Auditor's Responsibility Under Auditing Standards Generally Accepted in the United States of America

Transcription

1 am CPAs & Advisors 220 W. Main Street, Suite 1700 P.O. Box 1178 Louisville, KY Fax Board of Directors The Quality and Charity Care Trust, Inc. Louisville, Kentucky As part of our audit of the financial statements of The Quality and Charity Care Trust, Inc. (Trust) as of and for the year ended June 30, 2008, we wish to communicate the following to you. Audit Scope and Results Auditor's Responsibility Under Auditing Standards Generally Accepted in the United States of America An audit performed. in accordance with auditing standards generally accepted in the United States of America is designed to obtain reasonable, rather than absolute, assurance about the financial statements. In performing auditing procedures, we establish scopes of audit tests in relation to the financial statements taken as a whole. Our engagement does not include a detailed audit of every transaction. Our engagement letter more specifically describes our responsibilities. These standards require communication of significant matters related to the financial statement audit that are relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Such matters are communicated in the remainder of this letter or have previously been communicated during other phases of the audit. The standards do not require the auditor to design procedures for the purpose of identifying other matters to be communicated with those charged with governance. An audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Our engagement letter more specifically describes your responsibilities. Qualitative Aspects of Significant Accounting Policies and Practices Significant Accounting Policies The Trust's significant accounting policies are described in Note 4 of the audited financial statements. experience BKD Praxiix : MEMBER," GLOBAL ALLIANCE OF INDEPENDENT FIRMS

2 Board of Directors The Quality and Charity Care Trust, Inc. Page 2 Alternative Accounting Treatments We had discussions,vith management regarding alternative accounting treatments within accounting principles generally accepted in the United States of America for policies and practices [()r material items, including recognition. measurement and disclosure considerations related to the accounting for specific transactions as \vcll as general accounting policies, as follows: No matters are reportable Management Judgments and Accounting Estimates Accounting estimates are an integral part of financial statement preparation by management, based on its judgments. The following areas involve significant areas of such estimates for which "ve are prepared to discuss management's estimation process and our procedures for testing the reasonableness of those estimates: No matters are reportable Financial Statement Disclosures The following areas involve particularly sensitive financial statement disclosures for which we are prepared to discuss the issues involved and relatedjudgttlents made in fonnulating those disclosures: No matters are reportable Audit Adjustments During the course of any audit, an auditor may propose adjustments to financial statement amounts. Management evaluates our proposals and records those adjustments which, in its judgment, are required to prevent the financial statements from being materially misstated. There were no recorded or unrecorded audit adjustments proposed Auditor's Judgments About the Quality of the Trust's Accounting Principles During tht~ course ofthe audit, we made the following observations regarding the Trust's application of accounting principles: fi No matters are reportable

3 Board of Directors The Quality and Charity Care Trust, Inc. Page 3 Other Material Written Communications Listed below are other material written communications between management and BKD related to the audit: Management representation letter (attached) Internal Control Over Financial Reporting In planning and performing our audit of the financial statements of the Trust as of and for the year ended June 30, 2008, in accordance with auditing standards generally accepted in the United States of America, we considered the Trust's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the fmancial statements, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control. Accordingly, we do not express an opinion on the effectiveness of the Trust's internal control. As such, our consideration of internal controls would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements of the Trust's financial statements on a timely basis. A control deficiency in design exists when a control necessary to meet a control objective is missing or an existing control is not properly designed so that, even if the control operates as designed, a control objective is not always met. A control deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Trust's ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Trust's financial statements that is more than inconsequential will not be prevented or detected by the Trust's internal controls. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the Trust's financial statements will not be prevented or detected by the Trust's internal controls. We observed the following matters that we consider to be control deficiencies, significant deficiencies or material weaknesses. Material Weaknesses No matters are reportable.

4 Board of Directors The Quality and Charity Care Trust. Inc. Page 4 Significant Deficiencies No matters are reportable. Other Control Deficiencies No matters are repottable. Other Matters Although not considered material weaknesses, significant ddiciencics or other control deficiencies in internal control over financial reporting, we observed the following matters and offer these comments and suggestions with respect to matters which came to our attention during the course of the audit of the financial statements. Our audit procedures arc designed primarily to enable us to form an opinion on the financial statements and, thcrefore, may not bring to light all weaknesses in policies and procedures that may exist. HO\vever, these matters are offered as constructive suggestions for the consideration of management as part of the ongoing process of modifying and improving accounting controls and the financial and administrative practices and procedures. We can discuss these matters further at your convenience and may provide implementation assistance for changes or improvements if you require. Patient Account Billing During the indigent care log testing, one out of 30 patients \vas not billed within 15 days as the Trust Agreement stipulates. Management's Response Management concurs with the auditors' observation. System work, which occurred during the year, eliminated duplicated comments. Original comments were deleted on this account in error. Management will perform additional testing procedures on future system changes. During the indigent care Jog testing, four out of 30 patient accounts were noted as receiving care at the James Graham Brown Cancer Center. These patients "vere not billed within 15 days as the billing process at the James Graham Brown Cancer Center is to bill patients on the eleventh of the month follovving the patient visit. Management's Response Management concurs with the auditors' observation. Patient visits billed from the James Graham Brown Cancer Center occur on a monthly basis rather than each visit for the convenience of the patient. As there are multiple visits for patients at the James Graham Brown Cancer Center undergoing active treatment in one month, this is the timing used for billing this group of visits. University Medical Center CUMC) \vill explore jf an

5 Board of Directors The Quality and Charity Care Trust, Inc. Page 5 exception for the billing requirement or if a change in billing practice for these patients will be t~)lihcoming. Remittance of Amounts Due to UMC Section 6b of the Trust Agreement requires the Trust to remit amounts due to Utv1C at the end of each trust year within a 45-day period thereafter. Currently, the Trust is not remitting the mnount of money due to Ul'viC on a timely has is. Management's Response Management concurs with the auditors' observation. Management has discussed with UMC and it was detemlined that the Trust has not been following this section of the Trust Agreement. Due to the timing of the information, the Trust will wait until the end of the 2009 fiscal year and remit to UMC the additional funds for the past four years. After this year, the Trust will begin remitting excess funds on an annual basis. Management's written responses to the other matters identified in our audit have not been subjected to the auditing procedures applied in the audit of the financial statements, and accordingly, we express no opinion on it. ****** This communication is intended solely for the information and usc of management, board of directors and others within the organization and is not intended to be and should not be used by anyone other than these specified parties. April 27, 2009

6 OFFICE OF THE CONTROLLER AND TREASURER Univer:-,ity of Loubvdlc LC'uLsvHl~?" Kt;:ntiJcky 4~}192 April 27, 2009 BKD, LLP Certified Public Accountants P.O. Box 1178 Louisville, KY Weare prov'iding this letter in colmection 'W'ith your audits of tbe financial statements of The Quality and Charity Care Trust, Inc. (Trust) as of and for the years ended June 30, 2008 and We confinn that we are responsible for the fair presentation of the financial statements in confolmity with accounting principles generally accepted in the United States of America. We are also responsible for adopting sound accounting policies, establishing and maintaining effective intemal control over financial reporting, operations and compliance and preventing and detecting fraud. Certain representations in this letter are described as being limited to matters that are material Items are considered material, regardless of size, if they involve an omission or misstatement of accounting infonnation that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the infolmation would be changed or influenced by the omission or misstatement. We confinn, to the best of our knowledge and belief, the following: 1. The financial statements referred to above are fairly presented in confonnity with accounting principles generally accepted in the United States of }\m eri ca. 2. We have made available to you: (a) (b) (c) All financial records and related data. All minutes of meetings of the board of directors held through the date of this letter. All significant contracts and grants, 3. We have informed you of all current risks of a material amount that arc not adequately prevented or detected by Trust procedures with respect to: (a) Misappropriation of assets.

7 BKD, LLP April 27, 2009 Page 2 (b) Misrepresented or misstated assets, liabilities or net assets. 4. We acknmvledge our responsibility for the design and implementation of programs and controls to prevent and detcct fraud. 5. We have no knowledge of any known or suspected: (a) (b) Fraudulent financial reporting or misappropriation of assets involving management or employees who have significant roles in internal control. Fraudulent financial reporting or misappropriation of assets involving others that could have a material effect on the financial statements. 6. We have no knowledge of any allegations of fraud or suspected fraud affecting the Trust received in conununications from employees, customers, regulators, suppliers or others. 7. Except as reflected in the financial statements, there are no: (a) (b) (e) (d) (e) (f) (g) Plans or intentions that may materially affect caitjing values or classifications of assets and liabilities. Material transactions omitted or improperly recorded m the financial records. Material gain/loss contingencies requiring accrual or disclosure, including those arising from environmental remediation obligations. Events occurring subsequent to the balance sheet date requiring adjustment or disclosure in the financial statements. Related-party ttansactions, balances, anangements or guarantees. Af,lTeements to purchase assets previously sold. Violations of law, regulations, contracts, grants or requirements of regulatory agencies for which losses should be accrued or matters disclosed in the financial statements.

8 BKD, LLP April 27, 2009 Page 3 (h) (i) (j) Unasserted claims or assessments that are probable of assertion and must be disclosed as a loss contingency. We have not sought or received attorney's services during or subsequent to the audit period. Also, we are not aware of any claims, asserted or unasserted, for which legal counsel should be sought. Restrictions on cash balances or compensating balance agreements. Guarantees, whether written or oral, under which the Trust is contingently liable. 8. Adequate provisions and allowances have been accrued for any material losses from: (a) (b) Sales commitments in excess of normal requirements of above prevailing market prices. Purchase commitments in excess of normal requirements or above prevailing market prices. 9. Except as disclosed in the financial statements, the Trust has: (a) (b) Satisfactory title to all recorded assets, and they are not subject to any liens, pledges or other encumbrances. Complied with all aspects of contractual and grant agreements, for which noncompliance would materially affect the financial statements. 10. We have not been designated as a potentially responsible party (PRP or equivalent status) by the Environmental Protection Agency (EPA) or other cognizant regulatory agency with authority to enforce environmental1aws and regulations. 11. With regard to deposit and investment activities: (a) (b) All deposit, repurchase and reverse repurchase agreements and investment transactions have been made in accordance with legal and contractual requirements. Disclosures of deposit and investment balances and risks in the financial statements are consistent with our understanding of the applicable laws regarding enforceability of any pledges of collateral.

9 BKD, LLP April 27, 2009 Page 4 (c) \Ve understand that your audit docs not represent an opinion regarding the enforceability of any pledges of collateral. 12. With respect to any nonattest services you have provided us during the year: (a) (b) (c) (d) We have designated a qualified management-level individual to be responsible and accountable for overseeing the nonattest services. We have established and monitored the perfonnancc of the n011atte8t services to ensure that they meet our objectives. We have made any and all decisions involving management functions vvith respect to the nonattest services and accept full responsibility for such decisions. We have evaluated the adequacy of the services performed and any findings that resulted. l3. We have identified to you any activities conducted having both fundraising and program or management and general components (joint activities) and have allocated the costs of any joint activities in accordance vvith the provisions of AICPA Statement of Position The supplementary infol111ation required by the Govenm1ental Accounting Standards Board (GASB), consisting of management's discussion and analysis, has been prepared and is presented in conformity with the applicable GASB pronouncements. The information contained therein is based on all facts, decisions and conditions currently known to us and is measured using the same methods and assumptions as were used in the preparation of the financial statements. There has been no change from the preceding period in the methods of measurement and presentation. Dr. Larry Cook Chairperson, QCCT I/) ti La~P&:J Controller am Treasurer Alme T. Rademaker Manager of Reporting and University Accounting

10 THE QUALITY AND CHARITY CARE TRUST, INC. Accountants Report and Financial Statements June 30, 2008 and 2007 and Supplemental Schedule for the Year Ended June 30, 2008

11 THE QUALITY AND CHARITY CARE TRUST, INC. June 30, 2008 Table of Contents: Page(s) Independent Accountants Report on Financial Statements and Supplementary Information...1 Management's Discussion and Analysis (Unaudited)...2 Financial Statements as of and for the years ended June 30, 2008 and 2007: Statements of Assets and Liabilities...5 Statements of Changes in Balance Due to University Medical Center, Inc....6 Notes to Financial Statements...7 Supplemental Schedule of Indigent Patient Charges Funded by the Trust...13 Notes to Supplemental Schedule of Indigent Patient Charges Funded by the Trust...14

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13 THE QUALITY AND CHARITY CARE TRUST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED) INTRODUCTION The following discussion provides an overview of the financial position and activities of the Quality and Charity Care Trust, Inc. (Trust) as of and for the years ended June 30, 2008, 2007 and This discussion has been prepared by management and should be read in conjunction with the financial statements and related notes, which follow this section. ORGANIZATION AND ACTIVITIES OF THE QUALITY AND CHARITY CARE TRUST The Trust is a Kentucky non-stock, not-for-profit corporation organized in April 1983 in connection with a trust agreement originally entered into in January Parties to the trust agreement, last amended in February 1996, include the Louisville/Jefferson County Metro Government, formerly the City of Louisville, Kentucky and Jefferson County, Kentucky, (Louisville Metro Government); the Commonwealth of Kentucky (Commonwealth); the University of Louisville (the University); and University Medical Center, Inc. (UMC). The purpose of the Trust is to manage government funds received and to disburse such funds to UMC for providing hospital care services to economically disadvantaged patients through the University of Louisville Hospital. The Trust may also invest cash held temporarily in tax-exempt securities. The business and affairs of the Trust are under the supervision, management and control of the Board of Directors. The nine member Board of Directors consists of six members appointed by the Board of Trustees of the University of Louisville or members of the University staff serving at the pleasure of the Board plus three other Directors. These three Directors are elected by the University of Louisville Board of Trustees, two from a list of nominees submitted by the Mayor of Louisville, and one from the Louisville and Jefferson County Board of Health. Each Director is elected for a one-year term. USING THE FINANCIAL STATEMENTS The Trust financial report includes two financial statements: the Statements of Assets and Liabilities and the Statements of Changes in Balance Due to University Medical Center, Inc. These financial statements are prepared in accordance with Government Accounting Standards Board (GASB) principles as prescribed by GASB Statement No. 34, Basic Financial Statements Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No

14 The Trust is considered a fiduciary fund that serves in a custodial capacity for the primary purpose of receiving and disbursing funds in accordance with the Trust agreement. The Trust financial statements are reported separately as an agency fund and are not part of the financial statements of the University of Louisville, the Louisville Metro Government, the Commonwealth of Kentucky, or UMC. FINANCIAL HIGHLIGHTS Total annual funding provided from government sources as specified by the trust agreement amounted to $33.6 million for the year ended June 30, STATEMENT OF ASSETS AND LIABILITIES As of June 30, 2008, the Trust s total assets were $359 thousand compared to $235 thousand as of June 30, 2007, and to $112 thousand as of June 30, STATEMENT OF CHANGES IN AMOUNTS DUE TO UNIVERSITY MEDICAL CENTER, INC. The purpose of this statement is to provide a summary of activity affecting the liability due to UMC for the fiscal years ended June 30, 2008 and As an agency fund, the Trust does not earn profits or own assets that would result in an accumulation of net assets as defined by financial reporting standards. Its sole purpose is to collect and disburse funds as specified by the Trust agreement. RECEIPTS For the fiscal year ended June 30, 2008, combined receipts from the Commonwealth of Kentucky and the Louisville Metro Government received by the Trust were $33.6 million, $1.0 million more than the $32.6 million reported for the year ended June 30, 2007, and $1.8 million more than the $31.8 million reported for the year ended June 30, INTEREST RECEIVED FROM INVESTMENT OF FUNDS Interest received for cash invested over the past fiscal year was slightly higher than the prior fiscal year due to larger cash balances. Interest reported for the year ended June 30, 2008 amounted to $143 thousand compared to $142 thousand earned in the preceding year, and to $87 thousand earned in the year ended June 30,

15 DISBURSEMENTS TO UNIVERSITY MEDICAL CENTER For the fiscal year ended June 30, 2008, the Trust remitted $33.6 million to the UMC as compared to $32.6 million for the year ended June 30, 2007 and to $31.8 million for the year ended June 30, The higher amount in the fiscal year ended June 30, 2008 is a result of a $1.0 million increase in funding provided to the Trust as determined annually by the formula set forth in the Agreement. SUPPLEMENTAL SCHEDULE OF INDIGENT PATIENT CHARGES FUNDED BY THE TRUST This schedule identifies the total hospital charges billed for indigent and/or medically needy patients, the amount of charges eligible for reimbursement through the Trust and the amounts actually reimbursed with funding from the Trust. For the year ended June 30, 2008, the total hospital charges for indigent patients at 100% of billing rates established by UMC for hospital care were $290.2 million, compared to last year s total of $220.8 million, and an increase of 30.5% over the total of $222.3 million for the fiscal year ended June 30, According to the Trust Agreement, only 58% or $168.3 million of these billed charges are eligible for reimbursement. Funding from the trust amounted to $33.6 million for the year, leaving $138.7 million in eligible patient billing needs that were not reimbursed. ECONOMIC FACTORS IMPACTING FUTURE PERIODS The major factors that would affect funds remitted to the Trust are changes in the consumer price index, collection of tax revenues by the contributing governments, and amendments to the Trust agreement. The annual Trust funding required from the Louisville Metro Government, and the Commonwealth of Kentucky was established by the agreement as last revised in February Any funding increase is determined by a formula that takes into consideration the lesser of the annual increase in the consumer price index or each government s rate of increase in tax revenues. For the year ending June 30, 2009, the Trust will receive total combined funding from the two governments amounting to $34.3 million. 4

16 The Quality and Charity Care Trust, Inc. Statements of Assets and Liabilities June 30, 2008 and ASSETS Cash $ 358,898 $ 235,047 Total assets $ 358,898 $ 235,047 LIABILITIES Due to University Medical Center, Inc. $ 358,898 $ 235,047 Total liabilities $ 358,898 $ 235,047 See notes to financial statements 5

17 The Quality and Charity Care Trust, Inc. Statements of Changes in Balance Due to University Medical Center, Inc. Years Ended June 30, 2008 and Balance due to the University Medical Center, Inc. - beginning of year $ 235,047 $ 111,796 Receipts: Government funding 33,637,644 32,629,370 Interest income 142, ,951 Total receipts 33,780,582 32,771,321 Disbursements: Distributions to University Medical Center, Inc. - indigent care 33,637,644 32,629,368 Administrative expenses 19,087 18,702 Total disbursements 33,656,731 32,648,070 Balance due to the University Medical Center, Inc. - end of year $ 358,898 $ 235,047 See notes to financial statements 6

18 The Quality and Charity Care Trust, Inc. Notes to Financial Statements As of and for the Years Ended June 30, 2008 and Organization and Purpose a. Incorporation The Quality and Charity Care Trust, Inc. (Trust) is a non-stock, not-for-profit corporation affiliated with the Louisville/Jefferson County Metro Government, formerly the City of Louisville, Kentucky and Jefferson County, Kentucky (Louisville Metro Government); the Commonwealth of Kentucky (Commonwealth); the University of Louisville (University); and University Medical Center, Inc. (UMC). The Trust was incorporated in April 1983 in connection with a trust agreement entered into in January 1983, amended in January 1994 (the Trust Agreement) and revised on February 6, 1996 (Revised Quality and Charity Care Trust Agreement) between the Louisville Metro Government; the Commonwealth; the University; and UMC. The purpose of the Trust is to manage government funds received and to disburse such funds to UMC for providing hospital care services to economically disadvantaged patients through the University of Louisville Hospital. b. Terms and Funding The Revised Quality and Charity Care Trust Agreement provides for the following terms, as well as the option to extend these terms for two additional five-year periods. 1 st term February 1996 to June nd term July 1996 to June rd term July 2000 to June th term July 2004 to June th term July 2008 to June th term July 2012 to June 2016 As set forth in the Revised Quality and Charity Care Trust Agreement, the funds available to the Trust from government sources are determined annually, and the Trust disburses these funds to UMC monthly in the amount of one-twelfth of the total funds determined to be available. 7

19 c. Hospital Facilities The establishment of the Trust was one in a series of events in which certain hospital facilities and operations were leased and assumed via a management contract. Concurrently therewith, certain affiliation and other agreements were entered into between the University s School of Medicine and other parties involved in the use and operation of such facilities. On February 6, 1996, UMC entered into an affiliation agreement with the University, which replaced the previous management contract that had begun in May 1983, amended in January 1994 and cancelled February 6, Trust Agreement The principal provisions and the capitalized terms below as defined in the Revised Quality and Charity Care Trust Agreement are as follows: a. Funding Provisions Funding of the Trust is provided monthly based on initially prescribed amounts by the Louisville Metro Government and the Commonwealth of Kentucky. One-twelfth of the total funds available are disbursed to UMC monthly. Any funding increase to the Trust is limited by the Trust Agreement to the lesser of each government s rate of increase in tax revenues or the Consumer Price Index. After the entire amount of funding available to the Trust has been exhausted, as discussed above, UMC is committed to continue to provide medically necessary Hospital Care, to the extent facilities are available, to all Indigent and Medically Needy individuals at its own expense. No portion of funding provided to the Trust by the Louisville Metro Government may be used to provide Hospital Care for persons who are not residents of Jefferson County. After 10% of the total funds provided by the Commonwealth and Louisville Metro Government have been expended to provide medically necessary Hospital Care to Indigent and Medically Needy individuals who are not residents of Jefferson County, UMC is under no further obligation to provide Hospital Care to non-residents of Jefferson County. 8

20 b. Payment/Billing Provisions UMC is obligated to provide medically necessary Hospital Services, to the extent facilities are available, to all Indigent and Medically Needy individuals. The Revised Quality and Charity Care Trust Agreement restricts payments from the Trust to UMC for services rendered at a rate no greater than 58% of standard billed charges, as established by UMC. UMC provides the Trust with a summary billing statement identifying each Indigent or Medically Needy individual and related charges within thirty days of year-end. To the extent total Billed Charges (net of collections from other sources) exceeds the amount paid to UMC for any Trust year and to the extent the Trust has funds remaining, the Trust will pay such excess to UMC annually. If no funds are available, the Trust will pay such excess to UMC when additional funding is received in the next Trust year. To the extent total amounts paid (including reimbursement amounts from prior Trust years) to UMC exceed Billed Charges (net of collections from other sources) for any Trust year, such excess will be repaid to the Trust by UMC annually. The UMC is required by the Revised Quality and Charity Care Trust Agreement that it make every effort to collect money for services rendered. The collection is to be made from either the patient or some available third party payer prior to collecting funds from the Trust. This is required to protect the integrity of the Trust and ensure funds will be available for the intended purpose. The Revised Quality and Charity Care Trust Agreement restricts the increase in UMC s standard billed charges to the percentage increase in the Consumer Price Index Medical Care Component for all charges after July 1, Technical Interpretations To provide guidance for implementation of the original Trust Agreement, Humana Corporation, the original provider of Hospital Care, prepared a document dated August 30, 1984, commonly referred to as the Technical Interpretations. This document has not been formally incorporated into the Revised Quality and Charity Care Trust Agreement but was formally approved by the Board of Directors of the Trust. The Technical Interpretations principally: Provide guidance on the mathematical methodology to be used for calculating Billed Charges (net of collections from other sources) for billing to the Trust. 9

21 Provide that charges related to individuals suspected in the judgment of UMC to be Indigent or Medically Needy may be billed to the Trust on a tentative basis in the year in which service is provided. Charges related to patients who are ultimately determined not to be Indigent or Medically Needy are then credited back to the Trust in the year in which the determination is made. Conversely, charges related to patients who are initially believed not to qualify as Indigent or Medically Needy may, upon subsequent determination of qualification, be billed to the Trust in the year in which the determination is made. 4. Basis of Presentation and Summary of Significant Accounting Policies In addition to the accounting methods described in the Revised Quality and Charity Care Trust agreement and the Technical Interpretations, the following are the significant accounting policies followed by the Trust. a. Basis of Presentation The financial statements of the Trust are prepared on the accrual basis of accounting. These financial statements are prepared in accordance with Government Accounting Standards Board (GASB) principles as prescribed by GASB Statement No. 34, Basic Financial Statements Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 37. The Trust is considered a fiduciary fund that serves in a custodial capacity for the primary purpose of receiving and disbursing funds to benefit the University Medical Center. The Trust s financial statements are reported separately as an agency fund and are not part of the financial statements of the University, the Louisville Metro Government, the Commonwealth or UMC. Pursuant to GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, the University has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB) that were issued on or before November 30, 1989, and do not conflict with or contradict GASB pronouncements. b. Transaction Logs Final Billed Basis All transactions processed in a given Trust year are accumulated, by patient, and entered into a log (Log) for that year. With the exception of year-end in-house patients and patients discharged but not yet final billed, as discussed below, transactions are generally recorded in the Log at the time of final billing and are categorized by the Trust year in which the patient is final billed. 10

22 c. Year-end In-House or Discharged Patients Not Final Billed Transactions related to patients who are in-house at year-end or discharged but not final billed (with the exception of those classified under the Medicaid pending or Medicare payer codes) are summarized as of year-end and recorded in the Log in the year in which service was provided. These transactions are recorded in the Log regardless of whether the patients are believed to have adequate insurance or other means to satisfy their bills. Upon final billing (in the following Trust year) the transactions pertaining to the year end in-house or discharged but not yet final billed patients are reversed in the following Trust year s Log under the year of original recording. The transactions related to those patients then deemed to be Indigent or Medically Needy are recorded in the following Trust year s Log. d. House Bill No. 1 The Kentucky General Assembly signed into law House Bill No. 1 (HB1) on May 26, HB1 provides continued coverage of hospital charges in excess of the fourteen-day limit to Medicaid patients and additional funding to hospitals to improve access of medical care for low-income individuals and families by way of the Kentucky Hospital Care Program (KHCP). In response to HB1, UMC modified the procedure under which charges are billed to the Trust to exclude those charges associated with KHCP-applicable patients. e. Cash Cash on deposit is insured up to $100,000. Amounts on deposit with banks in excess of $100,000 are not collateralized. Effective October 3, 2008, the FDIC's insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31, f. Investments Investments are stated at cost, which approximates market. The Trust s investments are uninsured and unregistered and are held by the dealer bank s depository in the Trust s name. g. Income Taxes The Trust is exempt from federal and state income taxes as a not-for-profit charitable corporation. 11

23 h. Annual Settlements Annual settlements are made within forty-five days of each Trust year-end for the difference between calculated net charges and government funding received by UMC. i. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of receipts, disbursements and other changes in balance due to University Medical Center, Inc. during the reporting period. Actual results could differ from those estimates. 5. Related Party The Trust is a corporation affiliated with the University. The Trust has its own Board of Directors but is administered by officers and employees of the University. No portion of administrative costs associated with such officers and employees is charged to the Trust. 12

24 University of Louisville Hospital The Quality and Charity Care Trust Inc Supplemental Schedule of Indigent Patient Charges Funded by the Trust Year Ended June 30, 2008 Applicable to Trust Fiscal Year Ended June 30: I II III IV V Net Charges Maximum Eligible Amounts in Excess of Eligible for Trust for Trust Maximum Reimbursement Reimbursement Reimbursement Indigent and/or Medically Needy Net Charges Amounts Reimbursed to UMC from Trust Fourth Term: 2005 $ (47,919) $ (27,793) ,458, , ,504,611 3,192, ,160, ,293,185 $ 33,637,644 Total applicable to fourth term ( ) $ 297,075,847 $ 172,303,991 $ 33,637,644 $ 138,666,347 $ 33,637,644 Total applicable to third term ( ) 337, , ,488 - Total applicable to second term ( ) Total applicable to initial term - February 6, 1996 to June 30, Total applicable to all periods $ 297,412,895 $ 172,499,479 $ 33,637,644 $ 138,861,835 $ 33,637,644 I - Represents the aggregate amount of each patient's charges at 100% of the billed charges established by UMC for the hospital care provided to the patient (which amounts equal the amounts reflected on detailed patient bills); less the aggregate total of amounts applied to each patient's bill from a variety of sources (excluding reimbursement from the Trust) including but not limited to cash receipts, contractual discounts, reversal of transactions previously processed for year end in-house or discharged but not yet final billed patients and corrections of errors. II - Represents the mathematical result of multiplying Column I by the percentage factor (58%) specified in the Revised Trust Agreement. III - Represents the maximum allowable charges to be reimbursed by the Trust, as defined in the Revised Trust Agreement. IV - Represents Column II minus Column III. V - Represents the maximum allowable charges to be reimbursed by the Trust, as defined in the revised Trust Agreement in addition to amounts returned to UMC for the balance due at the end of the 4th term of the Trust Agreement - July 2004 to June

25 The Quality and Charity Care Trust, Inc. Notes to Supplemental Schedule of Indigent Patient Charges Funded by the Trust For Year Ended June 30, First through Ninth Amendments to the Revised Quality and Charity Trust Agreement The first through ninth amendments to the Revised Quality and Charity Care Trust Agreement, effective until June 30, 1999, suspended the portion of the Trust Agreement that provided for the transfer of available funding to the Trust and UMC for the fiscal years from June 30, 1996 through These amendments stipulated that such available funding was to be transferred to the Commonwealth of Kentucky Cabinet for Human Resources, Department of Medicaid Service (Department). The Commonwealth was obligated to reimburse both the City of Louisville and Jefferson County, Kentucky 100% of their contribution to the Trust for these periods. The remaining funding was used to enable the Department to receive Federal Medicaid matching payments. The payments, known as Type III Disproportionate Share Hospital (DSH) payments, are provided for in 907 KAR 1:013E. The amendments had the effect of nullifying all transactions related to the Trust for years 1996 through 1999 pursuant to the Revised Quality and Charity Care Trust Agreement. As a result of the amendments, no transactions or reimbursements have been recognized related to the Trust in the Trust s Supplemental Schedule of Indigent Patient Charges Funded by the Trust from June 30, 1996 through