Greenville Health System, GHS Partners In Health, Inc. and The Endowment Fund of the Greenville Hospital System, Inc.

Transcription

1 Greenville Health System, GHS Partners In Health, Inc. and The Endowment Fund of the Greenville Hospital System, Inc. Combined Financial Statements as of and for the Years Ended September 30, 2013 and 2012, and Independent Auditors Report

2 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 2 MANAGEMENT S DISCUSSION AND ANALYSIS 3 13 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012: Combined Statements of Net Position 14 Combined Statements of Revenues and Expenses and Changes in Net Position 15 Page Combined Statements of Cash Flows Notes to Combined Financial Statements 18 43

3 INDEPENDENT AUDITORS REPORT To the Board of Trustees of the Greenville Health System, the Board of Directors of GHS Partners In Health, Inc. and the Board of Directors of The Endowment Fund of the Greenville Hospital System, Inc. Greenville, South Carolina We have audited the accompanying combined financial statements of the primary government of the Greenville Health System, GHS Partners In Health, Inc. and The Endowment Fund of the Greenville Hospital System, Inc. (the Reporting Entity ), which comprise the combined statement of net position as of September 30, 2013 and the related combined statements of revenues and expenses and changes in net position, and cash flows for the year then ended, and the related notes to the combined financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit 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 combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Reporting Entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Reporting Entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

4 The accompanying combined financial statements do not contain the fiduciary pension trust fund and the Greenville Health Corporation and Affiliates, a component unit of the Greenville Health System. Accounting principles generally accepted in the United States of America require that combined financial statements containing the primary government must contain all component units and fiduciary funds in the combined financial statements. Inclusion of Greenville Health Corporation and Affiliates would result in increases as of September 30, 2013 and 2012 of approximately $80,955,000 and $80,053,000 in assets; approximately $78,365,000 and $77,986,000 in net position; and increases of approximately $23,051,000 and $22,530,000 in revenues; and approximately ($356,000) and ($733,000) in revenues under expenses, respectively, for the years then ended. Opinion In our opinion, except for the effects of not combining all component units of the Greenville Health System as discussed in the preceding paragraph, the combined financial statements referred to above present fairly, in all material respects, the financial position of Greenville Health System, GHS Partners In Health, Inc. and The Endowment Fund of the Greenville Hospital System, Inc. as of September 30, 2013 and 2012, and the changes in their financial position and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Prior Period Combined Financial Statements The combined financial statements of the Reporting Entity as of and for the year ended September 30, 2012, were audited by other auditors whose report dated December 19, 2012, expressed an unmodified opinion on those combined financial statements. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis be presented to supplement the basic combined financial statements. Such information, although not a part of the basic combined 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 combined 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 combined financial statements, and other knowledge we obtained during our audit of the basic combined 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. December 10,

5 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2013 AND 2012 This section of Greenville Health System, GHS Partners In Health, Inc. and The Endowment Fund of the Greenville Hospital System, Inc. s (collectively, the Reporting Entity ) combined financial statements presents management s analysis of the Reporting Entity s financial performance during the years ended September 30, 2013 and Please read it in conjunction with the combined financial statements and accompanying notes, which follow this section. Financial Highlights The Reporting Entity s financial position improved as a result of operations in Fiscal Years 2013 and Some highlights for Fiscal Years 2013 and 2012 include: Fiscal Year 2013 Net position increased $80 million or 8.7%. Total operating revenues increased $269 million or 18.6%. Total operating expenses increased $241 million or 17.2%. Operating income for 2013 was $65 million (or margin of 3.8%). Laurens County Health Care System - The Board of Trustees of the Greenville Health System, along with the Board of Trustees of the Laurens County Health Care System, approved a plan to integrate the two systems effective July 1, Under the integration agreement, Laurens County Health Care System ( LCHCS ) leased its facilities and transferred its operating assets to the Greenville Health System as part of a forty year lease agreement. The former operations and facilities of Laurens County Health Care System are now known as Laurens County Memorial Hospital ( LCMH ). Pursuant to the Governmental Accounting Standards Board ( GASB ) Statement No. 69, the Reporting Entity s combined financial statements include the financial results of LCMH for the period October 1, 2012 through September 30, Fiscal Year 2012 Net position increased $51 million or 5.8%. Total operating revenues increased $39 million or 2.8%. Total operating expenses increased $51 million or 3.8%. Operating income for 2012 was $37 million (or margin of 2.6%). Nonoperating activities were positive due to investment earnings

6 Cancer Center of the Carolinas - On July 1, 2012, Greenville Health System acquired the net position of the Cancer Center of the Carolinas at a total purchase price of $28,600,000. The purchase price was funded with cash on hand at the acquisition date. The fair value of the net position acquired from the Cancer Center of the Carolinas at the acquisition date was $19,900,000 (primarily consisting of capital assets, patient accounts receivable, and inventory), resulting in goodwill of $8,700,000. The Cancer Center of the Carolinas is now known as The Cancer Institute ( Cancer Institute ). Overview of the Combined Financial Statements The Combined Financial Statements consist of two parts: Management s Discussion and Analysis (this section) and the Required Basic Combined Financial Statements. The Required Basic Combined Financial Statements also include notes that explain in more detail some of the information in the combined financial statements. Required Basic Combined Financial Statements The Reporting Entity uses accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. The combined statements of net position include all of the Reporting Entity s assets and liabilities and provide information about the nature and amounts of investments in resources (assets) and the obligations to Reporting Entity creditors (liabilities). The assets and liabilities are presented in a classified format, which distinguishes between current and long-term assets and liabilities. These statements also provide the basis for computing rate of return, evaluating the capital structure of the Reporting Entity, and assessing the liquidity and financial flexibility of the Reporting Entity. All of the Reporting Entity s revenues and expenses are accounted for on the combined statements of revenues and expenses and changes in net position. These statements measure the performance of the Reporting Entity s operations over the past year. The final required statements are the combined statements of cash flows. The primary purpose of these statements is to provide information about the Reporting Entity s cash receipts and cash payments during the reporting period. The statements report cash receipts, cash payments, and net changes in cash resulting from operating, investing, noncapital financing, and financing activities and information concerning sources and uses of cash

7 Financial Analysis for Fiscal Year 2013 Compared to Fiscal Year 2012 Table A-1 Condensed Combined Statements of Net Position (in millions of dollars) Fiscal Fiscal Dollar Percentage Year Year Increase Increase (Decrease) (Decrease) Current assets $ 442 $ 376 $ % Capital assets net Other long-term assets Total assets $ 1,810 $ 1,698 $ Current liabilities $ 231 $ 206 $ Long-term liabilities Total liabilities Unrestricted Invested in capital assets Restricted Total net position 1, Total liabilities and net position $ 1,810 $ 1,698 $ 112 7% As can be seen in Table A-1, net position increased from $924 million to $1 billion in Fiscal Year The increase in the net position was primarily a result of revenues over expenses from operating activities as well as the net position acquired from the integration of LCMH. Current assets increased $66 million due to an increase in cash and cash equivalents of $37 million as a result of improved operational performance and an increase of $20 million in patient accounts receivable. This increase was primarily attributed to the patient accounts receivable balances associated with the integration of LCMH. Current assets also increased due to an increase of $8 million in estimated third-party payor settlements primarily due to Medicaid teaching funds to be received. Capital assets increased $25 million primarily due to the addition of $36 million of capital assets from LCMH, offset by an increase in depreciation of $11 million. Other long-term assets increased $21 million due to an increase of additional investments with longer maturities. The increase in other longterm assets was offset by a $14 million decrease in assets with limited use. The increase of $25 million in current liabilities is primarily due to increases of $18 million in salaries payable due to the timing of payroll and $12 million in the retirement savings plan payable. In Fiscal Year 2013, the Board of Trustees approved a plan for a 2.5% discretionary contribution to the retirement savings plan as compared to no discretionary contribution in Fiscal Year These increases are offset by a decrease of $12 million in the amounts owed to vendors at September 30, The increase in long-term liabilities is primarily due to $26 million of longterm liabilities associated with LCMH offset by principal payments on long-term debt

8 Financial Analysis for Fiscal Year 2012 Compared to Fiscal Year 2011 Table A-2 Condensed Combined Statements of Net Position (in millions of dollars) Fiscal Fiscal Dollar Percentage Year Year Increase Increase (Decrease) (Decrease) Current assets $ 376 $ 359 $ 17 5 % Capital assets net Other long-term assets Total assets $ 1,698 $ 1,638 $ 60 4 Current liabilities $ 206 $ 181 $ Long-term liabilities (16) (3) Total liabilities Unrestricted Invested in capital assets Restricted Total net position Total liabilities and net position $ 1,698 $ 1,638 $ 60 4% As can be seen in Table A-2, net position increased from $873 million to $924 million in Fiscal Year The increase in the net position was primarily a result of revenues over expenses from operating and nonoperating activities. Current assets increased $17 million due to a $9 million receivable for Medicare and Medicaid incentive payments for meaningful use of electronic health records. Current assets also increased due to a $13 million increase in net patient accounts receivable. This increase was primarily attributable to the accounts receivable balance associated with the Cancer Institute. Capital assets increased $29 million primarily due to current year additions, including upfit renovations completed for the Health Services Education Building, the acquisition of the Cancer Institute, and the completion of additional information services projects, offset by current year depreciation expense. Other long-term assets increased $14 million due to $9 million of goodwill resulting from the purchase of the Cancer Institute and $5 million of additional investments with longer maturities. These investments are not restricted as to their use and are readily convertible into cash. The increase in current liabilities is primarily due to an $8 million increase in salaries payable, a $4 million subsidy accrual for USC School of Medicine Greenville, and a general increase in amounts owed to vendors. The decrease in long-term liabilities is primarily due to principal payments on long-term debt

9 Financial Analysis for Fiscal Year 2013 Compared to Fiscal Year 2012 Table A-3 Condensed Combined Statements of Revenues and Expenses and Changes in Net Position (in millions of dollars) Fiscal Fiscal Dollar Percentage Year Year Increase Increase (Decrease) (Decrease) Net patient service revenues $ 1,628 $ 1,389 $ % Other revenue Total revenues 1,712 1, Salaries, wages, benefits, and contracted labor Supplies and other costs Depreciation and interest Total operating expenses 1,647 1, Operating income Nonoperating activities (6) 19 (25) (132) Excess of revenues over expenses Net position of Laurens County Memorial Hospital Other (8) (5) (3) 60 Change in net position Beginning net position Ending net position $ 1,004 $ 924 $ 80 9% The increase in net patient service revenues of $239 million was primarily due to improved payor mix associated with the addition of the Cancer Institute, an increase in inpatient and outpatient volumes, and the addition of Laurens County Memorial Hospital that generated $47 million of net patient service revenue for Inpatient discharges increased 4% from the prior year while outpatient visits increased 14% from the prior year, excluding the impact of the LCMH integration. The Cancer Institute accounted for 3% of the increase in outpatient visits due to the Institute being operational for all of Fiscal Year 2013 compared to only three months in Fiscal Year Surgical volumes increased 4% from the prior year, excluding LCMH. Additionally, $3 million of income was recognized in Fiscal Year 2013 due to prior year retroactive adjustments for Medicare and Medicaid settlements. Other operating revenues increased $30 million primarily due to $14 million of other operating income recognized from the addition of LCMH. Other operating revenues also increased $5 million due to philanthropic contributions and $7 million due to retail pharmacy revenue, which was volume driven

10 The increase in salaries, wages, benefits, and contract labor was primarily due to a 9.1% increase in full time equivalents. Included in the increase is the addition of approximately 400 employees of LCMH and a full year of Cancer Institute employees. Management continues to focus on maintaining adequate staffing levels to meet the health care needs of the community. This also includes an increase in the variable compensation expense approved by the Board of Trustees. Salaries, wages, benefits, and contract labor also increased $12 million due to a decision to fund a 2.5% discretionary contribution to employee retirement accounts. Supplies and other costs increased $95 million due to an increase in cost of drugs sold, primarily resulting from the Cancer Institute. Supplies and other costs also increased due to the addition of LCMH and increased inpatient and outpatient volumes above. Income from nonoperating activities decreased $25 million primarily due to an decrease in the market valuation of investments and investment income on investments. Financial Analysis for Fiscal Year 2012 Compared to Fiscal Year 2011 Table A-4 Condensed Combined Statements of Revenues and Expenses and Changes in Net Position (in millions of dollars) Fiscal Fiscal Dollar Percentage Year Year Increase Increase (Decrease) (Decrease) Net patient service revenues $ 1,389 $ 1,366 $ 23 2 % Other revenue Total revenues 1,443 1, Salaries, wages, benefits, and contracted labor Supplies and other costs Depreciation and interest (14) (15) Total operating expenses 1,406 1, Operating income (12) (24) Nonoperating activities Excess of revenues over expenses (6) (10) Other (5) (6) 1 (17) Change in net position (5) (9) Beginning net position Ending net position $ 924 $ 873 $ 51 6% The increase in net patient service revenues was primarily due to an increase in ancillary and room charges and an increase in outpatient and physician office visit volume. Inpatient discharges decreased 3% from the prior year; however, outpatient visits increased 5%. The inpatient discharge trend is due to several factors, including a transition of services to the outpatient arena in cardiovascular and other services, an overall decline in utilization in the geographic area, and reductions in readmission rates. Surgical volumes increased 2% from the prior year. Bad debt and charity write-offs were 9.9% of gross charges, down from 10.7% in the - 8 -

11 prior year. There was also $7 million of income recognized in Fiscal Year 2012 due to prior year retroactive adjustments for Medicare and Medicaid settlements. Other operating revenue increased $16 million primarily due to $11 million of income recognized from Medicare and Medicaid incentive payments for meaningful use of electronic health records; $2 million of this income was received in the Fiscal Year Other operating revenue also increased $2 million due to the opening of a retail pharmacy on the Patewood Memorial Campus. The increase in salaries, wages, benefits, and contract labor was due to a 4.7% increase in full time equivalents. Included in the increase is the expansion of the physician practice group, including the addition of over 350 Cancer Institute employees. Management continues to focus on maintaining adequate staffing levels to meet the health care needs of the community. Supplies and other costs increased $21 million due to an increase in cost of drugs sold, primarily resulting from the purchase of the Cancer Institute. Depreciation and interest expense decreased $14 million primarily due to a change in estimate on the useful lives of certain long-lived assets. Income from nonoperating activities increased $6 million primarily due to an increase in the market valuation of investments and realized gains on investments. This increase was offset by $10 million of expense related to subsidy payments to the University of South Carolina School of Medicine ( USC School of Medicine ), of which $6 million was paid in Fiscal Year Liquidity (for Fiscal Years 2013 and 2012) Cash and Cash Equivalents Cash and cash equivalents, including those assets held in assets with limited use, increased from $155 million at September 30, 2012 to $219 million at September 30, The increase is primarily due to cash generated from operations and less cash used to purchase capital assets. Capital Assets As of September 30, 2013, the Reporting Entity had $724 million of net capital assets, as reflected in Table A-6, which represents a net increase (additions, deletions, and depreciation) of $25 million or 3.6% from the end of the prior year. The increase in net capital assets is due primarily to the addition of LCMH. As of September 30, 2013 and 2012, the average age of plant (i.e., capital assets) for the Reporting Entity was 11.8 and 12.7 years, respectively. More detailed information regarding the Reporting Entity s capital assets is presented in Note 4 of the Notes to the Combined Financial Statements

12 Table A-5 Capital Assets (in millions of dollars) Fiscal Fiscal Year Year Land and land improvements $ 78 $ 75 Buildings Equipment Projects in progress Total capital assets 1,609 1,515 Accumulated depreciation (885) (816) Net capital assets $ 724 $ 699 Long-Term Debt As of September 30, 2013, the Reporting Entity had $515 million in outstanding long-term debt. This represents a net increase of $12 million from the prior fiscal year. During Fiscal Year 2013, the Reporting Entity refinanced the Series 2010A Recovery Zone Economic Development Bonds of LCMH by issuing a $14.4 million 2013A Promissory Note. The Reporting Entity also restructured the existing promissory notes of LCMH by entering into a 2013B Promissory Note for $5.6 million. In addition, LCHCS had $5.5 million of outstanding Series 2012 General Obligation Refunding Bonds that became part of the Reporting Entity s long-term debt in LCMH also had $1.1 million of Series 2010B Revenue Bonds that were paid in full at the time of integration. These increases in long-term debt are offset by the principal repayment on the Series 2003A, Series 2008A, Series 2008D, and Series 2008E bonds which is offset by bond discount and deferred refunding amortization. For more detailed information regarding the Reporting Entity s long-term debt, please refer to Notes 7 and 8 of the Notes to the Combined Financial Statements. Liquidity (for Fiscal Years 2012 and 2011) Cash and Cash Equivalents Cash and cash equivalents, including those assets held in assets with limited use, decreased from $182 million at September 30, 2011 to $155 million at September 30, The decrease is primarily due to $86 million of cash used for capital asset purchases, the acquisition of the Cancer Institute, and debt service payments. This decrease was offset by cash generated from operations. Capital Assets Management continues to focus on providing state-of-the-art facilities and equipment to meet the needs of the community, the Reporting Entity s patients, and its medical staff physicians. As of September 30, 2012, the Reporting Entity had $699 million of net capital assets, as reflected in Table A-5, which represents a net increase (additions, deletions, and depreciation) of $29 million or 4% from the end of the prior year. The increase in net capital assets is primarily due to current year additions, including upfit renovations completed for the Health Sciences Education Building, the acquisition of the Cancer Institute, and the completion of

13 additional information services projects, offset by current year depreciation expense. As of September 30, 2012 and 2011, the average age of plant (i.e., capital assets) for the Reporting Entity was 12.7 and 9.9 years, respectively. The impact of the change in estimated useful lives had a 2.4 year impact on the calculation of the ratio at September 30, More detailed information regarding the Reporting Entity s capital assets is presented in Note 4 of the Notes to the Combined Financial Statements. Table A-6 Capital Assets (in millions of dollars) Fiscal Fiscal Year Year Land and land improvements $ 75 $ 71 Buildings Equipment Projects in progress Total capital assets 1,515 1,436 Accumulated depreciation (816) (766) Net capital assets $ 699 $ 670 Long-Term Debt As of September 30, 2012, the Reporting Entity had $503 million in outstanding long-term debt. This represents a net decrease of $13 million from the prior fiscal year, which is primarily due to the principal repayment of the Series 2003A, Series 2008A, Series 2008D, and Series 2008E bonds, which is offset by bond discount and deferred refunding amortization. During Fiscal Year 2012, the Reporting Entity refunded the Series 2001 Hospital Revenue Bonds by issuing $93 million of Series 2012 Hospital Revenue Bonds. The Reporting Entity also restructured its Series 2008C bonds. Health Care Reform Patient Protection and Affordable Care Act On March 23, 2010, the Patient Protection and Affordable Care Act ("ACA") was enacted. Some of the provisions of ACA took effect immediately or within a few months of final approval while others have been and will continue to be phased in over time. The ACA changes the way health care services are covered, delivered, and reimbursed. The reimbursement under programs of ACA is based on performance, quality and integration of care. One of the primary objectives of ACA is to provide or make available, or subsidize the premium costs of, health care insurance for some of the millions of currently uninsured (or underinsured) consumers who fall below certain income levels. These provisions will become effective January 1, To the extent all or any of those provisions produce the intended result, an increase in utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced. Associated with increased utilization will be increased variable and fixed costs of providing health care services, which may or may not be offset by increased revenues. This increase in payment coverage will be partially funded

14 by a reduction in the payments made for treating Medicare and Medicaid beneficiaries, including disproportionate share payments. However, significant technical issues with the federal online insurance marketplace have negatively impacted the ability of individuals to purchase health insurance. These technical issues could delay the individual tax penalties beyond the expected March 31, 2014 deadline. The ACA also calls for a reduction in growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share payments, and the expansion of Medicaid for individuals and families. The state of South Carolina has decided to not participate in the expansion of Medicaid coverage under the ACA. The decision of the State could have a significant impact on the Reporting Entity s finances going forward. Management of the Reporting Entity will continue to analyze ACA in order to assess the effects of the legislation on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation or impact on the Reporting Entity s combined financial position, results of operations, or cash flows. Management believes that the Reporting Entity is well positioned to adjust to the future impact of the ACA and the changes generally occurring in the health care delivery market. Budget Control Act of 2011 The Budget Control Act of 2011 ( BCA ) was enacted into law on August 2, The BCA set caps on discretionary spending for Fiscal Year 2012 through Fiscal Year 2021 and created the Joint Select Committee on Deficit Reduction (often referred to as the Super Committee ). The BCA instructed the Super Committee to develop proposals that would save $1.5 trillion over ten years. The Super Committee failed to propose at least $1.2 trillion in savings over ten years, therefore, automatic spending cuts, called sequestration, was set to occur in January 2013, but was delayed until March A wide range of spending is exempted from sequestration including Medicaid. Medicare is not exempted from sequestration, although benefits and beneficiary cost sharing remain unchanged. Providers bear all cuts and Medicare savings are limited to 2% of total program costs. The 2% reduction is subtracted from the regular reimbursement formulas for each provider sector. On April 10, 2013, the Office of Management and Budget ( OMB ) issued a report to Congress on the automatic spending reductions for Fiscal Year 2014 under the terms of the BCA. The law requires that $109 billion in spending, divided equally between defense and nondefense, must be reduced in Fiscal Year 2014 and each subsequent year through Fiscal Year 2021 as a result of the failure of the Joint Committee process. Spending reductions in Fiscal Year 2014 through Fiscal Year 2021 will occur through a reduction of the discretionary spending limits established under Title I of the BCA and a sequestration of nonexempt mandatory spending. The impact the BCA may have on the Reporting Entity s combined financial position, results of operations, or cash flows cannot be predicted with certainty. Health Information Technology for Economic and Clinical Health Act The Health Information Technology for Economic and Clinical Health Act ( HITECH ) contains significant changes to the privacy and security provisions of the Health Insurance Portability and Accountability Act of 1996, including major changes to the enforcement provisions. HITECH also establishes programs under Medicare and Medicaid to provide incentive payments for the meaningful use of certified electronic health record ( EHR ) technology. Beginning in 2011, the Medicare and Medicaid EHR incentive programs will provide incentive payments to eligible professionals and eligible hospitals for demonstrating meaningful use of certified EHR technology. Health care providers demonstrate their meaningful use of EHR technology by meeting objectives specified by the Centers for Medicare and Medicaid Services for using health information

15 technology and by reporting on specified clinical quality measures. Beginning in 2015, hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use will have their Medicare payments significantly reduced. The Reporting Entity recognized approximately $11,651,000 in income and received approximately $15,973,000 in payments during the year ended September 30, 2013 related to these incentive payments. The Reporting Entity recognized approximately $10,939,000 in income and received approximately $1,969,000 in payments during the year ended September 30, 2012 related to these incentive payments. University of South Carolina School of Medicine During the year ended September 30, 2010, the Board of Trustees of the Greenville Health System along with the Board of Trustees of the University of South Carolina ( USC ) approved a plan to expand the USC School of Medicine to Greenville, South Carolina. An expanded medical education program will increase the supply of physicians, improve health care, and enhance the environment for innovation. In July 2012, the USC School of Medicine Greenville enrolled its first class. Greenville Health System has agreed to fund annual budgeted losses and cash flow needs of the USC School of Medicine Greenville, anticipated to be material over the next 10 years. At that time, it is anticipated that tuition will cover the costs. During the years ended September 30, 2013 and 2012, Greenville Health System recognized expenses of approximately $9,098,000 and $10,278,000, respectively, included in nonoperating activities on the combined statements of revenues and expenses and changes in net position. The payments made under this agreement represent voluntary nonexchange transactions under Governmental Accounting Standards Board ( GASB ) Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and expenses are reported as the resources are paid. Accordingly, future anticipated costs associated with this agreement have not been accrued at September 30, During 2012, Greenville Health System and USC entered into a memorandum of understanding for cooperation of services exchange ( MOU ) to coordinate certain operating activities between the two organizations. As a result of this MOU, Greenville Health System incurred approximately $10,311,000 and $4,600,000 of reimbursable expenses on behalf of the USC School of Medicine Greenville for items including administrative expenses and compensation of the Greenville Health System s teaching staff that provided training services to the USC School of Medicine Greenville during the years ended September 30, 2013 and 2012, respectively. Greenville Health System has received all but approximately $2,458,000 and $3,500,000, which has been recorded as a receivable from USC and reflected on the combined statement of net position in other current assets as of September 30, 2013 and 2012, respectively. Future Outlook The Board of Trustees and management continue to have a positive outlook about the future of the Reporting Entity. The Reporting Entity expects to continue to expand its services in the region through affiliations with physician groups and the expansion of current programs. Requests for Information This financial report is designed to provide a general overview of the Reporting Entity s finances for all those with an interest in the Reporting Entity s finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Reporting Entity

16 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. COMBINED STATEMENTS OF NET POSITION AS OF SEPTEMBER 30, 2013 AND 2012 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 141,884 $ 105,215 Patient accounts receivable (less allowance for uncollectible accounts of ($99,976 and $87,224 in 2013 and 2012, respectively) 219, ,320 Inventories of drugs and supplies 21,485 17,623 Estimated third-party payor settlements 10,904 3,273 Other current assets 27,700 29,842 Current portion of assets with limited use 20,680 20,673 Total current assets 441, ,946 ASSETS WITH LIMITED USE 529, ,061 Less current portion (20,680) (20,673) Assets with limited use, net 508, ,388 OTHER INVESTMENTS 115,571 82,620 CAPITAL ASSETS Net 723, ,339 GOODWILL 8,752 8,752 OTHER ASSETS 11,435 8,052 TOTAL ASSETS $ 1,809,973 $ 1,698,097 LIABILITIES AND NET POSITION CURRENT LIABILITIES: Accounts payable $ 19,920 $ 32,491 Accrued liabilities 194, ,122 Current portion of obligations under capital leases Current portion of long-term debt 16,654 13,645 Total current liabilities 231, ,423 LONG-TERM DEBT Less current portion 498, ,093 OBLIGATIONS UNDER CAPITAL LEASES Less current portion 4,011 4,185 OTHER LONG-TERM LIABILITIES 72,115 74,641 Total liabilities 806, ,342 NET POSITION: Unrestricted 776, ,783 Invested in capital assets net of related financing 204, ,126 Restricted 22,681 19,846 Total net postion 1,003, ,755 TOTAL LIABILITIES AND NET POSITION $ 1,809,973 $ 1,698,097 See notes to combined financial statements

17 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. COMBINED STATEMENTS OF REVENUES AND EXPENSES AND CHANGES IN NET POSITION FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) REVENUES: Net patient service revenues $ 1,628,235 $ 1,388,681 Other revenue 83,514 54,043 Total operating revenues 1,711,749 1,442,724 EXPENSES: Salaries, wages, benefits, and contracted labor 977, ,914 Supplies and other costs 575, ,854 Depreciation 75,344 64,218 Interest 18,213 17,831 Total operating expenses 1,647,137 1,405,817 OPERATING INCOME 64,612 36,907 NONOPERATING ACTIVITIES (6,190) 18,746 EXCESS OF REVENUES OVER EXPENSES BEFORE CAPITAL CONTRIBUTIONS, TRANSFERS, AND RESTRICTED FUNDS AND OTHER ACTIVITY 58,422 55,653 CAPITAL CONTRIBUTIONS 1,563 2,861 NET POSITION OF LAURENS COUNTY MEMORIAL HOSPITAL 29,376 - TRANSFERS FROM (TO) GREENVILLE HEALTH CORPORATION AND AFFILIATES 69 (1,638) RESTRICTED FUNDS, SUNDRY RECEIPTS, AND DISBURSEMENTS Net (9,347) (5,675) CHANGE IN NET POSITION 80,083 51,201 NET POSITION Beginning of year 923, ,554 NET POSITION End of year $ 1,003,838 $ 923,755 See notes to combined financial statements

18 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash receipts from patients and third-party payors $ 1,608,914 $ 1,365,834 Other operating revenue 94,943 38,628 Cash payments to vendors (597,922) (472,939) Cash payments for salaries and benefits (960,481) (834,747) Net cash provided by operating activities 145,454 96,776 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Transfers to Greenville Health Corporation and Affiliates (42) (1,638) Payments to USC School of Medicine (13,355) (6,021) Restricted funds, sundry receipts, and disbursements (9,347) (5,675) Net cash used in noncapital financing activities (22,744) (13,334) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Capital contributions 1,563 2,861 Acquisition of The Cancer Institute - (27,012) Payments for capital assets, net of disposals (66,793) (85,643) Principal payments and refundings on long-term debt (37,941) (175,415) Proceeds of long-term debt 19, ,162 Financing cost of debt (1) (1,054) Payments on obligations under capital leases (601) (211) Net cash used in capital and related financing activities (83,788) (123,312) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (871,274) (672,640) Sales of investments 889, ,576 Investment income realized 6,888 19,126 Net cash provided by investing activities 24,993 13,062 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 63,915 (26,808) CASH AND CASH EQUIVALENTS: Beginning of year 154, ,521 End of year $ 218,628 $ 154,713 (continued)

19 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. COMBINED STATEMENTS OF CASH FLOWS (continued) FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) RECONCILIATION OF CASH AND CASH EQUIVALENTS: Cash and cash equivalents in current assets $ 141,884 $ 105,215 Cash and cash equivalents in assets with limited use 76,744 49,498 TOTAL CASH AND CASH EQUIVALENTS $ 218,628 $ 154,713 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Operating income $ 64,612 $ 36,907 ADJUSTMENTS TO RECONCILE OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Bad debt provision 198, ,486 Depreciation 75,344 64,218 Amortization 1,463 2,231 Loss on disposal of capital assets 42 2,655 Amortization of deferred gain on monetization (4,772) (4,772) Changes in operating assets and liabilities: Patient accounts receivable (210,366) (166,790) Inventories of drugs and supplies (2,163) 2,539 Other assets 7,091 (16,380) Estimated third-party payor settlements (7,449) (9,133) Accounts payable (9,570) 9,866 Other liabilities 32,728 14,949 Net cash provided by operating activities $ 145,454 $ 96,776 SUPPLEMENTAL CASH FLOW INFORMATION Noncash financing activities acquisition price accrual $ - $ 2,146 Noncash investing activities capital asset purchase accruals $ 4,026 $ 7,028 Laurens County Memorial Hospital - see Note 1 $ 29,376 $ - See notes to combined financial statements

20 GREENVILLE HEALTH SYSTEM, GHS PARTNERS IN HEALTH, INC. AND THE ENDOWMENT FUND OF THE GREENVILLE HOSPITAL SYSTEM, INC. NOTES TO COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND REPORTING ENTITY The combined financial statements include the accounts and transactions of the Greenville Health System Board of Trustees ( GHS ), GHS Partners in Health, Inc. ( PIH ) and The Endowment Fund of the Greenville Hospital System, Inc. (the Endowment ), combined (the Reporting Entity ). Collectively, GHS and PIH are referred to as the Health System. GHS owns and operates acute care hospitals and related specialty health care facilities. GHS was established by The General Assembly of South Carolina in 1947 to meet the medical and health care needs of the citizens of Greenville County. On June 13, 2013, the Governor of the State of South Carolina signed legislation that changed the name of the Greenville Hospital System to the Greenville Health System. GHS is exempt from federal income tax as an organization described in Section 115 and Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. The Endowment was established in 1992 as a not-for-profit corporation organized under the laws of the State of South Carolina for the exclusive benefit of the Health System and other entities which are organized for the Health System s benefit. The Endowment is exempt from income taxes as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. The purpose of the Endowment is to encourage and promote the provision of health care services in furtherance of the Health System s mission through a permanent endowment. It is the intent of the Endowment that the principal will be held in perpetuity with the Endowment s Board of Directors reserving the right to use both principal and earnings thereon as they shall deem appropriate and consistent with the charitable purposes of the Endowment. Accordingly, all assets of the Endowment are presented as assets with limited use. PIH was established in 1994 as a not-for-profit corporation under the laws of the State of South Carolina to meet the health needs of the community. PIH consists primarily of physician practices including the support staff. PIH is exempt from income taxes as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. GHS, the primary government, is the sole beneficiary of the Greenville Health Corporation and Affiliates (the Corporation ), PIH, and the Endowment. Members of the Board of Trustees of GHS also serve as the members of the Board of Directors of the Endowment. GHS appoints the Board of Directors of the Corporation and PIH. The authority normally exercised by a Board of Directors has been delegated for PIH to GHS. GHS s combined financial reporting entity would include these affiliated organizations as blended component units. However, the financial data of the Corporation is not included in the accompanying combined financial statements. The combined financial statements present only the financial data for the primary government, Endowment, and PIH. The combined financial statements for each affiliated organization, and for the Health System s combined financial reporting entity, can be obtained upon request from the Health System. At September 30, 2013 and 2012, if the omitted component unit was included, there would be an increase in the Reporting Entity s total assets of approximately $80,955,000 and $80,053,000 and net position of approximately $78,365,000 and $77,986,000, respectively, and an increase (decrease) in revenues under expenses of

21 approximately ($356,000) and ($733,000) for the years ended September 30, 2013 and 2012, respectively. The Health System also sponsors the Greenville Health System Pension Trust Plan. The Greenville Health System Pension Trust Plan is governed by the Health System s Board of Trustees and is used to account for assets held in trust by Wells Fargo Bank, N.A. ( Wells Fargo ) for the benefit of the employees of the Health System. The Greenville Health System Pension Trust Plan s assets and assets reserved for employees pension benefits are approximately $332,916,000 and $331,518,000 at September 1, 2013 and 2012, respectively (see Note 6). The Health System s combined financial reporting entity would include the combined statements of net position and statements of changes in net position of the Greenville Health System Pension Trust Plan as a fiduciary fund. However, the combined statements of net position and statements of changes in net position of the Greenville Health System Pension Trust Plan are not included in the accompanying combined financial statements as such combined financial statements present only the financial data for the primary government, Endowment, and PIH. The Board of Trustees of the Health System, along with the Board of Trustees of the Laurens County Health Care System, approved a plan to integrate the two systems effective July 1, Under the integration agreement, Laurens County Health Care System leased its facilities and transferred its operating assets to the Health System as part of a forty year lease agreement, with three, twenty year renewal options. The former operations and facilities of Laurens County Health Care System are now known as Laurens County Memorial Hospital ( LCMH ). Pursuant to the Governmental Accounting Standards Board ( GASB ) Statement No. 69 Government Combinations and Disposals of Government Operations, the Reporting Entity s combined financial statements include the financial results of LCMH for the period October 1, 2012 through September 30, The assets, liabilities, and net position of LCMH as of October 1, 2012 are as follows (in thousands): Current assets $ 16,576 Capital assets 35,521 Other assets 15,899 Total assets $ 67,996 Current liabilities $ 13,204 Long term liabilities 25,416 Total liabilities 38,620 Net position 29,376 Total liabilities and net position $ 67, SIGNIFICANT ACCOUNTING POLICIES Accounting Standards and Methods The Reporting Entity follows the provisions of the American Institute of Certified Public Accountants ( AICPA ) Audit and Accounting Guide, Health Care Organizations (the Guide ). Under the provisions of the Guide, the Reporting Entity qualifies as a governmental organization and is subject to the pronouncements of GASB. The Reporting Entity is

22 reported as an enterprise fund under GASB pronouncements. The proprietary fund method of accounting is used whereby revenues and expenses are recognized on the accrual basis. Pursuant to GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, the Reporting Entity will only recognize GASB statements as authoritative guidance. Financial Accounting Standards Board ( FASB ) statements, including those issued after November 30, 1989 and AICPA pronouncements will no longer be authoritative and may be used as non-authoritative guidance. Pursuant to GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, the Reporting Entity has identified net position as the residual of all other elements presented on the combined statements of net position (previously known as net assets). Use of Estimates The preparation of the Reporting Entity s combined financial statements in conformity with accounting principles generally accepted in the United States of America ( GAAP ) requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Actual results could differ from those estimates. Net Position The Reporting Entity classifies its net position for accounting and reporting purposes as unrestricted, restricted, or invested in capital assets, net of related financing: Unrestricted Resources of the Reporting Entity that bear no external restrictions as to use or purpose. These resources include amounts generated from operations and undesignated gifts. Invested in Capital Assets Net of Related Financing Resources of the Reporting Entity invested in capital assets. Restricted Resources that are designated as to use by donors or grantors and certain Reporting Entity programs. Revenues Activities associated with the provision of health care services constitute the ongoing, major, and central operations of the Health System. Revenues related to these activities are reported as operating. Net patient service revenues are reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered and include estimated retroactive revenue adjustments due to future audits, reviews, and investigations, as well as an estimate of uncollectible accounts. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Under the Medicare and Medicaid programs, the Health System s payments are based on either predetermined rates or the cost of services, which are generally less than the Health System s customary charges. Medicare and Medicaid net patient service revenues were approximately 46% of total Health System net patient service revenues for the years ended September 30, 2013 and 2012, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. The Health System believes that it is in compliance with all applicable laws and regulations and that it has recorded adequate provisions for any inquiries and reviews. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action, including fines, penalties, and exclusion from the