MidMichigan Health. Disclosure Statement

Transcription

1 MidMichigan Health Disclosure Statement

2 MIDMICHIGAN HEALTH DISCLOSURE STATEMENT: JUNE 30, 2012 This Disclosure Statement discusses MidMichigan Health s results of operations, financial condition and liquidity, risk management activities, and significant accounting policies. MidMichigan s fiscal year ends on June 30 th. The following is an outline of the analysis included herein: Business Overview o Governance o MidMichigan Health facilities & campus description o Medical Staff o Community Oversight o Service Area Summary of Results Review of Consolidated Results Historical Capitalization Historical Debt Service Coverage Liquidity Risk Management Issued But Not Yet Effective Accounting Standards Forward-Looking Information The Appendix includes additional information that may be helpful but is not required. BUSINESS OVERVIEW MidMichigan Health is a non-profit, tax-exempt corporation established in 1982 under the laws of the State of Michigan. At MidMichigan Health, our patients are the focus of everything we do. MidMichigan Health s mission is to provide excellent health services to improve the quality of life for people in our communities. MidMichigan Health s vision is to be an integrated health system providing seamless care to each person we serve. This care is provided through coordinated hospitals, home care, nursing homes, and urgent care, as well as through physician services and advanced medical technology. MidMichigan Health s family of organizations is dedicated to providing quality, comprehensive health care throughout the middle of Michigan and beyond. MidMichigan Health, as the parent company, provides long-range strategic planning for and coordinates the activities of its affiliate organizations. MidMichigan Health is exempt from federal income tax under section 501(a) of the Internal Revenue Code (the "Code") by reason of being an organization described by Section 501(c)(3) of the Code. With respect to its affiliates, MidMichigan Health has the right to elect the Board of Directors and must approve any amendments to the articles of incorporation and bylaws. Further, it has the authority to approve major expenditures and long-term borrowings of its affiliates. MidMichigan Health is the sole member of each of its affiliates. See GOVERNANCE herein. MidMichigan Health includes: two acute care hospitals, one rural hospital, one critical access hospital, two nursing homes, home health services, ambulatory centers and programs, a physicians group, a captive insurance company, various medical office buildings, magnetic resonance imaging, and through February 2012 hemodialysis services. It also provides radiation therapy and positron emission tomography (PET) imaging services in connection with other healthcare systems. MidMichigan Health serves a primary service area with a population of approximately 274,000 people (2012 estimate). The Obligated Group under the Master Indenture consists of MidMichigan Health and all of its active controlled affiliates except MidMichigan Assurance Group, Ltd (MAG). As of MAG held assets of $22.2 million, while total consolidated assets equaled $961.4 million, including MAG. Unless otherwise noted, MidMichigan Health is used herein to include MidMichigan Health and its consolidated affiliates. 1

3 BUSINESS OVERVIEW: GOVERNANCE MidMichigan Health Disclosure Statement MidMichigan Health serves as the parent company for all controlled affiliates which, together, provide diverse quality healthcare and related services to the residents of the central Michigan area. The principal function of MidMichigan Health is to establish and coordinate long-term plans and objectives for each entity that is a part of the system. MidMichigan Health was incorporated for the benefit and governance oversight of MidMichigan Health and other controlled affiliates and is legally designated as the "sole member" of its directly controlled affiliates. MidMichigan Health and its controlled affiliates are listed and described in the following table. Legal Entity and How Referred to in this Statement MidMichigan Health MidMichigan Medical Center-Midland (Midland) MidMichigan Medical Center-Gratiot (Gratiot) MidMichigan Medical Center-Clare (Clare) MidMichigan Medical Center-Gladwin (Gladwin) Description The parent company and Obligated Group agent A 265-bed acute care hospital (1) A 142-bed acute care hospital A 49-bed rural acute care hospital A 25-bed critical access hospital MidMichigan Physicians Group (MPG) A physician employment and management affiliate MidMichigan Visiting Nurse Association (MVNA), d.b.a. MidMichigan Home Care (MHC) A Medicare-certified affiliate offering skilled nursing and physical, occupational, respiratory, and speech therapies, hospice, private duty nursing, and durable medical equipment MidMichigan Gladwin Pines (MGP) A 120-licensed bed nursing home MidMichigan Stratford Village (MSV) An 80-licensed bed nursing home MidMichigan Regional Imaging (MRI) A magnetic resonance imaging corporation Regional Dialysis Services Inc. (RDS) A hemodialysis service organization (2) MidMichigan Urgent Care (MUC) A walk-in urgent care facility in Midland and Freeland MidMichigan Health Development Associates (MHDA) A tax-exempt real estate development and management corporation MidMichigan Assurance Group, Ltd.(MAG) A primary care captive insurance company (1) In Fiscal 2012, 15 additional beds were brought on-line when the Harlow expansion was complete. Beds were transferred from Clare when obstetrics unit was closed. (2) As of February 1, 2012 MidMichigan Health sold substantially all of the assets of RDS and Great Lakes Renal Network (GLRN). RDS is currently in the process of being wounddown. MidMichigan Health patients that require renal care now receive it from DaVita Inc. BUSINESS OVERVIEW: MIDMICHIGAN HEALTH FACILITIES & CAMPUS DESCRIPTIONS As an integrated health care delivery system, in addition to the four hospitals, MidMichigan Health includes a number of other affiliates which provide key services to the communities and hospitals MidMichigan Health serves. These include an employed physicians group, home health services, two long-term care facilities, magnetic resonance imaging services, hemodialysis services, and various medical office buildings. A brief description of all MidMichigan Health affiliates follows: MidMichigan Medical Center-Midland Operated Beds Midland, a 265-licensed bed hospital located in Midland, Michigan, is the only hospital within its county. The campus consists of approximately 146 acres and represents MidMichigan Health's flagship acute care 2

4 facility. It provides a full continuum of primary, secondary and tertiary services. Midland s services include general medicine and surgery, bariatric surgery, cardiology, acute and ambulatory psychiatric services, ambulatory rehabilitation medicine, oncology, pediatrics, basic and complex diagnostic services (including magnetic resonance imaging), and a full range of ambulatory services at Midland s main campus. Midland also maintains an 18-resident family practice medical education program which is one of the oldest such programs in the country. Midland began operating a full cardiac program in August An additional cardiologist and mid-levels were added in Fiscal 2012 to help expand cardiovascular clinics to our outreach areas. Significant resources have been committed to the neurosciences, oncology, orthopedics, and cardiology strategic business units. In March 2008, MidMichigan Health approved the renovation and expansion of the hospital, also known as, the Harlow Expansion. The total construction square footage (new and remodeled) added approximately 280,000 square feet. The expansion consisted of three new floors which replaced existing semi-private rooms with 36 private rooms on each floor including critical care rooms. The renovation also included an enlarged surgical services department, including four additional operating rooms and two remodeled and renovated rooms, pre-surgical, recovery areas, and support areas such as cardiac catheterization, post anesthesia care, and interventional radiology departments. The project was complete and placed into service on December 5, 2011 on-time and within budget. MidMichigan Health was able to complete the third floor within the original budget. In the original plans we only expected to shell in this floor. Midland is a regional leader in investing in advanced technology, offering state-of-the-art equipment and procedures typically found only in large academic medical centers. For example, Midland offers the region s most advanced robotic surgery capabilities using the da Vinci SI Surgical System, is the only hospital in Michigan to offer Gamma Knife Perfexion, considered the gold standard in brain surgery, and has an array of advanced imaging techniques that is unmatched in the region. Advanced technologies available at Midland include: Advanced Imaging 128-slice Computed Tomography (CT) Scanning Magnetic resonance imaging (3.0 T closed and 1.0 T open) Positron Emission Tomography (PET) Cardiovascular Technology Intravascular Ultrasound (IVUS) SPY imaging system Transmyocardial revascularization (TMR) Neuroscience Deep Brain Stimulation (DBS) O-ARM intraoperative imaging device Stereotactic radiosurgery HBodyArrayH Gamma Knife Perfexion Robotic Surgery da Vinci SI Surgical System MidMichigan Medical Center-Gratiot -100 Operated Beds Gratiot, a 142-licensed bed acute care hospital, is located in Alma, Michigan. Gratiot is the only hospital located within its county. In addition to specialty services commonly found in community hospitals, Gratiot also provides a full range of inpatient and outpatient rehabilitation services, urgent care, psychiatry, and specialty centers for sleep disorders, pain management, magnetic resonance imaging services, and substance abuse. MidMichigan Gratiot Cancer Center, located in Alma, is operated as a department of Midland and provides both radiation and medical oncology care to cancer patients. Gratiot also offers bariatric surgery and has been named by the American Society for Metabolic and Bariatric Surgery as a Center of Excellence. In September 2008, Gratiot opened its 140,000-square-foot patient tower which includes 120-private-patient rooms. This was the last phase of the Gratiot facility improvement project started in The new emergency department, urgent care, and occupational health facility opened in

5 MidMichigan Medical Center-Clare - 49 Operated Beds Clare, a 49-licensed bed rural acute care hospital, is located in Clare, Michigan. Clare is the only hospital located within its county. It offers services that are reflective of rural facilities, such as primary care services including inpatient, 24-hour emergency room coverage, urgent care medicine, and radiology services. In addition to these services, Clare also provides nuclear medicine services, an intensive care unit, and a progressive care unit. Both ultrasound and fixed CT scanning equipment are located in Clare to provide diagnostic imaging. Additional services are available to Clare patients through Gratiot and Midland. Clare completed its 14,000-square-foot surgical suites addition to the Medical Center in June It included state-of-the-science operating rooms, communication, and video and telemedicine capabilities which enhance its patient safety and diagnostic capabilities. MidMichigan Medical Center-Gladwin - 25 Operated Beds Gladwin, a 25-licensed bed critical access hospital, is located in Gladwin, Michigan. Gladwin is the only hospital located within its county. It offers services similar to Clare, reflective of its rural location. These services include primary care services including inpatient, 24-hour emergency room coverage, urgent care medicine, nuclear medicine, infusion and radiology services. Both ultrasound and fixed CT scanning equipment are located in Gladwin, providing diagnostic services to Gladwin patients. Additional services are available to Gladwin patients primarily through Midland. MidMichigan Physicians Group is a multi-specialty physician practice serving 10 communities in the middle of Michigan as of. There are 25 specialties represented in the practice with office locations in Auburn, Clare, Farwell, Freeland, Gladwin, Harrison, Hemlock, Houghton Lake, Midland, and Mt. Pleasant. As well as employing physicians since 1996, MPG also provides specialized services such as billing, coding, practice management, and computer services to other area physician practices. Physician compensation is based on data available through the Medical Group Management Association (MGMA) and American Medical Group Association (AMGA). Physicians with two years of experience participate in an incentive plan based on median compensation and median worked relative value units (RVUs) as determined by MGMA-AMGA data. MPG employs approximately 130 physicians and mid-level providers. MidMichigan Home Care is a home health care agency that makes approximately 64,000 visits to patients per year, and an additional 19,000 hospice visits. This agency, with a service area of 12 counties, provides services in skilled nursing, physical, occupational, and speech therapy, and social work, as well as home health aide assistance for people in their homes. MHC also provides oxygen and respiratory therapy, medical equipment, health care personnel, and special services, on a long or short-term basis. In addition, respite services are offered as temporary relief for caregivers as well as a hospice program which provides care for terminally ill persons and support for their families. MHC is accredited by the Community Health Accreditation Program (CHAPS) for both its skilled and hospice programs. MidMichigan Gladwin Pines (120 Operated Beds) and MidMichigan Stratford Village (80 Operated Beds) are located in Gladwin and Midland counties, respectively, and provide extended nursing care to residents. The facilities are licensed to operate 200 beds, of which 200 are staffed. The combined occupancy rate for MGP and MSV approximated 83.8% as of (based on staffed beds). MGP and MSV are Medicare-certified facilities. MGP is located adjacent to Gladwin and is fully equipped to provide skilled and basic nursing. MSV is located in a country setting on seven acres in Midland with easy access to the city. A full range of treatment is available for all patients. In addition, both facilities provide rehabilitative services and physical, occupational, and speech therapists assist in the care of these patients, if appropriate. MSV stopped providing assisted living services as of June 30, 2009, and now focuses on its core services as an 80-licensed-bed nursing home. During Fiscal 2012, MSV completed approximately $2 million in renovations which created neighborhoods for a more home-like environment. 4

6 MidMichigan Regional Imaging offers one of the most advanced methods of diagnostic examinations Magnetic Resonance Imaging. Fixed units are located on the Midland campus and mobile services travel to Clare, Gladwin, and Flint. MRI offers the latest in imaging technology with the highest strength open magnet and the only 3Tesla magnet available in the middle of Michigan. The American College of Radiology (ACR) accredits MRI. Regional Dialysis Services (RDS) provided hemodialysis services in Midland, West Branch, Bay City, and Gladwin until February 1, 2012, when DaVita Inc acquired the Great Lakes Renal Network. RDS is a joint venture between MidMichigan Health (67% ownership interest) and Bay Regional Medical Center (33% ownership interest). RDS is also a 50% owner in Alpena Dialysis Services (ADS), a joint venture with Alpena General Hospital, see Joint Ventures herein. Currently these organizations are in the process of being wounddown. MidMichigan Urgent Care is a walk-in urgent care facility, located in Midland and Freeland, Michigan. Midland serves approximately 84 patients per day (31,000 patients per year) and Freeland serves approximately 24 patients per day (9,000 patients per year) by providing medical care to those who are unable to see their family physician. Both facilities also offer occupational health services for local employers, including physicals, drug screens, and injury treatment. MidMichigan Health Development Associates is a real estate development and management company. It is a tax-exempt corporation which supports the other patient care organizations by providing physician office space that is convenient for patients. MidMichigan Assurance Group, Ltd is a primary captive insurance company domiciled in the Cayman Islands. It began insuring independent and employed physicians effective July 1, [Remainder of page intentionally left blank] 5

7 BUSINESS OVERVIEW: MEDICAL STAFF MidMichigan Health Disclosure Statement The chart below shows the number of physicians affiliated with MidMichigan Health according to practice status as of. The Medical Staff is organized into groups according to type of hospital affiliation. The categories of MidMichigan Health s Medical Staff membership are as follows: Active Courtesy Provisional Physicians who qualify as Active members of the Medical Staff and who regularly perform a major part of their hospital medical practice at a MidMichigan Health hospital Physicians who qualify as Active members of the Medical Staff but use MidMichigan Health hospitals infrequently Physicians who are serving probationary periods of Medical Staff appointment at a MidMichigan Health hospital Physician Status 2012 Active 195 Courtesy 141 Provisional 128 Total 464 % of Active Physicians Board Certified 94% Source: MidMichigan Health Medical Staff Records [Remainder of page intentionally left blank] 6

8 As of, the specialties of MidMichigan Health's physicians were: Physicians by Specialty Number of Physicians Allergy and/or Allergy and Immunology 3 Anesthesiology 22 Cardiology 21 Critical Care Medicine 7 Dermatology 1 Emergency Medicine 63 Endocrinology and Metabolism 2 Family Practice 75 Gastroenterology 10 Infectious Diseases 4 Internal Medicine 31 Nephrology 3 Neurology, including Neurosurgery 16 Obstetrics and Gynecology 19 Occupational Medicine 3 Oncology, including Radiation Oncology 15 Ophthalmology/Optometry 20 Orthopedic Surgery 15 Otolaryngology 7 Pain Management 3 Pathology 5 Pediatrics (includes general Pediatrics and subspecialties) 12 Physical Medicine and Rehabilitation 4 Podiatry 4 Psychiatry 9 Pulmonary Diseases 1 Radiology* 51 Rheumatology 1 Stroke Telemedicine 2 Surgery (includes general and subspecialties) 27 Urology 8 Total 464 *Includes approximately 30 Nighthawk Teleradiologists MidMichigan Health conducts an annual assessment of physician manpower needs and is continuously involved in recruiting primary care and specialty care physicians to all four MidMichigan Health hospitals. 7

9 BUSINESS OVERVIEW: COMMUNITY OVERSIGHT MidMichigan Health is a membership corporation consisting of 177 community members, who meet at least once a year, serve staggered five-year terms, and elect MidMichigan Health s Board of Directors. The individuals selected to be members are drawn from a broad representation of the citizens of the communities served by MidMichigan Health with particular emphasis given to those individuals who have demonstrated positive interest in MidMichigan Health and want to promote health care in the communities served by MidMichigan Health. A 17-member Board of Directors governs MidMichigan Health. A majority of the Board must be residents of Midland County, Michigan. Terms of the Board of Directors are for one year. However, no director (other than the Chief Executive Officer) may serve more than nine consecutive terms. Under the bylaws of each of the affiliates of MidMichigan Health, MidMichigan Health has certain reserved powers. These reserved powers include MidMichigan Health's right to approve the following: Changes in the purposes of the affiliate; Changes in the corporation s Articles of Incorporation or Bylaws; Corporate reorganizations, mergers, consolidations or affiliations; Sales, conveyances, assignments, transfers, alienations, pledges, or other encumbrances of any assets of the corporation; Annual operating and capital budgets and any capital expenditures of the corporation in excess of the amount designated from time to time by MidMichigan Health; Guarantees by the corporation of the debt of others; and Incurrence by the corporation of any debt or lease obligation in excess of an amount designated from time to time by MidMichigan Health. Subject to the powers and authorities reserved for MidMichigan Health, each affiliate maintains its separate existence with its own Board of Directors. Each affiliate s Board of Directors is approved by MidMichigan Health and is responsible for fulfilling its mission (which is the same for all MidMichigan Health Affiliates) and strategic plan, as well as managing its property and business affairs. MidMichigan Health is the sole member of each affiliate with the exception of RDS, a joint venture of which it owns 67%. [Remainder of page intentionally left blank] 8

10 BUSINESS OVERVIEW: SERVICE AREA Market Environment MidMichigan Health Disclosure Statement MidMichigan Health's service area consists of the following four main service areas and cities: Northwest Area: Clare, Harrison, Farwell, and Lake Northeast Area: Beaverton and Gladwin Southeast Area: Sanford, Coleman, Midland, Freeland, Hope, and Auburn Southwest Area: St. Louis, Alma, Elwell, Breckenridge, Riverdale, Shepherd, Wheeler, Vestaberg, Ithaca, Sumner, Edmore, Rosebush, Blanchard, Mt. Pleasant, and Weidman MidMichigan Health serves the majority of the population in these cities, with only one other competing hospital in Mt. Pleasant. The MidMichigan Health service area has experienced a slight decline in population (just under a 1% decline) over the past decade with declines in the children and adult age categories offset by increases in the young adult, older adult, and senior age categories. MidMichigan Health has identified other areas of strategic interest including Bay, Saginaw, Roscommon, Ogemaw, Montcalm, and Clinton counties. Approximately 60% of the population in the combined service area, including the areas of strategic interest, resides within the four main service areas. Map of MidMichigan Health s Service Area 9

11 The following table shows the current and projected population count, composition, and five-year growth rate for the service area by age group. Population % of Total Growth Rate 2012 Proj Proj Projected Average Population Breakdown Total Population 273, , % 100.0% 1.2% 0.2% Population by Age Children ,403 75, % 27.1% -4.3% -0.9% Young Adults ,202 57, % 20.6% 11.4% 2.3% Adults ,556 65, % 23.5% -10.4% -2.1% Older Adults ,305 36, % 13.2% 12.9% 2.6% Seniors 65-plus 39,378 43, % 15.6% 10.7% 2.1% Source: Michigan Health and Hospital Association, MHASC Data Services as of March 2012 (annualized) The 2010 median household income of the service area was $39,025 compared to $48,432 for the state of Michigan. The 2010 median household income for Midland County was $51,103. Source: US Census Bureau, 2010 data Market Share by Service MidMichigan Health s market share by strategic business unit as of June 2012 follows: Strategic Business Unit Market Share Mental Health 71.1% Primary Care 62.9% Rehabilitation 60.1% Cardiovascular 60.5% Surgical Services 57.6% Orthopedic 53.9% Neuroscience 51.1% Oncology 47.6% Source: Michigan Health and Hospital Association, MHASC Data Services as of March 2012 (annualized) [Remainder of page intentionally left blank] 10

12 Competition The table below discloses information relating to the discharges of patients residing in the MidMichigan Health service area for MidMichigan Health and its major competitors during Fiscal , the most recent data available. MidMichigan Health is the market leader, with a service area market share of 58.9% in Fiscal Miles from Nearest Market Share (% of Inpatient Discharges) Change MidMichigan Health FY2010- Location FY2012 FY2011 FY2010 FY2012 MidMichigan Health % 57.8% 58.6% 0.3% Covenant Medical Center Saginaw % 6.8% 7.0% -0.7% St. Mary s of Michigan Saginaw % 3.0% 3.0% -0.3% McLaren Bay Region % 3.2% 3.2% 0.1% McLaren Central Michigan Mt. Pleasant % 11.7% 11.1% 0.6% All Other 17.0% 17.5% 17.1% -0.6% Total 100.0% 100.0% 100.0% Source: Michigan Health and Hospital Association, MHASC Data Services as of March 2012(annualized) The slight increase in market share in Fiscal 2012 was driven primarily by our medical center in Midland where the Executive Health Resources (EHR) project has been successful in documenting through a second physician medical necessity review that the patient should be classified as an inpatient utilizing evidence based medicine. The increase in cardiology and general surgery manpower also contributed to market share increases in cardiovascular and surgical services service line. MidMichigan Health continues to focus on physician recruitment. [Remainder of page intentionally left blank] 11

13 REVIEW OF CONSOLIDATED RESULTS MidMichigan Health Disclosure Statement The following table presents selected inpatient, outpatient, and ancillary service utilization and other data for MidMichigan Health for Fiscal 2010 to Consolidated Historical Utilization of Services Statistics Fiscal Year Ended June 30, Licensed Beds Acute (including rehabilitation and mental health) (1) Extended Care Operated Beds Acute (2) Extended Care Acute Admissions 20,338 19,153 19,747 Acute Length of Stay (in days) Medicare Case Mix Index: MidMichigan Health Medicare Case Mix Index: Midland Patient Days Acute 76,683 77,625 79,044 Extended Care 61,348 61,139 65,176 % Occupancy (based on operated beds) Acute 49.8% 47.4% 49.20% Extended Care 83.8% 83.8% 89.70% Outpatient Visits (3) 448, , ,231 Emergency Room Visits (3) 68,094 68,536 72,956 Urgent Care Visits (4) 79,828 74,955 67,937 Ambulatory Surgery Visits (3) 37,296 38,496 33,143 Home Health Visits (5) 83,753 88,101 87,350 Source: MidMichigan Health records (1) In Fiscal 2012, 15 additional beds were brought on-line upon completion of the Harlow expansion. Beds were transferred from Clare when obstetrics unit was closed. (2) Decrease due to thirty-six less beds in operation at Gratiot offset by the additional 17 beds brought on-line in Midland. (3) Refined outpatient statistics methodology to exclude zero charge stats in Fiscal 2012 and Due to data constraints, Fiscal 2010 has not been restated. The estimated impact on Fiscal 2010 would be between a 4-12% decrease in the number reported. (4) Includes urgent care visits for Clare, Gratiot, and Midland. (5) Includes home health, private duty, and hospice visits. [Remainder of page intentionally left blank] 12

14 Management s Discussion of Recent Utilization Trends MidMichigan Health s market share increased from 58.6% in 2010 to 58.9% in 2012, primarily driven by our medical center in Midland where the Executive Health Resources (EHR) compliance project has been successful in properly assigning patient status correctly (inpatient vs. outpatient observations), decreasing clinical denials, improving patient throughput, and ensuring appropriate medical necessity documentation. The increase in cardiology and general surgery manpower also contributed to market share increases in cardiovascular and surgical services service line. MidMichigan Health s centralized services facilitate the efficient delivery of healthcare services to the community, thereby providing capacity to accommodate increases in patient volume. Acute Admissions Acute care admissions for the system have increased from Fiscal 2010 to Fiscal 2012 approximately 3.0%. The increase is mainly driven by Midland where market share has increased. The only Medical Center that experienced a decline in admissions was Gratiot due to increased competition. MidMichigan Health has increased its physician recruiting efforts in Gratiot to offset the increased competition it has experienced. Outpatient Visits MidMichigan Health experienced a slight decrease in its outpatient visits of 1.2% from Fiscal 2011 to Fiscal 2012 reflecting the reduction of outpatient observations and the continued pressure on the economy. Emergency Room Visits Overall, emergency room visits decreased 0.6% in Fiscal 2012 as compared to Fiscal The largest decreases were seen in Clare and Gladwin where efforts continue to increase physician access. Urgent Care Visits Influenza has a large influence on urgent care volumes. Increased urgent care visits from Fiscal 2010 to Fiscal 2012 of approximately 17.5% reflect the opening of the urgent care in Freeland, Michigan and the timing and severity of influenza during this time period. Ambulatory Surgery Visits Overall, ambulatory surgery visits for the system decreased 3.1% in Fiscal 2012 compared to Fiscal The largest decreases were seen in Midland due to the opening of Great Lakes Bay Surgery & Endoscopy Center, of which Midland has a 44% ownership interest as of. [Remainder of page intentionally left blank] 13

15 FINANCIAL SUMMARY The financial Summary has been derived by MidMichigan Health s management from MidMichigan Health s audited consolidated financial statements for the periods presented. The following summary of consolidated financial information should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements of MidMichigan Health and report of independent auditors. CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30th (In thousands) UNRESTRICTED REVENUE: Net patient service revenue $559,213 $541,366 $536,226 Net assets released from restrictions 970 1,123 1,133 Other revenue 14,521 15,441 15,408 Equity earnings from joint ventures 1,607 1,619 1,426 Total unrestricted revenue 576, , ,193 EXPENSES: Salaries and wages 234, , ,499 Employee benefits 58,651 54,996 54,416 Supplies 90,545 92,183 96,586 Purchased services and other 62,381 53,543 50,761 Fees 45,761 38,135 38,050 Depreciation and amortization 40,576 33,076 32,027 Provision for uncompensated services 32,270 29,823 28,255 Utilities 9,278 9,324 8,924 Interest 10,640 8,602 8,757 Insurance 2,535 2,399 3,919 Total expenses 587, , ,194 OPERATING (LOSS) INCOME BEFORE OTHER ITEMS (10,895) 12,745 12,999 OTHER ITEMS: RESTRUCTURING CHARGES 3,438-6,973 CARDIOLOGY EXPANSION - - 2,914 Total other items 3,438-9,887 OPERATING (LOSS) INCOME (14,333) 12,745 3,112 NONOPERATING ITEMS: Investment income 21,218 30,561 14,905 Other - (2) (531) Total nonoperating items 21,218 30,559 14,374 EXCESS OF REVENUE OVER EXPENSE FROM CONTINUING OPERATIONS $6,885 $43,304 $17,486 14

16 CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30th (In thousands) UNRESTRICTED NET ASSETS: Excess of revenue over expenses from continuing operations $6,885 $43,304 $17,486 Net assets released from restrictions for capital expenditures Change in unrealized investment return (12,722) 43,897 27,824 Net change in pension and postretirement related items (52,525) 31,137 (14,501) (Decrease) Increase in unrestricted net assets before discontinued operations (57,518) 118,403 31,174 Discontinued operations - Regional Dialysis Services and Great Lakes Renal Network (Dialysis): Income from discontinued operations 4,581 2,560 - Gain on sale 22, Distributions to noncontrolling interest (7,205) (467) (166) (Decrease) Increase in unrestricted net assets ($37,227) $120,496 $31,008 [Remainder of page intentionally left blank] 15

17 SUMMARY OF FINANCIAL RESULTS The finance highlights for 2012 include the following: MidMichigan Health Disclosure Statement Total operating revenue for the year was $576.3 million, an increase of $16.8 million, or 3.0% over the prior year, as three of the four hospitals experienced an increase in hospital admissions. Reported operating loss for the year was $14.3 million, a decrease of $27.1 million from FY2011. The loss included $3.4 million in restructuring charges, reflecting the need to right-size operations. These charges represented the cost of the involuntary separation program and consisted mainly of wages and health and unemployment benefits. The operating results also included several unusual expenses: EMR related start-up costs, clinical documentation and healthcare reform. These expenses were unbudgeted and significantly impacted operations. Of these expenses approximately $11.5 million are expected to be nonrecurring in Fiscal Operating EBIDA (Earnings before Interest, Depreciation and Amortization) remained strong at $36.9 million. On February 1, 2012, MidMichigan Health sold substantially all of the assets of RDS and Great Lakes Renal Network (GLRN), a service line of Gratiot, to DaVita, Inc. for $25.7 million in cash. As a result of the sale, a gain of $22.9 million was recognized. The Board of Directors made the decision to monetize the assets since MidMichigan Health and its other members (other hospitals) did not have sufficient critical mass to continue to deliver high quality care given the current reimbursement environment. As of the acquisition date the network only served approximately 500 patients. MidMichigan Health experienced unrealized investment return (losses) of approximately $12.7 million compared to $44.0 million of unrealized investment return (gains) a year ago. Days cash on hand declined as of as compared with June 30, 2011, reflecting the current financial markets and the use of internal funds as expected for key strategic initiatives, but remained very strong at 275. MidMichigan Health recorded a minimum pension and postretirement charge of approximately $52.5 million in accordance with the requirements of FASB ASC (formerly SFAS 158) during the last quarter of Fiscal 2012, compared to a $31.1 million credit during the last quarter of Fiscal MidMichigan Health continues to fund its defined benefit pension plan (a cash balance plan) and contributions throughout Fiscal 2012 totaled $15.0 million as compared with $12.0 million in Fiscal The finance highlights for 2011 include the following: Total operating revenue for the year was $559.5 million, an increase of $5.4 million, or 1.0% over the prior year, as two of the four hospitals experienced an increase in hospital admissions. Reported operating income for the year was $12.7 million, an increase of $9.6 million from FY2010. Fiscal 2010 included $9.9 million in restructuring and cardiology expansion charges, accounting for the majority of the change. 16

18 The finance highlights for 2010 include the following: MidMichigan Health Disclosure Statement Total operating revenue for the year was $554.2 million, a decrease of $1.8 million, or 0.3% over the prior year, as all four hospitals experienced decreases in hospital admissions. Reported operating income for the year was $3.1 million, a decrease of $16.7 million from FY2009. Included in Fiscal 2010 was $7.0 million in restructuring charges in Midland, Gratiot, Gladwin and the parent. These charges represented the cost of the voluntary and involuntary separation programs and consisted mainly of wages and health and unemployment benefits. Fiscal 2010 also included $2.9 million for termination fees and tail insurance paid to employ a group of cardiologists allowing MidMichigan Health to provide the care its patients needed closer to home. [Remainder of page intentionally left blank] 17

19 Third-Party Reimbursement and Sources of Payment Payments on behalf of a majority of the patients are made to MidMichigan Health by the federal government under the Medicare and Medicaid programs, by Blue Cross Blue Shield of Michigan (BCBSM), and other commercial insurance carriers. The communities which MidMichigan Health serves have experienced varying degrees of managed care penetration. Currently, managed care levels primarily represent direct contracts with commercial payors in the markets served by MidMichigan Health. Health Maintenance Organization ( HMO ) penetration remains very small and currently no contracts have capitated payment arrangements. The sources of payment for services provided by MidMichigan Health for Fiscal , were as follows: Sources of Payment Percent of Gross Revenue FY2012 FY2011 FY2010 Medicare 50.0% 48.7% 50.8% Medicaid 11.7% 12.1% 11.0% Blue Cross Blue Shield 19.5% 20.0% 20.8% Other 18.8% 19.2% 17.4% Total 100.0% 100.0% 100.0% Medicare is a major insurer of health care services and is administered by the federal government. The federal government contracts with local organizations to operate as intermediaries and carriers to enforce Medicare policies and make payments to organizations that contract and bill for services provided to Medicare beneficiaries. Michigan is transitioning to a Medicare Administrative Contractor which will process healthcare claims for Michigan and Indiana. Payment for hospitalization is made on the basis of diagnosis related groups (DRG) covering both the operating and capital costs of care. Medicare payments for Mental Health hospitalization are made through a prospective per diem methodology and rehabilitation hospitalization is paid prospectively and set per discharge with the amount based on case mix groups (CMG). MidMichigan Medical Center Gladwin is designated as a critical access hospital and is paid 101% of reimbursable costs. Ambulatory services are paid on a fee schedule based on individual services provided each patient, either from the physician fee schedule, laboratory fee schedule, ambulatory payment classification schedule or prospective payment for End Stage Renal Dialysis (ESRD). Skilled nursing services are paid based on prospectively set rates using resource utilization groups (RUG). Services to homebound patients are made based on prospectively set rates using home health resource groups (HHRG) that cover a 60-day episode of care. Blue Cross Blue Shield of Michigan is an insurer of health care services operated under the authority of state law. The name, "Blue Cross" is licensed for use from the Blue Cross Blue Shield Association, a national not-for-profit association. The basis of payment to hospitals from BCBSM is covered under the Participating Hospital Agreement (PHA) signed in The PHA makes payment for hospitalization to large hospitals on the basis of DRGs and to small rural hospitals generally on a percentage of charges. Payment for mental health and rehabilitation hospitalization is made based on per diem rates. A new PHA contract revises payment rate setting methods for DRG, incentives, and outpatient. BCBSM will continue to recognize other agreements with Providers until they expire or the Provider signs onto the new PHA. MidMichigan Health s current contract with BCBSM ended at, but continues under automatic annual review unless re-opened by either party. 18

20 Medicaid is a jointly funded program of the state and federal governments, administered by the state government. Federal law establishes minimum eligibility requirements and the state may exceed the federal minimums. The funding split is set by federal law and is made on the basis of matching amounts spent by the state government for covered services. Payment for hospitalization is made under a DRG system tailored to Medicaid recipients by the state. Rehabilitation hospitalization services are paid on the basis of per diem rates. Payment for mental health services are made through county administered boards. The state contracts with the county board, and the county board is then authorized to contract for needed services with area providers. Ambulatory services are paid on a fee-for-service rate system. Other payments received include allocations of state-wide pools for Disproportionate Share Hospitals and Graduate Medical Education. The state has contracted with managed care organizations ("MCOs") for providing the majority of acute care services for Medicaid recipients. These MCOs may then contract with providers to obtain services for covered recipients or pay providers based on rates set by the State. MidMichigan Health has operated under this program since Fiscal To maximize federal matching funds, the State has instituted assessments on hospitals and nursing homes. The funds are then used to increase Medicaid payments. MidMichigan Health has worked to contract directly with local businesses for health care services through its ConnectCare product or by joining select commercial insurance networks covering regional or national businesses. These contracts generally pay based on discounts off of charges or on a set fee for a given service and do not have capitated or risk sharing arrangements. Individuals covered by these insurances are only responsible for any co-insurance amounts or non-covered services. [Remainder of page intentionally left blank] 19

21 Summary of Operations The summary of consolidated financial information presented below for MidMichigan Health summarizes operating income from 2012 versus 2011 and 2011 versus versus 2011 in millions Change $ Change % Revenue Net patient service revenue $559,213 $541,366 $17, % Other revenue 17,098 18,183 (1,085) -6.0% Total Operating Revenue 576, ,549 16, % Total Operating Expenses 587, ,804 40, % Operating Income Before Other Items (10,895) 12,745 (23,640) % Restructuring Charges 3,438-3, % Operating Income (14,333) 12,745 (27,078) % Nonoperating investment (loss) income 21,218 30,559 (9,341) -30.6% Excess of Revenue over (under) Expenses 6,885 43,304 (36,419) -84.1% Change in unrealized investment return (12,722) 43,897 (56,619) % Net change in pension and postretirement related items (57,518) 31,137 (88,655) % Discontinued operations 20,291 2,093 18, % Other 5, , % Increase (Decrease) in Unrestricted Net Assets ($37,227) $120,496 ($157,723) % Total Operating Expenses Expenses Change $ Change % Salaries & Benefits $ 293,220 $ 279,719 $ 13, % Supplies 90,545 92,183 (1,638) -1.8% Purchases Services and other 62,381 53,543 8, % Fees 45,761 38,135 7, % Depreciation and amortization 40,576 33,076 7, % Provision for uncompensated services 32,270 29,823 2, % Interest 10,640 8,602 2, % Other 11,813 11, % Total Operating Expenses $ 587,206 $ 546,804 $ 40, % Total operating revenue in 2012 was $576.3 million, an increase of $16.7 million or 3% versus This includes patient service revenue less adjustments for amounts contractually agreed to primarily for Medicare, Medicaid, and Blue Cross Blue Shield of Michigan, and other operating revenue from nonpatient activities. Total operating revenue was impacted by the increase in admissions for Fiscal 2012 compared to Fiscal 2011 as discussed in Management s discussion of recent utilization trends. 20

22 Total operating expenses less other items in 2012 increased $40.4 million, or 7.4% compared to Fiscal Salaries and benefits increased approximately $13.5 million as a result of adding new physician practices in MidMichigan Physicians Group. Purchased services increased $8.8 million, primarily in contract services and software maintenance due to the EMR implementations. Fees increased $7.6 million, primarily in consultations fees for healthcare reform and clinical documentation. Depreciation and amortization increased due to removal of asbestos along with an increase in depreciation for the completion of the Harlow and electronic medical record projects. Interest increased due to the Fiscal 2009 bonds being capitalized in Fiscal 2011 and expensed in Fiscal 2012 since the project was placed in service. Fiscal 2012 includes $3.4 million related to restructuring charges reflecting the need to right-size its operations. These charges represented the cost of the involuntary separation program and consisted mainly of wages and health and unemployment benefits. Although the strategic plan remains appropriate, management s focus remain on performance improvements. Nonoperating investment income decreased from $30.6 million in Fiscal 2011 to $21.2 million in Fiscal The most significant factor influencing the decrease was lower realized gains on the sale of investments. Management does not market time its investments but has a disciplined approach to rebalance back to its target allocation quarterly. Change in unrealized investment (loss) return consists of the unrealized gains (losses) on all other investments not accounted for using the equity method. Fiscal 2012 included a decrease to unrestricted net assets of $52.5 million while Fiscal 2011 included a increased of $31.1 million to comply with minimum pension and postretirement liability adjustments related to Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 715, Accounting for Defined Benefit Pension and Other Post-Retirement Plans. The primary driver for the significant change was the decrease in the discount rate from 5.50% in Fiscal 2011 to 4.05% in Fiscal The consolidated financial statements as of and for the years ended and 2011, have been reclassified to present the operations of RDS and GLRN as discontinued operations. Included in the discontinued operations is the income from discontinued operations, gain on sale and distributions to noncontrolling interest. The gain on sale of $22.9 million was recorded in Fiscal [Remainder of page intentionally left blank] 21

23 2011 versus 2010 in millions Change $ Change % Revenue Net patient service revenue $541,366 $536,226 $5, % Other revenue 18,183 17, % Total Operating Revenue 559, ,193 5, % Total Operating Expenses 546, ,194 5, % Operating Income Before Other Items 12,745 12,999 (254) -2.0% Other Items: Restructuring Charge - 6,973 (6,973) 100.0% Cardiology Expansion - 2,914 (2,914) 100.0% Operating Income 12,745 3,112 9, % Nonoperating investment income 30,559 14,374 16, % Excess of Revenue over Expenses 43,304 17,486 25, % Change in unrealized investment return 43,897 27,824 16, % Net change in pension and postretirement related items 31,137 (14,501) 45, % Discontinued operations 2,093-2, % Other (134) -67.3% Increase in Unrestricted Net Assets $120,496 $31,008 $89, % Total Expenses in millions Change $ Change % Expenses Salaries & Benefits $ 279,719 $ 273,915 $ 5, % Supplies 92,183 96,586 (4,403) -4.6% Purchases Services and other 53,543 50,761 2, % Fees 38,135 38, % Depreciation and amortization 33,076 32,027 1, % Provision for uncompensated services 29,823 28,255 1, % Interest 8,602 8,757 (155) -1.8% Other 11,723 12,843 (1,120) -8.7% Total Operating Expenses $ 546,804 $ 541,194 $ 5, % Total operating revenue in 2011 was $559.5 million, an increase of $5.4 million or 1.0% versus This includes patient service revenue less adjustments for amounts contractually agreed to primarily for Medicare, Medicaid, and Blue Cross Blue Shield of Michigan, and other operating revenue from nonpatient activities. The increase reflected an increase in rates, the complexity of the outpatient procedures performed and the increase in physician services revenue, as a result of employing more physicians. Inpatient admissions actually declined by 4.1%, primarily in Gratiot and Clare as a result of increased competition and the need for more physician access. 22

24 Total operating expenses reported in 2011 increased $5.6 million, or 1.0% compared to Fiscal The following information explains the major changes: o Salaries and benefits increased approximately $5.8 million as a result of employing hospitalists and cardiologists in MPG and the increased staffing at three of the medical centers related to the EMR implementation (approximately $1.8 million) and the implementation of the first system-wide incentive plan (approximately $2.3 million). o Purchased services increased $2.8 million, primarily in contract services due to the EMR implementations and contract labor for locum coverage in MPG. o Provision for uncompensated expense increased $1.6 million due to an increase in self-pay patients and the effect of the economy on collections. o Offsetting those increases was a $4.4 million decrease in supplies, primarily driven by the decline in volume. Fiscal 2010 included $7.0 in restructuring charges in Midland, Gratiot, Gladwin and the parent. These charges represented the cost of the voluntary and involuntary separation programs and consisted mainly of wages and health and unemployment benefits. Fiscal 2010 also included $2.9 million for termination fees and tail insurance paid to employ a group of cardiologists allowing MidMichigan Health to provide the care its patients needed closer to home. Nonoperating investment income increased from $14.4 million in Fiscal 2010 to $30.6 million in Fiscal The major significant factor influencing the increase was higher realized gains on the sale of investments. Management does not market time its investments but has a disciplined approach to rebalance back to its target allocations quarterly. Change in unrealized investment (loss) return consists of the unrealized gains (losses) on all other investments not accounted for using the equity method. Fiscal 2010 included a decrease to unrestricted net assets of $14.5 million while Fiscal 2011 included an increase of $31.1 million to comply with minimum pension and postretirement liability adjustments related to Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 715, Accounting for Defined Benefit Pension and Other Post-Retirement Plans. The primary driver for the significant change was the increase in the discount rate from 5.35% in Fiscal 2010 to 5.50% in Fiscal [Remainder of page intentionally left blank] 23