2017 Audit Results: Alameda Health System A Public Hospital Authority

Transcription

1 2017 Audit Results: Alameda Health System

2 Board of Trustees Alameda Health System 2017 Audit Results: Alameda Health System Dear Board of Trustees: Thank you for your continued engagement of Moss Adams LLP. We are pleased to have the opportunity to meet with you to discuss the results of our audit of the financial statements of Alameda Health System (the Health System) as of and for the year ended June 30, The accompanying report, which is intended solely for the use of the Board and management, presents important information regarding the Health System s financial statements and our audit that we believe will be of interest to you. It is not intended to be, and should not be, used by anyone other than these specified parties. We conducted our audit with the objectivity and independence that you expect. We receive the full support and assistance of the Health System s personnel. We are pleased to serve and be associated with the Health System as its independent public accountants and look forward to our continued relationship. We look forward to discussing our report or any other matters of interest with you during this meeting.

3 Agenda 2017 Audit Results: Alameda Health System Auditor Opinion and Report Communication with Those Charged with Governance GASB Updates 3

4 Auditor Opinion & Report Better Together: Moss Adams & Alameda Health System

5 Scope of Services 2017 Audit Results: Alameda Health System We have performed the following services for Alameda Health System: Attest service: Annual financial statement audit as of and for the year ended June 30, 2017 Nonattest service: Assisted in the drafting of the financial statements of Alameda Health System Nonattest service: Assisted with certain payroll tax matters 5

6 Auditor Report on the Financial Statements 2017 Audit Results: Alameda Health System Unmodified Opinion Financial statements are presented fairly and in accordance with U.S. GAAP 6

7 Statements of Net Position

8 Assets and Deferred Outflows (in millions) $ $ $ $ $ $0 Cash and Cash Equivalents Patient AR, net Due from 3rd Party Other Current Assets Capital Assets, net Restricted Cash Deferred Outflows

9 Liabilities and Deferred Inflows (in millions) $ $ $200 9 $ $0 A/P Due to 3rd Party Other Current Liabilities Liquidity Facility Net Pension Liability Other Noncurrent Liabilities Deferred Inflows

10 Net Patient Service Accounts Receivable Dollars (in millions) % Net Revenues 10 $140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $117 $96 $ % 25.0% 20.0% 15.0% 10.0% 23.7% 15.5% 15.3%

11 Operations

12 Income Statements Year to Year Comparison Total Operating Expenses (in thousands) June 30, 2017 $972,899 June 30, 2016 $898, % Salaries, Wages & Benefits Physician Contract Services 67% 9% 8% Purchased Services Materials and Supplies Facilities 9% 8% 3% 3% 2% 8% Depreciation and Amortization Other 2% 2% 3% 9%

13 Communication with Those Charged with Governance Better Together: Moss Adams & Alameda Health System

14 Our Responsibility 2017 Audit Results: Alameda Health System 14 Our responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards. 1 To express our opinion on whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, and in accordance with U.S. GAAP. However, our audit does not relieve you or management of your responsibilities. 2 To perform an audit in accordance with generally accepted auditing standards issued by the AICPA, and design the audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. 3 To consider internal control over financial reporting as a basis for designing audit procedures but not for the purpose of expressing an opinion on its effectiveness or to provide assurance concerning such internal control. 4 To communicate findings that, in our judgment, are relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you.

15 Planned Scope & Timing of the Audit 2017 Audit Results: Alameda Health System 15 It is the auditor s responsibility to determine the overall audit strategy and the audit plan, including the nature, timing and extent of procedures necessary to obtain sufficient and appropriate audit evidence and to communicate with those charged with governance and overview of the planned scope and timing of the audit. OUR COMMENTS The planned scope and timing of the audit was communicated to the Health System s Board of Trustees at the audit planning meeting and was included in the engagement letter for the year ended June 30, We are in the process of auditing Alameda Health Partners (now included in summary form in the footnotes to the Health System s financial statements as well as the Alameda Health System Foundation, which is discretely presented.

16 Significant Accounting Policies & Unusual Transactions 2017 Audit Results: Alameda Health System 16 The auditor should determine that the Board of Trustees is informed about the initial selection of and changes in significant accounting policies or their application. The auditor should also determine that the Board of Trustees is informed about the methods used to account for significant unusual transactions and the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. OUR COMMENTS Management has the responsibility for selection and use of appropriate accounting policies. The significant accounting policies used by the Health System are described in the footnotes to the financial statements. Throughout the course of an audit, we review changes, if any, to significant accounting policies or their application, and the initial selection and implementation of new policies. There were no changes to significant accounting policies for the year ended June 30, We believe management has selected and applied significant accounting policies appropriately and consistent with those of the prior year.

17 Management Judgements & Accounting Estimates 2017 Audit Results: Alameda Health System 17 The Board of Trustees should be informed about the process used by management in formulating particularly sensitive accounting estimates and about the basics for the auditor s conclusions regarding the reasonableness of those estimates. OUR COMMENTS Management s judgements and accounting estimates are based on knowledge and experience about past and current events and assumptions about future events. We apply audit procedures to management s estimates to ascertain whether the estimates are reasonable under the circumstances and do not materially misstate the financial statements. Significant management estimates impacting the financial statements include the following: patient accounts receivable (gross, contractual allowance, and allowance for bad debt), net patient service revenue, net pension liability, uninsured losses for professional liability, liability for workers compensation claims, useful lives of capital assets, and postemployment medical benefits. We deem them to be reasonable.

18 Significant Audit Adjustments & Unadjusted Differences Considered by Management to Be Immaterial 2017 Audit Results: Alameda Health System 18 The Board of Trustees should be informed of all significant audit adjustments arising from the audit. Consideration should be given to whether an adjustment is indicative of a significant deficiency or a material weakness in the Health System s internal control over financial reporting, or in its process for reporting interim financial information, that could cause future financial statements to be materially misstated. OUR COMMENTS No significant audit adjustments or unadjusted differences were identified. The Board of Trustees should also be informed of uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements as a whole.

19 Deficiencies in Internal Control 2017 Audit Results: Alameda Health System Any material weaknesses and significant deficiencies in the design or operation of internal control that came to the auditor s attention during the audit must be reported to the Board of Trustees. OUR COMMENTS Material weakness None noted Significant deficiencies Nothing to communicate 19

20 Difficulties Encountered in Performing the Audit 2017 Audit Results: Alameda Health System 20 The Board of Trustees should be informed of any significant difficulties encountered in dealing with management related to the performance of the audit, including disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the Health System s financial statements, or the auditor s report. OUR COMMENTS No significant difficulties were encountered during our audit. We are pleased to report that there were no disagreements with management. We are not aware of any significant accounting or auditing matters for which management consulted other accountants.

21 GASB updates Better Together: Moss Adams & Alameda Health System

22 GASB Accounting Updates 2017 Audit Results: Alameda Health System GASB Statement No. 82, Pension Issues an amendment of GASB Statements No. 67, No. 68, and No. 73. Adopted as of June 30, GASB Statement No. 80, Blending Requirements for Certain Component Units. Adopted as of June 30, GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Effective for the Health System beginning July 1, GASB Statement No. 87, Leases. Effective for the Health System beginning July 1, 2020.

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26 FINAL DRAFT 10/25/2017 Report of Independent Auditors and Financial Statements with Required Supplementary Information Alameda Health System, a Public Hospital Authority (a Component Unit of the County of Alameda, California) June 30, 2017 and 2016

27 Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS... 1 REPORT OF INDEPENDENT AUDITORS FINANCIAL STATEMENTS Statements of Net Position Statements of Net Position (continued) Statements of Revenues, Expenses, and Changes in Net Position Statements of Cash Flows Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Required Supplementary Information... 62

28 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 INTRODUCTION The management s discussion and analysis is intended to serve as a narrative overview and analysis of the financial performance for Alameda Health System (Health System) for the fiscal years ended June 30, 2017 and This overview serves as an introduction to the audited financial statements, which can be found on pages of this report. It should be read in conjunction with the more detailed information contained within the accompanying financial statements. The annual report consists of the Health System s management s discussion and analysis, basic financial statements, notes to those statements and required supplementary information. The basic financial statements include the Statements of Net Position, Statements of Revenues, Expenses, and Changes in Net Position, and Statements of Cash Flows. Together, they provide an indication of the Health System s financial health. The Statements of Net Position include all of the Health System s assets, deferred outflows, liabilities, and deferred inflows utilizing the economic resources measurement focus and accrual basis of accounting. It also provides information as to which components of net position are categorized as net investment in capital assets, restricted or unrestricted for general purposes. The Statements of Revenues, Expenses, and Changes in Net Position report all of the revenues and expenses that have contributed to the change in net position during the fiscal year. It includes all of the Health System s operating and nonoperating transactions. The Statements of Cash Flows present information about the cash receipts and cash payments of the Health System during the most recent fiscal year. These statements show the effects on financial position of cash provided by and used in operating, investing, and noncapital and capital and related financing activities. When used with related disclosures and information in the other financial statements, the information in the statement of cash flows helps readers assess the Health System s ability to generate cash flows, its ability to meet its obligations as they come due, and its needs for external financing. The basic financial statements include the financial position and activity of the Alameda County Healthcare Foundation as a discretely presented component unit, and also include the financial position and activity of the Alameda Health Partners as a blended component unit of Alameda Health System. Notes to the financial statements provide additional information that is essential to the full understanding of the data provided in the Health System s financial statements. CONDENSED FINANCIAL STATEMENT INFORMATION Following is a presentation of certain summary financial information derived from the basic financial statements. 1

29 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 TABLE I COMPARATIVE STATEMENTS OF NET POSITION June 30, 2017 June 30, 2016 June 30, 2015 (amounts in thousands) Change in 2017/2016 Change in 2016/2015 Current assets $ 390,180 $ 320,927 $ 254,692 $ 69,253 $ (82,523) Noncurrent assets Restricted cash - capital 23,683 23,580 23, Capital assets, net 87,445 80,716 78,445 6,729 (8,566) Total noncurrent assets 111, , ,891 6,832 (8,498) Total assets 501, , ,583 76,085 (91,021) Deferred outflows of resources 145, , ,890 (11,419) 42,777 Current liabilities 272, , ,662 40,811 48,797 Noncurrent liabilities Long-term obligations, net 30,903 44,750 59,048 (13,847) (14,298) Other noncurrent liabilities 600, , ,322 28,750 46,155 Total noncurrent liabilities 631, , ,370 14,903 31,857 Total liabilities 903, , ,032 55,714 80,654 Deferred inflows of resources 28,520 19,431 17,226 9,089 2,205 Net position: Net investment in capital assets 87,445 79,670 76,396 7,775 (7,604) Restricted for capital projects 23,683 23,580 23, Unrestricted Deficit (396,492) (388,477) (413,602) (8,015) (208,133) Total net position $ (285,364) $ (285,227) $ (313,785) $ (137) $ (215,694) FINANCIAL ANALYSIS COMPARATIVE STATEMENTS OF NET POSITION Please refer to Table I Comparative Statements of Net Position above. Assets 2017 Total assets increased by $76.1 million or 17.9% to $501.3 million at June 30, 2017 from June 30, Current assets increased $69.3 million from June 30, 2016 as a result of the following reasons: Due from third-party payors, increased by $68.9 million or 51.3% of the balance at June 30, Several supplemental revenue receivables increase as appeals and audits of governmental programs for prior years were underway at June 30, Noncurrent assets increased $6.8 million from June 30, 2016 as a result of the following reason: Net capital assets increased by $6.7 million primarily due to equipment purchases. 2

30 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Deferred Outflows of Resources 2017 Total deferred outflows of resources decreased by $11.4 million to $145.2 million at June 30, 2017 from June 30, Differences in expected and actual activities, such as plan experience and investment earnings, as defined by Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions, increased by $27.3 million as determined by actuarial consultants, which was offset by amortization of deferred outflows of resources of $38.7 million. Liabilities 2017 Total liabilities increased by $55.7 million or 6.6% to $903.4 million at June 30, 2017 from June 30, Current liabilities increased by $40.8 million or 17.6% from June 30, 2016 as a result of the following reasons: Accounts payable and accrued expenses increased $17.5 million due to delayed timing of payments to vendors. Due to third-party payors increased $18.9 million with additional reserves for potential program overpayments. Noncurrent liabilities increased by $14.9 million or 2.4% from June 30, 2016 to June 30, 2017 for the following reasons: Amounts due to the County of Alameda Liquidity Facility increased by $4.0 million due to timing of cash receipts from funding sources. Pension obligations as defined by GASB Statement No. 68, Accounting and Financial Reporting for Pensions, increased by $18.3 million as determined by actuarial consultants. Other postemployment benefits obligations increased by $6.7 million as determined by the actuarial consultants. Long-term obligations, net of current maturities decreased by $13.8 million according to payment schedules. Deferred Inflows of Resources 2017 Total deferred inflows of resources increased by $9.1 million to $28.5 million at June 30, 2017 from June 30, Differences in expected and actual activities, such as plan experience and investment earnings, as defined by Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions, increased by $9.1 million as determined by actuarial consultants, which was offset by amortization of deferred inflows of resources of $8.0 million. 3

31 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 FINANCIAL ANALYSIS COMPARATIVE STATEMENTS OF NET POSITION 2016 Please refer to Table I Comparative Statements of Net Position on page 2. Assets 2016 Total assets increased by $68.6 million or 19.2% to $425.2 million at June 30, 2016 from June 30, Current assets increased $66.2 million from June 30, 2015 as a result of the following reasons: Net patient accounts receivable decreased by $21.7 million or 18.4% from the balance at June 30, Improvements in revenue cycle processes were a contributing factor for this decrease. The due from third-party payors, increased by $87.5 million or 187.2% of the balance at June 30, Several supplemental revenue receivables increased as appeals and audits of governmental programs for prior years were underway at June 30, Noncurrent assets increased $2.4 million from June 30, 2015 as a result of the following reason: Net capital assets increased by $2.3 million primarily due to new equipment associated with the completion of the new acute care tower at Highland Hospital. Deferred Outflows of Resources 2016 Total deferred outflows of resources increased by $42.8 million to $156.7 million at June 30, 2016 from June 30, Changes in prior pension assumptions as defined by Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions, decreased by $16.5 million as determined by actuarial consultants. Differences between expected and actual investment earnings-pension as defined by Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions, increased by $59.2 million as determined by actuarial consultants. Liabilities 2016 Total liabilities increased by $80.7 million or 10.5% to $847.7 million at June 30, 2016 from June 30, Current liabilities increased by $48.8 million or 26.7% from June 30, 2015 as a result of the following reasons: Due to third-party payors increased $48.8 million with additional reserves for potential program overpayments. 4

32 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Noncurrent liabilities increased by $31.9 million from June 30, 2015 to June 30, 2016 for the following reasons: Amounts due on the County of Alameda Liquidity Facility decreased by $35.5 million due to improved cash flow from operations, primarily driven by collection of patient accounts receivable. Pension obligations as defined by GASB Statement No. 68, Accounting and Financial Reporting for Pensions, increased by $81.8 million as determined by actuarial consultants. Long-term obligations, net of current maturities decreased by $14.3 million according to payment schedules. Deferred Inflows of Resources 2016 Total deferred inflows of resources increased by $2.2 million to $19.4 million at June 30, 2016 from June 30, Differences in expected and actual activities, such as investment earnings, increased by $1.4 million. TOTAL NET POSITION Total net position is the difference between assets, deferred outflows of resources, liabilities, and deferred inflows of resources as reported in the Comparative Net Position table listed below. Total net position decreased by $137 thousand at June 30, 2017 and increased by $28.6 million at June 30, 2016 over the prior years. 5

33 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 TABLE II COMPARATIVE STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION June 30, 2017 June 30, 2016 June 30, 2015 (amounts in thousands) Change in 2017/2016 Change in 2016/2015 Revenues Patient service revenues, net $ 641,469 $ 620,821 $ 492,651 $ 20,648 $ 128,170 Capitation revenue 59,679 35,062 34,041 24,617 1,021 Other government programs 243, , ,682 (6,860) 14,532 Other operating revenues 25,472 19,148 16,055 6,324 3,093 Total revenues 969, , ,429 44, ,816 Operating Expenses Salaries and benefits 662, , ,237 58, ,604 Physician contract services and purchased se 159, , ,587 9,845 5,944 Materials and supplies 82,678 82,255 72, ,409 Depreciation and amortization 15,140 14,083 15,361 1,057 3,356 Other operating costs 52,869 47,680 47,714 5,189 (827) Total operating expenses 972, , ,557 74, ,486 Operating income/(loss) (2,925) 27,087 (62,128) (30,012) 11,330 Nonoperating expenses, net 58 (29) (102) Income/(loss) before extraordinary item (2,867) 27,058 (62,230) (29,925) 11,865 Capital contributions 2,730 1,500-1,230 - Extraordinary item (12,435) Change in net position (137) 28,558 (62,230) (28,695) (570) Change in accounting principle - - (153,464) - (82,263) Net position, beginning of the year (285,227) (313,785) (98,091) 28,558 (98,741) Net position, end of the year $ (285,364) $ (285,227) $ (313,785) $ (137) $ (181,574) FINANCIAL ANALYSIS COMPARATIVE STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION 2017 Please refer to Table II Comparative Statements of Revenues, Expenses, and Changes in Net Position above. The first component of the overall change in the Health System s net position is the Operating Income/ (Loss) or the difference between total operating revenues and total operating expenses. The operating loss for fiscal year 2017 was $2.9 million compared to the operating gain of $27.1 million for fiscal year Operating Revenue 2017 Total operating revenue, composed of net patient services revenue, capitation revenue, other government program revenue, and other operating revenue, increased by $44.7 million to $970.0 million for fiscal year 2017 over the prior fiscal year due to the following reasons: Net patient service revenues increased by $20.6 million over fiscal year 2016 due to continued process improvements in revenue cycle administration. 6

34 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Capitation revenue increased by $24.6 million due to additional funding from the Health Plan for Alameda County (HPAC). Operating Expenses 2017 Total operating expenses increased by $74.7 million to $972.9 million for the year ending June 30, 2017 over the prior fiscal year. Salaries and benefits increased by $58.2 million for fiscal year 2017 over fiscal year 2016 due to the following: Paid full time equivalents increased by 6% from 3,923 at June 30, 2016 to 4,148 at June 30, 2017, which resulted in higher salary and benefit expense. Also, salary increases in union agreements and higher registry utilization were factors. All other expenses increased by $16.5 million for fiscal year 2017 over fiscal year 2016 due to the following: Physician contract services increased by $7.4 million from new contracts. Facilities increased by $2.5 million due to higher utility cost and facility repairs. General and administrative expenses increased by $4.6 million from higher insurance and legal costs. Grant related program expenses increased by $1.1 million. FINANCIAL ANALYSIS COMPARATIVE STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION 2016 Please refer to Table II Comparative Statements of Revenues, Expenses, and Changes in Net Position on page 5. The first component of the overall change in the Health System s net position is the Operating Income/ (Loss) or the difference between total operating revenues and total operating expenses. The operating gain for fiscal year 2016 was $27.1 million compared to the operating loss of $62.1 million for fiscal year Operating Revenue 2016 Total operating revenue, composed of net patient services revenue, capitation revenue, other government program revenue, revenue, and other operating revenue, increased by $146.8 million to $925.2 million for fiscal year 2016 over the prior fiscal year due to the following reasons: Net patient service revenues increased by $128.2 million over fiscal year As a result of participation in County Savings and Realignment Redirection under the Affordable Care Act, Assembly Bill 85 (AB85), the Health System recorded $108.9 million in fiscal year The additional increase is due to volumes and continued process improvements in revenue cycle administration. Other government programs revenue increased by $14.5 million due to new programs. 7

35 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Operating Expenses 2016 Total operating expenses increased by $57.6 million to $898.2 million for the year ending June 30, 2016 over the prior fiscal year. Salaries and benefits increased by $46.5 million for fiscal year 2016 over fiscal year 2015 due to the following: Salary increases in union agreements, and higher registry utilization. Pension and post-retirement benefit expenses increased $26.2 million over fiscal year All other expenses increased by $11.1 million for fiscal year 2016 over fiscal year 2015 due to the following: Grant related program expenses increased by $2.5 million. Physician contract services increased by $2.9 million. Materials and supplies expense increased by $9.6 million; $8.6 million of the increase was in the cost of pharmaceuticals purchased for patient care including increased costs associated with the federal government 340B drug discount program. General and administrative expenses decreased by $3.9 million, due primarily to insurance premium reductions for medical malpractice. VOLUME AND UTILIZATION PAYOR MIX Please refer to Table III Payor Mix below. Payor Mix 2017 Payor Mix during fiscal year 2017 was consistent with fiscal year Medi-Cal increased by 6.3% to 54.5% over fiscal year 2016 at 48.2%. This was offset by a 5.5% decrease in HPAC County Programs and a 1.0% decrease in Commercial Insurance in fiscal year Payor Mix 2016 The Health System saw a continued shift in Payor Mix during fiscal year The increases in Medicare and Commercial Insurance were the continuing result of the acquisition of Alameda Hospital and San Leandro Hospital as the Health System serves more of those populations at those locations. The HPAC County Programs saw a slight rebound during 2016 compared to 2015, but it remains down over 2014 and prior years as expected due to the effects of the Affordable Care Act, which shifted previously uninsured populations to Medi-Cal and other coverage providers. 8

36 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 TABLE III PAYOR MIX June 30, 2017 June 30, 2016 June 30, 2015 Change in % 2017/2016 Change in % 2016/2015 Medi-Cal 54.5% 48.2% 52.6% 6.3% (4.4)% HPAC - County Programs 4.4% 9.9% 8.7% (5.5)% 1.2% Medicare 28.8% 27.9% 25.4% 0.9% 2.5% Self pay - Other 2.9% 3.6% 3.4% (0.7)% 0.2% Commercial Insurance 9.4% 10.4% 9.9% (1.0)% 0.5% Total 100.0% 100.0% 100.0% INPATIENT VOLUME Please refer to Table IV Average Daily Census, Table V Patient Days, and Table VI Average Length of Stay on pages 9 and 10. Inpatient Volume 2017 Total inpatient census and patient days in fiscal year 2017 increased by 3% compared to fiscal year These changes are described below. Skilled Nursing & Sub-Acute average daily census increased by 6 patients per day for a net increase of 1,829 patient days. The average length of stay for these patients increased by 81.0 days to days. Medical-Surgical average daily census increased by 5 patients per day for a net increase of 1,625 patient days. Inpatient Volume 2016 Total inpatient census and patient days in fiscal year 2016 increased compared to fiscal year These changes are described below. Skilled Nursing & Sub-Acute average daily census increased by 2 patients per day for a net increase of 936 patient days. The average length of stay for these patients increased by 8.2 days to days. Medical Surgical average daily census increased by 5 patients per day for a net increase of 2,122 patient days. Step down unit care increased by 5 patients per day for a net increase of 1,719 patient days. The average length of stay for these patients decreased by 3.2 days to 7.5 days 9

37 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 STEP DOWN UNIT CARE INCREASED BY 5 PATIENTS PER DAY FOR A NET INCREASE OF 1,719 PATIENT DAYS. THE AVERAGE LENGTH OF STAY FOR THESE PATIENTS DECREASED BY 3.2 DAYS TO 7.5 DAYSTABLE IV AVERAGE DAILY CENSUS June 30, 2017 June 30, 2016 June 30, 2015 Change in Census 2017/2016 Change in Census 2016/2015 Skilled nursing and subacute Medical - surgical Psychiatry Acute rehabilitation Maternity/gynecology (2) Step down unit Intensive care unit Level 2 nursery Total average daily census June 30, 2017 TABLE V PATIENT DAYS June 30, 2016 June 30, 2015 Change in Pt Days 2017/2016 Change in Pt Days 2016/2015 Skilled nursing and subacute 101,059 99,230 98,294 1, Medical - surgical 46,672 45,047 42,925 1,625 2,122 Psychiatry 24,673 24,908 24,992 (235) (84) Acute rehabilitation 6,568 5,990 5, Maternity/gynecology 3,163 2,869 3, (618) Step down unit 14,460 14,033 12, ,719 Intensive care unit 10,934 9,893 9,710 1, Level 2 nursery 1,487 1,351 1, Total Patient Days 209, , ,751 5,695 4,570 TABLE VI AVERAGE LENGTH OF STAY (ALOS) June 30, 2017 June 30, 2016 June 30, 2015 Change in ALOS 2017/2016 Change in ALOS 2016/2015 Skilled nursing and subacute Medical - surgical Psychiatry (0.5) (0.1) Acute rehabilitation (2.6) 0.6 Maternity/gynecology (0.7) Step down unit (3.2) Intensive care unit Level 2 nursery Length of Stay

38 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 OUTPATIENT VOLUME Please refer to Table VII Outpatient Visits on page 10. Outpatient Volumes 2017 Overall total clinic visits increased by 1,936 or 0.6% below fiscal year Highland visits increased by 4,663 or 2.6%. Eastmont visits decreased by 1,394 or 2.1%. Winton visits increased by 1,954 or 6.5%. Newark visits decreased by 105 or 0.4%. Behavioral Health visits decreased by 2,494 or 9.9%. Alameda visits decreased by 1,047 or 8.6%. Fairmont visits increased by 359 or 26%. Total emergency room (ER) visits decreased by 10,856 or 7.4%. Highland Emergency Room and Trauma Center visits decreased by 7,219 or 9.3%. San Leandro Emergency Room visits decreased by 353 or 1.0%. Alameda Emergency Room visits decreased by 1,030 or 5.8%. John George Psychiatric Emergency Room visits decreased 2,254 or 14.4%. Outpatient Volumes 2016 Overall total clinic visits decreased by 8,267 or 2.4% below fiscal year Highland visits decreased by 9,335 or 5.0%. Eastmont visits decreased by 5,330 or 7.5%. Newark visits increased by 1,684 or 6.6%. Behavioral Health visits increased by 3,704 or 17.3%. Alameda visits increased by 929 or 8.3%. Fairmont visits increased by 97 or 7.6%. 11

39 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Total emergency room (ER) visits increased by 326 or 0.2%. Highland Emergency Room and Trauma Center visits decreased by 2,480 or 3.1%. San Leandro Emergency Room visits increased by 1,748 or 5.1% Alameda Emergency Room visits increased by 283 or 1.6%. John George Psychiatric Emergency Room visits increased 775 or 5.2%. June 30, 2017 TABLE VII OUTPATIENT VISITS June 30, 2016 June 30, 2015 (amounts in thousands) Change in Visits 2017/2016 Change in Visits 2016/2015 Clinics Highland 180, , ,330 4,663 (9,335) Eastmont 64,370 65,764 71,094 (1,394) (5,330) Winton 32,024 30,070 30,086 1,954 (16) Newark 27,116 27,221 25,537 (105) 1,684 Behavioral Health 22,629 25,123 21,419 (2,494) 3,704 Alameda 11,067 12,114 11,185 (1,047) 929 Fairmont 1,740 1,381 1, Total Clinic Visits 339, , ,935 1,936 (8,267) Emergency Room (ER) Highland ER and Trauma 70,339 77,558 80,038 (7,219) (2,480) San Leandro ER 35,443 35,796 34,048 (353) 1,748 Alameda ER 16,802 17,832 17,549 (1,030) 283 John George Psych ER 13,382 15,636 14,861 (2,254) 775 Total Emergency Visits 135, , ,496 (10,856) 326 CAPITAL ASSET AND DEBT ADMINISTRATION CAPITAL ASSETS Capital assets recorded by the Health System consist primarily of leasehold improvements and equipment purchased to provide patient care services across each of the facilities. A large part of the capital assets used by the Health System, land, hospital facilities, and other equipment are leased from the County for one dollar annually. Facilities leased from the County include the Highland campus, Fairmont campus, and John George campus. Facilities leased from non-county property holders include the Airport Center in west Oakland, Eastmont Wellness Center, Hayward Wellness Center and Alameda Hospital. Facilities owned by the Health System include Newark Wellness Center and San Leandro Hospital. 12

40 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 In April, 2016, a new acute services tower replacement opened on the Highland campus. The existing 1975 acute tower was deemed incapable of withstanding an earthquake of 8.0 and greater without extensive retrofitting or replacement in conformance with the State of California s seismic safety laws. The County decided to replace the existing nine story acute tower with an eight story building with 169 beds. All construction and building outfitting costs were borne by the County. The Health System underwrote the costs of relocating personnel. DEBT ADMINISTRATION The Health System uses the treasury function of the County to support funding for working capital requirements through a liquidity facility from the County. In addition, the Health System received funding from the County s 1997 Certificates of Participation (COPS) issuance to provide for certain capital improvements. The Health System is repaying the County for its portion of the proceeds from the COPS debt issuance. The Health System has determined that it is legally obligated for its share of Pension Obligation Bonds issued by Alameda County in prior years that are associated with pension funding. Refer to Notes 8 and 9 within the Basic Financial Statements for more detail on the Health System s liquidity facility with the County and the long-term obligations under the COPS and Pension Obligation bond issuance, respectively. CURRENTLY KNOWN FACTS, DECISIONS, OR CONDITIONS LEGISLATIVE IMPACT ON THE HEALTH SYSTEM OPERATING ENVIRONMENT The Affordable Care Act (ACA) or Obamacare is a United States federal statute signed into law by President Barack Obama on March 23, The ACA was enacted with the goals of increasing the quality and affordability of health insurance, lowering the uninsured rate by expanding public and private insurance coverage, and reducing the costs of healthcare for individuals and the government. It introduced a number of mechanisms including mandates, subsidies, and insurance exchanges meant to increase coverage and affordability. The law also requires insurance companies to cover all applicants within new minimum standards and offer the same rates regardless of pre-existing conditions or sex. Additional reforms aimed to reduce costs and improve healthcare outcomes by shifting the system towards quality over quantity through increased competition, regulation, and incentives to streamline the delivery of healthcare. In 2011 the Congressional Budget Office projected that the ACA would lower both future deficits and Medicare spending. The ACA includes numerous provisions that take effect between 2010 and The ACA has two primary mechanisms for increasing insurance coverage: expanding Medicaid eligibility to include individuals within 138% of the federal poverty level (FPL), and creating state-based insurance exchanges where individuals and small business can buy health insurance plans; those individuals with incomes between 100% and 400% of the FPL will be eligible for subsidies to do so. 13

41 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Significant reforms, most of which took effect on January 1, 2014, include: Health insurance exchanges operate as a new avenue by which individuals and small businesses in every state can compare policies and buy insurance (with a government subsidy if eligible). In addition, the law established four tiers of coverage: bronze, silver, gold, and platinum. All categories offer the same set of essential health benefits. What the categories specify is the division of premiums and out-of-pocket costs: bronze plans will have the lowest monthly premiums and highest out-of-pocket costs, and vice versa for platinum plans. The percentages of health care costs that plans are expected to cover through premiums (as opposed to out-of-pocket costs) are, on average: 60% (bronze), 70% (silver), 80% (gold), and 90% (platinum). Low-income individuals and families whose incomes are between 100% and 400% of the federal poverty level will receive federal subsidies on a sliding scale if they purchase insurance via an exchange. Those from 133% to 150% of the poverty level will be subsidized such that their premium costs will be 3% to 4% of income. Medicaid eligibility expanded to include individuals and families with incomes up to 133% of the federal poverty level, including adults without disabilities and without dependent children. The law also provides for a 5% income disregard, making the effective income eligibility limit for Medicaid 138% of the poverty level. US citizens and legal residents will be required to have and maintain health insurance, or pay a fine starting at $95 per person in 2014, increasing to $695 in Under the Affordable Care Act (ACA), the Federal Government finances 100% of the Federal Medicaid Assistance Percentages (FMAP) of the costs of those made newly eligible for Medicaid from Jan 1, 2014 to Dec The Health System recognized approximately $126.3 million for FY16 under programs associated with the FMAP. Effective January 1, 2017, the Federal Government s participation level will begin to decrease on a phased basis over the next 4 calendar years. This FMAP change will reduce the Health System s supplemental program revenues that are cost-based for newly eligible Medi-Cal patients. Effective January 1, 2017, the FMAP will fall to 95% of cost. January 1, 2018, it will fall to 94%. January 1, 2019 it will decline to 93%. Effective January 1, 2020 the Federal Government participation level will decline to 90% with no further decreases beyond. Additionally, as part of the renewed Waiver, Centers for Medicare & Medicaid Services authorized California to invest savings generated through the Demonstration to achieve critical objectives, such as improved quality of care and better care coordination through safety net providers. Over 5 years up to $6.6 billion in federal funds will be available from the Delivery System Reform Incentive Pool (DSRIP) Program, which is part of a $15.3 billion safety net care pool. Many key concepts underlying federal health care reform will be tested, evaluated, and refined in California. As a result of participation in the DSRIP, the Health System received $34.8 million for fiscal year 2015, the final year of the program. 14

42 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Additionally, as part of the renewed Waiver (Medi-Cal 2020), Centers of Medicare & Medicaid Services authorized California to invest savings generated through the Demonstration to achieve critical objectives, such as improved quality of care and better care coordination through safety net providers. Over 5 years, up to $7.464 billion in federal funds will be available from Public Hospital Redesign and Incentives in Medi-Cal program (PRIME). PRIME builds upon and succeeds the DSRIP program described above. As a result of participating in PRIME, the Health System earned $31.5 million for fiscal year 2016 in its first year, and $24.3 million for fiscal year 2017 in its second year. On April 25, 2016, Centers for Medicare & Medicaid Services (CMS) released a Medicaid Managed Care Final Rule. This final rule seeks to modernize how states purchase managed care services for Medicaid beneficiaries, strengthen the consumer experience and revise key consumer protections. This final rule is the first major update to Medicaid and Children's Health Insurance Program (CHIP) regulations in more than a decade. Some key goals include: supporting State efforts to advance delivery system reform and improve the quality of care; strengthening the beneficiary experience of care and key beneficiary protections; strengthening program integrity by improving accountability and transparency; and aligning key Medicaid and CHIP managed care requirements with other health coverage programs. Under this ruling, some of the supplemental reimbursement programs in which the Health System is currently participating will change from cost-based to alternative payment methodologies. CMS, Department of Healthcare Services (DHCS), and California Association of Public Hospitals (CAPH) are working on revising the current cost-based reimbursement funding structures towards quality measures. As of June 30, 2017, new programs Enhanced Payment Program (EPP) and Quality Incentive Payment (QIP) are being developed. The potential impact to the Health System cannot be determined until the new structures are finalized. On May 19, 2016, DHCS informed all California hospitals that operate Federally Qualified Heath Centers (FQHCs) that CMS is requiring DHCS to exclude hospital-based FQHC costs from the calculation of the Disproportionate Share (DSH) Limit. The ruling had an immediate impact on fiscal year 2015, later on determined to impact fiscal years 2013 and If this ruling stands, the exclusion of the costs of hospital-based FQHCs will adversely impact the DSH payments that the Health System will receive in settlements. Currently, the Health System (along with other public health systems) is challenging CMS s decision. In Fiscal Year 2016 and 2017, the Health System has included reserves for the potential financial impact if the challenge turns unfavorable for fiscal years from 2013 and forward. LIQUIDITY The Health System relies on short term borrowing from a liquidity facility through the County to fund weekly cash flow to meet payroll and vendor payments. The Liquidity Facility acts as a revolving line of credit which sweeps daily cash receipts from the Health System which are then used to pay down the loan balance and increases as the Health System draws funds for operating purposes. During fiscal year 2016, the Health System completed a replacement Agreement on the Repayment of Debt to the Consolidated Treasury of the County of Alameda. The Liquidity Facility provides a declining level of credit access as of June 30 th of each year; the limit at June 30, 2017 was $140.0 million and at June 30, 2016 it was $145.0 million. Further reductions are scheduled over the life of the Agreement down to $50.0 million. In addition, the Health System is provided an additional $50.0 million of liquidity above the year end maximum during the year. This is in recognition of the variability of the timing of receipts from supplemental government programs. The Agreement contains other requirements such as the availability of monthly reporting. The Health System was in compliance with the Agreement as of June 30 th of each year throughout the reporting periods in the attached statements. 15

43 Management s Discussion and Analysis As of and for the Years Ended June 30, 2017 and 2016 Throughout the fiscal year 2017 and 2016, the Health System was below the flexible maximum balance of $185.0 million and $190.0 million, respectively. At June 30, 2017 the Health System had a Net Negative Balance (NNB) of $105.8 million and was below the agreement s limit reduction schedule end of year ceiling of $140.0 million. At June 30, 2016 the Health System had a Net Negative Balance (NNB) of $101.4 million and was below the NNB ceiling of $145.0 million. Financial Performance The Health System did not meet fiscal year 2017 budget targets but did met fiscal year 2016 budget targets. Timing of Conversion of Net Revenue to Cash Receipts The Health System initiated a Revenue Cycle Improvement Project during 2015 and continued to achieve substantial improvement in the areas of claims processing and service authorizations during fiscal years 2016 and Contacting the Health System s Financial Management This financial report is designed to provide a general overview of the Health System s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Chief Financial Officer, Alameda Health System, 1411 East 31st Street, Oakland, California

44 Report of Independent Auditors The Board of Trustees Alameda Health System Report on the Financial Statements We have audited the accompanying financial statements of Alameda Health System, a Public Hospital Authority, an enterprise fund of the County of Alameda (the Health System), and its discretely presented component unit, Alameda Health System Foundation (the Foundation), which comprise the statements of net position as of June 30, 2017 and 2016, and the related statements of revenues, expenses, and changes and in net position and cash flows for the years then ended, and the related notes to the financial statements, which collectively comprise the Health System's financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America; the California Code of Regulations, Title 2, Section , State Controller s Minimum Audit Requirements for California Special Districts; and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from 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. 17