The Brooklyn Hospital Center and Subsidiaries Year Ended December 31, 2016 With Reports of Independent Auditors

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1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION AND A UDIT R EPORTS AND S CHEDULES R ELATED TO THE U NIFORM G UIDANCE The Brooklyn Hospital Center and Subsidiaries Year Ended December 31, 2016 With Reports of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements and Supplementary Information and Audit Reports and Schedules Related to the Uniform Guidance Year Ended December 31, 2016 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Statements of Financial Position...3 Consolidated Statements of Operations...4 Consolidated Statements of Changes in Net Assets...5 Consolidated Statements of Cash Flows...6 Notes to Consolidated Financial Statements...7 Supplementary Information and Audit Reports and Schedules Related to the Uniform Guidance Schedule of Expenditures of Federal Awards...35 Notes to Schedule of Expenditures of Federal Awards...36 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards...38 Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance...40 Schedule of Findings and Questioned Costs...42

3 Ernst & Young LLP 5 Times Square New York, NY Tel: Fax: ey.com The Board of Trustees The Brooklyn Hospital Center Report on the Financial Statements Report of Independent Auditors We have audited the accompanying consolidated financial statements of The Brooklyn Hospital Center and Subsidiaries (the Hospital ), which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, 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 Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free of material misstatement, whether due to fraud or error. Auditor s 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain 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 entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited 1

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Brooklyn Hospital Center and Subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations, changes in their net assets and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Schedule of Expenditures of Federal Awards for the year ended December 31, 2016, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the 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. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we also have issued our report dated May 10, 2017, on our consideration of the Hospital s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Hospital s internal control over financial reporting and compliance. May 10, 2017, except for the schedule of expenditures of federal awards for which the date is September 29, EY 2 A member firm of Ernst & Young Global Limited

5 Consolidated Statements of Financial Position December (In Thousands) Assets Current assets: Cash and cash equivalents $ 19,887 $ 22,761 Investments 2,753 2,433 Assets limited as to use, current portion (Note 4) 7,250 6,751 Accounts receivable: Patient care, less allowance for uncollectible accounts (2016 $22,240; 2015 $22,866) 52,779 43,866 Other receivables, net 5,681 5,714 Total accounts receivable, net 58,460 49,580 Current portion of estimated receivable due from third-party payors 10,575 3,795 Other current assets 6,450 7,227 Total current assets 105,375 92,547 Estimated receivable due from third-party payors, net of current portion 12,470 9,241 Assets limited as to use, net of current portion (Note 4) 20,791 28,292 Property, buildings and equipment, net (Note 5) 93,876 99,537 Other noncurrent assets 73,112 66,976 Total assets $ 305,624 $ 296,593 Liabilities and net assets Current liabilities: Short-term borrowings (Note 6) $ 14,695 $ 14,695 Current portion of long-term debt (Note 7) 9,755 8,286 Accounts payable and accrued expenses 45,092 39,101 Accrued salaries and related liabilities 23,887 21,658 Current portion of professional insurance liabilities (Note 11) 6,865 6,347 Total current liabilities 100,294 90,087 Long-term debt, net of current installments (Note 7) 32,330 39,604 Other noncurrent liabilities 24,990 24,179 Professional insurance liabilities, net of current portion (Note 11) 30,384 31,451 Estimated liability due to third-party payors 6,128 3,886 Total liabilities 194, ,207 Commitments and contingencies (Notes 2, 6, 7, 8, 9, 10, and 11) Net assets: Unrestricted 103,303 99,275 Temporarily restricted 5,116 5,032 Permanently restricted 3,079 3,079 Total net assets 111, ,386 Total liabilities and net assets $ 305,624 $ 296,593 See accompanying notes. 3

6 Consolidated Statements of Operations Year Ended December (In Thousands) Revenue Net patient service revenue $ 403,252 $ 397,499 Provision for bad debts (15,470) (15,981) Net patient service revenue, less provision for bad debts 387, ,518 Other revenue (Note 12) 36,858 29,630 Total revenue 424, ,148 Expenses Salaries and wages 217, ,660 Employee benefits 61,825 58,037 Medical supplies 41,974 39,284 Other 70,392 69,628 Insurance 12,327 11,161 Depreciation and amortization 14,480 14,491 Interest and amortization of deferred financing fees 2,336 2,393 Total expenses 420, ,654 Excess of revenue over expenses 4,028 3,494 Increase in unrestricted net assets $ 4,028 $ 3,494 See accompanying notes. 4

7 Consolidated Statements of Changes in Net Assets Unrestricted Temporarily Permanently Restricted Restricted (In Thousands) Total Net Assets Net assets at January 1, 2015 $ 95,781 $ 7,327 $ 3,079 $ 106,187 Increase in unrestricted net assets 3,494 3,494 Contributions and other items 2,865 2,865 Net assets released from restrictions (3,217) (3,217) Change in net realized and unrealized gains and losses on investments (12) (12) Provision for uncollectible pledges (1,931) (1,931) Change in net assets 3,494 (2,295) 1,199 Net assets at December 31, ,275 5,032 3, ,386 Increase in unrestricted net assets 4,028 4,028 Contributions and other items Net assets released from restrictions (788) (788) Change in net realized and unrealized gains and losses on investments Change in net assets 4, ,112 Net assets at December 31, 2016 $ 103,303 $ 5,116 $ 3,079 $ 111,498 See accompanying notes. 5

8 Consolidated Statements of Cash Flows Year Ended December (In Thousands) Operating activities Change in net assets $ 4,112 $ 1,199 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 14,480 14,491 Amortization of deferred financing costs Change in net unrealized gains and losses on investments (746) 166 Changes in operating assets and liabilities: Patients accounts receivable, net (8,913) 2,037 Other receivables and other assets (5,326) (6,125) Accounts payable and accrued expenses 5,991 6,028 Accrued salaries and related liabilities 2, Other noncurrent liabilities 811 2,648 Professional insurance liabilities (549) 133 Estimated amounts due from/to third-party payors, net (7,767) (5,314) Net cash provided by operating activities 4,626 16,093 Investing activities Net change in assets limited as to use and investments 7,428 3,387 Acquisitions of property, buildings and equipment (6,631) (9,954) Net cash provided by (used in) investing activities 797 (6,567) Financing activities Payments on long-term debt and capital lease obligations (8,297) (9,059) Net cash used in financing activities (8,297) (9,059) Net (decrease) increase in cash and cash equivalents (2,874) 467 Cash and cash equivalents, beginning of year 22,761 22,294 Cash and cash equivalents, end of year $ 19,887 $ 22,761 Supplemental disclosure of cash flow information Interest paid $ 2,212 $ 2,176 Supplemental disclosure of noncash investing and financing activities Equipment acquired through capitalized lease obligations $ 2,188 $ 3,271 See accompanying notes. 6

9 Notes to Consolidated Financial Statements December 31, Organization The Brooklyn Hospital Center (the Hospital ) is a 464-bed acute care voluntary, not-for-profit hospital. The Hospital was incorporated under New York State not-for-profit corporation law for the purpose of providing health care services primarily to residents of Brooklyn, New York. The Hospital is a membership corporation, with at least five members pursuant to its bylaws. The members elect the Hospital s Board of Trustees. The Hospital is an academic affiliate of The Icahn School of Medicine at Mount Sinai and a clinical affiliate of the Mount Sinai Hospital. The Brooklyn Hospital Foundation, Inc. (the Foundation ), a subsidiary of the Hospital, is a notfor-profit corporation under Section 501(c)(3) of the Internal Revenue Code, whose main purpose is to solicit contributions on behalf of the Hospital. Ashland Place Houses, Inc. ( Ashland ), a notfor-profit subsidiary of the Foundation, was originally formed for real estate purposes. During December 2013, the Hospital formed Metropolis Assurance Company Ltd. ( Metropolis ), an exempt company incorporated in the Cayman Islands, whose main purpose is to act as a captive insurance company. Operations began January 1, 2014 (see Note 11). Other subsidiaries of the Hospital include Ashland Place Holding Corp. and Park Ventures Housing Corp. Parkventures, Inc. is a subsidiary of the Foundation. The Hospital and the following physician practices operate professional corporations (collectively referred to as the PCs ) for the purpose of operating faculty practices: Brooklyn Hospital Radiology, P.C.; TBHC Medical Services, P.C.; TBHC Emergency Medicine, P.C.; TBHC Physician Services, P.C.; TBHC Medical Testing Services, P.C.; TBHC Pediatric Services, P.C,; Brooklyn Hospital Women s Healthcare Medical Providers, P.C.; Brooklyn Hospital ECG Medical Services, P.C. (inactive); and Brooklyn Hospital Nuclear Medicine, P.C. (inactive). As part of a joint venture arrangement (see Note 15), in January 2015 the Hospital established Modern Physician Services, P.C. ( Modern PC ) which operated urgent care health facilities. Operating activities for the urgent care facilities commenced in September In September 2016, the Hospital transferred ownership in Modern PC to a physician affiliated with the for-profit partner in the joint venture. 7

10 1. Organization (continued) The accompanying consolidated financial statements include the accounts of the Hospital and its subsidiaries described above, including the Foundation, and Metropolis and the PCs and Modern PC (through September 2016 until ownership transferred). All significant intercompany transactions and account balances have been eliminated in consolidation. 2. Summary of Significant Accounting Policies The Hospital s significant accounting policies are as follows: Use of Estimates: The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, including estimated uncollectibles for accounts receivable for services to patients, and liabilities, including estimated payables to third-party payors and professional insurance liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the amounts of revenue and expenses reported during the period. There is at least a reasonable possibility that certain estimates will change by material amounts in the near term. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents include all highly liquid amounts invested in accounts with depository institutions which are readily convertible to known amounts of cash with original maturities of three months or less, and which are not included within assets limited as to use. The Hospital does not hold any money market funds with significant liquidity restrictions that would require the funds to be excluded from cash equivalents. Investments: Investments consist of cash equivalents and mutual funds. All investments are carried at fair value based on quoted market prices (see Note 14) and are classified as trading investments. Assets Limited as to Use: Assets so classified represent cash and investment securities whose use is restricted for specific purposes under internal designation or terms of agreements. The Hospital reports investments in equity securities with readily determinable fair values and all investments in debt securities at fair value based on quoted market prices (see Note 14). Investment income or loss (including realized gains or losses on investments, interest, and dividends) is included in other revenue in the accompanying consolidated statements of operations, unless the income or loss is temporarily or permanently restricted by explicit donor stipulations. All assets limited as to use investments are classified as trading securities. 8

11 2. Summary of Significant Accounting Policies (continued) Investment in Limited Liability Company: The Hospital accounts for its investment in HF Management Services, LLC, a limited liability company (the LLC ), under the equity method of accounting. Through December 31, 2014, the LLC was the sole member of Senior Health Partners, Inc. ( SHP ). Effective January 1, 2015, the LLC distributed its ownership interest in SHP to the LLC s owners, which then exchanged their interests in SHP with Healthfirst, Inc. ( HFI ) in exchange for subvention certificates. In connection with this transaction, the assets and liabilities of SHP were marked to fair value as of January 1, As a result of these transactions, the Hospital received subvention certificates in the amount of approximately $5.5 million and recognized a gain of approximately $1.3 million in the accompanying consolidated statement of operations for the year ended December 31, Repayment of the subvention certificates may be made by HFI from time to time, subject to certain financial conditions and regulatory approvals. The subvention certificates are included in other noncurrent assets in the accompanying consolidated statements of financial position. For the years ended December 31, 2016 and 2015, the Hospital recorded its equity in the income (loss) of the LLC of approximately $1.6 million and $(2.3) million, respectively, and distributions received from the LLC of approximately $2.1 million and $2.0 million, respectively. Additionally, the Hospital participates as a member in certain managed care insurance entities affiliated with the LLC (the Healthfirst Programs ). Under health care services agreements with these entities, certain payments due to the Hospital as a health care provider to insured enrollees are retained by the Healthfirst Programs as additional capital contributions. The Hospital may be entitled to have its retained payments repaid in the future upon the dissolution of an entity in the Healthfirst Programs or similar circumstances, or with the approval of the Healthfirst Programs governing board, subject to any restrictions by the State of New York, as detailed in such agreements. Total accumulated retained payments at December 31, 2016 and 2015 are approximately $31.4 million and $25.6 million, respectively, and are reported within other noncurrent assets in the accompanying consolidated statements of financial position. Accounts Receivable and Net Patient Service Revenue: Net patient service revenue is reported at estimated net realizable amounts from patients, residents, third-party payors, and others for services rendered and includes estimated retroactive revenue adjustments due to ongoing and future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. 9

12 2. Summary of Significant Accounting Policies (continued) The Hospital recognizes accounts receivable and patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered (see description of third-party payor payment programs below). For uninsured patients that do not qualify for charity care, the Hospital recognizes revenue on the basis of discounted rates under the Hospital s self-pay patient policy. Under the policy for self-pay patients, a patient who has no insurance and is ineligible for any government assistance program has his or her bill reduced to the amount which would be billed to a commercially insured patient. The impact of this policy on the financial statements is lower net patient service revenue, as the discount is considered a revenue allowance, and a lower provision for bad debt. Patient service revenue for the years ended December 31, 2016 and 2015, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources based on primary insurance designation, is as follows (in thousands): Third-party payors $ 394,851 $ 389,706 Self-pay 8,401 7,793 Total all payors $ 403,252 $ 397,499 Deductibles and copayments under third-party payment programs within the third-party payor amounts above are the patients responsibility and the Hospital considers these amounts in its determination of the provision for bad debts based on collection experience. Accounts receivable are also reduced by an allowance for doubtful accounts. The amount of the allowance for doubtful accounts is based upon management s assessment of historical and expected net collections, business and economic conditions, trends in health care coverage, and other collection indicators. Additions to the allowance for doubtful accounts result from the provision for bad debts. Accounts written off as uncollectible are deducted from the allowance for doubtful accounts. In evaluating the collectibility 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. 10

13 2. Summary of Significant Accounting Policies (continued) 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 payors who are known to be having financial difficulties that make the realization of amounts due unlikely). 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 discounted rates 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 totaled approximately $22.2 million and $22.9 million at December 31, 2016 and 2015, respectively. The allowance for doubtful accounts for self-pay patients was approximately 91% of self-pay accounts receivable as of December 31, 2016 and Overall, the total of self-pay discounts and write-offs did not change significantly for the year ended December 31, The Hospital has not changed its charity care policy for the years ended December 31, 2016 and Third-Party Payment Programs: The Hospital has agreements with third-party payors that provide for payment for services rendered at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: Medicare Payments: Hospitals are paid for most Medicare inpatient and outpatient services under the national prospective payment system and other methodologies of the Medicare program for certain other services. Federal regulations provide for certain adjustments to current and prior years payment rates, based on industry-wide and hospital-specific data. At December 31, 2016, Medicare cost reports of the Hospital have been settled for years through Non-Medicare Reimbursement: In New York State, hospitals and all non-medicare payors, except Medicaid, workers compensation and no-fault insurance programs, negotiate hospitals payment rates. If negotiated rates are not established, payors are billed at hospitals established charges. Medicaid, workers compensation and no-fault payers pay hospital rates promulgated by the New York State Department of Health. Effective December 1, 2009, the New York State payment methodology was updated such that payments to hospitals for Medicaid, 11

14 2. Summary of Significant Accounting Policies (continued) workers compensation and no-fault inpatient services are based on a statewide prospective payment system, with retroactive adjustments; prior to December 1, 2009, the payment system provided for retroactive adjustments to payment rates, using a prospective payment formula. Outpatient services also are paid based on a statewide prospective system that was effective December 1, Medicaid rate methodologies are subject to approval at the Federal level by the Centers for Medicare and Medicaid Services ( CMS ), which may routinely request information about such methodologies prior to approval. Revenue related to specific rate components that have not been approved by CMS is not recognized until the Hospital is reasonably assured that such amounts are realizable. Adjustments to the current and prior years payment rates for those payors will continue to be made in future years. Other Third-Party Payors: The Hospital also has entered into payment agreements with certain commercial insurance carriers and health maintenance organizations. The basis for payment to the Hospital under these agreements includes prospectively determined rates per discharge or days of hospitalization and discounts from established charges. Additionally, the Healthfirst Programs compensate and share risk with the Hospital in accordance with the terms of health care services agreements. The agreements provide for an allocation to the Hospital s risk-sharing pool based on a percentage of the premium revenue received by the Healthfirst Programs under capitated payment arrangements for enrolled participants assigned to the Hospital based on the primary care physician selected by the participant. The majority of the Healthfirst Programs premium revenue is derived from the Medicaid and Medicare programs and is subject to annual rate setting and various retroactive and retrospective provisions. In the event health care service costs incurred by the Hospital, as determined in accordance with specified contractual payment methodologies, are in excess of the risk-sharing pool allocation, the Hospital shares the risk for costs up to stop-loss reinsurance thresholds. Revenue earned under the Healthfirst Programs was approximately 20% and 16% of the Hospital s net patient service revenue for the years ended December 31, 2016 and 2015, respectively. For the years ended December 31, 2016 and 2015, net adjustments and settlements related to prior years were not significant. The Hospital has appealed certain items in audited cost reports. The outcome of these appeals is uncertain and, therefore, potential revenue associated with these appeals is not included within the accompanying consolidated statements of operations. 12

15 2. Summary of Significant Accounting Policies (continued) Revenue from the Medicare and Medicaid programs accounted for approximately 80% and 81% of the Hospital s net patient service revenue for the years ended December 31, 2016 and 2015, respectively. There are various proposals at the federal and state levels that could, among other things, significantly reduce payment rates or modify payment methods. The ultimate outcome of these proposals and other market changes, including the potential effects of or revisions to health care reform that has been enacted by the federal and state governments, cannot presently be determined. Future changes in the Medicare and Medicaid programs and any reduction of funding could have an adverse impact on the Hospital. Laws and regulations governing the Medicare and Medicaid programs are 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. The Hospital believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that could have a material adverse effect on the accompanying consolidated financial statements. Noncompliance with such laws and regulations could result in fines, penalties, and exclusion from such programs. Classification of Net Assets: The Hospital separately accounts for and reports donor restricted and unrestricted net assets. Unrestricted net assets are not externally restricted for identified purposes by donors or grantors. Unrestricted net assets include resources that the governing board may use for any designated purpose and resources whose use is limited by agreement between the Hospital and an outside party other than the donor or grantor. Temporarily restricted net assets are those whose use by the Hospital has been limited by donors to a specific time frame or purpose. Temporarily restricted net assets at December 31, 2016 and 2015, are available for capital improvements, research, education, and other health care related services. When donor restrictions expire, that is, when a time restriction ends or a purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions in the accompanying consolidated statements of operations and consolidated statements of changes in net assets. 13

16 2. Summary of Significant Accounting Policies (continued) Permanently restricted net assets have been restricted by donors to be maintained by the Hospital in perpetuity. The Hospital follows the requirements of the New York Prudent Management of Institutional Funds Act ( NYPMIFA ) as they relate to its permanently restricted contributions and net assets. The Hospital has interpreted NYPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment fund, absent explicit donor stipulations to the contrary. The Hospital classifies as permanently restricted net assets the original value of the gifts donated to the permanent endowment and the original value of subsequent gifts to the permanent endowment. Accumulated earnings of the permanent endowment are used in accordance with the direction of the applicable donor gift. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until the amounts are appropriated for expenditure in accordance with a standard of prudence prescribed by NYPMIFA. The Hospital considers several factors in making a determination to appropriate or accumulate donor-restricted endowment funds, including but not limited to the following: the duration and preservation of the fund; the purposes of the Hospital and the donor-restricted endowment fund; general economic conditions; the possible effects of inflation and deflation; and the investment and spending policies of the Hospital. Changes in endowment net assets for the years ended December 31, 2016 and 2015 are summarized in the following table (in thousands): Temporarily Restricted Permanently Restricted Total Endowment net assets at January 1, 2015 $ 2,210 $ 3,079 $ 5,289 Investment return: Investment income Net depreciation (realized and unrealized) (103) (103) Total investment return (12) (12) Endowment net assets at December 31, ,198 3,079 5,277 Investment return: Investment income Net appreciation (realized and unrealized) Total investment return Endowment net assets at December 31, 2016 $ 2,684 $ 3,079 $ 5,763 14

17 2. Summary of Significant Accounting Policies (continued) The Hospital is the known beneficiary of a bequest under a will; however, the amount that will be ultimately realized under the bequest is pending final settlement of certain proceedings. The Hospital s share of this bequest totals approximately $4.1 million and is expected to be recorded in the consolidated financial statements in 2017 as an increase to permanently restricted endowments. Property, Buildings, and Equipment: Property, buildings, and equipment are recorded at cost or, if donated, at appraised or fair value at time of donation. Assets acquired under capitalized leases are recorded at the present value of the lease payments at the inception of the lease. Depreciation and amortization are determined by use of the straight-line method over the estimated useful lives of the assets or the lesser of the estimated useful life of the asset or lease term (ranging from 2 to 40 years). Such amortization is included in depreciation and amortization in the accompanying consolidated financial statements. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. The carrying amount of assets and the related accumulated depreciation and amortization are removed from the accounts when such assets are disposed of, and any resulting gain or loss is included in operations. Inventory: Inventory, included in other current assets in the accompanying consolidated statements of financial position, is stated at the lower of cost (first-in, first-out method) or market. Inventory is used in the provision of patient care and is not held for sale. Deferred Financing Costs: Deferred financing costs are included as a deduction to long-term debt in the accompanying consolidated statements of financial position and are amortized using the effective interest method over the term of the related debt (accumulated amortization of approximately $1.3 million and $1.0 million at December 31, 2016 and 2015, respectively). Performance Indicator: The consolidated statements of operations include excess of revenue over expenses as the performance indicator. 15

18 2. Summary of Significant Accounting Policies (continued) Program Services: The Hospital s program services consist of providing health care and related services, including graduate medical education. For the years ended December 31, 2016 and 2015, expenses related to providing these services are as follows (in thousands): Health care and related services $ 357,440 $ 346,506 Program support and general services 63,172 61,148 $ 420,612 $ 407,654 Tax Status: The Hospital, the Foundation and the PCs, excluding Modern PC and the inactive PCs, are Section 501(c)(3) organizations exempt from Federal income taxes under Section 501(a) of the Internal Revenue Code (the Code ). The organizations are also exempt from New York State and City income taxes. Ashland was formed as a New York State not-for-profit organization. Metropolis is not subject to taxes on income or gains in the Cayman Islands. Currently, there are no direct taxes imposed on income in the Cayman Islands and, additionally, Metropolis has received a tax exemption certificate for the next 30 years, in the event that taxes are imposed in the Cayman Islands at a future date. The federal and state income taxes attributable to unrelated business activities or taxable subsidiaries are immaterial to the consolidated financial statements. Reclassifications: Certain reclassifications have been made to 2015 balances previously reported in order to conform with the 2016 presentation. The reclassifications had no impact on the Hospital s net assets or changes in net assets. Recent Accounting Pronouncements: In April 2015, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) , Simplifying the Presentation of Debt Issuance Costs. ASU requires debt issuance costs related to a recognized debt liability to be presented in the statements of financial position as a direct deduction from the corresponding debt liability rather than as an asset. This change makes the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The recognition and measurement guidance for debt issuance costs is not affected. The provisions of ASU are effective for the Hospital for annual reporting periods beginning after December 15, 2015, with retrospective application to all periods presented. The Hospital has adopted ASU for the year ended December 31, As a result, approximately $0.7 million of net deferred financing costs at December 31, 2016 (approximately $1.1 million at December 31, 2015) are reflected in the accompanying consolidated statements of financial position as a component of long-term debt (see Note 7). 16

19 2. Summary of Significant Accounting Policies (continued) In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern, that requires management of public and nonpublic companies to evaluate and disclose where there is substantial doubt about an entity s ability to continue as a going concern. The standard is effective for annual periods ending after December 15, Management adopted ASU for the year ended December 31, The adoption of ASU did not impact the Hospital s 2016 consolidated financial statements. In May 2014, the FASB issued ASU , Revenue from Contracts with Customers. The core principle of ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU supersedes the FASB s current revenue requirements and most industry-specific guidance. The FASB subsequently issued ASU , Revenue from Contracts with Customers, which deferred the effective dates of ASU Based on ASU , the provisions of ASU are effective for the Hospital for annual reporting periods beginning after December 15, Early application is permitted only as of annual reporting periods beginning after December 15, The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In February 2016, the FASB issued ASU , Leases, which will require lessees to report most leases on their statements of financial position and recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2018, and interim periods in the following year. Early adoption is permitted. The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In April 2015, the FASB issued ASU , Customer s Accounting for Fees Paid in a Cloud Computing Arrangement. The ASU requires the Hospital to determine whether a software contracting arrangement contains a software license element. If so, the related fees paid are accounted for consistent with the acquisition of other software licenses; if not, the arrangement is accounted for as a service contract. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, An entity adopting the ASU may apply it either prospectively 17

20 2. Summary of Significant Accounting Policies (continued) to new arrangements or retrospectively. The Hospital has elected to adopt ASU prospectively as of January 1, 2016 with no impact to the accompanying 2016 consolidated financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Financial Statement Presentation, which eliminates the requirement for not-for-profits (NFPs) to classify net assets as unrestricted, temporarily restricted and permanently restricted. Instead, NFPs will be required to classify net assets as net assets with donor restrictions or without donor restrictions. Among other things, the guidance also modifies required disclosures and reporting related to net assets, investment expenses and qualitative information regarding liquidity. NFPs will also be required to report all expenses by both functional and natural classification in one location. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2017 and interim periods thereafter. Early adoption is permitted. The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In August 2016, the FASB issued ASU , Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues in order to limit diversity in practice: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The provisions of ASU are effective for the Hospital for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In November 2016, the FASB issued ASU , Statement of Cash Flows Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-ofperiod and end-of-period total amounts shown on the statement of cash flows. The provisions of 18

21 2. Summary of Significant Accounting Policies (continued) ASU are effective for the Hospital for annual periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. The Hospital has not completed the process of evaluating the impact of ASU on its consolidated financial statements. 3. Concentrations of Credit Risk At December 31, 2016 and 2015, the Hospital has substantially all of its cash deposited in one financial institution and amounts deposited exceed federal depository insurance limits. Investments in money market funds are not guaranteed by the U.S. government. The Hospital is located in Brooklyn, New York. The Hospital grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. Concentrations of gross accounts receivable from patients and third-party payors were as follows: December Medicare 11% 12% Medicaid Managed care governmental payors Commercial and managed care insurers All others % 100% 19

22 4. Assets Limited as to Use Assets limited as to use are required to be maintained for the following purposes (in thousands): December Assets under debt agreement with third parties: Mortgage reserve fund (Note 7) $ 4,744 $ 5,043 Debt service funds ,130 5,443 Temporarily restricted accumulated endowment earnings (Note 2) 2,684 2,198 Permanently restricted (Note 2) 3,079 3,079 Designated for self-insurance (Note 11) 13,959 20,644 Designated and held by Metropolis (Note 11) 3,189 3,679 28,041 35,043 Less current portion of assets limited as to use 6,929 6,751 $ 21,112 $ 28,292 The required balance of the mortgage reserve fund for each year through the maturity of the related outstanding debt is as follows (in thousands): 2017 $ 4, , , , , ,970 20

23 4. Assets Limited as to Use (continued) Investment return included in other revenue in the consolidated statements of operations for the years ended December 31, 2016 and 2015 consists of the following (in thousands): Interest and dividend income $ 534 $ 551 Net realized gains and losses Change in net unrealized gains and losses on investments 420 (63) Total investment return $ 1,357 $ 534 Investment return related to temporarily restricted net assets totaled approximately $0.5 million and $(12,000) in 2016 and 2015, respectively. 5. Property, Buildings, and Equipment A summary of property, buildings, and equipment and accumulated depreciation and amortization is as follows (in thousands): December Land $ 895 $ 895 Buildings and improvements 130, ,450 Fixed equipment 79,215 74,906 Movable equipment 179, , , ,020 Less accumulated depreciation and amortization 300, ,202 90,231 94,818 Construction-in-progress 3,645 4,719 $ 93,876 $ 99,537 Substantially all property, buildings, and equipment have been pledged as collateral under various debt agreements (see Note 7). 21

24 5. Property, Buildings, and Equipment (continued) Property, buildings, and equipment includes capitalized leases aggregating approximately $20.4 million and $20.7 million at December 31, 2016 and 2015, respectively, having accumulated amortization of approximately $12.3 million and $9.8 million at December 31, 2016 and 2015, respectively. 6. Short-Term Borrowings On October 31, 2012, the Hospital refinanced a previous revolving line of credit agreement in connection with other debt restructuring activities (see Note 7(b)). Interest on the line of credit is currently payable at LIBOR plus 2.75% (approximately 3.7% and 3.2% at December 31, 2016 and 2015, respectively) or can be converted to the Prime rate plus 1.0%. The outstanding balance of advances under the line of credit is approximately $14.7 million at December 31, 2016 and The line is collateralized by a security interest in a portion of the Hospital s accounts receivable balance, with a collection account for associated cash receipts. The Hospital maintains a stand-by letter of credit totaling approximately $3.7 million. At December 31, 2016, no draw-downs had been made under the letter of credit agreement. 7. Long-Term Debt A summary of long-term debt and obligations under capital leases is as follows (in thousands): December FHA Section 241 insured mortgage note (a) $ 26,134 $ 28,558 Term loans (b) 8,000 9,500 Capitalized leases payable at varying amounts of interest and principal through 2020, secured by the financed equipment 8,699 10,884 42,833 48,942 Less deferred financing costs, net of accumulated amortization 748 1,052 Less current portion 9,755 8,286 Noncurrent portion $ 32,330 $ 39,604 22

25 7. Long-Term Debt (continued) (a) On March 25, 1999, the Dormitory Authority of the State of New York ( DASNY ) issued Federal Housing Administration ( FHA ) Insured Mortgage Hospital Revenue Bonds, Series 1999 in the amount of approximately $73.8 million. Simultaneously, the Hospital executed a mortgage approximating $51.5 million, payable in monthly installments of approximately $0.3 million, representing principal and interest, at 5.29% scheduled through August 1, The mortgage is secured by certain of the Hospital s property and equipment. The FHA mortgage was final-endorsed by the FHA on May 17, In December 2012, the DASNY bonds were defeased and refinanced through the issuance of Government National Mortgage Association securities by a commercial lender. In connection therewith, DASNY assigned the Hospital s mortgage to the commercial lender. The mortgage continues to be insured under FHA. This transaction resulted in a reduction in the interest rate of the mortgage loan, effective December 18, 2012, to a fixed rate of 2.01% over the remaining term. All other material terms of the mortgage remained the same. Pursuant to the mortgage agreement and related documents, the Hospital is required to maintain certain debt service funds, including a mortgage reserve fund (see Note 4). In addition, the Hospital is required to maintain certain financial ratios and financial conditions. In the event these ratios or conditions are not met, the Hospital may be required to obtain approval to engage in certain transactions. At December 31, 2016 and 2015, the Hospital was in compliance with the financial covenants. (b) Effective October 31, 2012, the Hospital refinanced an existing revolving line of credit agreement (see Note 6) and term loan. The refinanced agreement resulted in the extinguishment of the prior term loan and the issuance of a $20.0 million term loan (the Term Loan ). The Term Loan was scheduled to be due October 31, 2017, with principal and interest payable at LIBOR plus 3.25%. Effective October 31, 2014, the Hospital amended the Term Loan. The amended agreement included a principal repayment of $6.0 million on October 31, 2014, and quarterly payments of $375,000 commencing January 1, 2015 through October 1, 2016, quarterly payments of $500,000 commencing January 1, 2017 through October 1, 2019, and a final payment due upon maturity of $2.0 million. The amended loan matures October 31, 2019, and has interest payable at LIBOR plus 2.75% (3.6% and 3.08% at December 31, 2016 and 2015, respectively). 23