multiples of earnings approach. If the fair value of the reporting unit exceeds the carrying value, goodwill is considered not impaired and no further testing is performed. If the carrying value of a reporting unit exceeds its fair value, then the Authority must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit s goodwill. If the carrying value of a reporting unit s goodwill exceeds its implied fair value, the Authority records an impairment loss equal to that excess. Costs of borrowing. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Costs incurred in connection with the issuance of bonds and notes are deferred and amortized over the term of the related debt using the straight-line method, which approximates the effective interest method. Compensated absences. The Authority s employees earn personal days off (PDO s) at varying rates depending on years of service. All employees that accrue PDO s are required to use at least a minimum number of PDO s each year as pay for time not worked. Up to sixty (60) PDO s may be banked. PDO s in excess of sixty (60) days are automatically bought back by the Authority. Employees may elect to receive a cash pay-out for accrued PDO s provided that such pay-out will leave a balance equal to or greater than ten (10) days. Effective May 2012, PDO s will be cashed out at $0.85 on each dollar. Upon termination of employment, eligible PDO s will be paid to the employee. The accrued PDO is reported as a current liability in 2012 and Net assets. Net assets of the Authority are classified into two components. Net assets invested in capital assets net of related debt consist of capital assets net of accumulated depreciation and reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. Unrestricted net assets are remaining net assets that do not meet the definition of invested in capital assets net of related debt. 18

21 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies, Operating revenues and expenses. The Authority s statement of revenues, expenses and changes in net assets distinguishes between operating and nonoperating revenues and expenses. Operating revenues result from exchange transactions associated with providing health care services the Authority s principal activity. Nonexchange revenues, including taxes, grants, and contributions received for purposes other than capital asset acquisition, are reported as nonoperating revenues. Operating expenses are all expenses incurred to provide health care services, other than financing costs. Net patient service revenue. The Authority has agreements with third-party payors that provide for payments to the Authority at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. 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. Charity care. The Authority provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Authority does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Grants and contributions. From time to time, the Authority receives grants from the State of Georgia as well as contributions from individuals and private organizations. Revenues from grants and contributions (including contributions of capital assets) are recognized when all eligibility requirements, including time requirements are met. Grants and contributions may be restricted for either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are restricted to a specific operating purpose are reported as nonoperating revenues. Amounts restricted to capital acquisitions are reported after nonoperating revenues and expenses. 19

22 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies, Impairment of long-lived assets. The Authority evaluates on an ongoing basis the recoverability of its assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is required to be recognized if the carrying value of the asset exceeds the undiscounted future net cash flows associated with that asset. The impairment loss to be recognized is the amount by which the carrying value of the long-lived asset exceeds the asset s fair value. In most instances, the fair value is determined by discounted estimated future cash flows using an appropriate interest rate. The Authority has not recorded any impairment charges in the accompanying statements of revenues, expenses and changes in net assets for the years ended. Income taxes. The Authority is a governmental entity and is exempt from income taxes. Accordingly, no provision for income taxes has been provided. Recently issued accounting pronouncements. The GASB issued GASB Statement No. 61, The Financial Reporting Entity: Omnibus an Amendment to GASB 14 and 34, in November GASB Statement No. 61 provides guidance on information presented about the financial reporting entity and its component units and amends the criteria for blending in certain circumstances. The Authority expects to adopt this GASB Statement in fiscal year The GASB issued GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, in December GASB Statement No. 62 incorporates FASB Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins of the AICPA, issued on or before November 30, 1989, which do not conflict or contradict with GASB pronouncements into the GASB authoritative literature. The Authority expects to adopt this GASB Statement in fiscal year

23 TIFT COUNTY HOSPITAL AUTHORITY 1. Description of Reporting Entity and Summary of Significant Accounting Policies, Recently issued accounting pronouncements, continued. The GASB issued GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, in June GASB Statement No. 63 provides financial reporting guidance for deferred outflows and inflows of resources and identifies net position as the residual of all other elements presented in a statement of financial position. The Authority expects to adopt this GASB Statement in fiscal year The GASB issued GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, in April GASB Statement No. 65 reclassifies certain items that were previously reported as assets and liabilities as deferred outflows of resources, deferred inflows of resources, or current-period outflows and inflows. The Authority expects to adopt this GASB Statement in fiscal year Net Patient Service Revenue The Authority has agreements with third-party payors that provide for payments to the Authority at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: Medicare. Inpatient and outpatient services rendered to Medicare program beneficiaries are generally paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Certain other reimbursable items are reimbursed at a tentative rate with final settlement determined after submission of annual cost reports by the Authority and audits thereof by the Medicare Administrative Contractor (MAC). The Authority s Medicare cost reports have been settled by the MAC through September 30, Revenue from the Medicare program accounted for approximately 39% and 35% of the Authority s net patient service revenue for the years ended, respectively. 21

24 2. Net Patient Service Revenue, TIFT COUNTY HOSPITAL AUTHORITY Medicaid. Inpatient services rendered to Medicaid program beneficiaries are paid at prospectively determined rates per admission. Outpatient services rendered to Medicaid program beneficiaries are generally reimbursed under a cost reimbursement methodology. The Authority is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Authority and audits thereof by the Medicaid fiscal intermediary. The Authority s Medicaid cost reports have been settled by the Medicaid fiscal intermediary through September 30, Revenue from the Medicaid program accounted for approximately 5% and 6% of the Authority s net patient service revenue for the years ended. The Authority participates in the Indigent Care Trust Fund (ICTF) Program. The Authority receives ICTF payments for treating a disproportionate number of Medicaid and other indigent patients. ICTF payments are based on the Authority s estimated uncompensated cost of services to Medicaid and uninsured patients. The ICTF is funded through intergovernmental transfers from participating public hospitals and matching federal funds. The net amount of ICTF payments recognized in net patient service revenues was approximately $3,126,000 and $3,462,000 for the years ended, respectively. The Authority also participates in the Medicaid Upper Payment Limit (UPL) program. The UPL payment adjustments are based on a measure of the difference between Medicaid payments and the amount that could be paid based on Medicare payment principles. The net amount of UPL payment adjustments recognized in net patient service revenue was approximately $553,000 and $1,469,000 for the years ended September 30, 2012 and 2011, respectively. During 2010, the State of Georgia enacted legislation known as the Provider Payment Agreement Act (the Act) whereby hospitals in the State of Georgia are assessed a provider payment in the amount of 1.45% of their net patient revenue. The Act became effective July 1, The provider payments are due on a quarterly basis to the State of Georgia. The payments are to be used for the sole purpose of obtaining federal financial participation for medical assistance payments to providers on behalf of Medicaid recipients. The provider payment will result in a corresponding increase in Medicaid payments for hospital services of approximately 11.88%. The Authority made provider payments to the State of Georgia of approximately $2,791,000 and $2,708,000 in 2012 and 2011, respectively. The payments are included in other expenses in the accompanying statements of revenues, expenses and changes in net assets. 22

25 2. Net Patient Service Revenue, TIFT COUNTY HOSPITAL AUTHORITY During 2012, the Authority entered into a settlement agreement with Medicare related to the calculation of the Rural Floor Budget Neutrality Adjustment and recognized receipt of the payment of $1,726,000 in net patient service revenue in the accompanying financial statements. The Authority also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Authority under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. 3. Charity Care Charges excluded from revenue under the Authority s charity care policy were approximately $59,404,000 and $57,584,000 for the years ended, respectively. 4. Designated Net Assets Of the $257,501,000 and $228,664,000 of unrestricted net assets reported in 2012 and 2011, respectively, the following amounts have been designated by the Authority s Board of Trustees: Designated for capital acquisitions $ 187,277,000 $ 154,820,000 Designated for malpractice self-insurance 3,824,000 3,814,000 Total $ 191,101,000 $ 158,634,000 Designated funds remain under the control of the Board of Trustees and may at its discretion subsequently use for other purposes. 23

26 5. Deposits and Investments TIFT COUNTY HOSPITAL AUTHORITY Investment policy. The Authority s investment policy allows for investments in four (4) basic asset classes: (1) Cash and cash equivalents Assets in this class must be invested in money market funds or fixed income obligations such as certificates of deposit, commercial paper, U.S. Treasury Bills, and other similar high quality, investment grade instruments with maturities not longer than one year. (2) Fixed income securities Assets in this class must be invested in debt securities guaranteed by the U.S. Government and/or its agencies, corporate bonds, debentures, or other forms of corporate debt. (3) Equities Assets in this class must be invested in equity securities that are listed and marketable on U.S. national, regional or over-the-counter exchanges. (4) Alternative assets Assets in this class must be invested in open ended commodity mutual funds. Custodial credit risk deposits. Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to them. State law requires collateralization of all deposits with federal depository insurance and other acceptable collateral in specific amounts. As of, the Authority s deposits were entirely insured or collateralized with securities held by a trustee in the Authority s name. Custodial credit risk investments. For an investment, this is the risk that in the event of the failure of the counterparty, the Authority will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The Authority s investments are held in the Authority s name by a custodial bank that is the agent of the Authority. 24

27 5. Deposits and Investments, TIFT COUNTY HOSPITAL AUTHORITY The carrying amounts of deposits and investments are included in the Authority s balance sheets as follows: Deposits $ 59,669,000 $ 77,184,000 Investments 187,277, ,820,000 Total $ 246,946,000 $ 232,004,000 Included in the following balance sheet captions: Cash and cash equivalents $ 41,552,000 $ 54,984,000 Short-term investments 5,001,000 2,400,000 Noncurrent cash and investments: Internally designated for capital acquisitions 187,277, ,820,000 Internally designated for malpractice self-insurance 3,824,000 3,814,000 Held by trustee for capital acquisitions 9,292,000 15,986,000 Total $ 246,946,000 $ 232,004,000 The Authority s investments generally are reported at fair value. At September 30, 2012 and 2011, the Authority s investments consisted of the following: Money market funds $ 3,079,000 $ 3,387,000 Certificates of deposit 2,418,000 - U.S. Treasury obligations 35,424,000 31,458,000 U.S. Government agency obligations 22,107,000 24,872,000 Corporate obligations 29,765,000 20,998,000 Marketable equity securities 76,544,000 59,185,000 Non-U.S. equity mutual funds 8,711,000 7,326,000 Commodity mutual funds 8,617,000 6,928,000 Interest receivable 612, ,000 Total $ 187,277,000 $ 154,820,000 25

28 5. Deposits and Investments, TIFT COUNTY HOSPITAL AUTHORITY Interest rate risk. In accordance with its investment policy, the Authority manages its exposure to declines in fair values by limiting investments to the intermediate term. Intermediate term is defined as between three (3) and seven (7) years. Under no circumstances can a bond be purchased with a maturity greater than ten (10) years unless the bond has a put feature of 10 years or less. A put feature on a bond is defined as the right to tender (put back to) the issuer the bond at a specified price at a specified time. The Authority s debt securities had the following maturities: September 30, 2012 Investment Type Carrying Amount Investment Maturities (In Years) Less Than More Than 10 U.S. Treasury obligations $ 35,424,000 $ 507,000 $ 28,594,000 $ 6,323,000 $ - U.S. Government agency obligations 22,107,000 11,937,000 9,602, ,000 - Corporate obligations 29,765, ,000 16,897,000 12,275, ,000 Total $ 87,296,000 $ 12,635,000 $ 55,093,000 $ 19,166,000 $ 402,000 September 30, 2011 Investment Type Carrying Amount Investment Maturities (In Years) Less Than More Than 10 U.S. Treasury obligations $ 31,458,000 $ - $ 30,050,000 $ 1,408,000 $ - U.S. Government agency obligations 24,872,000-11,410,000 11,427,000 2,035,000 Corporate obligations 20,998,000-18,280,000 2,635,000 83,000 Total $ 77,328,000 $ - $ 59,740,000 $ 15,470,000 $ 2,118,000 26

29 5. Deposits and Investments, TIFT COUNTY HOSPITAL AUTHORITY Credit risk. The Authority s investment policy requires investments in debt obligations be rated BBB or better according to the Barclays Capital methodology used to determine inclusion in their family of indices. The methodology employed utilizes the three (3) major rating agencies Fitch, Standard & Poor s and Moody s and is as follows: When all three rating agencies provide a rating on a particular security, the security will be governed by the middle rating of the three; If only two of the three rating agencies rate the security, the security will be governed by the lowest of the two ratings; If only one of the three rating agencies rate the security, the security will be governed by that rating. The Authority s investment in U.S. Treasury obligations, U.S. Government agency obligations, corporate obligations, and money market funds carried the following ratings at : Rating Agency 2012 Rating Range 2011 Rating Range Standard & Poor s AAA to BBB AAA to BBB+ Moody s Aaa to Baa3 Aaa to Baa1 Concentration of credit risk. The Authority s investment policy has a target allocation of 55% for fixed income securities. The portfolio may not have, at any one time, any investment in the obligations, property, or securities of any one issuer aggregating in excess of 5% of the total portfolio, with the exception that there shall be no limit on direct obligations of the U.S. Government or its guaranteed federally sponsored agencies. 27