Northern Westchester Hospital Association and Subsidiaries

Transcription

1 Northern Westchester Hospital Association and Subsidiaries Consolidated Financial Statements and Additional Information as of and for the Years Ended December 31, 2012 and 2011, and Independent Auditors Report

2 NORTHERN WESTCHESTER HOSPITAL ASSOCIATION AND SUBSIDIARIES TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 2 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011: Balance Sheets 3 Statements of Operations 4 Statements of Changes in Net Assets 5 Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 32 ADDITIONAL INFORMATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011: 33 Page Supplemental Consolidating Schedules Balance Sheets Information Supplemental Consolidating Schedules Statements of Operations and Changes in Net Assets Information 38 41

3 Deloitte & Touche LLP Two World Financial Center New York, NY USA Tel: Fax: INDEPENDENT AUDITORS REPORT To the Board of Trustees of Northern Westchester Hospital Association Mount Kisco, New York We have audited the accompanying consolidated financial statements of Northern Westchester Hospital Association and its subsidiaries (the Hospital ) (an affiliate of Stellaris Health Network), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Hospital 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 Hospital 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. Member of Deloitte Touche Tohmatsu

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Hospital as of December 31, 2012 and 2011, and the results of its operations, changes in its net assets, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis-of-Matter As discussed in Note 1 to the consolidated financial statements, the Hospital adopted the requirements of accounting guidance related to the presentation of the provision for bad debts in the 2012 and 2011 consolidated statements of operations. Our opinion is not modified with respect to this matter. Report on Additional Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The additional information listed in the table of contents is presented for the purpose of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual entities, and is not a required part of the consolidated financial statements. This information is the responsibility of the Hospital s management, was derived from, and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audits of the consolidated financial statements, and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. May 31,

5 NORTHERN WESTCHESTER HOSPITAL ASSOCIATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,771,572 $ 5,912,968 Patient accounts receivable less estimated uncollectibles of $4,970,000 and $4,458,000 in 2012 and 2011, respectively 26,483,618 29,013,337 Estimated insurance recoveries 3,500,000 5,500,000 Other receivables 935,229 1,954,290 Inventory 3,779,389 3,563,692 Prepaid expenses 1,604,602 1,519,373 Current portion of assets whose use is limited 6,145,356 7,034,910 Total current assets 51,219,766 54,498,570 ASSETS WHOSE USE IS LIMITED Net of current portion 29,547,072 23,140,694 PROPERTY, PLANT, AND EQUIPMENT Net 149,732, ,498,708 GOODWILL AND INTANGIBLE ASSET Net 2,269,914 2,352,414 DEFERRED FINANCING COSTS Net 1,514,336 1,611,550 OTHER ASSETS 881, ,871 TOTAL $ 235,165,260 $ 219,964,807 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable and accrued expenses $ 34,067,885 $ 35,400,746 Accrued salaries and other related benefits 7,791,367 8,009,871 Due to third-party payors 2,177,001 2,479,247 Current portion of long-term debt 4,821,356 4,729,979 Estimated insurance claims payable 3,500,000 5,500,000 Current portion of estimated liability for self-insurance 3,941,000 3,849,000 Total current liabilities 56,298,609 59,968,843 LONG-TERM DEBT Net of current portion 29,497,434 27,579,175 ESTIMATED LIABILITY FOR SELF-INSURANCE Net of current portion 10,351,401 11,438,000 ACCRUED PENSION LIABILITY 38,482,555 27,511,148 DUE TO THIRD-PARTY PAYORS Net of current portion 2,000,000 2,000,000 OTHER LIABILITIES 3,963,998 3,743,042 Total liabilities 140,593, ,240,208 COMMITMENTS AND CONTINGENCIES (Note 13) NET ASSETS: Unrestricted 77,079,660 78,854,287 Temporarily restricted 9,473, ,843 Permanently restricted 8,018,469 8,003,469 Total net assets 94,571,263 87,724,599 TOTAL $ 235,165,260 $ 219,964,807 See notes to consolidated financial statements

6 NORTHERN WESTCHESTER HOSPITAL ASSOCIATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 AND REVENUES: Net patient service revenue (after contractual allowances and discounts) $ 243,850,060 $ 234,833,535 Provision for bad debts (4,421,216) (4,400,004) Net patient service revenue, net of provision for bad debts 239,428, ,433,531 Other operating revenue 7,362,729 6,623,925 Net assets released from restrictions operations 1,045, ,093 Total revenues 247,837, ,954,549 EXPENSES: Salaries 100,832,506 94,202,610 Employee benefits 30,654,622 26,108,715 Supplies and other 95,093,363 92,468,674 Depreciation and amortization 13,078,538 11,541,883 Interest 948, ,599 Total expenses 240,607, ,175,481 INCOME FROM OPERATIONS 7,229,514 12,779,068 NONOPERATING ITEMS: Unrestricted contributions and legacies 126, ,302 Equity earnings (losses) on limited liability partnerships and corporations and other investment income net 545,488 (1,016,611) Fundraising activities (562,458) 808,890 Total nonoperating items 109,827 (107,419) EXCESS OF REVENUES AND NONOPERATING ITEMS OVER EXPENSES 7,339,341 12,671,649 OTHER CHANGES IN UNRESTRICTED NET ASSETS: Net assets released from restrictions for capital purposes 285,000 1,198,628 Pension-related adjustments (9,398,968) (15,584,119) DECREASE IN UNRESTRICTED NET ASSETS $ (1,774,627) $ (1,713,842) See notes to consolidated financial statements

7 NORTHERN WESTCHESTER HOSPITAL ASSOCIATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Temporarily Permanently Unrestricted Restricted Restricted Net Assets Net Assets Net Assets Total BALANCE January 1, 2011 $ 80,568,129 $ 2,645,278 $ 7,371,154 $ 90,584,561 Excess of revenue and nonoperating items over expenses 12,671, ,671,649 Interest income and losses on investments - (478,238) - (478,238) Contributions - 1,425,939 1,900 1,427,839 Net assets released from restrictions for operating purposes - (897,093) - (897,093) Net assets released from restrictions for capital purposes 1,198,628 (1,198,628) - - Transfer - (630,415) 630,415 - Pension-related adjustments (15,584,119) - - (15,584,119) Change in net assets (1,713,842) (1,778,435) 632,315 (2,859,962) BALANCE December 31, ,854, ,843 8,003,469 87,724,599 Excess of revenue and nonoperating items over expenses 7,339, ,339,341 Interest income and losses on investments - 816, ,552 Contributions - 9,120,652 15,000 9,135,652 Net assets released from restrictions for operating purposes - (1,045,913) - (1,045,913) Net assets released from restrictions for capital purposes 285,000 (285,000) - Pension-related adjustments (9,398,968) - - (9,398,968) Change in net assets (1,774,627) 8,606,291 15,000 6,846,664 BALANCE December 31, 2012 $ 77,079,660 $ 9,473,134 $ 8,018,469 $ 94,571,263 See notes to consolidated financial statements

8 NORTHERN WESTCHESTER HOSPITAL ASSOCIATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND CASH FLOWS FROM OPERATING ACTIVITIES AND NONOPERATING ITEMS: Change in net assets $ 6,846,664 $ (2,859,962) Adjustments to reconcile change in net assets to net cash provided by operating activities and nonoperating items: Depreciation and amortization 13,078,538 11,541,883 Provision for bad debts 4,421,216 4,400,004 Equity (gains) losses on limited liability partnerships and corporations and other realized (gains) losses (421,640) 2,061,912 Pension-related adjustments 9,398,968 15,584,119 Restricted contributions (9,135,652) (1,427,839) Changes in operating assets and liabilities: Patient accounts receivable (1,891,497) (7,132,515) Estimated insurance recoveries 2,000,000 (5,500,000) Other receivables 1,019,061 (144,597) Due to third-party payors (302,246) 372,547 Estimated insurance claims payable (2,000,000) 5,500,000 Estimated liability for self-insurance (994,599) 2,917,278 Accounts payable and accrued expenses (1,514,861) 3,806,461 Accrued salaries and other related benefits (218,504) 1,373,973 Accrued pension liability 1,572,439 (4,798,481) Change in all other operating assets and liabilities (245,325) 313,610 Net cash provided by operating activities and nonoperating items 21,612,562 26,008,393 CASH FLOWS FROM INVESTING ACTIVITIES: Capital acquisitions (24,804,062) (21,792,045) Purchases of investments (4,876,154) (5,083,646) Sales of investments 5,328,601 3,078,744 Net cash used in investing activities (24,351,615) (23,796,947) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt issuance 4,019,515 - Proceeds from restricted contributions 3,588,021 1,795,091 Repayment of debt (2,009,879) (3,443,998) Net cash provided by (used in) financing activities 5,597,657 (1,648,907) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,858, ,539 CASH AND CASH EQUIVALENTS Beginning of year 5,912,968 5,350,429 CASH AND CASH EQUIVALENTS End of year $ 8,771,572 $ 5,912,968 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 973,943 $ 852,700 Accruals for the acquisition of property, plant, and equipment $ 182,000 $ - See notes to consolidated financial statements

9 NORTHERN WESTCHESTER HOSPITAL ASSOCIATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Northern Westchester Hospital Association (the Association ) is a membership corporation organized under the not-for-profit corporation laws of the state of New York and is exempt from federal income tax on related income under Section 501(c)(3) of the Internal Revenue Code (IRC). The Association operates an acute care facility located in Mount Kisco, New York. The Association is an affiliate of Stellaris Health Network ( Stellaris ). The purpose of Stellaris is to preserve a strong community-based health care system for Westchester and Putnam counties, expand access to and improve the quality of care for the communities served, develop a comprehensive network of providers, and achieve and capitalize on economies of scale to provide efficient and effective health care to the community. The other affiliates of Stellaris are Lawrence Hospital Center, Phelps Memorial Hospital Association, and White Plains Hospital Center. Under the terms of the affiliation agreement, Stellaris is the sole member of the Association subject to certain terms and conditions. The Association is the parent company of NORCORP, Inc. (NORCORP), the Northern Westchester Hospital Center Foundation, Inc. ( Foundation ), Northern Westchester Realty Holding Corporation ( Holding ), and Northern Westchester Surgical Services, P.C. ( Surgical Services ) (collectively, the Hospital ). NORCORP is a not-for-profit corporation exempt from income tax under Section 501(c)(3) of the IRC. NORCORP promotes health care education, research, and advances in the health field and supports activities of not-for-profit organizations engaged in health care activities for the betterment of the general health of the communities served. NORCORP owns 100% of the common stock of Northern Westchester Oncology Management Associates, Inc. (NWOMA), a for-profit outpatient oncology center subject to income taxes. During 2005, NWOMA became dormant and is in the process of being dissolved. In addition, NORCORP owns 100% of the common stock of NWHC Health Management Services, Inc. ( Management Services ), a for-profit health management company subject to income taxes. In October 2006, Management Services entered into a joint venture with Yorktown Radiology. In October 2010, Management Services acquired the remaining ownership interest in Yorktown Radiology. In February 2012, the practice was approved by the Department of Health to provide services under Article 28 of the New York State Public Health Law. As such, it became an operating department of the Hospital. The Foundation s primary purpose is to raise funds on behalf of the Hospital. The Foundation is exempt from federal income tax under Section 501(c)(3) and maintains public charity status under Section 509(a)(3) of the IRC. Holding s primary purpose is to acquire rental property for the benefit of the Hospital. Holding is exempt from federal income tax under Section 501(c)(2) of the IRC. Surgical Services is a for-profit New York professional service corporation pursuant to Section 708 of the Business Corporation Law of the State of New York. Surgical Services was established January 1,

10 Income taxes relating to for-profit operations are not significant. Basis of Accounting The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the American Institute of Certified Public Accountants Audit and Accounting Guide, Health Care Entities, and other pronouncements applicable to health care organizations and include the activities of the Association, NORCORP, NWOMA, Foundation, Holding, Surgical Services, and Management Services. The Hospital accounts for its interest in its controlled affiliates using the equity basis of accounting. Such entities are presented in the supplemental consolidating schedules on a cost basis. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for uncollectible patient accounts, contractual allowances, valuation of alternative investments, estimated amounts due to third-party payors, estimated liability for self-insurance, and accrued pension liability and other employee benefit costs. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with maturities of three months or less from the date of purchase, excluding amounts classified as assets whose use is limited. Inventory Inventory is accounted for under the first-in, first-out method at the lower of cost or market. Assets Whose Use is Limited Assets whose use is limited include assets set aside by the Board of Trustees, over which the Board of Trustees retains control and may use at its discretion, assets held by trustees under indenture agreements, assets held in a malpractice trust, and donor-restricted gifts. Assets whose use is limited that are invested in alternative investments, which include hedge funds structured as limited partnerships, are reported using the equity method of accounting, which approximates fair value as estimated by the investment manager. The fund managers estimates and assumptions of fair values of nonmarketable investments may differ significantly from the values that would have been used had a ready market existed and may also differ significantly from the values at which such investments may be sold, and the differences could be material. Certain of the alternative investments have restrictions on the withdrawal of the funds. The holdings of alternative investment interests may indirectly expose the Hospital to securities lending, short sales of securities, and trading in futures, forward contracts, options, and other derivative products. All investments in debt securities are measured at fair value at the balance sheet date based upon quoted market prices. Investment income or loss (including realized gains and losses on investments, equity earnings and losses on limited liability partnerships and corporations, interest, and dividends) is included in excess of revenues and nonoperating items over expenses, unless the income or loss is restricted by donor or law. Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. As such, it is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the consolidated balance sheets and consolidated statements of operations and changes in net assets. Other-Than-Temporary Impairment of Investments The Hospital reviews its investments to identify those for which market value is below cost. The Hospital then makes a determination as to whether the investment should be considered other-than-temporarily impaired. The Hospital has not - 8 -

11 recognized any losses related to declines in value that were other than temporary in nature in 2012 and Property, Plant, and Equipment Property and equipment acquisitions are recorded at cost or, in the case of gifts, at fair market value at the date of the gift. Capitalized lease obligations are recorded at the present value of the minimum lease payments at the inception of the lease. Leased assets are amortized over the lesser of the estimated useful life of the asset or lease term. Such amortization is reported within depreciation and amortization in the accompanying consolidated statements of operations. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. Gifts of long-lived assets, such as land, buildings, or equipment, are reported as unrestricted support and are excluded from the excess of revenues and nonoperating items over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long these long-lived assets must be maintained, expiration of donor-restrictions is reported when the donated or acquired long-lived assets are placed in service. Land improvements Buildings and fixed equipment Furniture and equipment 8 15 years 6 20 years 3 10 years Goodwill and Other Intangibles Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at the reporting unit level annually or more frequently if the presence of certain circumstances indicates that impairment may have occurred. The impairment review process compares the fair value of the reporting unit in which goodwill resides to the carrying value. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit goodwill to its carrying amount. In calculating the implied fair value of the reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. Intangible assets (other than goodwill) are amortized on a straight-line basis over the periods of benefit. The Hospital evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset s carrying amount may not be recoverable. Deferred Financing Costs Deferred financing costs include legal, financing, and placement fees associated with the issuance of long-term debt. Deferred financing costs are being amortized over the term of the related debt using the interest method. Accumulated amortization was approximately $717,000 and $799,000 as of December 31, 2012 and 2011, respectively. Impairment of Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less cost to sell

12 Self-Insurance Costs under self-insurance programs for employee health benefits, professional liability, and workers compensation include the estimated costs for both reported claims and claims incurred but not reported. The undiscounted estimates are approximately $1,000,000 for employee health benefits as of December 31, 2012 and 2011, and $2,987,000 and $2,677,000 for workers compensation as of December 31, 2012 and 2011, respectively. These amounts are included in the accompanying consolidated balance sheets as accounts payable and accrued expenses and estimated liability for self-insurance. The undiscounted estimate for professional liability is approximately $11,581,000 and $12,850,000 at December 31, 2012 and 2011, respectively, which is recorded as estimated liability for self-insurance in the accompanying consolidated balance sheets (see Note 7). Net Assets The net assets of the Hospital and changes therein are classified and reported as follows: Unrestricted Net Assets Unrestricted net assets represent contributions, gifts, and grants that have no donor-imposed restrictions or that arise as a result of operations. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use has been limited by donors or grantors to a specific time period or purpose. Temporarily restricted net assets are available for capital acquisition, defined health care operations, health care education, and indigent care. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity (the income from which is expendable to support health care services and necessary education). Generally, the donors of these assets permit the Hospital to use all of the income earned on related investments for specific purposes. Pledges Receivable Pledges receivable, less an allowance for uncollectible amounts, are recorded in the year made and are primarily unsecured and are receivable from individuals and business. Pledges receivable greater than one year are recorded at their present value (discounted at December 31, 2012 and 2011 at 1.0% and 4.0%, respectively). Restricted pledges are reported as additions to the appropriate restricted net assets. Donor-Restricted Gifts Gifts of cash and other assets are reported as 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 and reported in the accompanying consolidated statements of operations and changes in net assets as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions. Consolidated Statements of Operations For purposes of display, transactions deemed by management to be ongoing, major, or central to the provision of health care services are reported as revenues and expenses; peripheral or incidental transactions, primarily contributions and fundraising activities and investment income and losses, other than that related to funds held in the malpractice trust, including equity earnings and losses on limited liability partnership and corporation investments, are reported as nonoperating items. The accompanying consolidated statements of operations include the caption excess of revenues and nonoperating items over expenses, which is the performance indicator. Changes in unrestricted net assets that are excluded from the performance indictor, consistent with industry practice, include permanent transfers of assets from affiliates for other goods and services, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets), and pension-related adjustments. Patient Service Revenue, after contractual allowances and discounts (but before provision for bad debts) The Hospital recognizes patient service revenue associated with services provided to patients

13 who have third-party coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the Hospital recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a significant portion of the Hospital s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Hospital records a significant provision for bad debts related to uninsured patients in the period the services are provided. Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources, is as follows: Medicare $ 64,354,834 $ 63,131,552 Medicaid 8,598,199 8,298,851 Managed care 141,947, ,747,022 Self-pay 4,357,138 4,084,673 Other third-party payors 24,592,701 24,571,437 Net patient service revenue after contractual allowances and discounts $ 243,850,060 $ 234,833,535 A summary of the payment arrangements with major third-party payors follows: Medicare Under the Medicare program, the Hospital receives reimbursement under a prospective payment system (PPS) for inpatient and outpatient services. Under the Hospital inpatient PPS, fixedpayment amounts per inpatient discharge are established based on the patient s assigned diagnosis related group (DRG). When the estimated cost of treatment for certain patients is higher than the average, providers typically will receive additional outlier payments. Under outpatient PPS, ambulatory services are paid based on service groups called ambulatory payment classifications. The Hospital s behavioral health unit is subject to PPS based on the intensity of the services provided to the patient. The Hospital has received final settlements through Non-Medicare Payors On March 30, 2011, the New York State fiscal 2012 budget was passed resulting in the extension of the New York Health Care Reform Act of 1996 (the Act ) for an additional three-year period ending March 31, Under the Act, Medicaid payment rates are promulgated by the New York State Department of Health on a prospective basis. The Act has been revised to incorporate certain proposals made by the Medicaid Redesign Team. In addition to a global Medicaid spending cap, the Act includes delivery system reform, home care payment changes, mandatory enrollment of populations into managed long-term care or managed care, payment and quality linkages, palliative care provisions, utilization review, and reimbursement reductions. Fixed payment amounts per inpatient discharge are established based on the patient s assigned case mix similar to a Medicare DRG. All other third-party payors, principally, Blue Cross, other private insurance companies, home maintenance organizations, preferred provider organizations, and other managed care plans, negotiate payment rates directly with the Hospital. Such arrangements include DRG-based payment systems, per diems, case rates, and percentage of billed charges. If such rates are not negotiated, then the payors are billed at the Hospital s established charges. Indigent Care Pool New York state regulations provide for the distribution of funds from an indigent care pool which is intended to partially offset the cost of services provided to the uninsured. The funds are distributed to hospitals based on each hospital s level of bad debt and charity care in relation to all other hospitals. For the years ended December 31, 2012 and 2011, the Hospital received distributions of

14 approximately $1,328,000 and $1,554,000, respectively, from the indigent care pool, which are included in net patient service revenue in the accompanying consolidated statements of operations. Laws and Regulations Both federal and New York state regulations provide for certain adjustments to current and prior years payment rates and indigent care pool distributions based on industry-wide and hospital-specific data. The Hospital has established estimates based on information presently available of the amounts due to or from Medicare, Medicaid, workers compensation, and no-fault payors and amounts due from the indigent care pool for such adjustments. There are various proposals at the federal and New York state levels that could, among other things, reduce reimbursement rates or modify reimbursement methods. The ultimate outcome of these proposals and other market changes cannot presently be determined. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as settlements are finalized. Changes in estimates increased net patient service revenue by $67,000 in 2012 and decreased net patient service revenue $373,000 in The Hospital believes that it is in compliance, in all material respects, with all applicable laws and regulations and it is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquires have been made, compliance with such laws and regulations can be subject to future government review and interpretation. Noncompliance with such laws and regulations could result in repayments of amounts improperly reimbursed, substantial monetary fines, civil and criminal penalties, and exclusion from the Medicare and Medicaid programs. The federal government and many states have aggressively increased enforcement under Medicare and Medicaid antifraud and abuse legislation. Recent federal initiatives have prompted a national review of federally funded health care programs. The Hospital has implemented a compliance program to monitor conformance with applicable laws and regulations, but the possibility of future government review and interpretation exists. The ultimate outcome of any such reviews, which may be initiated by regulatory agencies, cannot be determined. Charity Care The Hospital strives to maintain quality health care delivery in a manner that respects the dignity of the individual and family, regardless of ability to pay. Consistent with the Hospital s taxexempt status and community service responsibilities, the Hospital provides financial assistance in the form of free or discounted care to patients who need health care services and meet program eligibility criteria. Because the collection of amounts determined to qualify as charity care is not pursued, it is not reported as revenue. The estimated cost incurred by the Hospital to provide services to patients who are unable to pay was approximately $4,122,000 and $3,256,000 for the years ended December 31, 2012 and 2011, respectively. The estimated cost of these charity care services was determined using a ratio of cost to gross charges and applying that ratio to the gross charges associated with providing care to charity patients for the period. Gross charges associated with providing care to charity patients include only the related charges for those patients who are financially unable to pay and qualify under the Hospital s charity care policy and that do not otherwise qualify for reimbursement from a governmental program. Certain services are provided under Medical Assistance and Medicare programs whereby the payments received are less than the cost of providing the services. Additionally, services are performed at no charge, which benefit the community, such as public health screening, health care publications, workplace wellness, health-related educational programs, and other activities

15 Provision and Allowance for Doubtful Accounts To provide for accounts receivable that could become uncollectible in the future, the Hospital establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. In evaluating the collectability of accounts receivable, the Hospital analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, the Hospital analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Hospital records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Hospital s allowance for doubtful accounts for self-pay patients with no insurance and for patient responsibility for insured patients was approximately 16 percent and 13 percent of patient accounts receivable at December 31, 2012 and 2011, respectively. In addition, the Hospital s write-offs and net referrals to collection agencies for these accounts increased from $3,782,000 in 2011 to $3,909,000 in The increase reflects the negative trends experienced in the collection of amounts from these patients. The Hospital has not changed its charity care or uninsured discount policies during fiscal years 2011 or Electronic Health Records Incentives Under the Health Information Technology for Economic and Clinical Health (HITECH) Act, acute care hospitals are eligible for incentive payments for achieving meaningful use of electronic health records (EHR) from both Medicare and Medicaid. The Hospital reports amounts awarded to it under the EHR program as other operating revenue when the Hospital has completed the compliance requirements as set forth by Medicare and Medicaid. During 2012, the Hospital recorded as other operating revenue an estimated $1,699,000 from Medicare and $289,000 from Medicaid, respectively. Accounting for Asset Retirement Obligations The Hospital recognizes a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation is factored into the measurement of the liability when sufficient information exists. The types of asset retirement obligations that the Hospital considers are those for which it has a legal obligation to perform an asset retirement activity, however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within its control. The New York State Department of Labor Industrial Code Rule 56 requires the controlled removal or encapsulation of asbestos by a licensed contractor in commercial and public buildings, including renovation and partial or complete demolition activities; such legislation is applicable to the Hospital. The fair value of a liability for the legal obligation associated with an asset retirement is recorded in the period in which the obligation is incurred. When the liability is initially recorded, the cost of the asset retirement is capitalized. At December 31, 2012 and 2011, the Hospital has recorded a liability for the removal of asbestos of approximately $1,024,800 and $878,000, respectively, which is included in other liabilities in the accompanying consolidated balance sheets

16 Accounting for Postretirement Benefit Plans The Hospital recognizes the overfunded or underfunded status of its defined benefit pension and other postretirement benefit plans (collectively, postretirement benefit plans ) in the consolidated balance sheets. Changes in the funded status of the plans are reported in the year in which the changes occur as a change in unrestricted net assets presented below the excess of revenues and nonoperating items over expenses in its consolidated statements of operations and changes in net assets. Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. The purpose of this ASU is to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. In addition, some of the amendments could change how the fair value measurements guidance in Accounting Standards Codification (ASC) 820 is applied. The amendments in this ASU are to be applied prospectively. The provisions of ASU were adopted by the Hospital on January 1, The adoption of ASU had no impact on the consolidated financial statements and no additional disclosures were required in the notes to the consolidated financial statements. In July 2011, the FASB issued ASU , Health Care Entities (Topic 954), Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The adoption of ASU requires the Hospital change the presentation of its consolidated statements of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, the ASU requires the Hospital to provide enhanced disclosures about its sources of patient service revenue, policies for recognizing revenue and assessing bad debts, as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The provisions of ASU were effective for the Hospital beginning January 1, The adoption of this ASU decreased net patient service revenue by $4,421,000 for 2012 and $4,400,000 for There was no impact on total revenues and excess of revenues and nonoperating items over expenses for the years ended December 31, 2012 and The Hospital has included the enhanced disclosures in Note 1 to the consolidated financial statements. In September 2011, the FASB issued ASU , Disclosures About an Employer s Participation in a Multiemployer Plan, which amends ASC , Compensation Retirement Benefits Multiemployer Plans, by increasing the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The Hospital adopted the provisions of ASU on January 1, The adoption of this accounting standard had no impact on the Hospital s consolidated financial statements. Additional disclosures required under this ASU are included in Note 8 to the consolidated financial statements

17 2. ASSETS WHOSE USE IS LIMITED Assets whose use is limited at December 31, 2012 and 2011, consist of the following: Cash investments $ 13,126,188 $ 14,907,696 Alternative investments limited liability partnerships and corporations 14,628,010 13,058,812 Corporate and U.S. government bonds 1,091, ,625 Pledges receivable net 6,847,102 1,299,471 Total assets whose use is limited 35,692,428 30,175,604 Less current portion of assets whose use is limited (6,145,356) (7,034,910) Assets whose use is limited noncurrent $ 29,547,072 $ 23,140,694 Assets whose use is limited consist of construction funds of $2,411,000 and $4,917,000 at December 31, 2012 and 2011, respectively; malpractice trust and debt service reserve funds of approximately $9,000,000 and $11,606,000 at December 31, 2012 and 2011, respectively; and Board designated funds of approximately $6,790,000 and $4,782,000 at December 31, 2012 and 2011, respectively. The remaining assets whose use is limited have been restricted by donors. The pledges receivable at December 31, 2012 and 2011, which are included in assets whose use is limited in the accompanying consolidated balance sheets, are as follows: Due in less than one year $ 1,840,841 $ 643,559 Due in one to five years 5,352, ,912 Discount on pledges (137,000) (102,000) 7,056,102 1,372,471 Allowance for uncollectible pledges (209,000) (73,000) Total $ 6,847,102 $ 1,299,

18 Return on investments for the years ended December 31, 2012 and 2011, are as follows: Unrestricted net assets: Other operating income (loss) $ 814,644 $ (567,063) Nonoperating items equity (losses) earnings on limited liability partnerships and corporations and other investment income net 545,488 (1,016,611) Temporarily restricted net assets investment income and (losses) gains on investments 816,552 (478,238) Total return on investments $ 2,176,684 $ (2,061,912) 3. FAIR VALUE MEASUREMENTS GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The fair value hierarchy is as follows: Level 1 Quoted (unadjusted) prices for identical assets in active markets. Level 2 Other observable inputs, either directly or indirectly, including: Quoted prices for similar assets in active markets; Quoted prices for identical or similar assets in nonactive markets (few transactions, limited information, noncurrent prices, high variability over time, etc.); Inputs other than quoted prices that are observable for the asset (interest rates, yield curves, volatilities, default rates, etc.); and Inputs that are derived principally from or corroborated by other observable market data. Level 3 Unobservable inputs that cannot be corroborated by observable market data

19 The following table presents information as of December 31, 2012 and 2011, about the Hospital s financial assets that are measured at fair value on a recurring basis: Quoted Prices in Other Active Observable Unobservable Markets Inputs Inputs December 31, 2012 (Level 1) (Level 2) (Level 3) Fair Value Assets whose use is limited: Cash investments $ 13,126,188 $ - $ - $ 13,126,188 Corporate and U.S. government bonds - 1,091,128-1,091,128 Alternative investments - limited liability partnerships and corporations ,628,010 14,628,010 Total assets whose use is limited 13,126,188 1,091,128 14,628,010 28,845,326 Assets held in pension plan: Cash investments 12,739, ,739,621 Alternative investments - limited liability partnerships and corporations ,298,316 60,298,316 Total assets held in pension plan 12,739,621-60,298,316 73,037,937 Total $ 25,865,809 $ 1,091,128 $ 74,926,326 $ 101,883,263 Quoted Prices in Other Active Observable Unobservable Markets Inputs Inputs December 31, 2011 (Level 1) (Level 2) (Level 3) Fair Value Assets whose use is limited: Cash investments $ 14,907,696 $ - $ - $ 14,907,696 Corporate and U.S. government bonds - 909, ,625 Alternative investments - limited liability partnerships and corporations ,058,812 13,058,812 Total assets whose use is limited 14,907, ,625 13,058,812 28,876,133 Assets held in pension plan: Cash investments 14,506, ,506,443 Equity securities 2,182, ,182,707 Alternative investments - limited liability partnerships and corporations ,971,170 51,971,170 Total assets held in pension plan 16,689,150-51,971,170 68,660,320 Total $ 31,596,846 $ 909,625 $ 65,029,982 $ 97,536,

20 At December 31, 2012 and 2011, Level 1 investments include cash investments and equity securities, Level 2 investments include corporate and U.S. government bonds, and Level 3 investments are comprised of investments in limited partnerships. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash Investments The carrying value of cash investments approximates fair value as maturities are less than three months and/or include money market funds that are based on quoted prices and actively traded. Equity Securities Fair value estimates for publicly traded equity securities are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the prices. Debt Securities The estimated fair values of debt securities are based on quoted market prices and/or other market date for the same or comparable instruments and transactions in establishing the prices. Fair value of debt securities that do not trade on a regular basis in active markets are classified as Level 2. Limited Liability Partnerships and Corporations Investments in limited partnerships do not have readily determinable market values. Fair value estimates are based on information provided by each fund manager. As a practical expedient, the Hospital measures the fair value of these investments on the basis of the net asset value per share (or its equivalent). Such investments are accounted for under the equity method of accounting and any adjustments to the estimated fair value are recorded as changes in the value of the investment