Abington Health (A Subsidiary of Thomas Jefferson University) Consolidated Financial Statements June 30, 2015

Transcription

1 Abington Health (A Subsidiary of Thomas Jefferson University) Consolidated Financial Statements

2 Index Page(s) Independent Auditor s Report Consolidated Financial Statements Balance Sheet...3 Statement of Operations...4 Statement of Changes in Net Assets...5 Statement of Cash Flows...6 Notes to Financial Statements Supplemental Consolidating Information Balance Sheet...26 Statement of Operations...27

3 Independent Auditor s Report Board of Trustees Abington Health We have audited the accompanying consolidated financial statements of Abington Health (a subsidiary of Thomas Jefferson University) and its subsidiaries, which comprise the consolidated balance sheet as of, and the related consolidated statements of operations, of changes in net assets, and of cash flows for the year then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Entitiy s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Abington Health, and its subsidiaries, as of, and the results of their operations, changes in their net assets, and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

4 Other Matter Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating 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 consolidating information has been subjected to the auditing procedures applied in the audit 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 of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual entities and is not a required part of the consolidated financial statements. Accordingly, we do not express an opinion on the financial position and results of operations of the individual entities. September 22,

5 Consolidated Balance Sheet Assets Current Cash and cash equivalents $ 135,510,442 Investments 632,691,327 Patient and third-party receivables, net of doubtful accounts of approximately $13,085,000 89,641,121 Other accounts receivable 19,169,033 Prepaid expenses and other assets 10,918,414 Total current assets 887,930,337 Net pledges receivable 10,238,767 Assets whose use is limited 83,615,348 Property and equipment, net of accumulated depreciation 473,401,155 Other assets, including funds held in trust by others for the benefit of Abington Memorial Hospital 71,667,021 Other noncurrent assets 52,048,214 Total assets $ 1,578,900,842 Liabilities and Net Assets Current Current maturities of long-term debt $ 13,413,200 Accounts payable 47,328,294 Accrued salaries and wages 49,723,930 Third-party and other liabilities 35,789,635 Total current liabilities 146,255,059 Accrued insurance and other liabilities 68,964,011 Pension liability 143,887,186 Long-term debt, net of current maturities 315,898,917 Total liabilities 675,005,173 Net assets Unrestricted 758,512,143 Temporarily restricted 68,837,022 Permanently restricted 76,546,504 Total net assets 903,895,669 Total liabilities and net assets $ 1,578,900,842 The accompanying notes are an integral part of these consolidated financial statements. 3

6 Consolidated Statement of Operations Revenues Net patient service revenue $ 780,570,546 Provision for bad debts 24,452,401 Net patient service revenue less provision for bad debts 756,118,145 Other operating revenue 34,185,726 Net assets released from restrictions 11,508,879 Total revenues 801,812,750 Expenses Salaries, wages and employee benefits 446,159,894 Utilities, purchased services and other 125,360,708 Supplies 127,806,004 Depreciation and amortization 46,570,324 Interest 12,942,580 Insurance 10,463,043 Total expenses 769,302,553 Income from operations 32,510,197 Income from investments, trusts, estates and contributions 35,612,844 Excess of revenues over expenses 68,123,041 Change in net unrealized gains (14,218,172) Change in pension liability (2,529,077) Net assets released from restrictions used for capital 1,496,902 Increase in unrestricted net assets $ 52,872,694 The accompanying notes are an integral part of these consolidated financial statements. 4

7 Consolidated Statement of Changes In Net Assets Temporarily Permanently Total Unrestricted Restricted Restricted Net Assets Net assets at June 30, ,639,449 63,348,441 77,299, ,287,088 Excess of revenues over expenses 68,123,041 68,123,041 Contributions - 16,781, ,869 17,193,143 Investment income - 3,342,720 3,342,720 Increase (decrease) in value of split interest agreements and trusts - 291,623 (1,164,563) (872,940) Net change in unrealized gains (loss) on investments (14,218,172) (2,014,727) (16,232,899) Net assets released from restrictions used for capital 1,496,902 (1,496,902) - Change in pension liability (2,529,077) (2,529,077) Net assets released from restrictions used for operations - (11,415,407) (11,415,407) Increase (decrease) in net assets 52,872,694 5,488,581 (752,694) 57,608,581 Net assets at $ 758,512,143 $ 68,837,022 $ 76,546,504 $ 903,895,669 The accompanying notes are an integral part of these consolidated financial statements. 5

8 Consolidated Statement of Cash Flows Years Ended Cash flows from operating activities Increase in net assets $ 57,608,581 Adjustments to reconcile increase in net assets to net cash provided by operating activities Changes in pension liability 2,529,077 Depreciation and amortization 46,570,324 Realized and unrealized loss in investments, net 16,232,899 Decrease in value of split interest agreements and trusts 872,940 Provision for bad debts 24,452,401 Contributions restricted for endowment (411,869) Income on equity investments interests (758,006) Gain on disposal of fixed assets (5,088,017) Changes in assets and liabilities Accounts and pledges receivable (29,003,526) Prepaid expenses and other assets 4,481,017 Accounts payable, accrued expenses and other liabilities 15,006,798 Net cash provided by operating activities 132,492,619 Cash flows from investing activities Increase in assets whose use is limited (994,160) Purchases of property and equipment (28,668,454) Proceeds from sale of property and equipment 9,751,770 Purchases of investments (63,778,328) Sale of investments 28,453,606 Distribution from equity investments 1,337,562 Net cash used in investing activities (53,898,004) Cash flows from financing activities Decrease in deferred financing fees 252,703 Contributions restricted for endowment 411,869 Repayments of long-term debt (7,163,200) Net cash used in financing activities (6,498,628) Net increase in cash and cash equivalents 72,095,987 Cash and cash equivalents Beginning of the year 63,414,455 End of the year $ 135,510,442 The accompanying notes are an integral part of these consolidated financial statements. 6

9 1. Organization Abington Health ( AH ) was formed in 2009 as a not for profit holding company and is the controlling entity of Abington Memorial Hospital (the Hospital ), Lansdale Hospital Corporation ( LHC ) and Abington Health Foundation, ( AHF ). AH is the sole corporate member of each entity and as the parent organization strives to continually develop and operate an integrated healthcare delivery system which provides a comprehensive spectrum of medically necessary healthcare services to the residents of Pennsylvania counties including: Montgomery, portions of Bucks and Philadelphia. All entities are exempt from Federal income taxes under the provisions of Section 501(c) (3) of the Internal Revenue Code. Effective April 30,, Thomas Jefferson University ( TJU ) became the sole corporate member of AH to further expand and enhance AH s mission of improving the quality of life for all by fostering healing, easing suffering, and promoting wellness in a culture of safety, learning and respect. TJU is an independent, non-profit corporation organized under the laws of the Commonwealth of Pennsylvania and recognized as a tax-exempt organization pursuant to Section 501(c) (3) of the Internal Revenue Code. It conducts research and offers undergraduate and graduate instruction through the Sidney Kimmel Medical College, the Jefferson Colleges of Nursing, Pharmacy, Health Professions, Population Health, and Biomedical Sciences. TJU has approximately 3,600 students and is located in Philadelphia, Pennsylvania. TJU is also the sole corporate member of Thomas Jefferson University Health System ( TJUHS ), an integrated healthcare organization that provides inpatient, outpatient, and emergency care services through acute care, ambulatory care, physician, and other primary care services for residents of the Greater Philadelphia Region. These consolidated financial statements do not include the financial position of TJU nor the results of operations for TJU. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Principles of Consolidation The consolidated financial statements include the accounts of AHF, the Hospital and LHC. All significant intercompany transactions and balances have been eliminated. Excess of Revenues over Expenses The statement of operations includes excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, pension liability adjustments and net assets released for capital. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, including the accompanying notes. Management considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of the financial statements 7

10 including, but not limited to, recognition of net patient service revenue, which includes contractual allowances and provisions for bad debt; estimates for healthcare professional and general liabilities; determination of fair values of certain financial instruments; assignment of useful lives to depreciable assets; and assumptions for measurement of pension liabilities. Management relies on historical experience and other assumptions believed to be reasonable relative to the circumstances in making judgments and estimates. Actual results could differ from those estimates. Cash and Cash Equivalents All highly liquid temporary cash investments purchased with an original maturity of 90 days or less are considered to be cash equivalents other than those held for investment. The carrying value approximates their fair value. Investments and Investment Income Investments classified as current assets are available to fund current operations as needed. All investments are measured and recorded at fair value based on valuation techniques as discussed under the heading Fair Value Measurements in this Note. Investment income or loss (including realized gains and losses on investments, interest and dividends) is included in the excess of revenues over expenses, unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from the excess of revenues over expenses. Other-thantemporary impairment losses are recorded as realized losses and reported in income from investments, trusts, estates and contributions. Assets Whose Use is Limited Assets whose use is limited represent proceeds from the sale of bonds by the Montgomery County Higher Education and Health Authority on behalf of the Hospital. The funds, including interest income from their temporary investment, are held by a bank trustee for debt service reserves required by bond indentures. These amounts were established in connection with the 2012, 2009 and 1993 Bond issues discussed in Note 6, and amounted to $486,000 on. Also included in Assets whose use is limited are $50,141,000 and $32,988,000 in Temporary and permanently restricted assets at. Beneficial Interest in Perpetual Trusts Beneficial interests in perpetual trusts represent AH s interest in perpetual trusts that are administered by independent trustees and generally consist of marketable equity securities. Because the trusts are perpetual and the original corpus cannot be violated by spending, they are reported as permanently restricted net assets. Investments in Unconsolidated Organizations Investments in unconsolidated organizations represent AH investments in joint ventures or partnerships. Where applicable, the equity method is used to account for these investments. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. 8

11 Level 2 Level 3 Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the same term of the financial instrument. Alternative investments fair value is based on their net asset value per unit as reported by their managers. Inputs to the valuation methodology are unobservable. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Assets and liabilities that are measured at fair value are based on one or more of the three valuation techniques that follow: Market Approach Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Cost Approach Amount that would be required to replace the service capacity of an asset (i.e., replacement cost). Income Approach Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques and option-pricing models). Property and Equipment AH property and equipment is recorded at cost. Major renewals and improvements are capitalized while maintenance and repairs are expensed when incurred. Provisions for depreciation are made over the estimated useful lives of buildings and equipment using the straight-line method. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts. The resulting gain or loss is included in the consolidated statements of operations. Depreciation lives are as follows: land improvements 10 to 15 years, equipment 3 to 15 years, buildings 18 to 40 years. Depreciation expense was approximately $46,461,000 for fiscal year. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Hospital has been limited by donors to a specific time period or purpose. Temporarily restricted net assets at were approximately $68,837,000. Also included in temporarily restricted net assets are unrealized investment gains of $11,755,000 as of. These temporarily restricted net assets are available for health services, education and research and capital expenditures. 9

12 The net assets available by restricted purpose are as follows: Permanently restricted net assets as of fiscal year ended was approximately $76,547,000. These permanently restricted net assets have been restricted by the donors and are maintained by the hospital in perpetuity, the income of which is for the most part unrestricted and is used to support healthcare services. Permanently restricted net assets also include funds held by independent trustees of $46,606,000 as of. Net Patient Service Revenue The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. The basis for payment under these agreements include prospectively determined rates per discharge and per day, discounts from established charges, capitated per member per month payments, and certain cost reimbursement methodologies. Net patient service revenue is reported at the estimated net realizable amounts from patients, third party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third party payors. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Medicare cost reports for all years through 2010 and 2012 have been audited and final settled as of. The 2011, 2013 and 2014 Medicare cost reports have been filed and are awaiting final settlement as of June 30,. The Hospital did not have any amounts included in net patient service revenue for fiscal year, related to third party payors final settlements. Included in the Hospital s net patient service revenues are payments made on behalf of the Medicare and Medicaid programs. These payments represent 29% and 5% of net patient service revenue, respectively, for the fiscal year ended. Laws and regulations governing the Medicare and Medicaid program payments are complex and subject to interpretation. The Hospital believes that it is in compliance with all applicable laws and regulations as they relate to these programs. Such laws and regulations can be subject to review and interpretation by the Medicare and Medicaid programs. Regulatory Oversight The healthcare industry in general and the services that the Hospital provides are subject to extensive federal and state laws and regulations. Additionally, a portion of the Hospital s net revenues is from payments by government-sponsored healthcare programs, principally Medicare and Medicaid, and is subject to audit and adjustments by applicable regulatory agencies. Allowance for Doubtful Accounts The Hospital records an allowance for doubtful accounts for estimated losses resulting from the failure of patients to make payments for services. The allowance is determined by analyzing historical data and trends. Accounts receivable are written off against the allowance for doubtful accounts when management determines that recovery is unlikely and collection efforts cease. Health services $ 42,648,000 Education and research 13,271,000 Capital 12,918,000 $ 68,837,000 10

13 Other Operating Revenue Other Operating Revenue consists primarily of outpatient pharmacy, rental income, investment income, parking income, cafeteria sales, Medicare meaningful use funds and other assorted fees that the Hospital receives in the course of providing health care services. Charity Care and Financial Assistance The Hospital and LHC, under their financial assistance policies, provide a significant amount of services without charge or at amounts less than established rates to patients who are unable to compensate either entity for their treatments either through third party coverage or their own resources. Because these amounts are not expected to be paid, they are not reported as revenue. The cost of this care is based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to these patients. The ratio of costs to charges is calculated based on the total expenses (less community benefit expense) divided by gross patient service revenue. The estimated cost of caring for these patients for the year ending was $12,686,000. In addition, the Hospital and LHC provide services and supplies at amounts below cost to persons covered by government programs, including Medicare and Medicaid. The Hospital also sponsors certain other subsidized programs and charity services that provide substantial benefit to the broader community. Such services and programs include community service programs designed for specific healthcare concerns, including health education, support groups and health screenings. Donor-Restricted Gifts Unconditional promises to give cash and other assets are recognized at the present value of future cash flows, and are reported at fair value at the date the promise is received. Conditional promises to give and intentions to give are reported at fair value at the date the gift is received. The 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 restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying financial statements. Other Noncurrent Assets Other noncurrent assets include hospital acquisitions whose purchase price exceeded the value of the assets received. These amounts have been classified as Intangible Assets and are evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable from the estimated future cash flows expected from their use. Retirement Plans Abington Memorial Hospital sponsors a noncontributory defined benefit pension plan covering all eligible employees. Plan benefits are generally based on years of service and employees earnings during the five highest of the last ten years of covered employment. Abington Memorial Hospital s policy is to fund annually at least the minimum amount required by the Employee Retirement Income Security Act of On January 1, 2011, the Hospital closed the defined benefit plan to new hires and established a defined contribution plan that is available to all new hires after January 1, After one year of service, participants will be eligible to receive matching funds based on contributions they make to the Hospital s 403(b) retirement savings plan as well as core employee contributions, which will vary based on years of service. Lansdale Hospital sponsors a 401(k) defined contribution plan covering all eligible employees. The plan has 11

14 a 50% employer match with a 4% maximum. Total retirement plan expense was $25,773,000 for. Accrued Insurance and Other Liabilities Accrued insurance and other liabilities primarily consists of estimated liabilities for reported and incurred but not reported claims related to professional liability, workers compensation and employee health care. Professional liabilities recorded on the consolidated balance sheets have been discounted using a 3.5% discount rate for. Accounting For Long Lived Assets The Hospital reviews the realizably of long-lived assets and certain tangible assets whenever events and circumstances occur which indicate recorded costs may not be recoverable. No impairments of long-lived assets were recognized during. New Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued an accounting standard update in May 2014 regarding the accounting for and disclosure of revenue recognition. Specifically, the update outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which will be common to both US GAAP and International Financial Reporting Standards. The guidance was effective for annual periods beginning after December 15, 2016, which allowed for full retrospective adoption of prior period data or a modified retrospective adoption. Early adoption was not permitted. In July, the FASB issued an update to delay the effective date of the new revenue standard by one year, or, in other words, to be effective for annual and interim periods beginning after December 15, Entities will be permitted to adopt the new revenue standard early, but not before the original public organization effective date. AH is currently evaluating the effects of this guidance. The FASB issued an accounting standard update in May regarding the required disclosures for entities that elect to measure the fair value of certain investments using the net asset value per share (or its equivalent) practical expedient in accordance with the fair value measurement authoritative guidance. The update removes the requirement to categorize within the fair value hierarchy, and also, limits the requirement to make certain other disclosures, for all such investments. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and should be applied on a retrospective basis for the periods presented. Early adoption is permitted. AH is currently evaluating the effects of this guidance. The FASB issued an accounting standard update in April regarding the presentation of debt issuance costs on the balance sheet. The update requires capitalized debt issuance costs be presented on the balance sheet as a reduction to debt, rather than recorded as a separate asset. The amendments in this update are effective for annual and interim periods beginning after December 15, and should be applied on a retrospective basis for the periods presented. Early adoption is permitted and the AH s consolidated balance sheet at reflects capitalized debt issuance costs as a reduction of debt. 12

15 3. The Investments and Investment Income Investments that are measured at fair value are presented in the consolidated balance sheets under the following classifications: Investments $ 632,691,000 Assets whose use is limited 83,615,000 Other investments, including funds held in trust by others for the benefit of Abington Health 71,667,000 The following table presents the financial instruments carried at fair value as of, categorized based on the fair value hierarchy described in Note 2: $ 787,973,000 Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 20,016,000 $ - $ - $ 20,016,000 Fixed income securities 32,589, ,105, ,694,000 Unregistered fixed income funds - 113,923, ,923,000 Mutual funds 336,569, ,569,000 Mutual funds-unregistered - 92,949,000-92,949,000 Beneficial interests in perpetual and charitable remainder trusts ,999,000 54,999,000 Total assets measured at fair value $ 389,174,000 $ 336,977,000 $ 54,999, ,150,000 Investments not subject to fair value leveling 6,823,000 Total investments and assets whose use is limited $ 787,973,000 As of, AHF recorded transfers of $27,486,000 from Level 1 to Level 2 and $15,891,000 from Level 2 to Level 1 due to a combination of investment portfolio additions and rebalancing. The following table is a roll forward of the financial instruments classified as Level 3: Investments Fair value at June 30, 2014 $ 55,503,000 Contributions 1,115,000 Income attributed to the hospital 1,739,000 Distributions to the hospital (1,739,000) Change in value of perpetual and charitable remainder trusts (1,619,000) Fair value at $ 54,999,000 13

16 Investment income for is comprised of the following: The following tables shows the investments gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of : Abington Health reviews the carrying value of its investments for declines in value that could be considered other than temporary. The unrealized losses reported involve investments where the market value was not deemed to be impaired on an other than temporary basis under the Abington Health s impairment policy. Abington Health has the intent and the ability to hold these investments until the fair value recovers back to its carrying value. In general, Abington Health presumes that an individual security in an unrealized loss position of greater than 25% for a continuous period of 12 months or longer has suffered a decline in value that is other than temporary. Abington Health carries out further analysis on individual securities to either validate its presumption or understand why the decline in value is temporary. There were no other than temporary impairments recorded in. 4. Patient Service Revenue Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from major payer sources, and is as follows for the year ended : Investment income included in income from investments, trusts, estates and contributions Interest and dividends $ 24,071,000 Net realized gains/losses 11,542,000 $ 35,613,000 Less Than 12 Months 12 Months or Greater Unrealized Unrealized Fair Value Loss Fair Value Gain (Loss) Fixed income securities $ 31,999,000 $ (2,974,000) $ - $ - $ 31,999,000 $ (2,974,000) $ - $ - Medicare $ 228,398,000 Medicaid 41,301,000 Managed Care and Other 508,709,000 Uninsured 2,162, ,570,000 Provision for Bad Debts 24,452,000 $ 756,118,000 14

17 The provision for bad debt expense is based upon management s assessment of expected net collections considering economic conditions, historical experience, trends in healthcare coverage and other collection indicators. Periodically throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience by payer category, including those amounts not covered by insurance and history of cash collections. The results of this review are then used to make any modifications to the provision for bad debt expense to establish an appropriate allowance for uncollectible accounts. After satisfaction of amounts due from insurance and reasonable efforts to collect from the patient have been exhausted both the Hospital and LH follow established guidelines for placing certain past due patient balances with collection agencies, subject to terms of certain restrictions on collection efforts as determined by the two healthcare entities. Accounts Receivable are written off after collection efforts have been followed in accordance with established policies. 5. Property and Equipment Property and equipment are recorded at cost for purchased items and at fair value for contributed items. Major renewals and improvements are capitalized while maintenance repairs are expensed when incurred. Depreciation is provided over the estimated life of each class of depreciable asset and is computed using the straight-line method. Land, buildings and equipment and accumulated depreciation consist of the following at : 6. Long-term Debt Long-term debt outstanding at consisted of the following: Land and land improvements $ 79,123,000 Buildings 559,836,000 Equipment 382,111,000 Construction-in-progress 1,836,000 1,022,906,000 Accumulated depreciation (549,505,000) $ 473,401,000 Amounts payable to Montgomery County Higher Education and Health Authority Series A Revenue Bonds 2012 (a) $ 138,415,000 Series B Revenue Bonds 2012 (a) 50,000,000 Series A Revenue Bonds 2009 (b) 121,280,000 Series A Revenue Bonds 1993 (c) 8,790,000 Other notes payable 713,000 Unamortized Premium 12,879,000 Unamortized Discount and Debt Issuance Cost (2,765,000) 329,312,000 Current maturities (13,413,000) $ 315,899,000 15

18 Unamortized Premium/ (Discount and Debt Principal Issuance Costs) Amounts payable to Montgomery County Higher Education and Health Authority Series A Revenue Bonds 2012 (a) $ 138,415,000 $ 11,320,000 Series B Revenue Bonds 2012 (a) 50,000,000 - Series A Revenue Bonds 2009 (b) 121,280,000 (600,000) Series A Revenue Bonds 1993 (c) 8,790,000 (134,000) Other notes payable 713,000 (472,000) Total $ 319,198,000 $ 10,114,000 The fair value of the Hospital s tax-exempt debt is calculated based upon yields available in the quoted market as of for bonds with comparable maturities and credit quality. The estimated aggregate fair value of the Hospital s long-term debt at approximated $341,785,000. a. In August 2012 at the Hospital s request, the Montgomery County Higher Education and Health Authority ( Authority ) issued $138,415,000 Hospital Series A (2012A) and $50,000,000 Series B Revenue Bonds of 2012 (2012B). The Series A Bonds consist of $80,320,000 of serial bonds maturing from June 2018 through June 2027 with interest rates of 3.25% or 5% and yields of 1.70% to 3.48%. In addition, there is another $58,095,000 of term bonds due June 2031 with interest rates of 3.75% or 5% and yields ranging from 3.45% to 3.92%. The Series B bonds consist of $50,000,000 of variable rate direct placement bonds maturing from June 2020 through June The proceeds of the 2012A and 2012B bonds were used together with other available funds to finance a project consisting of: (a) the refunding of the Authority s 1998 bonds, (b) the refunding of the Authority s 2002 bonds, (c) the payment or reimbursement of the Hospital and LH of certain capital expenditures, and (d) payment of the costs of issuance of the 2012A and 2012B Bonds. The effect of the refunding of the 1998 and 2002 bond issues resulted in a gain of $1,363,000. b. In November 2009, at the Hospital s request, the Montgomery County Higher Education and Health Authority ( Authority ) issued $152,935,000 Hospital Revenue Bonds Series A of 2009 (Abington Memorial Hospital Obligated Group) ( 2009 Bonds ). The 2009 Bonds consist of $152,935,000 of term bonds maturing from June 2011 to June 2033 with interest rates ranging from 3% to 5.25% with yields ranging from 2.22% to 5.27%. The proceeds from this bond issue were used to refinance the lines of credit and advance refund a portion of the 1998 Bonds. c. In January 1993, at the Hospital s request, the Authority issued Hospital Revenue Bonds, Series A of 1993 ( 1993 Bonds ). The 1993 Bonds are dated January 1, 1993 and mature in various years through June 1, 2022, with interest rates ranging from 4.7% to 6.1%. In July 2003, the Hospital called its 1993 bonds, consistent with the bond s call option, at a call price of 102%. Upon receipt of the called 1993 bonds, the Hospital remarketed them, without a call option, resulting in a non-operating net gain to the Hospital of $3,051,

19 The Hospital and AHF formed an Obligated Group, consisting of the Hospital and AHF, and have entered into a Master Trust Indenture, dated June 1, Pursuant to this agreement, the Hospital and AHF have as members of the Obligated Group assumed financial liability for all outstanding Hospital bond issues including the 1993 bonds. Lansdale Hospital Corporation became part of the obligated group upon issuance of the 2009 bonds. Under the terms of the Master Trust Indenture, the Obligated Group has pledged and granted a lien on and a security interest in their gross revenues. The Obligated Group generated the required income available for debt service, as defined in the financing agreement, as amended and restated, of at least 110% of annual debt service. Principal and interest on the 1993 bonds are covered by Municipal Bond insurance. Cash paid for interest approximated $13,969,000 in. Deferred financing costs represent bond issuance costs which are being amortized over the life of the bonds, using the effective interest method. Amortization expense, in relation to the bonds, was approximately $227,000 for the year ended. Aggregate annual maturities for long-term debt for each of the five fiscal years and thereafter subsequent to are as follows: 7. Insurance Coverage ,413, ,078, ,138, ,483, ,433, and thereafter 259,653,000 Professional Liability and Other Insurance In compliance with the Healthcare Services Malpractice Act of Pennsylvania ( Act 111, of 1975), The Hospital and LHC utilize a captive insurance company to provide its professional liability insurance. Specifically, the Hospital insurance provider, Cassatt RRG, is owned by various regional non-profit hospitals including Abington Memorial Hospital. Cassatt RRG is incorporated under the laws of the state of Vermont and operates as a Risk Retention Group under the Federal Liability Risk Retention Act of Cassatt RRG reinsures with Cassatt Insurance Company, LTD which is owned by the various regional non-profit hospitals, including the Hospital, and incorporated as an insurance company under the laws of Bermuda. The Hospital and LHC maintain primary professional liability insurance in the amount of $500,000 per occurrence and $2,500,000 per annual aggregate, utilizing a guaranteed cost policy underwritten by Cassatt RRG, Inc. In addition, as required by state legislation, the two entities participate in the Pennsylvania Medical Care and Reduction of Error Fund ( MCARE Fund ) which provides limits of $500,000 per occurrence and $1,500,000 per annual aggregate in excess of the primary limits. Premium payments for the MCARE Fund are based upon each individual licensed healthcare provider s rating with the Joint Underwriters Association and may be subject to future increases to cover any funding deficiencies within the Fund. The MCARE Fund currently has an unfunded liability and depending upon the ultimate resolution of this matter the Hospital may incur additional insurance costs. 17

20 The Hospital and LHC believe that Cassatt Insurance Company has been adequately funded and has sufficient reserves to meet its projected liabilities; however, the Hospital may incur additional insurance costs depending on the claims experience of Cassatt Insurance Company. The Cassatt RRG, Inc. policy also provides general liability coverage in the amount of $1,000,000 per occurrence and $2,000,000 per annual aggregate. Cassatt Insurance Company has also historically provided professional liability insurance coverage above the MCARE Fund per claim limit. For the period ended, Cassatt Insurance Company provides coverage in excess of the MCARE per claim limit to $4,000,000 and through reinsurance provides layered excess professional liability coverage of $15,000,000 per occurrence with a $45,000,000 annual aggregate. The Hospital and LHC supplement the above coverage with the purchase of an Umbrella Liability policy, also written by Cassatt RRG, Inc., providing nonprofessional layered liability coverage of $49,000,000 per occurrence with a $49,000,000 annual aggregate. For the year ended June 30,, the annual general and professional liability insurance premium paid (including the MCARE Fund and excess policy) was approximately $8,267,000. At, the estimated liability recorded in the accompanying balance sheets related to professional liability amounted to approximately $59,111,000. Anticipated insurance recoveries from third parties associated with these liabilities for was $46,218,000. Workers Compensation Insurance Abington Memorial Hospital is self-insured for workers compensation claims. At, the estimated liability recorded in the accompanying balance sheets amounted to approximately $7,113,000. The Hospital has historically purchased stop loss insurance for individual claims, and currently purchases stop-loss insurance for individual claims in excess of $750,000. Lansdale Hospital Corporation has purchased a $250,000 deductible (per claim) commercial worker s compensation policy through PMA Insurance Group. 8. Pension Plan Current accounting guidance requires employers to recognize the overfunded or underfunded projected benefit obligation ( PBO ) of a defined benefit pension plan as an asset or liability in the statement of financial position. The PBO represents the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. Employers are also required to recognize annual changes in gains or losses, prior service costs, or other credits that have not been recognized as a component of net periodic pension cost through unrestricted net assets. Current accounting guidance requires an employer to measure defined benefit plan assets and obligation as of the date of its year-end balance sheet, with limited exceptions. The plan has a measurement date of June 30th. Items included in unrestricted net assets represent amounts that have not been recognized in net periodic pension expense. The components recognized in unrestricted net assets, as of June 30, is as follows: 18 Net actuarial loss $ 139,390,000 Prior service cost 3,000 $ 139,393,000

21 Year-end amounts in unrestricted net assets expected to be recognized as components of net periodic pension expense during the next fiscal year are as follows: Amortization of net actuarial loss $ 6,494,000 Amortization of service cost 2,000 6,496,000 The following table sets forth the change in the Hospital s projected benefit obligation and the change in the fair value of plan assets, as well as the amounts recognized in the financial statements, at : $ Change in projected benefit obligation Benefit obligation at beginning of year $ 637,330,000 Service cost 26,837,000 Interest cost 28,350,000 Actuarial (gain) loss (4,285,000) Benefits paid (13,167,000) Projected benefit obligation at end of year 675,065,000 Change in plan assets Fair value of plan assets at beginning of year 493,946,000 Actual return on plan assets, net of expenses 26,398,000 Employer contributions 24,000,000 Benefits paid (13,166,000) Fair value of plan assets at end of year 531,178,000 Funded status $ 143,887,000 Reconciliation of the funded status Unrecognized prior service cost $ (3,000) Unrecognized actuarial loss (139,390,000) Cumulative contributions (less than) in excess of Cumulative net periodic benefit cost (4,494,000) Net amount recognized at year-end $ (143,887,000) Amounts recognized in statement of financial position consist of Accrued pension liability $ (143,387,000) Accumulated benefit obligation at the end of year $ 575,831,000 19

22 The principal assumptions used in determining the actuarial present value of the benefit obligations were as follows: Plan assets are allocated at as follows: The following table presents the Plan s financial instruments as of, measured at fair value on a recurring basis using the fair value hierarchy defined in Note 2. The Hospital invests plan assets with the objective of funding plan liabilities, maintaining liquidity sufficient to pay current year benefit requirements, earn a return above the actuarial assumption and diversify adequately among asset classes so as to earn a reasonable return relative to the risk of capital loss. Consistent with this investment objective the Plan has established a target investment allocation of 57.5% (range 50%-70%) equity, 37.5% (range 30%-50%) fixed income, and 5% (range 0%-10%) alternative investments. Weighted average assumptions as of June 30 Discount rate 4.70 % Rate of compensation increase 4.06 % Components of net periodic benefit cost Service cost $ 26,837,000 Interest cost 28,349,000 Expected return on plan assets (39,809,000) Amortization of prior service cost 3,000 Recognized actuarial gain or loss 6,594,000 Net periodic benefit cost $ 21,974,000 Allocation Percentage June 30 Equity securities % Cash and Debt securities % Level 1 Level 2 Level 3 Total Pension investment program Cash and cash equivalents $ 12,980,000 $ - $ - $ 12,980,000 Equity securities 301,635,000 76,030, ,665,000 Debt securities - 140,533, ,533,000 Total pension investment program $ 314,615,000 $ 216,563,000 $ - $ 531,178,000 20

23 The principal assumptions used in determining the Net Periodic Benefit Cost are as follows: The Hospital s expected rate of return on plan assets assumption was developed based on historical returns for the major asset classes. This review also considered both current market conditions and projected future conditions. Employer contributions expected for fiscal year 2016 is $24,000,000. Estimated Future Benefit Payments for the next five fiscal years: 9. Concentration of Credit Risk The Hospital provides healthcare services to its patients, most of who are local residents and are insured under third-party agreements and publicly funded programs. The mix of receivables from patients and third-party payors was as follows: Discount rate 4.50 % Rate of compensation increase 4.06 % Expected return on plan assets 8.00 % ,126, ,885, ,824, ,122, ,651,000 Medicare 21% Medicaid 7% Blue Cross 14% Managed Care 42% Other third-party payors 9% Self-Pay 7% 100% 10. Lease Commitments The Hospital and LHC lease office space and certain equipment under operating leases. Rental expense was approximately $8,770,000 in. 21

24 Future payments for operating leases as of are as follows: 11. Other Commitments and Contingencies Litigation Abington Health is involved in litigation arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by commercial insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position or results of operations of the Hospital. 12. Functional Expenses The Hospital serves patients who reside principally in the Montgomery and Bucks county communities through a number of specialty inpatient and outpatient programs, including cardiology, oncology, psychiatry, obstetrics, perinatology, neonatology, pediatrics, orthopedics, rehabilitative medicine and trauma care. Expenses for primary, secondary and tertiary services (including those listed above) are as follows: 13. Funds Held in Trust by Others ,791, ,835, ,742, ,337, ,300, and thereafter 11,946,000 Nonoperating revenue includes approximately $1,739,000 received by the Hospital in, as beneficiary of several trust funds which are controlled by outside trustees. The Hospital is an income beneficiary of these trusts for which the assets have been placed in perpetuity with a trustee. These assets, with a fair market value of approximately $46,606,000, respectively, have been included as part of other investments and permanently restricted net assets at. Healthcare services $ 642,884,000 General and administrative 126,419,000 $ 769,303,000 22

25 14. Pledges Receivable At, AH s pledges receivable of $10,239,000 consists of unconditional promises to give and are expected to be realized as follows: 15. Endowments Between one year and five years $ 10,528,000 More than five years - 10,528,000 Discount and allowance for uncollectible pledges (289,000) Net pledges $ 10,239,000 Abington Health endowments consist of individual donor restricted funds for a variety of purposes plus the following where the assets have been designated for endowment: pledges receivables, split interest agreements, and other net assets. The net assets associated with endowment funding are classified and reported based on the existence or absence of donor imposed restrictions. The Commonwealth of Pennsylvania law permits AMH to allocate to income each year a portion of endowment return. The law allows non-profit organizations to spend a percentage of the market value of their endowment funds, including realized and unrealized gains. The percentage, which by law must be between 2% and 7%, is to be elected annually. In AMH s Board of Trustees adopted a spending policy which elected a payout of 7% of endowment market value based on an average spanning three years. The Board of Trustees has interpreted the State Prudent Management of Institution Funds Act ( SPMIFA ) as requiring the preservation of the fair value of the original gift as of the date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation AH classifies as permanently restricted net assets (a) the original value of gifts donated to a permanent endowment, (b) the original value of subsequent gifts to a permanent endowment, and (c) accumulations to a permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund, except for beneficial interests in perpetual trust that is classified in permanently restricted net assets is classified as temporary restricted net assets until those amounts are appropriated for expenditure by AH in a manner consistent with the standard of prudence prescribed by SPMIFA. 23