Pocono Health System. Independent Auditor s Report and Consolidated Financial Statements

Transcription

1 Independent Auditor s Report and Consolidated Financial Statements

2 Contents Independent Auditor s Report... 1 Consolidated Financial Statements Balance Sheets... 3 Statements of Operations and Changes in Net Assets... 4 Statements of Cash Flows... 6 Notes to Financial Statements... 8 Supplementary Information Consolidating Schedule Balance Sheet Information Consolidating Schedule Statement of Operations and Changes in Net Assets Information... 46

3 Independent Auditor s Report Board of Directors Pocono Health System East Stroudsburg, Pennsylvania We have audited the accompanying consolidated financial statements of Pocono Health System, which comprise the consolidated balance sheets as of, and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated 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 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Board of Directors Pocono Health System Page 2 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pocono Health System as of, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of a Matter As discussed in Note 23 to the consolidated financial statements, the 2015 consolidated financial statements have been restated to correct a misstatement. Our opinion is not modified with respect to this matter. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the consolidated financial statements, and accordingly, we do not express an opinion or provide any assurance on it. Springfield, Missouri September 19, 2016

5 Consolidated Balance Sheets Assets (Restated - Note 23 ) Current Assets Cash and cash equivalents $ 5,492,184 $ 22,709,055 Short-term investments 115,908, ,090,811 Assets limited as to use - current 3,028,059 2,790,000 Pledges receivable - current 552, ,992 Patient accounts receivable, net of allowance; $25,244,649, $32,729,882 39,609,555 33,667,301 Supplies 4,420,323 4,291,140 Prepaid expenses and other 10,840,603 6,086,102 Total current assets 179,851, ,421,401 Assets Limited As To Use Internally designated 39,962,615 40,806,594 Held by trustee 15,113,092 13,716,416 55,075,707 54,523,010 Less amount required to meet current obligations 3,028,059 2,790,000 52,047,648 51,733,010 Property and Equipment, At Cost Land and land improvements 8,835,366 8,886,181 Buildings and leasehold improvements 172,029, ,686,296 Equipment 140,115, ,234,072 Construction in progress 5,143,418 1,181, ,123, ,988,196 Less accumulated depreciation 173,370, ,903, ,753, ,084,417 Other Assets Deferred financing costs 659, ,282 Other investments 1,618,770 1,622,345 Pledges receivable, net 2,495,668 3,607,537 Other 8,072,253 8,932,891 12,846,168 14,859,055 Total assets $ 397,498,925 $ 400,097,883 See

6 Liabilities and Net Assets (Restated - Note 23 ) Current Liabilities Current maturities of long-term debt $ 3,359,695 $ 3,039,140 Accounts payable 14,769,124 14,222,700 Accrued expenses 20,405,272 19,569,509 Estimated amounts due to third-party payers 2,809,670 5,178,884 Estimated self-insurance costs current 5,975,000 1,275,000 Total current liabilities 47,318,761 43,285,233 Other Liabilities Estimated self-insurance costs 12,836,515 12,616,799 Interest rate swap agreements 3,918,146 3,032,885 Accrued pension obligation 2,122,274 6,208,363 Asset retirement obligations 745, ,739 Other long-term liabilities 7,283,279 7,767,315 Total other liabilities 26,905,855 30,352,101 Long-Term Debt 118,246, ,473,859 Total liabilities 192,470, ,111,193 Net Assets Unrestricted net assets attributable to the Health System 195,312, ,013,550 Unrestricted net assets attributable to noncontrolling interest 3,394,720 3,485,775 Total unrestricted net assets 198,707, ,499,325 Temporarily restricted 3,152,599 4,524,165 Permanently restricted 3,168,138 2,963,200 Total net assets 205,027, ,986,690 Total liabilities and net assets $ 397,498,925 $ 400,097,883 3

7 Consolidated Statements of Operations and Changes in Net Assets Years Ended Unrestricted Revenues, Gains and Other Support Net patient service revenue (net of contractual discounts and allowances) $ 335,730,199 $ 325,318,765 Provision for uncollectible accounts (32,000,455) (39,995,183) Net patient service revenue less provision for uncollectible accounts 303,729, ,323,582 Other 6,568,376 8,755,278 Net assets released from restrictions used for operations 771, ,260 Total unrestricted revenues, gains and other support 311,069, ,855,120 Expenses Salaries and wages 131,070, ,453,794 Employee benefits 35,896,153 34,776,201 Professional fees 2,048,526 2,381,179 Supplies and other 118,934, ,968,732 Depreciation and amortization 15,756,787 16,429,754 Interest 5,247,902 5,303,552 Total expenses 308,954, ,313,212 Operating Income 2,114,918 9,541,908 Other Income (Expense) Investment return 2,368,232 2,494,755 Settlement for pension plan (2,674,926) - Change in unrealized gains and losses on trading securities and fair value of interest rate swap agreement (2,269,027) (829,333) Interest rate swap expense (516,688) (520,244) Contributions 90, ,763 Gain on investment in equity investee and other 65, ,988 Affiliation expenses (2,101,580) (1,246,048) Total other income (expense) (5,038,205) 441,881 Excess (Deficiency) of Revenues Over Expenses (2,923,287) 9,983,789 Grants for acquisition of equipment - 2,895,750 Change in fair value of interest rate swap agreements (8,514) 59,731 Net assets released from restrictions used for acquisition of property and equipment 1,255,311 1,576,592 Contributions from noncontrolling interest - 4,292,000 Distributions to noncontrolling interest (840,438) (3,539,911) Sales of shares of controlling interest in subsidiary - (123,994) Dividends received (12,647) (173,169) Defined benefit pension costs Net gain (loss) arising during the year 405,606 (2,260,554) Amortization of prior service cost and net loss 656, ,484 Settlement charge 2,674,926 - Increase in Unrestricted Net Assets $ 1,207,920 $ 13,236,718 See 4

8 Consolidated Statements of Operations and Changes in Net Assets Years Ended Unrestricted Net Assets Attributable to the Health System Excess (deficiency) of revenues over expenses $ (3,672,670) $ 9,497,095 Grants for acquisition of equipment - 2,895,750 Change in fair value of interest rate swap agreements (8,514) 59,731 Net assets released from restrictions used for acquisition of property and equipment 1,255,311 1,576,592 Sales of shares of controlling interest in subsidiary - (123,994) Dividends received (12,647) (173,169) Defined benefit pension costs Net gain (loss) arising during the year 405,606 (2,260,554) Amortization of prior service cost and net loss 656, ,484 Settlement charge 2,674,926 - Increase in unrestricted net assets attributable to the Health System 1,298,975 11,997,935 Unrestricted Net Assets Attributable to Noncontrolling Interest Excess of revenues over expenses 749, ,694 Contributions from noncontrolling interest - 4,292,000 Distributions to noncontrolling interest (840,438) (3,539,911) Increase (decrease) in unrestricted net assets attributable to noncontrolling interest (91,055) 1,238,783 Increase in unrestricted net assets 1,207,920 13,236,718 Temporarily Restricted Net Assets Contributions received 573,714 1,103,014 Investment return 81,211 91,655 Net assets released from restrictions (2,026,491) (2,352,852) Decrease in temporarily restricted net assets (1,371,566) (1,158,183) Permanently Restricted Net Assets Contributions received 204, ,732 Increase in permanently restricted net assets 204, ,732 Change in Net Assets 41,292 12,699,267 Net Assets, Beginning of Year 204,986, ,287,423 Net Assets, End of Year $ 205,027,982 $ 204,986,690 See 5

9 Consolidated Statements of Cash Flows Years Ended (Restated - Note 23 ) Operating Activities Change in net assets $ 41,292 $ 12,699,267 Items not requiring (providing) operating cash flow (Gain) loss on disposal of property and equipment (5,943) 84,856 Depreciation and amortization 15,756,787 16,429,754 Grants for acquisition of equipment - (2,895,750) Gain on investment in equity investee and other (65,025) (387,988) Net loss on investments 1,555, ,890 Change in fair value of interest rate swap agreements 885,261 97,662 Change in defined benefit pension plan (3,737,495) 1,734,070 Restricted contributions received (778,652) (1,723,746) Distributions to noncontrolling interest 840,438 3,539,911 Changes in Patient accounts receivable, net (5,942,254) 141,043 Supplies, prepaid and other current assets (4,883,684) 877,342 Estimated amounts due to third-party payers (2,369,214) (720,890) Estimated self-insurance costs 4,919,716 2,089,951 Accounts payable and accrued expenses (1,311,699) (2,171,315) Net cash provided by operating activities 4,904,618 30,514,057 Investing Activities Purchase of investments (83,118,788) (58,592,168) Proceeds from sale of investments 77,197,039 56,430,912 Proceeds from sale of interest in subsidiary 377, ,000 Change in other assets 77, ,566 Purchase of property and equipment (14,496,735) (13,387,900) Proceeds from sale of property and equipment 1,800 23,000 Net cash used in investing activities (19,961,787) (14,625,590) See 6

10 Consolidated Statements of Cash Flows Years Ended (Restated - Note 23 ) Financing Activities Proceeds from restricted contributions $ 2,125,390 $ 2,830,181 Proceeds from grants for acquisition of equipment - 2,895,750 Distributions to noncontrolling interest (840,438) (3,539,911) Principal payments on long-term debt and capital lease obligations (3,444,654) (2,966,314) Net cash used in financing activities (2,159,702) (780,294) Increase (Decrease) in Cash and Cash Equivalents (17,216,871) 15,108,173 Cash and Cash Equivalents, Beginning of Year 22,709,055 7,600,882 Cash and Cash Equivalents, End of Year $ 5,492,184 $ 22,709,055 Supplemental Cash Flows Information Property and equipment acquisitions included in accounts payable $ 3,928,635 $ 1,577,711 Interest paid $ 5,186,047 $ 5,292,275 Capital lease obligations incurred for capital assets $ 537,677 $ 901,522 See 7

11 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations and Principles of Consolidation Pocono Health System is a not-for-profit corporation whose purpose is to support programmatically and financially the activities of Pocono Medical Center (the Medical Center ), a not-for-profit, acute-care hospital and other entities it controls. The Health System s operations and primary service area includes Stroudsburg, Pennsylvania, and surrounding communities in Monroe County, Pennsylvania. All revenues generated by the Health System are related to the delivery of health care services. The consolidated financial statements include the accounts and transactions of Pocono Health System, the controlling parent, and its affiliates, Pocono Medical Center, Family Care Centers, Inc., Pocono Healthcare Partners, Pocono Health Foundation, Pocono Ambulatory Services, Inc., Visiting Nurse Association Hospice of Monroe County, Home Health Services of Monroe County, Inc. and Pocono Health System Investment Collaborative, LP, collectively referred to on a consolidated basis as the Health System. All significant intercompany transactions and balances have been eliminated in consolidation. Pocono Ambulatory Services, Inc. is the majority general shareholder of Pocono Ambulatory Surgery Center Limited, which is a limited partnership. Pocono Ambulatory Services, Inc. controls Pocono Ambulatory Surgery Center Limited through its 37.75% interest of the general partnership membership units and ability to influence control of operations. The noncontrolling interest represents the proportionate share of Pocono Ambulatory Surgery Center Limited equity owned by third parties. Pocono Health System is the majority shareholder of Pocono Health System Investment Collaborative, LP, which is a limited partnership. Pocono Health System controls Pocono Health System Investment Collaborative, LP through its 83.5% majority interest of the partnership. The noncontrolling interest represents the proportionate share of Pocono Health System Investment Collaborative equity owned by third parties. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8

12 Cash and Cash Equivalents The Health System considers all liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. Cash equivalents consisted of money market accounts and certificates of deposit. At June 30, 2016, the Health System s cash accounts exceeded federally insured limits by approximately $10,810,000. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. The investment in equity investee is reported on the equity method of accounting. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in temporarily restricted net assets. Other investment return is reflected in the consolidated statements of operations and changes in net assets as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Assets Limited As To Use Assets limited as to use include (1) assets held by trustees and (2) assets set aside by the Board of Directors for future capital improvements and self-insurance claims over which the Board retains control and may at its discretion subsequently use for other purposes. Amounts required to meet current liabilities of the Health System are included in current assets. Patient Accounts Receivable Accounts receivable are reduced by an allowance for uncollectible accounts. In evaluating the collectability of accounts receivable, the Health System analyzes its past history and identifies trends for each of its major payer sources of revenue to estimate the appropriate allowance for uncollectible accounts and provision for uncollectible accounts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for uncollectible accounts. 9

13 For receivables associated with services provided to patients who have third-party coverage, the Health System analyzes contractually due amounts and provides an allowance for uncollectible accounts and a provision for uncollectible accounts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payer has not yet paid, or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Health System records a provision for uncollectible accounts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated or provided by policy) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for uncollectible accounts. The Health System s allowance for uncollectible accounts for self-pay patients decreased from 99% of self-pay accounts receivable at June 30, 2015, to 95% of self-pay accounts receivable at June 30, The Health System s write-offs increased approximately $19,800,000 from approximately $31,700,000 for the year ended June 30, 2015, to approximately $51,500,000 for the year ended June 30, Supplies The Health System states supply inventories at the lower of cost, determined using the first-in, first-out method, or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. The estimated useful lives for each major depreciable classification of property and equipment are as follows: Buildings and leasehold improvements Land improvements Equipment 20 to 40 years 15 to 20 years 4 to 10 years Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. 10

14 The Health System capitalizes interest costs as a component of construction in progress, based on interest costs of borrowing specifically for the project, net of interest earned on investments acquired with the proceeds of the borrowing. Total interest capitalized and incurred was: Interest capitalized $ 49,104 $ 122,314 Interest charged to expense 5,247,902 5,303,552 Total interest incurred $ 5,297,006 $ 5,425,866 Long-Lived Asset Impairment The Health System evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No asset impairment was recognized during the years ended. Self-Insurance Trust Pocono Health System Medical Professional Liability Self-Insurance Trust (the Trust ) was created for the purpose of accumulating and holding funds for use in the self-insurance program for general liability and miscellaneous professional liability risks. The Trust holds funds on behalf of Pocono Health System and its not-for-profit affiliated corporations. The funds of the Trust are included in the consolidated financial statements as a component of assets limited as to use. Deferred Financing Costs Deferred financing costs represents costs incurred in connection with issuance of long-term debt. Such costs are being amortized using the effective interest method over the term of the related debt. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Health System has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Health System in perpetuity, with the income derived from these assets either expendable at the discretion of management or restricted by the donor for specific purposes. 11

15 Net Patient Service Revenue The Health System has agreements with third-party payers that provide for payments to the Health System at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known. Charity Care The Health System provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Health System does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Professional Liability Claims The Health System recognizes an accrual for claim liabilities based on estimated ultimate losses and costs associated with settling claims and a receivable to reflect the estimated insurance recoveries, if any. Professional liability claims are described more fully in Note 7. 12

16 Income Taxes The Health System has been recognized as exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law. However, the Health System is subject to federal income tax on any unrelated business taxable income. The Health System files tax returns in the U.S. federal jurisdiction. With a few exceptions, the Health System is no longer subject to U.S. federal examinations by tax authorities for years before Excess (Deficiency) of Revenues Over Expenses The consolidated statements of operations and changes in net assets include excess (deficiency) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, certain changes in the defined benefit plan pension liability, change in fair market value of interest rate swap agreements, sales of shares of controlling interest in subsidiary, contributions from and distributions to noncontrolling interest, dividends received, permanent transfers to and from affiliates for other than goods and services and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). Self-Insurance The Health System has elected to self-insure certain costs related to employee health and accident benefit programs. Cost resulting from noninsured losses are charged to income when incurred. The Hospital has purchased insurance that limits its exposure for individual health claims and that limits its aggregate exposure to $285,000 per covered person. Transfers Between Fair Value Hierarchy Levels Transfers in and out of Level 1 fair value hierarchy (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period ending date. Electronic Health Records Incentive Program The Electronic Health Records Incentive Program, enacted as part of the American Recovery and Reinvestment Act of 2009, provides for one-time incentive payments under both the Medicare and Medical Assistance programs to eligible hospitals that demonstrate meaningful use of certified electronic health records technology (EHR). Payments under the Medicare program are generally made for up to four years based on a statutory formula. Payments under the Medical Assistance program are generally made for up to four years based upon a statutory formula, as determined by the state, which is approved by the Centers for Medicare and Medicaid Services. Payment under both programs are contingent on the hospital continuing to meet escalating meaningful use criteria and any other specific requirements that are applicable for the reporting period. The final amount 13

17 for any payment year is determined based upon an audit by the fiscal intermediary. Events could occur that would cause the final amounts to differ materially from the initial payments under the program. The Health System recognizes revenue ratably over the reporting period starting at the point when management is reasonably assured it will meet all of the meaningful use objectives and any other specific grant requirements applicable for the reporting period. The Health System has recorded revenue of approximately $1,000,000 and $2,040,000 in 2016 and 2015, respectively, which is included in other revenue within operating revenues in the statements of operations and changes in net assets. Subsequent Events Subsequent events have been evaluated through the date of the Independent Auditor s Report, which is the date the financial statements were issued. Note 2: Net Patient Service Revenue The Health System recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the Health System recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a significant portion of the Health System s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Health System records a significant provision for uncollectible accounts related to uninsured patients in the period the services are provided. This provision for uncollectible accounts is presented on the statement of operations as a component of net patient service revenue. The Health System has agreements with third-party payers that provide for payments to the Health System at amounts different from its established rates. These payment arrangements include: Medicare. Inpatient acute care services and substantially all outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. The Health System is reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by the Health System and audits thereof by the Medicare administrative contractor. 14

18 Effective June 26, 2015, the Medical Center was longer designated as a sole community hospital (SCH) by the Centers for Medicare and Medicaid Services (CMS). Medical Assistance. Inpatient acute care services rendered to Medical Assistance program beneficiaries are paid at prospectively determined rates per discharge. Outpatient services are paid based on a published fee schedule. Laws and regulations governing the Medicare and Medical Assistance programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. The Health System has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Health System under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. For the years ended, respectively, net patient service revenue increased by approximately $2,000,000 and $4,670,000 due to final settlements and changes in estimates of third-party settlement liabilities related to recovery audit contractor claims estimates which were different than amounts previously estimated. Additionally, the 2015 net patient service revenue increased approximately $2,000,000 due to routine annual valuation of accounts receivable estimates. Patient service revenue, net of contractual allowances and discounts (but before the provision for uncollectible accounts), recognized in the years ended, was approximately: Medicare $ 113,546,351 $ 109,016,847 Medical Assistance 33,880,830 21,644,240 Other third-party payers 166,043, ,098,594 Self-pay 22,259,688 34,559,084 Total $ 335,730,199 $ 325,318,765 15

19 Note 3: Concentration of Credit Risk The Health System grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. The mix of receivables from patients and third-party payers at, is: Medicare 34% 37% Medical Assistance 13% 18% Blue Cross 34% 21% Other third-party payers 16% 22% Patients 3% 2% 100% 100% Note 4: Investments and Investment Return Short-Term Investments Short-term investments include: Money market funds $ 3,752,828 $ 2,236,316 Mutual funds - fixed income securities 6,795,299 4,663,702 Mutual funds - equity securities 739, ,943 Common stock Consumer discretionary 36,739 35,523 Consumer staples 9,889 8,980 Energy 21,056 17,551 Financials 44,978 34,064 Health care 56,965 49,700 Industrials 14,646 11,535 Information technology 95,135 70,287 Material 4,263 9,069 Telecommunications 3,350 3,648 U.S. government obligations 25,628,204 21,290,282 Corporate bonds 44,081,842 39,295,268 Municipal securities 5,973,954 4,099,109 Mortgaged backed securities 28,171,783 39,078,890 Other 75,102 63,503 Interest receivable 402, ,441 $ 115,908,348 $ 112,090,811 16

20 Assets Limited As To Use Assets limited as to use include: Internally designated Money market funds $ 755,659 $ 434,872 Mutual funds - fixed income securities 11,376,696 11,248,938 Mutual funds - equity securities 6,974,847 7,197,401 Common stock Consumer discretionary 931,908 1,185,479 Consumer staples 250, ,695 Energy 534, ,718 Financials 1,140,881 1,136,800 Health care 1,444,929 1,658,591 Industrials 371, ,952 Information technology 2,712,253 2,669,857 Material 108, ,647 Telecommunications 84, ,736 U.S. government obligations 4,645,351 4,938,382 Corporate bonds 3,505,198 6,436,913 Mortgaged backed securities 3,142,158 - Other 1,983,230 2,204,613 $ 39,962,615 $ 40,806,594 Held by trustee Money market funds $ 8,739,701 $ 8,705,152 Mutual funds - fixed income securities 5,982,945 4,696,264 U.S. government obligations 100, ,240 Corporate bonds 50,612 52,860 Interest receivable 239,600 59,900 $ 15,113,092 $ 13,716,416 17

21 Other Investments Other investments include: Money market funds $ 30,610 $ 17,289 Mutual funds - fixed income securities 460, ,219 Mutual funds - equity securities 282, ,145 Common stock Information technology 307, ,788 U.S. government obligations 188, ,334 Corporate bonds 141, ,910 Mortgaged backed securities 127,280 - Other 80,335 87,660 $ 1,618,770 $ 1,622,345 Total investment return is comprised of the following: Interest and dividend income $ 2,728,029 $ 2,781,412 Realized gains (losses) on sales of investments (98,886) 15,975 Unrealized gains (losses) on trading securities (1,456,204) (735,865) Change in fair value of interest rate basis swap (812,823) (93,468) $ 360,116 $ 1,968,054 18

22 Total investment return is reflected in the consolidated statements of operations and changes in net assets as follows: Unrestricted net assets Other operating revenue $ 179,700 $ 210,977 Other nonoperating revenue Investment return 2,368,232 2,494,755 Change in unrealized gains and losses on trading securities and fair value of interest rate swap agreement (2,269,027) (829,333) 278,905 1,876,399 Temporarily restricted net assets Investment return 81,211 91,655 $ 360,116 $ 1,968,054 Note 5: Investment in and Advances to Equity Investee The investment in and advances to equity investee is recorded in other assets on the consolidated balance sheets and relates to Pocono Health Partners (PHP) 50% ownership of Pocono Imaging Partners, LLP (PIP). During 2016, Pocono Health Partners purchased the remaining 50% ownership of Pocono Imaging Partners, becoming the sole owner of PHP. PHP was subsequently dissolved and all remaining assets and liabilities were transferred from PIP to PMC. PHP recognized a gain of $65,025 and a loss of $136,500 for the years ended, respectively, from their investment in PIP. Note 6: Pledges Receivable Pledges receivable at, include the following unconditional promises to give: Restricted for capital expenditures Unconditional promises to give $ 3,964,181 $ 5,160,371 Less allowance for uncollectible pledges and unamortized discount 916, ,842 Net pledges receivable $ 3,047,791 $ 4,394,529 19

23 Amounts due in Less than one year $ 552,123 $ 786,992 One to five years 2,576,912 3,187,550 More than five years 835,146 1,185,829 $ 3,964,181 $ 5,160,371 The interest rate used for discounting was 3.5% for 2016 and Note 7: Other Liabilities Malpractice Effective August 1, 2003, the Health System became self-insured for medical malpractice risks. Its self-insured trust (the Trust ) provides hospital and physician professional liability insurance as required by Pennsylvania statute and is funded on an asserted claims-made basis. The retroactive dates are August 1, 2002, for the Medical Center and various for the physicians. The following is a recap of coverage limits for the Health System. Mcare Eligible o o Individual limits of $500,000 per occurrence $1,500,000 aggregate excess of the self-insured limits noted below Institutional Health Provider (Medical Center) o $500,000 per occurrence o $2,500,000 aggregate cost per annum Licensed physicians employed by the Medical Center, who do not have their own coverage o $500,000 per occurrence o $1,500,000 aggregate cost per physician per annum Non-Mcare Eligible - Miscellaneous Professional Liability (Pocono Health System, Pocono Ambulatory Services, Inc., Family Care Centers, Inc., Pocono Healthcare Partners, Pocono Health Foundation) o o $1,000,000 per occurrence $3,000,000 aggregate cost per annum 20

24 Non-Mcare eligible professional employees, employed by the Medical Center, statutorily required to maintain professional liability insurance coverage. o $1,000,000 per occurrence o $3,000,000 aggregate cost per annum Effective December 1, 2008, the Health System purchased commercial insurance limits of $10,000,000 each claim and $10,000,000 aggregate claims to respond to claims in excess of the self-insured limits noted above and a lead self-insured excess layer of $2,000,000 each loss and $4,000,000 aggregate. Effective August 1, 2010, the Health System purchased commercial excess insurance limits of $15,000,000 per claim and $15,000,000 aggregate claims to respond to claims excess of $3,000,000 per claim and $7,000,000 aggregate primary limits; thereby reducing the Health System s maximum exposure to loss. The general liability is funded on an occurrence basis also through the Trust with limits of $1,000,000 per occurrence and $3,000,000 aggregate. The $15,000,000 per claim and $15,000,000 aggregate claims commercial umbrella liability policy responds to claims in excess of the primary limits. Although the primary statutory limits are funded on an asserted claim basis through the Trust, actuarially determined incurred but not reported losses (IBNR) and also incurred but not enough losses (IBNE) are calculated and accrued on the Health System s financial statements. The accrued liability for malpractice claims at, was $14,177,926 and $8,058,210, respectively. At, the Health System recorded $1,875,000 and $0, respectively, of estimated insurance coverage receivables. It is reasonably possible that the Health System s estimate of losses will change by a material amount in the near term. Prior to August 1, 2003, the Health System purchased claims-made commercial medical malpractice insurance coverage. Through 1994, the coverage was retrospectively rated. Certain claims related to incidents prior to 2002 are handled outside of the Trust and are subject to varying levels of insurance coverage. In August 2012, a suit was filed against the Health System for malpractice relating to an incident prior to This suit was settled subsequent to June 30, The settlement has been recorded on the Health System s consolidated financial statements as of June 30, Health Insurance The Health System is self-insured for employee health coverage and has accrued an estimate of the ultimate costs for both reported claims and claims incurred but not reported. The accrual is estimated based on consideration of prior claims experience, recently settled claims, frequency of claims and other economic and social factors and is included in current accrued expenses on the balance sheets. It is reasonably possible that the Health System s estimate will change by a material amount in the near term. Commercial stop-loss insurance coverage is purchased for claims in excess of the aggregate annual amount. 21

25 Workers Compensation The Health System has a self-insurance program to provide for workers compensation claims. A trust fund has been established for this purpose and is included in assets limited as to use. The accrued liability for workers compensation at, was $4,633,589 and $5,833,589, respectively. As required by its insurance carrier, the Medical Center has obtained a $2,500,000 surety bond available at, to be used to satisfy retrospective premium adjustments which may be assessed. No amounts have been drawn on these letters of credit as of June 30, 2016 and Liabilities for self-insurance costs for malpractice and workers compensation are classified as current or long-term in the accompanying financial statements based on past experience, as well as other considerations, including the nature of each claim or incident and relevant trend factors. Note 8: Long-Term Debt Hospital Revenue Bonds Series 2007 (A) $ 60,265,000 $ 60,950,000 Series 2012 (B) 31,520,000 31,665,000 Series 2012 (C) 7,890,000 9,075,000 Series 2012 (D) 20,885,000 21,610,000 Note payable (E) 145, ,676 Capital lease obligations (F) 900, , ,606, ,512,999 Less current maturities 3,359,695 3,039,140 Long-term debt $ 118,246,327 $ 121,473,859 (A) Series 2007 Bonds issued through the Monroe County Hospital Authority in the original amount of $64,440,000 and bearing interest at 5% to 5.25% maturing at varying amounts through The proceeds of the Series 2007 bonds were used to advance refund the 2003 bonds, fund a debt service reserve fund, fund capital projects at the Medical Center and pay certain costs and expenses of issuing the bonds. The Series 2007 bonds are joint and several obligations of Pocono Medical Center, Pocono Health System and Family Care Centers, Inc. and are secured by a pledge of gross revenues and a second lien mortgage on the primary health care facility of the Medical Center. 22

26 (B) Series 2012A Hospital Revenue Bonds issued through the Authority in the original amount of $32,625,000, bearing interest at 1% to 5% maturing at varying amounts through January The proceeds of the Series 2012A bonds were used to advance refund the Series 2002A bonds, fund a debt service reserve fund, fund capital projects at the Medical Center and pay certain costs and expenses of issuing the bonds. The Series 2012 bonds are joint and several obligations of Pocono Medical Center, Pocono Health System and Family Care Centers, Inc. and are secured by a pledge of gross revenues. (C) Series 2012B Hospital Revenue Bonds issued through the Authority in the original amount of $12,115,000, bearing interest at a variable rate equal to 70% of the one-month BBA-LIBOR, and a variable spread plus 34 basis points. The interest rate of the Series 2012B bonds was 1.72% and 1.52% at, respectively. The Series 2012B bonds are payable in varying annual installments through January The proceeds of the Series 2012B bonds were used to fund capital projects at the Medical Center and pay certain costs and expenses of issuing the bonds. The Series 2012 bonds are joint and several obligations of Pocono Medical Center, Pocono Health System and Family Care Centers, Inc. and are secured by a pledge of gross revenues. In conjunction with the issuance of the Series 2012B bonds, the Medical Center has also entered into an interest rate swap agreement to help mitigate exposure to future changes in interest rates on the Series 2012B bonds. See Note 9 for additional discussion of the interest rate swap agreement. (D) Series 2012C Hospital Revenue Bonds issued through the Authority in the original amount of $23,590,000 bearing interest at a variable rate equal to 70% of the one-month BBA-LIBOR, and a variable spread plus 34 basis points. The interest rate of the Series 2012C bonds was 1.72% and 1.52% at, respectively. The Series 2012C bonds are payable in varying annual installments through January 2022, at which time a balloon payment of $16,415,000 is due. The proceeds of the Series 2012C bonds were used to advance refund the Series 2002B bonds, fund a debt service reserve fund and pay certain costs and expenses of issuing the bonds. The Series 2012 bonds are joint and several obligations of Pocono Medical Center, Pocono Health System and Family Care Centers, Inc. and are secured by a pledge of gross revenues. (E) (F) In June 2014, Pocono Ambulatory Surgery Center obtained $350,000 from a local financial institution through the issuance of a note payable. The note is collateralized by equipment. Under the provisions of the note, Pocono Ambulatory Surgery Center is directly obligated to make monthly payments of principal and interest through June 5, The interest rate at, was 3.35%. At varying rates of interest to 7%, due through January 2019, collateralized by leased equipment. 23

27 Aggregate annual maturities of long-term debt and payments on capital lease obligations at June 30, 2016: Long-Term Debt (Excluding Capital Lease Obligations) Capital Lease Obligations 2017 $ 2,917,308 $ 444, ,023, , ,060, , ,175,000 35, ,295,000 28,108 Thereafter 105,235,000 - $ 120,705, ,229 Less amount representing interest 2,539 Present value of future minimum lease payments 900,690 Less current maturities 442,387 Noncurrent portion $ 458,303 Note 9: Interest Rate Swap Agreements The Health System had entered into an interest rate swap agreement in conjunction with the Series 2002B variable rate bonds payable which were advance refunded with the issuance of the 2012 bonds. The swap agreement provides for the Health System to receive variable rates of interest from and to pay fixed rates of interest to the counterparty on the notional amount of $13,900,000. The pay rate on the notional amount is 4.475%, and the Health System receives 60.7% of the USD- ISDA Swap rate with a designated maturity of ten years. Under the swap agreement, the Health System pays the fixed rate on January 1 and July 1 of each year and receives the variable amount every 35 days. The swap agreement matures in incremental amounts through December 31, The carrying amount of the swap agreement is $3,710,300 and $2,924,700 at June 30, 2016 and 2015, respectively. 24

28 The interest rate swap agreement was tested for effectiveness on a quarterly basis, and on October 1, 2007, the interest rate swap was determined to be ineffective. Prior to October 1, 2007, all changes to the fair value of the swap were recorded in changes in unrestricted net assets. The fair value of the swap on October 1, 2007, was $1,550,163, and is being amortized over the remaining life of the swap, or 291 months, at $5,327 per month, until December 31, Effective for all periods after October 1, 2007, the amortization of the $1,550,163 as well as the changes in the fair value of the swap are shown as a component of excess of revenues over expenses in the statement of operations and changes in net assets. The loss recognized in the statements of operations and change in net assets for the years ended, is $812,823 and $93,468, respectively. Cash Flow Hedge As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Health System entered into an interest rate swap agreement for a portion of its floating rate debt relating to the Series 2012B bonds (see Note 8). The agreement provides for the Health System to receive interest from the counterparty equivalent to 70% of onemonth BBA-LIBOR and to pay interest to the counterparty at a fixed rate of 1.375% on a notional amount of $7,890,000 at. Under the agreement, the Health System pays or receives the net interest amount monthly. The swap expires on January 1, The expense associated with the swap is recognized in interest expense in the statement of operations and changes in net assets for the years ended. Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component unrestricted net assets and reclassified into excess revenues over expenses in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current excess revenues of expenses. The table below presents certain information regarding the Health System s interest rate swap agreement designated as a cash flow hedge Other Liabilities Fair value of interest rate swap agreement $ (207,834) $ (108,185) Changes in Unrestricted Net Assets Gain (loss) recognized in change in interest rate swap agreement (effective portion) (72,438) (4,193) Interest Expense Loss reclassified from unrestricted net assets into excess revenues over expenses (effective portion) 118, ,640 25