BON SECOURS HEALTH SYSTEM, INC.

Transcription

1 BON SECOURS HEALTH SYSTEM, INC. Quarterly Financial Disclosure Statement As of and for the Three Months Ended November 30, 2012 PLEASE NOTE THAT THIS DOCUMENT INCLUDES MANAGEMENT S DISCUSSION AND ANALYSIS, AS WELL AS UNAUDITED FINANCIAL STATEMENTS For past quarterly and annual disclosures please visit Direct questions regarding disclosure information to Karen_Mason@bshsi.org 1

2 This page intentionally left blank 2

3 Bon Secours Health System, Inc. Quarterly Financial Disclosure November 30, 2012 Table of Contents Page Overview of the System 5 The System Financial Highlights Rating Agency Update System Strategies Subsequent Events Operating Results 11 System Results by Market Management s Discussion and Analysis of Contribution by Market Sources of Net Patient Service Revenue Selected Summary Utilization Information Management s Discussion of Results of Operations Non-Controlling Interest Factors Affecting Results of Operations Balance Sheet and Capital Structure 22 Indebtedness of the Obligated Group Indebtedness of Other System Members Series 2013 Financing Defeasance of Series 1995 Bonds Amendment and Restatement of Master Indenture Direct Purchase Bonds Letters of Credit and Liquidity Enhancement Liquidity of BSHSI and Subsidiaries Interest Rate Risk Management Capital Market Uncertainties Investments Fair Value Disclosures Insurance and Pension Plans 30 Insurance Pension Plans 3

4 Organization 31 Healthcare Providers Exemption from Federal Income Taxation Shared Sponsorship Arrangements Joint Ventures Enterprise Risk Management Compliance Conflict of Interest Community Benefit Corporate Governance Employees Appendix 46 Unaudited Financial Statements of Bon Secours Health System, Inc. and Subsidiaries 4

5 BON SECOURS HEALTH SYSTEM, INC. Quarterly Financial Disclosure Three Months Ended November 30, 2012 OVERVIEW OF THE SYSTEM The System The information presented in this Financial Disclosure describes Bon Secours Health System, Inc., a Maryland nonprofit, nonstock membership corporation (referred to as BSHSI), and its affiliates, including Members of the Obligated Group of Bon Secours Health System (referred to as the Obligated Group), under the Master Trust Indenture dated October 1, 1985, as amended, restated and supplemented, among the Obligated Group and The Bank of New York Mellon Trust Company, N.A., as master trustee (referred to as the Master Indenture). BSHSI and its affiliates are described collectively in this Financial Disclosure as the System. Bon Secours, Inc., a Maryland nonprofit, nonstock membership corporation (referred to as BSI), is the sole corporate member of BSHSI, but has no health care operations. The System was organized in June 1983 to fulfill the health care mission of the United States Province of the Congregation of Sisters of Bon Secours of Paris (referred to as the Sisters of Bon Secours), a congregation of religious women of the Roman Catholic Church founded in France in The Sisters of Bon Secours have ministered to the health care needs of people in the United States since To ensure the sustainability of the ministry into the future as well as to broaden their collaboration with the laity in areas of influence, the Sisters of Bon Secours petitioned the Vatican to establish Bon Secours Ministries, an entity comprised of both lay persons and Sisters of Bon Secours to oversee the Catholic healthcare ministry of the System. Bon Secours Ministries, which is referred to as a public juridic person in the Catholic Church s Code of Canon Law, was established by the Vatican on May 31, 2006 with the specific responsibility to oversee (and, as appropriate, initiate) the healthcare ministries within the System and, in particular, the System s Catholic identity and mission. This formal relationship with the Catholic Church and the specific ministry is commonly referred to as sponsorship. The Sisters of Bon Secours formally transferred the responsibility of sponsorship of the System to Bon Secours Ministries on November 1, Since then, Bon Secours Ministries has provided an active presence of leadership and direction for the System to ensure its operations and use of resources are aligned with the mission, values and fundamentals of Catholic social teaching. The ministry of the System aids those in need, particularly those who are sick and dying, by offering a wide variety of services, including acute inpatient, outpatient, pastoral, palliative, home health, nursing home, rehabilitative, primary and secondary care and assisted living, in Florida, Kentucky, Maryland, New York, South Carolina and Virginia without regard to race, religion, color, gender, age, marital status, national origin, sexual orientation or disability. The table included under Health Care Providers lists the entities within the System that own and operate acute, skilled, long-term or assisted living facilities, the names of their principal facilities (which appear in italics), a general description of the function of those facilities and their locations. These entities are referred to in this Financial Disclosure as the Health Care Providers. Except as described under Health Care Providers and Joint Ventures, BSHSI, either directly or indirectly, is the sole or majority member or shareholder of each System affiliate, and as a consequence of that membership or shareholder status, controls all System affiliates. BSHSI provides management and administrative services to all such controlled System affiliates, and in some cases provides discrete administrative services to joint ventures in which BSHSI or an affiliate participates. Financial Highlights Operating results for the three months ended November 30, 2012 improved significantly over the comparable prior period. Operating income for the three months ended November 30, 2012 of $20.7 million represented a 2.6% operating margin, compared to the $10.2 million of operating income and a 1.3% operating margin for the comparable prior period. Overall, the System experienced volume growth over the comparable prior period with a 1.5% increase in emergency room visits, a 9.5% increase in primary care visits and a 0.3% increase in adjusted discharges. The System reported an excess of revenues over expenses of $26.2 million during the three 5

6 months ended November 30, 2012 as compared to an deficit of revenues over expenses of $22.6 million for the comparable prior period. Investment market returns of $17.9 million and losses of $6.9 million were included in the excess of revenues over expenses and in net nonoperating realized and unrealized investment gains for the three months ended November 30, 2012 and 2011, respectively. In addition, net losses related to the System s derivatives were $2.3 million and $17.3 million for the three months ended November 30, 2012 and 2011, respectively. Days cash on hand of at November 30, 2012 represented a decrease from days cash on hand of at August 31, Operations contributed approximately $14.3 million in cash during the three months ended November 30, Capital expenditures, an increase in daily operating expense, the timing of working capital changes and scheduled debt and swap payments conversely reduced reported days cash on hand as of November 30, 2012, resulting in a 5.2 day decrease from August 31, As described under OPERATING RESULTS Factors Affecting Results of Operations Net Patient Service Revenue, the change in accounting for patient bad debts from an operating expense to a reduction of net patient service revenue resulted in the retrospective calculation of days cash on hand of at August 31, 2012, from the previously reported Unrestricted net assets increased by $23.2 million during the three months ended November 30, 2012, which was primarily related to the favorable operating results and positive investment returns. At November 30, 2012, the System reported $812.8 million in unrestricted net assets, compared to $789.6 million at August 31, The debt to capitalization ratio of at November 30, 2012 represented an improvement over the reported at August 31, Rating Agency Update In December 2012, Fitch, Standard & Poor s and Moody s affirmed the System s bond ratings at A-, A- and A3, respectively, all with stable outlooks. System Strategies Clinical Transformation; Clinical Informatics As a prophetic Catholic health ministry, the System partners with its communities to create a more humane world, build health and social justice for all and provide exceptional value for those it serves. This prophetic vision has been in place for many years and is consistent with, yet pre-dates, the more recent public dialogue of healthcare reform. The System s sponsors and board of directors have embraced this vision and with management have been developing and implementing a strategic quality plan focusing on an extraordinary individual experience of care that includes improving quality, safety, service and cost through Clinical Transformation. This term embraces the development of clinical leadership and workforce, alignment of the System with premier practitioners through employment and other meaningful relationships, implementation of electronic heath records and care management systems and use of system-wide resources and talent to redesign how care is delivered to improve clinical outcomes and patient satisfaction and reduce costs. Management believes that Clinical Transformation has helped prepare the System to manage the current healthcare environment and has positioned the System to better adapt to changes resulting from healthcare reform. Clinical Transformation is intended to measurably improve the quality of patient care, create holistic, patient-centered care experiences and reduce healthcare costs by reducing waste and optimizing value. Management is continuing the System s efforts to achieve Clinical Transformation through the alignment of people, process and technology in a manner that enables rapid tests of innovation that lead to creative, effective patient care solutions. The System is dedicated to improving patient outcomes prior to, during and after an acute care episode by implementing evidence-based best practices and limiting unwanted variations in care while improving patient engagement and demonstrating financial improvement. Since June 2008, the System s Clinical Transformation collaborative team, which is comprised of Vice Presidents of Medical Affairs, Chief Nurse Executives and Chief Financial Officers within the System, has met regularly in an effort to identify, develop and implement improvements in patient care, engagement and satisfaction and financial performance. The collaborative team has developed learning communities and established clinical leadership roles and accountability. A Clinical Informatics multi-disciplinary team comprised of physicians, nurses, clinicians, information technology specialists and business development analysts was established in April 2011, and added to the collaborative team to focus on the System s data management and to further optimize Clinical Transformation and 6

7 the use of ConnectCare, discussed below. Clinical Informatics seeks to enhance human health by integrating information technology, computer science and knowledge management methodologies that management believes will deliver more efficient and safer patient care and strengthen the clinician-patient relationship. Over the last several fiscal years, the Clinical Transformation learning communities and local system teams have focused significant effort on improving patient outcomes and reducing variable costs by reducing unwanted variation in practice and delivering care that is both effective and efficient. Improvements have been driven by connecting providers across markets in many key service lines including cardiac surgery and cardiology, internal medicine, obstetrics, orthopedics and general surgery. From fiscal year 2009 to fiscal year 2012, the System s mortality, 30-day readmission rates and inpatient length of stay have decreased by 17%, 6% and 3%, respectively, while patient severity of illness as measured by case mix index has increased by 6%. Additionally, through focused efforts on reducing hospital-acquired infections, composite infection rates at the System s facilities have decreased by 50% and the incidence of hospital-acquired sepsis has been reduced by 63% during that same period. Augmenting these improvements in care delivery, the patient s experience of care, as assessed by the Gallup Organization, has been consistently at or above the 95th percentile of patients surveyed. During the fiscal year ended August 31, 2012, and as a direct result of the System s ongoing Clinical Transformation initiatives, including the establishment of the Clinical Informatics partnership and the implementation of ConnectCare, the System maintained direct variable cost per case consistent with the prior fiscal year in spite of wage and supply inflation. The System is the current recipient of the Premier Healthcare Alliance Excellence Award, which recognized the System for its commitment to excellence and leadership in providing high-quality efficient care. In addition, Bon Secours St. Francis Health System, consisting of St. Francis Hospital Downtown and St. Francis Hospital Eastside both located in Greenville, South Carolina, was ranked in July 2012 as the ninth best hospital system in the nation in Consumer Reports magazine s Top 10 Hospitals ranking of patient safety performance. Further, in August 2012, U.S News & World Report ranked St. Mary s Hospital, located in Richmond, Virginia, as the sixth best of the 125 Virginia hospitals, with eight high performing specialties (cancer, gastroenterology, geriatrics, nephrology, neurology and neurosurgery, orthopedics, pulmonology, and urology). The magazine also ranked Memorial Regional Medical Center as the 13th best in Virginia with five high performing specialties (diabetes and endocrinology, gastroenterology, nephrology, neurology and neurosurgery and pulmonology). St. Mary s Hospital was also recognized in August 2012 by Thomson Reuters for excellence as one of the nation s 50 Top Hospitals for cardiovascular care. In addition, for the past three years, the Society of Thoracic Surgeons and Consumer Reports have worked together to rate practices that perform cardiac bypass surgery. The Active International Cardiovascular Institute at Good Samaritan Hospital, located in Suffern, New York, was one of 27 groups nationally, and the only group in New York, to earn the highest rating for all three years. Finally, the System was named one of 27 recipients of the 2012 Gallup Great Workplace Award. This award honors organizations whose employee engagement results demonstrate they have some of the most productive and engaged workforces in the world. Management believes these successes and the associated recognition for quality improvements are a result of the System s Clinical Transformation initiatives and its commitment to creating an extraordinary individual experience of care across the continuum through the effective alignment of people, process and technology. ConnectCare Electronic Health Records System The System s comprehensive electronic health records system, an EPIC product referred to as ConnectCare, is in various stages of implementation in both inpatient and ambulatory care settings in five of the System s seven markets. ConnectCare is an integrated clinical information system that makes it possible to link all clinical information in one record. ConnectCare is comprised of electronic health record, billing and computerized order entry systems as well as a patient portal. As of August 31, 2012, implementation of ConnectCare was approximately 70% complete, with ten of 14 acute care facilities having fully implemented the electronic health record system, ten of 14 acute care facilities having fully implemented the computerized order entry system and nine of 14 acute care facilities having fully implemented the integrated EPIC billing system. In addition, the System has successfully implemented the ConnectCare system in approximately 161 ambulatory practice sites, including all primary care providers across Virginia and Kentucky. As of July 2011, seven hospitals covering three markets located in South Carolina, Virginia and Kentucky had fully implemented the acute care electronic health record and computerized order entry in all departments. The other six hospitals located in Virginia and Kentucky had also fully implemented the integrated EPIC billing system. These hospitals met Stage 6 of seven optimal stages of the Electronic Medical Record Adoption Model published by 7

8 the Healthcare Information and Management Systems Society (referred to as HIMSS). As of September 30, 2012, only 7.3% of the 5,319 hospital members of HIMSS had achieved a status of Stage 6 or higher. Benefits realized during the periods in which ConnectCare has been operational in these hospitals include a decrease in mortality rates and complications, an increase in the case mix index and reductions in both the average length of stay of admitted patients and average treatment time for emergency room patients. In April 2012, Mary Immaculate Hospital, located in Newport News, Virginia, fully implemented the acute care billing system, electronic health record and computerized order entry systems in all departments. In June 2012, electronic health record capabilities were implemented in the emergency departments at St. Anthony Community Hospital and Bon Secours Community Hospital in Charity New York (described under ORGANIZATION Shared Sponsorship Arrangements Bon Secours Charity Health System, Inc. ). The Good Samaritan Hospital emergency department had been implemented previously in January Maryview Medical Center, located in Portsmouth, Virginia, followed and was fully implemented in August By the end of November 2012, DePaul Medical Center, located in Hampton Roads, Virginia, went live, resulting in full ConnectCare implementation across Virginia. Embracing the patient s ability to access the electronic record is a key component of the System s patient population care coordination strategy. Since January 2010, over 55,590 patients have gained access to My Chart, ConnectCare s patient portal, which allows for better access to patient medical records, determining physician availability, scheduling of appointments, medication refills and electronic interaction with physicians. This capability enhances the patient, caregiver and physician relationships and improves all aspects of care coordination. The integration of finance, operations and clinical workflows resulting from the implementation of the ConnectCare system is improving patient documentation, expediting patient treatment and enhancing revenue capture and is beginning to facilitate improvements in key clinical quality indicators and reductions in costs per case. The implementation capabilities are essential to enable hospitals and physician practices to qualify for HITECH Stimulus Grants and are expected to be key tools utilized in population management under various future reimbursement scenarios, including accountable care organizations, bundled care payments or other quality/utilization payment structures. During fiscal year 2013, ambulatory practices and a new physician EPIC billing system are scheduled to be implemented in South Carolina and New York. In addition, the EPIC acute care billing system is scheduled to be implemented in South Carolina, finalizing ConnectCare implementation in that market. During fiscal year 2014, the System expects to complete the roll out of the ConnectCare systems in its New York and Baltimore markets bringing the ConnectCare system fully operational by in When complete, the System will maintain acute and ambulatory electronic health records, computerized order entry, integrated billing and patient accessible records for patients, caregivers and physicians in a consistent format and content structure at all locations. Cost savings, outcomes and patient safety are expected to be enhanced. Operating results have and will continue to be impacted by the resources and commitment to this implementation, including costs associated with staffing and purchased services as well as the associated capital commitment. The System has allocated approximately $33.0 million of its fiscal 2013 budgeted capital expenditures to implement the ConnectCare system and intends to continue to provide ongoing operational support to optimize the use of the system. As of August 31, 2012, the cost of implementing the ConnectCare system, although significant, was within budget. Physician Network The primary relationship between a hospital and physicians who practice in it is through the hospital s organized medical staff. The relationships vary from independent physicians who are members of a hospital s medical staff to contracted and employed physicians. The success of the System is dependent on the System s ability to attract physicians to participate in its networks, its ability to support physician needs and its ability to provide access to high-quality services and deliver high-quality patient care in a cost-effective manner. The members of the System collaborate annually on a comprehensive regional network development planning process. The plans resulting from this process provide the critical framework for creating a comprehensive, organized network of providers enabling the System to create an extraordinary individual experience of care in each of its regional markets. The goal over the next several years is to create a network designed to serve defined populations within each of the System s various markets and to improve the access and health of the communities served by the System. Each local system s plan is based on extensive analysis and modeling of physician supply and demand, community need and other market information. The goal of these strategies is to fully understand the 8

9 markets currently served by the System and at the same time allow the System to react to emerging market opportunities. Critical to the future success of population health management and the System is the ability to provide the System s communities with primary care and medical homes. Since June 2010, the System has qualified more than 78 providers as Level III providers recognized by the National Center for Quality Assurance. The patientcentered medical home is considered a model for the delivery of medical care centered on the primary care provider (the patient s home) and designed to provide long-term coordinated care to patients to both reduce the cost and improve the quality of healthcare. The System considers patient-centered medical homes to be among the most essential approaches to delivering higher-quality, cost effective primary care, especially for people with chronic health conditions. By connecting patients through these medical homes and the System s ConnectCare medical records system, hospitals and doctors will have access to the patient data critical to the effective health management of patient populations. One key strategy in achieving value, improving quality and reducing cost is the implementation of hospitalist programs in all System facilities. Hospitalist programs have been established at each System hospital. Hospitalists continue to provide acceleration of the Clinical Transformation initiatives and improve a patient s transition of care through the System s integrated health system. At November 30, 2012, the System employed 696 full-time equivalent physicians and mid-level providers, of which 324 were primary care providers and 372 were specialty care providers. This represented an increase of 45 physicians and mid-level providers during the three months ended November 30, The following chart represents the System s employed physician network growth: August 31, November 30, August 31, November 30, Primary Care Specialty Care Total Based on the regional network planning process described above, management expects the number of the System s employed physicians and mid-level full-time equivalents to continue to increase as the System seeks to develop comprehensive provider networks in the key markets in which it operates and to advance its quality and Clinical Transformation initiatives. The System s strategy in employing physicians is to enter into employment contracts with terms generally of one to five years. The operational costs of employing physicians other than related salaries and benefits are primarily occupancy costs, including rent and staffing expenses. The System also embraces those physicians wanting to remain independent and affords them opportunities to collaborate in Clinical Transformation by leveraging technology, providing education and access to patient medical information and by engaging them in helping to define and implement evidence-based medical care intended to improve patient outcomes and satisfaction. Furthermore, ConnectCare ambulatory (and other information technology options) are available to independent members of the medical staff. As of November 30, 2012, ConnectCare ambulatorywas live in ten independent practice locations with 75 independent providers. Cost Reduction Plans During fiscal year 2012, management initiated a significant fixed cost reduction plan throughout the System (referred to as the Stewardship Program) after a comprehensive assessment by an affiliate of Deloitte LLP (referred to as Deloitte Consulting) showed opportunities in various departmental, functional and managerial structures. The Stewardship Program has resulted in reduced fixed costs while focusing on systemness, quality of care, effective use of resources and minimization of system-wide duplication. The program includes initiative teams for purchased services, dietary services, facilities and environmental services, clinical asset management, marketing and planning, finance, human resources, case management, procurement/logistics, organization design, information services, revenue cycle, physician integration and corporate spending. The goal of the Stewardship Program is to reduce up to $200 million in System annual fixed costs by the end of fiscal year For the fiscal year ending August 31, 2012, as assessed and benchmarked by Deloitte Consulting, the Stewardship Program savings exceeded $50.0 million. While all teams contributed to attaining this goal, the primary drivers of the fiscal 9

10 year 2012 cost savings were reductions associated with marketing and planning, organizational design, purchased services, and information technology. During fiscal year 2013, implementation of current and new initiatives is expected to continue under the Stewardship Program. Reconfiguration of Certain Health Care Facilities In November 2011, Bon Secours St. Francis Medical Center, Inc. opened Bon Secours St. Francis Watkins Centre in Midlothian, Virginia. This is central Virginia s first free-standing emergency department and includes an imaging center, a women s imaging center, breast surgery practice and neurology practice. In December 2011, Bon Secours-Richmond Health System entered into an affiliation agreement with Rappahannock General Hospital, a Virginia not-for-profit, non-stock corporation (referred to as RGH), pursuant to which Bon Secours-Richmond Health System became a minority member of RGH, committed to certain capital contributions to RGH, and will work with RGH to improve healthcare services in the RGH community. During fiscal year 2012, certain of the System s local systems entered various affiliations with third parties which are intended to align healthcare in those communities through clinical collaboration of services while providing access to those in need. In August 2012, BSHSI established Good Helpcare, LLC to act as an Accountable Care Organization on behalf of Medicare beneficiaries in each of its local systems and share with Medicare any savings derived from its fee-for-service recipients. On January 10, 2013, the U.S. Department of Health and Human Services announced that Good Helpcare was selected as one of 106 new Accountable Care Organizations in Medicare. Good Helpcare is expected to manage approximately 55,000 beneficiaries in five states. The System has received certificates of public need under Virginia law to replace the existing DePaul Medical Center with a new 124-bed facility and to add 54 beds to St. Francis Medical Center, located in Midlothian, Virginia. The System is also seeking approval to add a limited amount of new bed capacity to certain of its Virginia facilities. The System has also received a certificate of public need under South Carolina law to build a new cancer center. Certain other System affiliates have received or are seeking regulatory approval with respect to the expansion or reconfiguration of certain health care services provided by those facilities. None of the foregoing additions or expansions has been submitted for approval by either the Board of Directors of BSHSI or the Board of Directors of BSI. There can be no assurance that any requested regulatory approval will be obtained or that any of the proposed projects will ultimately be approved by the Boards of Directors. Subsequent Events In accordance with the provisions of ASC 855 Subsequent Events, management evaluated events and transactions that occurred after November 30, 2012 and through January 14, The System did not have any material recognizable subsequent events during this period, other than the transactions described in this Financial Disclosure. 10

11 OPERATING RESULTS System Results by Market The following chart sets forth the consolidated total revenue and operating income for the System by market for the three months ended November 30, 2012 and 2011: Market Three Months Ended November 30, 2012 Total Revenues (In thousands) % Operating Income (loss) (In thousands) % Richmond, Virginia (a) $290, $17, Hampton Roads, Virginia (b) 158, (3,890) (18.8) Greenville, South Carolina 148, , Charity New York (c) 111, (4,953) (23.9) Russell, Kentucky 41, (1,116) (5.3) Baltimore, Maryland 28, (3,418) (16.5) Bronx, New York (d) 12, (675) (3.3) St. Petersburg, Florida 7, Subtotal 797, , Other (e) 11, , Total System $809, $20, (a) (b) (c) (d) Three Months Ended November 30, 2011 Richmond, Virginia (a) $269, $12, Hampton Roads, Virginia (b) 149, (4,421) (43.2) Greenville, South Carolina 144, , Charity New York (c) 107, (6,760) (66.0) Russell, Kentucky 41, Baltimore, Maryland 31, Bronx, New York (d) 13, (353) (3.5) St. Petersburg, Florida 7, Subtotal 764, , Other (e) 5, , Total System $769, $10, Includes St. M ary s Hospital, Richmond Community Hospital, M emorial Regional M edical Center and St. Francis Medical Center. Includes M aryview M edical Center, Province Place of M aryview, Province Place of DePaul, M ary Immaculate Hospital, St. Francis Nursing Care Center, DePaul Medical Center and Maryview Nursing Care Center. Includes Good Samaritan Hospital, St. Anthony Community Hospital, Bon Secours Community Hospital, Schervier Pavilion and Mount Alverno Center. Includes Schervier Nursing Care Center. (e) Includes System-level investment income (loss) and earnings in affiliates for certain joint ventures as well as shared services costs managed for the System by the health system office. 11

12 Management s Discussion and Analysis of Contribution by Market Certain local markets operating results for the three months ended November 30, 2012 fluctuated from the comparable prior period, as discussed below. Richmond, Virginia - Operating income in Richmond, Virginia increased to $17.5 million for the three months ended November 30, 2012 from $12.7 million for the comparable prior period. Overall volumes for the Richmond region improved in the three months ended November 30, 2012 versus the comparable prior period. New employee health programs organized around accountable care resulted in lower health claims. In addition, management implemented new expense management programs during fiscal year 2012, with a focus on reducing labor and purchased services costs, which have carried over into fiscal year Hampton Roads, Virginia - Operating losses in Hampton Roads, Virginia were $3.9 million for the three months ended November 30, 2012 compared to $4.4 million in the comparable prior period. The region continued to experience unfavorable shifts in payor mix, as well as soft volumes. Management continues to take actions intended to reduce labor and purchased service costs as well as pursue new primary care physician integration strategies. Greenville, South Carolina Operating income in Greenville, South Carolina was $5.5 million for the three months ended November 30, 2012 compared to $7.0 million for the comparable prior period. Revenue growth of $3.5 million, or 2.5%, over the prior fiscal year was primarily due to volumes from a new hand surgery service line, new physician practice revenue as well as a rate increase during the latter part of fiscal year Charity New York - Operating losses in Charity New York were $4.9 million for the three months ended November 30, 2012 compared to operating losses of $6.8 million for the comparable prior period In April 2012, external resources from Deloitte Consulting were engaged to strengthen management action plans with a focus on both revenue cycle realization and cost reductions. In August 2012, Hunter Partners was engaged to implement the opportunities identified by Deloitte Consulting. Hunter Partners filled key management positions, including Charity New York s Chief Operating Officer and Chief Financial Officer, in an effort to strengthen the operational and financial discipline within the organization. Actions taken included a reduction in force of approximately 120 positions and new managed care rates effective September Other cost reductions, including Clinical Transformation, accounting and billing consolidation, purchased services, physician practice management and other expenses, are in progress. The contribution by market to operating income from continuing operations can and has varied materially from year to year due to specific market impacts. The relative contributions by market to System operating income from continuing operations for future periods may differ from those presented above. 12

13 Sources of Net Patient Service Revenue The following table shows the sources of net patient service revenue of acute care hospitals by local market, consolidated System, and consolidated Members of the Obligated Group for the three months ended November 30, 2012 and 2011: Three Months Ended November 30, 2012 Local Market: Managed Care Sources of Net Patient Service Revenue: Medicare (e) Commercial, Private Pay and Other Medicaid Total Richmond, Virginia (a) 56.1% 28.7% 8.2% 7.1% 100.0% Hampton Roads, Virginia (b) 43.8% 32.7% 14.5% 9.0% 100.0% Greenville, South Carolina (c) 50.3% 36.1% 8.5% 5.1% 100.0% Charity New York (d) 41.0% 42.2% 5.3% 11.5% 100.0% Ashland, Kentucky 39.9% 33.5% 13.4% 13.2% 100.0% Baltimore, Maryland 23.0% 39.0% 10.1% 27.9% 100.0% Consolidated Acute Care Hospitals 48.7% 33.0% 9.6% 8.6% 100.0% Consolidated Acute Care Hospital Members of the Obligated Group 49.8% 31.7% 10.2% 8.2% 100.0% Three Months Ended November 30, 2011 Local Market: Richmond, Virginia (a) 55.7% 29.3% 7.6% 7.3% 100.0% Hampton Roads, Virginia (b) 45.1% 34.5% 12.1% 8.3% 100.0% Greenville, South Carolina (c) 49.8% 36.6% 8.0% 5.7% 100.0% Charity New York (d) 43.8% 40.5% 4.7% 11.1% 100.0% Ashland, Kentucky 43.9% 33.1% 12.4% 10.6% 100.0% Baltimore, Maryland 25.5% 37.3% 3.6% 33.6% 100.0% Consolidated Acute Care Hospitals 48.9% 33.8% 8.3% 9.0% 100.0% Consolidated Acute Care Hospital Members of the Obligated Group 49.8% 32.6% 8.9% 8.7% 100.0% (a) Includes St. Mary's Hospital, Richmond Community Hospital, Memorial Regional Medical Center and St. Francis Medical Center. (b) Includes Maryview Medical Center, Mary Immaculate Hospital and DePaul Medical Center. (c) Includes St. Francis Hospital - Downtown and St. Francis Hospital - Eastside. (d) Includes Good Samaritan Hospital, St. Anthony Community Hospital and Bon Secours Community Hospital. (e) Medicare and Medicaid include respective Managed Care plans. 13

14 Selected Summary Utilization Information BSHSI and Subsidiaries The following table presents selected combined utilization statistics for the health care facilities owned and operated by the Health Care Providers for the three months ended November 30, 2012 and 2011: Three Months Ended November 30, Acute/Skilled Care Facilities: Beds in operation * 2,558 2,570 Discharges 31,545 32,466 Patient days 144, ,939 Average length of stay (days) Staffed bed occupancy 61.9% 63.3% Outpatient visits 339, ,456 Emergency room visits 146, ,267 Long-Term Care Facilities: Beds in operation * Patient days 84,069 83,770 Occupancy 92.8% 92.5% * As of November 30 Obligated Group The following table presents selected combined utilization statistics for the healthcare facilities owned and operated by the Members of the Obligated Group for the fiscal years ended November 30, 2012 and 2011: Three Months Ended November 30, Acute/Skilled Care Facilities: Beds in operation * 2,014 2,026 Discharges 26,221 26,865 Patient days 115, ,086 Average length of stay (days) Staffed bed occupancy 63.1% 64.0% Outpatient visits 286, ,667 Emergency room visits 127, ,176 Long-Term Care Facilities: Beds in operation * Patient days 31,871 31,390 Occupancy 88.9% 87.5% * As of November 30 14

15 Management s Discussion of Results of Operations In recent years, the System has focused heavily on improving the quality, efficiency and integration of care. This strategic effort is referred to within the System as Clinical Transformation. Primary strategies include the implementation of an electronic health record and order entry system, acquiring and integrating primary and specialty care physician practices and intense engineering and operational efforts to understand and redesign the System s care delivery models in all areas of practice. These capabilities have required the development of clinical and financial leaders to learn, understand and design new care pathways with expected results related to quality, service and cost. As part of this effort, the System is in its fifth year of a planned six year roll-out of the ConnectCare electronic health records system. ConnectCare provides acute electronic medical record and computerized order entry systems, physician practice electronic medical record systems and patient portal capabilities and impacts all elements of the acute care revenue cycle deployment. In addition, the System continues to acquire physician practices, resulting in an approximately 86% increase in number of physicians and mid-level full-time equivalents employed by the System as of November 30, 2012 compared to August 31, The System has 45 providers certified as patient-centered medical homes. This integration of physician practices provides the System an opportunity to better coordinate the quality and efficiency of care, supports its Clinical Transformation objectives, and allows the System to better respond to future healthcare changes. The following comparative charts provide information related to changes in certain line items for the System for the three months ended November 30, 2012 and A discussion of the causes for significant variances with respect to certain of the line items between the comparable periods follows these charts. The discussion of the System s results of operations that follows should be read in conjunction with the unaudited financial statements of BSHSI and subsidiaries contained in the Appendix. BSHSI and Subsidiaries Obligated Group (Dollars in thousands) November 30, 2012 November 30, 2011 Variance Variance % November 30, 2012 As a % of Total System Net patient service revenue $ 777,418 $ 746,797 $ 30, % $ 596, % Total revenue 809, ,866 39, % 626, % Salaries, wages and benefits 421, ,670 20, % 293, % Supplies 135, , % 114, % Purchased services and other 187, ,420 6, % 141, % Depreciation and amortization 34,000 31,177 2, % 28, % Interest 10,180 11,788 (1,608) -13.6% 8, % Operating income 20,708 10,241 10, % 38, % Nonoperating investment gains, net 15,530 (24,220) 39, % 15, % Other nonoperating activities, net (10,034) (8,664) (1,370) -15.8% (7,335) 73.1% Excess of revenues over expenses 26,205 (22,643) 48, % 46, % Other changes in unrestricted net assets, net (3,033) (498) (2,535) 508.9% 49, % Increase in unrestricted net assets 23,172 (23,140) 46, % 96, % BSHSI and Subsidiaries Obligated Group (Dollars in thousands) As of As of As a % of As of August Variance November 30, Variance November 30, Total 31, 2012 % System Days in accounts receivable, net % % Property, plant and equipment, net $ 1,090,742 $ 1,096,481 $ (5,738) -0.5% $ 901, % Current ratio % % Unrestricted cash and cash equivalents $ 117,682 $ 138,781 $ (21,099) -15.2% $ 485, % Unrestricted board-designated funds 823, ,762 $ 2, % $ 802, % Other investments limited or restricted as to use $ 189,169 $ 190,701 $ (1,532) -0.8% $ 63, % Total long-term debt $ 1,031,108 $ 1,047,610 $ (16,502) -1.6% $ 987, % 15

16 Total Revenue for the three months ended November 30, 2012 increased $39.7 million, or 5.2%, from the comparable prior period. The System s employed physician network grew to 696 full time equivalent physicians and mid-level providers at November 30, Volumes, as measured by adjusted discharges, grew 0.3% for the three months ended November 30, 2012 over the comparable prior period. The all-payer weighted case mix index increased 2.1% for the three months ended November 30, 2012, from the comparable prior period, reflecting higher patient acuity. There was a slight decrease, 0.7%, in total surgeries, including inpatient, outpatient and ambulatory, for the three months ended November 30, 2012 from the comparable prior period. As a percentage of gross patient revenue, charity care, bad debt and customer service adjustments were 9.0% for the three months ended November 30, 2012 compared to 8.7% for the comparable prior period. Salaries, Wages and Benefits Expense increased $20.1 million, or 5.0%, during the three months ended November 30, 2012 from the comparable prior period. This increase resulted primarily from the expansion of the System s employed physician network, which accounted for approximately $10.3 million, as well as increased nursing staffing due to higher surgical volumes and an increase to health plan benefits costs. Normal inflationary increases accounted for the remainder of the growth. Salaries, wages and benefits expense as a percentage of net patient service revenue was 54.2% for the three months ended November 30, 2012 which was relatively unchanged from the comparable prior period. Supplies Expense remained relatively flat at $135.6 million during the three months ended November 30, 2012 as compared to $134.6 million for the comparable prior period. Purchased Services and Other Expenses increased $7.0 million, or 3.9%, to $187.4 million for the three months ended November 30, 2012 from $180.4 million in the comparable prior period. Purchased services and other expenses as a percentage of net patient service revenue was 24.1% for the three months ended November 30, 2012, unchanged from the comparable prior period. During fiscal year 2012, and continuing in the first quarter of fiscal year 2013, the Stewardship Program initiatives were focused on reducing redundancies and inefficiencies of purchased services and other expenses. Depreciation and Amortization Expense increased $2.8 million, or 9.1%, for the three months ended November 30, 2012 from the comparable prior period primarily due to normal property and equipment capitalizations. Interest Expense decreased by $1.6 million, or 13.6%, for the three months ended November 30, 2012 from the comparable prior period. Operating Income increased by $10.5 million to $20.7 million for the three months ended November 30, 2012 from $10.2 million for the comparable prior period. Nonoperating Investment Gains, Net improved by $39.7 million, to a net gain of $15.5 million for the three months ended November 30, 2012 from a net loss of $24.2 million for the comparable prior period. Nonoperating investment gains, net for the three months ended November 30, 2012 include net realized and unrealized gains generated by the System s investment portfolio of $17.9 million for the three months ended November 30, 2012, compared to the net realized and unrealized losses of $6.9 million for the comparable prior period. In addition, unrealized losses and payments, net related to the System s derivatives were $2.3 million for the three months ended November 30, 2012, compared to $17.3 million for the comparable prior period. Other Nonoperating Activities, Net decreased by $1.4 million during the three months ended November 30, 2012 to a net loss of $10.0 million, compared to a net loss of $8.7 million for the comparable prior period. Other nonoperating activities include the System s foundations, schools of nursing, property management/medical office buildings, other community services as well as frozen pension plans. Other Changes in Unrestricted Net Assets, Net resulted in a decrease of $3.0 million for the three months ended November 30, 2012 compared to a decrease of $0.5 million for the comparable prior period. 16

17 Non-Controlling Interest The following table presents a reconciliation of the changes in consolidated unrestricted net assets attributable to the System s controlling interest and non-controlling interest for the three months ended November 30, 2012: Unrestricted net assetscontrolling interest Unrestricted net assetsnoncontrolling interest Total unrestricted net assets Balance as of August 31, 2012 $ 608,843 $ 180,780 $ 789,623 Excess of revenues over expenses 20,772 5,433 26,205 Net change in unrealized gains on other than trading securities (1,916) - (1,916) Grants for capital expenditures 2,709-2,709 Net assets released for property, plant and equipment Other changes in net assets of joint ventures Distributions to non-controlling interest owners - (1,536) (1,536) Transfers to affiliates & other changes, net (3,030) - (3,030) Increase in net assets 19,275 3,897 23,172 Balance as of November 30, 2012 $ 628,118 $ 184,677 $ 812,795 Factors Affecting Results of Operations Critical Accounting Policies The System considers critical accounting policies to be those that require the more significant judgments and estimates in the preparation of its consolidated financial statements, including the impairment of long-lived assets. Management relies on historical experience and on other assumptions believed to be reasonable under the circumstances in making its judgment and estimates. Actual results could differ materially from those estimates. The System does not anticipate that it will significantly change any of its critical accounting policies during the fiscal year ending August 31, The risks inherent with reimbursement from federal, state and private payors require that the collectability of receivables associated with these payors is reasonably stated in the consolidated financial statements. From a patient receivables standpoint, the System employs an active review process that assesses the reasonableness of its patient receivable allowances for contractual adjustments, uncompensated care, and bad debts and helps assure that the patient receivables are valued at their estimated net realizable value. In accounting for Medicare and Medicaid cost reports, the System records all third party receivables and liabilities at their estimated realizable values. Additionally, the System has a consulting arrangement with an accounting firm that is not affiliated with its independent auditors to review all cost reports submitted to third party payors and to assess the reasonableness of the System s recorded liabilities to these payors. Management believes that adequate provisions have been made for reasonable adjustments that may result from final cost report settlements. The System participates in a self-funded insurance program for hospital professional and general liabilities configured under a System affiliate, Bon Secours Assurance Company, Ltd. (referred to as BSAC), a Cayman Islands insurance company. Assets are maintained under the self-funded insurance program to provide specified levels of claims-made and occurrence-based coverage, depending on the year, for hospital professional and general liabilities. Excess claims-made coverage is obtained through commercial carriers. In August 2010, the Financial Accounting Standards Board (referred to as FASB) issued ASU No , Health Care Entities (Topic 954) Presentation of Insurance Claims and Related Insurance Recoveries. ASU No is intended to address current diversity in practice to the accounting by health care entities for medical malpractice claims and similar liabilities and their related anticipated insurance recoveries. Most health care entities have netted anticipated insurance recoveries against the related accrued liability, although some entities have presented the anticipated 17