South Nassau Communities Hospital and Subsidiaries Years Ended December 31, 2016 and 2015 With Report of Independent Auditors

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1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION South Nassau Communities Hospital Years Ended December 31, 2016 and 2015 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements and Supplementary Information Years Ended December 31, 2016 and 2015 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Statements of Financial Position...3 Consolidated Statements of Activities...5 Consolidated Statements of Changes in Net Assets...6 Consolidated Statements of Cash Flows...7 Notes to Consolidated Financial Statements...9 Supplementary Information Consolidating Statement of Financial Position...47 Consolidating Statement of Activities...48

3 Ernst & Young LLP 5 Times Square New York, NY Tel: Fax: ey.com The Board of Directors South Nassau Communities Hospital Report of Independent Auditors We have audited the accompanying consolidated financial statements of South Nassau Communities Hospital, which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, and the related consolidated statements of activities, 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 financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of South Nassau Communities Hospital at December 31, 2016 and 2015, and the consolidated results of their operations, changes in their net assets and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating statement of financial position as of December 31, 2016, and consolidating statement of activities for the year ended December 31, 2016, are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. March 13, 2017 ey 2 A member firm of Ernst & Young Global Limited

5 Consolidated Statements of Financial Position December Assets Current assets: Cash and cash equivalents (Note 13) $ 9,779,507 $ 3,170,788 Investments (Notes 3 and 13) 139,135, ,346,637 Current portion of assets whose use is limited (Notes 4, 8, 10, 13, and 15) 20,609,650 13,622,540 Patient receivables, less allowance for uncollectibles of $36,147,000 in 2016 and $38,977,000 in 2015 (Notes 2 and 12) 61,139,584 52,711,773 Other current assets 12,009,870 16,964,610 Total current assets 242,674, ,816,348 Assets whose use is limited (Notes 4, 8, 10, 13, and 15) 99,542,213 33,860,000 Long-term investments (Notes 3 and 13) 3,815,354 1,774,697 Other long-term assets 1,135, ,582 Insurance claims receivable 1,435, ,818 Property, plant, and equipment, net (Note 6) 309,303, ,352,804 Total assets $ 657,906,534 $ 541,947,249 3

6 December Liabilities and net assets Current liabilities: Amounts due under lines of credit (Note 7) $ 25,000,000 $ 20,000,000 Accounts payable 21,072,408 18,281,064 Accrued expenses 40,478,972 33,780,415 Accrued payroll and vacation 25,633,255 23,015,918 Current portion of long-term debt (Notes 8 and 13) 3,906,871 3,505,000 Current portion of accrued postretirement benefits other than pension (Note 9) 166, ,000 Current portion of estimated professional and general liabilities (Note 10) 11,980,000 10,290,000 Deferred grant revenue (Note 15) 6,739,000 Estimated third-party payor liabilities (Note 2) 7,750,000 7,780,000 Total current liabilities 142,726, ,840,397 Long-term debt, net of current portion (Notes 8 and 13) 86,964,900 83,018,557 Accrued pension payable (Note 9) 56,902,515 55,651,807 Accrued postretirement benefits other than pension, net of current portion (Note 9) 2,995,000 3,166,000 Estimated professional and general liabilities, net of current portion (Note 10) 34,820,030 33,860,000 Deferred grant revenue, net of current portion (Note 15) 64,722,183 Insurance claims payable 1,435, ,818 Other liabilities 2,412,685 2,794,599 Total liabilities 392,979, ,259,178 Commitments and contingencies Net assets: Unrestricted 261,111, ,913,374 Temporarily restricted (Note 11) 2,787, ,621 Permanently restricted (Note 11) 1,028,076 1,028,076 Total net assets 264,927, ,688,071 Total liabilities and net assets $ 657,906,534 $ 541,947,249 See accompanying notes. 4

7 Consolidated Statements of Activities Year Ended December Operating revenue: Net patient service revenue, net of contractual allowances and other discounts (Note 2) $ 500,861,944 $ 479,329,323 Provision for bad debts (Note 2) (12,662,626) (16,853,097) Net patient service revenue, less provision for bad debts 488,199, ,476,226 Other revenue (Notes 5 and 16) 17,573,294 10,332,782 Total operating revenue 505,772, ,809,008 Operating expenses: Salaries and wages 244,082, ,040,944 Employee benefits 50,864,056 52,740,336 Supplies and other expenses 170,997, ,466,796 Interest expense 3,626,886 3,539,033 Provision for depreciation and amortization 29,106,312 26,877,055 Total operating expenses 498,677, ,664,164 Operating income 7,095, ,844 Nonoperating gains and losses: Net nonoperating investment gain (loss) (Note 5) 6,139,363 (4,094,057) Unrestricted contributions, net of fund raising expenses of $362,339 in 2016 and $553,042 in ,917 99,905 Gain on sale of property (Note 6) 2,607,941 Gain related to Long Beach Medical Center transactions (Note 15) 2,216,258 Other nonoperating losses (1,274,506) Excess (deficiency) of revenue and gains over expenses 16,789,102 (3,849,308) Net assets released from restrictions for capital asset acquisitions 5,662,463 16,394,571 Pension and postretirement liability adjustments (Note 9) (5,253,183) 10,152,437 Transfer from related entities 616,807 Increase in unrestricted net assets $ 17,198,382 $ 23,314,507 See accompanying notes. 5

8 Consolidated Statements of Changes in Net Assets Years Ended December 31, 2016 and 2015 Unrestricted Net Assets Temporarily Restricted Net Assets Permanently Restricted Net Assets Total Net Assets Balance, January 1, 2015 $ 220,598,867 $ 982,459 $ 1,028,076 $ 222,609,402 Deficiency of revenue and gains over expenses (3,849,308) (3,849,308) HEAL capital grant funds earned 7,818,734 7,818,734 Restricted contributions, net of fund raising expenses and excluding capital grants 8,398,283 8,398,283 Net assets released from restrictions for operations (58,284) (58,284) Net assets released from restrictions for capital asset acquisitions 16,394,571 (16,394,571) Transfer from related entities 616, ,807 Pension and postretirement liability adjustments 10,152,437 10,152,437 Total changes in net assets 23,314,507 (235,838) 23,078,669 Balance, December 31, ,913, ,621 1,028, ,688,071 Excess of revenue and gains over expenses 16,789,102 16,789,102 FEMA capital grant funds earned 5,577,482 5,577,482 Restricted contributions, net of fund raising expenses and excluding capital grants 2,161,697 2,161,697 Net assets released from restrictions for operations (36,059) (36,059) Net assets released from restrictions for capital asset acquisitions 5,662,463 (5,662,463) Pension and postretirement liability adjustments (5,253,183) (5,253,183) Total changes in net assets 17,198,382 2,040,657 19,239,039 Balance, December 31, 2016 $ 261,111,756 $ 2,787,278 $ 1,028,076 $ 264,927,110 See accompanying notes. 6

9 Consolidated Statements of Cash Flows Year Ended December Operating activities Changes in net assets $ 19,239,039 $ 23,078,669 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Amortization of deferred financing fees, bond premium, and discount (626,786) (654,168) Provision for depreciation 28,839,984 26,760,172 Loss on disposal of assets 266, ,883 Nonoperating net investment (gain) loss (6,139,363) 4,094,057 Gain on sale of property (2,607,941) HEAL capital grant funds earned (7,818,734) FEMA capital grant funds earned (5,577,482) Restricted contributions, net of fund raising expenses and excluding capital grants (2,161,697) (8,398,283) Changes in operating assets and liabilities: Accounts receivable (8,427,811) 1,492,004 Other assets (current and long-term) 4,034,791 (5,766,928) Accounts payable and accrued expenses 9,489,901 61,820 Accrued payroll and vacation 2,617,337 2,854,146 Estimated third-party payor liabilities (30,000) (9,770,000) Estimated professional and general liabilities 2,650,030 3,600,000 Accrued pension and postretirement benefits payable 1,057,708 (12,748,381) Other liabilities (381,914) (1,683,661) Net cash provided by operating activities 42,242,124 15,217,596 Investing activities Purchases of property, plant, and equipment (52,773,080) (46,828,430) Proceeds from sale of property 6,323,784 7,266 Deposits in investments (3,649,491) (45,500) Deposits in long-term investments (2,957,019) (1,901,799) Withdrawals from long-term investments 916,362 2,137,637 Deposits in assets whose use is limited (84,060,360) (14,898,363) Withdrawals from assets whose use is limited 11,391,037 13,437,122 Net cash used in investing activities (124,808,767) (48,092,067) 7

10 Consolidated Statements of Cash Flows (continued) Year Ended December Financing activities Proceeds from line of credit $ 20,000,000 $ 7,000,000 Payments on line of credit (15,000,000) Proceeds from issuance of long-term debt 8,480,000 Principal payments on long-term debt (3,505,000) (3,370,000) Proceeds from FEMA capital grant 77,038,665 Proceeds from restricted contributions, bequests, and capital grants 2,161,697 8,398,283 Net cash provided by financing activities 89,175,362 12,028,283 Net increase (decrease) in cash and cash equivalents 6,608,719 (20,846,188) Cash and cash equivalents at beginning of year 3,170,788 24,016,976 Cash and cash equivalents at end of year $ 9,779,507 $ 3,170,788 Supplemental disclosure of cash flow information Cash paid for interest $ 4,321,108 $ 4,260,316 See accompanying notes. 8

11 Notes to Consolidated Financial Statements December 31, Organization and Summary of Significant Accounting Policies Organization South Nassau Communities Hospital (the Hospital) is a not-for-profit acute care teaching hospital that provides inpatient, ambulatory, home health, restorative, preventive and emergency medical care to the community. The Hospital is the sole member of SN Services Corporation (SN Services). SN Services owns 100% of the outstanding shares of South Nassau Healthcare Services, Inc. (SN Healthcare). Winthrop University Hospital (Winthrop) and the Hospital are members of the Winthrop South Nassau University Health System (the System). Winthrop South Nassau University Health System, Inc. (WSNUHS) is the sole member of the Hospital and Winthrop, and WSNUHS wholly owns Homecare Alliance, Inc. (inactive) and the Winthrop South Nassau Management Services Organization, Inc. (inactive) which, therefore, are related parties. On October 25, 2016, Winthrop and NYU Langone Health System (the NYU System), the parent of NYU Hospitals Center, entered into an Affiliation Agreement pursuant to which the NYU System would become the sole member of Winthrop. Upon receipt of all necessary regulatory approvals and satisfaction of closing conditions, WSNUHS will withdraw as the sole member of Winthrop, and the Hospital will cease to be affiliated with Winthrop. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Hospital and the following entities for which it is the sole member or controls through other means: South Nassau Healthcare Services, Inc.; South Nassau Healthcare Registry, Inc. SN Services Corporation; South Nassau Neonatal Services P.C.; South Nassau Physician Practice P.C.; Oceanside Counseling Center, Inc.; South Nassau Primary Medical Care P.C.; South Nassau Oncology P.C.; SN Radiological Practice P.C.; South Nassau Cardiovascular P.C.; South Nassau Family Medicine P.C.; South Nassau Medical Group P.C.; South Nassau Obstetrics and Gynecology P.C.; Radiological Associates of Long Island P.C.; South Nassau Oncology Practice P.C.; South Nassau Physicians P.C.; South Nassau Physician Group P.C.; South Nassau Urology P.C.; New York Medical Partners ACO, LLC, and 203 Merrick Road Holding Corp. All intercompany accounts and transactions have been eliminated in consolidation. 9

12 1. Organization and Summary of Significant Accounting Policies (continued) Tax Status The Hospital, SN Services Corporation, Oceanside Counseling Center, South Nassau Neonatal Services P.C., South Nassau Oncology P.C., South Nassau Physician Practice P.C., South Nassau Primary Medical Care P.C., SN Radiological Practice P.C., South Nassau Cardiovascular P.C., South Nassau Family Medicine P.C., South Nassau Medical Group P.C., South Nassau Obstetrics and Gynecology P.C., Radiological Associates of Long Island P.C., South Nassau Oncology Practice P.C., South Nassau Physicians P.C., South Nassau Physician Group P.C., South Nassau Urology P.C., and 203 Merrick Road Holding Corp. are Section 501(c)(3) organizations exempt from income taxes under Internal Revenue Code Section 501(a) and their income is generally not subject to Federal or New York State income taxes. South Nassau Healthcare Services, Inc. and New York Medical Partners ACO, LLC are taxable entities. The effects of income taxes are not material to the consolidated financial statements. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, including estimated uncollectibles for accounts receivable for services to patients, and liabilities, including estimated payables to third-party payors, estimated pension and postretirement benefits and professional malpractice insurance liabilities, at the date of the consolidated financial statements. Estimates also affect the amounts of revenue and expenses reported during the period. There is at least a reasonable possibility that certain estimates will change by material amounts in the near term. Actual results could differ from those estimates. During 2016 and 2015, the Hospital recorded changes in estimates to third-party payor liabilities as described in Note 2. Reclassifications For purposes of comparison, certain reclassifications have been made to the accompanying 2015 consolidated financial statements to conform to the 2016 presentation. Certain operating expenses have been reclassified from functional classification to natural classification in the current year. These reclassifications have no effect on net assets previously reported. 10

13 1. Organization and Summary of Significant Accounting Policies (continued) Functional Expenses Expenses classified by function for the years ended December 31, 2016 and 2015 are as follows: Health care and related services $ 449,212,731 $ 426,772,445 Administrative and general 49,464,752 45,891,719 $ 498,677,483 $ 472,664,164 Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. (ASU) , Revenue from Contracts with Customers. The core principle of ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU supersedes the FASB s current revenue recognition requirements and most industry-specific guidance. The provisions of ASU , as amended by ASU , will be effective for fiscal years beginning after December 15, 2017, and interim periods within that fiscal year, with early adoption permitted but not prior to annual periods beginning after December 15, The Hospital is in the process of evaluating the impact of ASU on its consolidated financial statements. In August 2014, the FASB issued ASU , Presentations of Financial Statements Going Concern, that requires management of public and nonpublic companies to evaluate and disclose where there is substantial doubt about an entity s ability to continue as a going concern. The standard is effective for annual periods ending after December 15, 2016 and for annual periods thereafter. Early application is permitted. Management adopted ASU for the year ended December 31, The adoption of ASU did not impact the Hospital s 2016 consolidated financial statements. In April 2015, the FASB issued ASU , Interest Imputation of Interest (Subtopic ) Simplifying the Presentation of Debt Issuance Costs. ASU simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. The Hospital adopted ASU as of January 1, 2016, and retrospectively applied the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums in the accompanying consolidated statements of financial position for all years presented. As a result, approximately $1.1 million of net deferred financing fees at 11

14 1. Organization and Summary of Significant Accounting Policies (continued) December 31, 2016 (approximately $1.2 million at December 31, 2015) are reflected in the accompanying consolidated statements of financial position as a component of long-term debt (see Note 8). In April 2015, the FASB issued ASU , Customer s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If certain criteria are met, an entity may account for such an arrangement under the internal use software guidance included in Accounting Standards Codification (ASC) , Internal Use Software, whereby amounts are capitalized. If such criteria are not met, the cloud computing arrangement is considered a service contract and the related costs are expensed as incurred. ASU is effective for public business entities for fiscal years beginning after December 15, 2015 with the option to apply the guidance prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Hospital adopted ASU prospectively as of January 1, 2016 with no impact to the 2016 consolidated financial statements. In February 2016, the FASB issued ASU , Leases, which will require lessees to report most leases on their balance sheets, but recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2018, and interim periods the following year. Early adoption is permitted. The Hospital has begun the process of evaluating the impact of ASU on its consolidated financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Financial Statement Presentation, which eliminates the requirement for not-for profits (NFPs) to classify net assets as unrestricted, temporarily restricted and permanently restricted. Instead, NFPs will be required to classify net assets as net assets with donor restrictions or without donor restrictions. Entities that use the direct method of presenting operating cash flows will no longer be required to provide a reconciliation of the change in net assets to operating cash flows. The guidance also modifies required disclosures and reporting related to net assets, investment expenses and qualitative information regarding liquidity. NFPs will also be required to report all expenses by both functional and natural classification in one location. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Hospital has begun the process of evaluating the impact of ASU on its consolidated financial statements. 12

15 1. Organization and Summary of Significant Accounting Policies (continued) In August 2016, the FASB issued ASU , Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues in order to limit diversity in practice: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In November 2016, the FASB issued ASU , Statement of Cash Flows Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-ofperiod and end-of-period total amounts shown on the statement of cash flows. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In January 2017, the FASB issued ASU , Compensation Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU addresses how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will be required to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers will present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. The standard is effective for the Hospital for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, Early adoption is permitted. Adoption of ASU will require the Hospital to include the service cost component of net periodic benefit cost related to its defined benefit plan and other 13

16 1. Organization and Summary of Significant Accounting Policies (continued) postretirement benefit plans (aggregate of approximately $0.1 million for 2016) within salaries and wages on the consolidated statements of activities and to present all other components (aggregate of approximately $0.8 million for 2016) as a separate line item excluded from the subtotal for operating income. Net periodic benefit cost is reported currently within employee benefits expense on the consolidated statements of activities. Cash and Cash Equivalents Cash and cash equivalents consist of financial instruments with original maturity dates of three months or less from the date purchased, which are not classified as assets whose use is limited or held in the investment portfolio. The Hospital does not hold any money market funds with significant liquidity restrictions that would be required to be excluded from cash equivalents. Investments and Investment Gains, Losses and Income Marketable securities are primarily invested in debt and equity securities and are carried at fair value (quoted market prices). Gains and losses on investments are reported as unrestricted, temporarily restricted or permanently restricted, where appropriate. The Hospital classifies marketable securities as trading securities. The Hospital and the Hospital s retirement plan have invested in commodities, international, emerging markets and hedge funds. The direct investments in these funds are not readily marketable, however, individual investment holdings of the various funds include market-traded securities. The financial statements of the various funds are audited annually by independent auditors, although the timing for reporting the results of such audits does not coincide with the Hospital s annual consolidated financial statement reporting. The Hospital s investments in these funds are reported based upon net asset values derived from the application of the equity method of accounting. The equity method reflects the Hospital s share of the net asset value of the funds. Investments held by the retirement plan are stated at fair value based upon, as a practical expedient, net asset values derived from the application of the equity method of accounting. General investment gains, if any, are reported in other revenue to the extent of interest expense. Self-insurance trust fund net investment gains, if any, are reported in other revenue to the extent there is malpractice insurance expense related to the Hospital. All other investment gains and losses are included in nonoperating gains and losses. 14

17 1. Organization and Summary of Significant Accounting Policies (continued) Assets Whose Use is Limited Assets whose use is limited include funds controlled under bond indenture, trustee controlled funds under malpractice funding requirements and cash advances related to the Long Beach construction project received from the Federal Emergency Management Agency (FEMA). Amounts required to meet current liabilities are reported as current assets at December 31, 2016 and Inventory Inventory, included in other current assets, is stated at the lower of cost (first-in, first-out method) or market. Deferred Compensation Certain Hospital employees participate in deferred compensation plans. In connection with these plans, the Hospital deposits amounts with trustees on behalf of the participating employees and records liabilities based on its contractual commitments. The assets are restricted for payments under the plans, but may revert to the Hospital under certain specified circumstances. At December 31, 2015, amounts on deposit with trustees (at fair value determined using Level 1 quoted prices as described in Note 13) were included in other current assets and were equal to liabilities under the deferred compensation plans, included in accrued expenses, and aggregated approximately $630,000. All remaining participants in the deferred compensation plans were paid out during 2016 and, therefore, no amounts are recorded as of December 31, Patient Receivables Amounts due for patient services for which the Hospital receives payment under various formulae are stated at their estimated net realizable values from each payor, which are generally less than the established charges of the Hospital. Patient receivables are reduced by an allowance for doubtful accounts. Additions to the allowance for doubtful accounts result from the provision for bad debts. The amount of the allowance for doubtful accounts is estimated based upon management s assessment of historical and expected net collections, business and economic conditions, trends in third-party payors and other collection indicators. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. At December 31, 2015, an allowance for doubtful accounts reserve was established to fully reserve for receivables due from Health Republic Insurance of New York of approximately $2,400,000. For receivables associated with self-pay patients (which 15

18 1. Organization and Summary of Significant Accounting Policies (continued) 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 Hospital records a significant provision for bad debts 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. Accounts written off as uncollectible and recoveries of such accounts are deducted from the allowance for doubtful accounts. See Note 2 for additional information relative to patient receivables and third-party payor programs. Property, Plant, and Equipment Property, plant, and equipment are stated at cost or, in the case of donated items, fair value at the time of donation. Depreciation has been provided in the consolidated financial statements on the straight-line method for property, plant, and equipment. In accordance with the Hospital s policy, no depreciation is recorded in the year of asset acquisition, while a full year s provision will be recorded in the year of disposition, except that significant additions are depreciated from the first month that they are put into service. The depreciation recorded is based upon the assets estimated useful lives as recommended by the American Hospital Association. Equipment under capital lease obligations is amortized using the straight-line method over the lesser of the estimated useful life of the asset or the lease term. Such amortization is included in depreciation and amortization in the accompanying consolidated statements of activities. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use has been limited by donors and grantors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity. Deferred Financing Costs Deferred financing costs are amortized using the effective interest method over the term of the related debt. Deferred financing costs, net of accumulated amortization, are $1,090,747 and $1,216,496 at December 31, 2016 and 2015, respectively, and are included in long-term debt in the accompanying consolidated financial statements. 16

19 1. Organization and Summary of Significant Accounting Policies (continued) Donor Restricted Gifts Gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor or grantor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying consolidated financial statements. The restricted asset is included in long-term investments until the restriction has expired. Deferred FEMA Revenue Amounts received from FEMA for capital projects for which expenditures have not been incurred by the Hospital are recognized as deferred grant revenue until earned. Once earned, these grant amounts are recognized as an increase to temporarily restricted net assets and subsequently as net assets released from restrictions for capital asset acquisitions. Excess (Deficiency) of Revenue and Gains over Expenses The consolidated statements of activities include excess (deficiency) of revenue and gains over expenses as the performance indicator. Changes in unrestricted net assets which are excluded from the performance indicator include capital assets acquired using contributions or grants which by a donor restriction were to be used for the purposes of acquiring such assets, pension and postretirement liability adjustments and transfers to and from related entities. Transactions deemed by management to be ongoing, major or central to the provision of health care services are reported as operating revenue and operating expenses and are included in operating income. Peripheral transactions or transactions of an infrequent nature are excluded from operating income. Asset Retirement Obligation The Hospital recorded an asset retirement obligation liability related to the estimated future costs to remediate asbestos. At December 31, 2016 and 2015, this liability was approximately $1,933,000 and $1,949,000, respectively, and is included in other liabilities in the consolidated statements of financial position. 17

20 2. Accounts Receivable for Services to Patients and Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors and others for services rendered, including estimated retroactive adjustments due to ongoing and future audits, reviews and investigations. The Hospital recognizes patient service revenue associated with services provided to patients who have third-party payor coverage based on the established contractual rates for services rendered. For uninsured patients that do not qualify for charity care, the Hospital recognizes revenue based on established rates for services provided. Retroactive adjustments are considered in recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews and investigations. Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources based on primary insurance designation for the years ended December 31, 2016 and 2015, is as follows: Third-party payors $ 497,821,973 $ 476,518,484 Self-pay 3,039,971 2,810,839 $ 500,861,944 $ 479,329,323 Deductibles and copayments under third-party payment programs within the third-party payors amount above are the patient s responsibility and the Hospital considers these amounts in its determination of the provision for bad debts based on collection experience. The majority of net patient service revenue is derived from agreements with Medicare, Medicaid, managed care and other programs. The majority of payments under these agreements and programs are based on specific amounts per case, defined as the cost of rendering service to program beneficiaries or contracted prices. 18

21 2. Accounts Receivable for Services to Patients and Net Patient Service Revenue (continued) Non-Medicare and Medicare Payments Non-Medicare Reimbursement: In New York State, hospitals and all non-medicare payors, except Medicaid, workers compensation and no-fault insurance programs, negotiate hospitals payment rates. If negotiated rates are not established, payors are billed at hospitals established charges. Medicaid, workers compensation and no-fault payors pay hospital rates promulgated by the New York State Department of Health. Effective December 1, 2009, the New York State payment methodology was updated such that payments to hospitals for Medicaid, workers compensation, and no-fault inpatient services are based on a statewide prospective payment system, with retroactive adjustments; prior to December 1, 2009, the payment system provided for retroactive adjustments to payment rates, using a prospective payment formula. Outpatient services also are paid based on a statewide prospective system that became effective December 1, Medicaid rate methodologies are subject to approval at the Federal level by the Centers for Medicare and Medicaid Services (CMS), which may routinely request information about such methodologies prior to approval. Revenue related to specific rate components that have not been approved by CMS is not recognized until the Hospital is reasonably assured that such amounts are realizable. Adjustments to the current and prior years payment rates for those payors will continue to be made in future years. Medicare Reimbursement: Hospitals are paid for most Medicare inpatient and outpatient services under the national prospective payment system and other methodologies of the Medicare program for certain other services. Federal regulations provide for certain adjustments to current and prior years payment rates, based on industry-wide and hospital-specific data. The Hospital is paid for services rendered to Medicare beneficiaries on a claim basis paid at a prospectively determined rate plus certain add-ons and other reimbursable items that are tentatively settled after submission of an annual cost report by the Hospital and final settlement determination after audits thereof by the Medicare Administrative Contractor of the submitted cost report. The classification of patients of the Hospital under the Medicare program and the appropriateness of their admission are subject to an independent review by a quality review organization. 19

22 2. Accounts Receivable for Services to Patients and Net Patient Service Revenue (continued) The Hospital has established estimates, based on information presently available, of amounts due to or from Medicare and non-medicare payors for adjustments to current and prior years payment rates, based on industry-wide and Hospital-specific data. Such amounts are included in the accompanying consolidated statements of financial position. For the years ended December 31, 2016 and 2015, net patient service revenue was increased by $3,290,000 and $8,500,000, respectively, for changes in estimates to reflect more recent information. At December 31, 2016 and 2015, estimated net third-party liabilities approximated $7,750,000 and $7,780,000, respectively. The current Medicaid, Medicare and other third-party payor programs are based upon extremely complex laws and regulations that are subject to interpretation. Medicare cost reports, which serve as the basis for final settlement with the Medicare program, have been audited by the Medicare fiscal intermediary through 2013 and settled through 2013, although revisions to final settlements or other retroactive changes could be made. Other years remain open for audit and settlement as are numerous issues related to the New York State Medicaid program for prior years. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount when open years are settled and additional information is obtained. Additionally, noncompliance with such laws and regulations could result in fines, penalties and exclusion from such programs. The Hospital is not aware of any allegations of noncompliance that could have a material adverse effect on the accompanying consolidated financial statements and believes that it is in compliance with all applicable laws and regulations. There are various proposals at the Federal and State levels that could, among other things, significantly reduce payment rates or modify payment methods. The ultimate outcome of these proposals and other market changes, including the potential effects of or revisions to health care reform that has been enacted by the Federal and State governments, cannot presently be determined. Future changes in the Medicare and Medicaid programs and any reduction of funding could have an adverse impact on the Hospital. Additionally, certain payors payment rates for various years have been appealed by the Hospital. If the appeals are successful, additional income applicable to those years might be realized. 20

23 2. Accounts Receivable for Services to Patients and Net Patient Service Revenue (continued) Charity Care Distinguishing the provision for bad debt from charity care requires judgment; together, they represent uncompensated care. The Hospital s policy regarding charity care is to provide a significant amount of care without regard to the patients ability to pay for services rendered; this includes free care and a sliding fee scale, based on the patients ability to pay which is defined as up to 500% of the federal poverty level. The Hospital utilizes a credit verification firm to assist in determining if uninsured patients meet the Hospital s charity care criteria. This process identifies uninsured patients that were under the poverty level but did not apply for charity care. The net cost of charity care includes the direct and indirect cost of providing charity care services, offset by revenues received from indigent care pools and other subsidies. The cost of charity care is estimated by utilizing a ratio of cost to gross charges applied to the gross charity care charges. The total amount, reported at cost, of charity care provided under the Hospital s policy for the years ended December 31, 2016 and 2015 was $2,986,752 and $3,740,032, respectively. For the years ended December 31, 2016 and 2015, the Hospital received funds to offset charity care in the amount of $1,391,927 and $1,774,763, respectively, from the Indigent Care Pool under the New York State Medicaid program. The charity care component of the Indigent Care Pool payments is estimated utilizing a ratio of charity care charges to total charity care and bad debt charges applied to the Indigent Care Pool payment. 21

24 3. Investments Below is a summary of the investments held by the Hospital at December 31: Cash and cash equivalents $ 8,932,208 $ 12,220,095 Marketable equity securities 56,704,725 50,452,899 Corporate bonds 20,715,837 17,014,898 Fixed income 207,750 Mutual funds 9,907,117 8,988,873 International mutual fund 12,273,069 11,936,436 Government obligations 6,643,261 6,824,211 Commodities fund 957, ,896 Emerging markets fund 8,197,368 7,514,319 International fund 14,636,753 13,160,393 Accrued interest 168, ,867 Total investments $ 139,135,491 $ 129,346,637 Long-Term Investments Below is a summary of the long-term investments held by the Hospital at December 31: Cash and cash equivalents $ 3,815,354 $ 1,774,697 22

25 4. Assets Whose Use is Limited Below is a summary of assets whose use is limited relating to the FEMA, bond indenture and other restricted funds and professional and general liabilities at December 31: FEMA, Bond Indenture and Other Restricted Funds Professional and General Liabilities Totals Cash and cash equivalents $ 73,351,833 $ 3,332,540 $ 18,595,299 $ 17,347,183 $ 91,947,132 $ 20,679,723 Marketable equity securities 6,286,604 5,251,582 6,286,604 5,251,582 Corporate bonds 2,628,510 2,940,245 2,628,510 2,940,245 Mutual funds 5,502,892 5,580,216 5,502,892 5,580,216 International mutual fund 1,467,292 1,927,689 1,467,292 1,927,689 Commodities fund 430, , , ,166 Emerging markets fund 2,061,080 1,949,148 2,061,080 1,949,148 International fund 3,277,418 2,946,835 3,277,418 2,946,835 Hedge fund 4,414,103 4,331,267 4,414,103 4,331,267 Government obligations 2,106,660 1,454,573 2,106,660 1,454,573 Accrued interest 30,140 33,096 30,140 33,096 Total assets whose use is limited 73,351,833 3,332,540 46,800,030 44,150, ,151,863 47,482,540 Less current portion 8,629,650 3,332,540 11,980,000 10,290,000 20,609,650 13,622,540 Assets whose use is limited long-term $ 64,722,183 $ $ 34,820,030 $ 33,860,000 $ 99,542,213 $ 33,860,000 23

26 5. Investment Income (Loss) The composition of investment income (loss) in the consolidated statements of activities for the years ended December 31 is as follows: Investment income (loss): Interest income $ 2,059,318 $ 3,645,119 Net realized gains 1,371,539 5,955,186 Change in net unrealized gains and losses on investments 5,242,369 (9,609,433) Change in value of equity method investments 3,208,019 (4,084,929) Total investment income (loss) $ 11,881,245 $ (4,094,057) Investment income (loss) is reported in the statements of activities as follows: Investment income from general investments included in other revenue $ 3,626,886 $ Investment income from self-insurance fund included in other revenue 2,114,996 Included in operating income 5,741,882 Nonoperating investment gains (losses) 6,139,363 (4,094,057) Total investment income (loss) $ 11,881,245 $ (4,094,057) 24

27 6. Property, Plant, and Equipment A summary of property, plant, and equipment and the related accumulated depreciation follows: Range of Estimated Useful December 31 Lives Land $ 32,149,311 $ 32,736,907 Land improvements 3 50 years 11,701,220 11,683,180 Buildings and building service equipment 3 70 years 333,588, ,605,661 Fixed and major movable equipment 3 20 years 193,323, ,217, ,762, ,243,545 Accumulated depreciation (305,290,106) (281,103,261) 265,472, ,140,284 Construction in progress 43,831,623 10,212,520 $ 309,303,729 $ 289,352,804 Net interest capitalized for the years ended December 31, 2016 and 2015 was approximately $126,000 and $12,000, respectively. In May 2016, the Hospital closed on the sale of a property for a purchase price of approximately $6,500,000. The net book value of the land and buildings at the time of the sale were approximately $3,700,000, resulting in a gain on sale of property which is recognized, net of closing costs, in the consolidated statements of activities for the year ended December 31, Lines of Credit The Hospital maintains a revolving line of credit with a commercial bank in the amount of $40,000,000 at December 31, The balance due at December 31, 2016 and 2015 is $25,000,000 and $20,000,000, respectively. The drawdowns in 2016 and 2015 were used to pay for various construction projects. The interest rate on any unpaid principal amount is based on the prime rate or 1.00% plus LIBOR, calculated separately for each drawdown. The fee on the average daily unused line of credit is 0.20%. The current line of credit is set to expire June 30,

28 7. Lines of Credit (continued) The Hospital maintains a second revolving line of credit with another commercial bank in the amount of $10,000,000. There is no balance due at December 31, 2016 and The interest rate on any unpaid principal amount is based on the prime rate or 1.65% plus LIBOR, never to be less than 2.75%, calculated separately for each drawdown. There is no fee on the unused line of credit. The current line of credit is set to expire October 1, Long-Term Debt A summary of long-term debt is as follows at December 31: Series 2012 bonds payable $ 76,955,000 $ 80,460,000 Mortgage loan note 8,480,000 85,435,000 80,460,000 Add net unamortized Series 2012 bond premium 6,527,518 7,280,053 Less deferred financing fees, net (1,090,747) (1,216,496) Less current portion of long-term debt (3,906,871) (3,505,000) $ 86,964,900 $ 83,018,557 In October 2012, the Hospital issued, through the Nassau County Local Economic Assistance Corporation, $90,770,000 of Series 2012 Revenue Bonds (Series 2012) at a premium of $10,162,698. The Series 2012 bonds were issued to refund previously outstanding Series 2001B and Series 2003B bonds (issued through the Dormitory Authority of the State of New York on behalf of the Winthrop South Nassau University Health System Obligated Group) and to fund capital additions and capital improvements. The Series 2012 bonds are payable on July 1 of every year through July 1, 2037, at varying interest rates (3.00% to 5.00%). In December 2016, the Hospital entered into a mortgage loan note with TD Bank in the amount of $8,480,000 to partially fund the acquisition of property at 2020 Wantagh Avenue. The note bears an interest rate of 4.03% and is payable in monthly installments of $51,778 until the agreement expires in January The Series 2012 bonds and mortgage loan note were issued pursuant to a Master Trust Indenture. In conjunction with the Master Trust Indenture Agreement, various security agreements were executed. The agreements included pledging, as collateral, property, plant, and equipment, gross receipts and limitations on the use of certain assets. 26