GOOD SHEPHERD HEALTH SYSTEM, INC.

Transcription

1 GOOD SHEPHERD HEALTH SYSTEM, INC. NOTICE WITH REGARD TO ANNUAL FINANCIAL INFORMATION AND OPERATING DATA FOR FISCAL YEAR ENDED SEPTEMBER 30, 2016 AND QUARTERLY INFORMATION FOR FISCAL QUARTERS ENDED DECEMBER 31, 2016 AND MARCH 31, 2017 Notice Dated: July 18, 2017 Enclosed with this notice is the audited consolidated balance sheet for Good Shepherd Health System, Inc. ( GSHS ) for the fiscal year ended September 30, 2016 (the FY 2016 Audit ). Effective February 1, 2017, GSHS and CHRISTUS Health, a Texas non-profit corporation ( CHRISTUS ) finalized their agreement to transfer control of GSHS to CHRISTUS, which became the sole corporate member of GSHS. Prior to such transfer, GSHS retained Ernst & Young LLP ( EY ) with regard to its audit for fiscal year As a result of EY s audit of GSHS, it was determined by GSHS that production of a complete audit of GSHS would require a significant and unreasonable amount of additional time and cost. Therefore, the enclosed FY 2016 Audit includes a balance sheet, but does not include an income statement, statement of changes in net assets or statement of cash flows, nor does it include comparative balance sheet information for fiscal year In addition to the FY 2016 Audit, the GSHS Continuing Disclosure Agreement, dated as of September 1, 2010, relating to its Series 2010 Bonds and the GSHS Continuing Disclosure Agreement, dated as of August 1, 2012, relating to its Series 2012C Bonds require the reporting of certain other annual and quarterly financial information and operating data. Based upon the results of EY s FY 2016 Audit and GSHS s own internal review, GSHS has determined that it will not be able to ensure the complete accuracy of such additional financial and operating data with regard to the fiscal year ended September 30, 2016 and the fiscal quarters ended December 31, 2016 and March 31, 2017 (all or a portion of which occurred prior to the transfer of control of GSHS to CHRISTUS), and therefore does not expect to provide such information. As a part of the transition period following the transfer of control to CHRISTUS, GSHS and CHRISTUS are working together to conform GSHS s reporting and recording keeping practices to those used by CHRISTUS. With regard to the Master Trust Indenture, dated as of May 1, 2004, as supplemented to the date hereof, between Regions Bank (as master trustee) and GSHS, The Good Shepherd Hospital, Inc. d/b/a CHRISTUS Good Shepherd Medical Center Longview (formerly known as The Good Shepherd Hospital, Inc. d/b/a Good Shepherd Medical Center), and Harrison County Hospital Association d/b/a CHRISTUS Good Shepherd Medical Center Marshall (formerly known as Harrison County Hospital Association d/b/a Good Shepherd Medical Center Marshall) (the Master Indenture ), on February 22, 2017, the Holders of a majority in principal amount of the secured obligations outstanding under the Master Indenture waived the requirements contained in, and waived and consented to noncompliance with, the provisions of the Master Indenture contained in Section 4.08 regarding annual filing of audited financial information for fiscal year Accordingly, the timing and the content of the enclosed FY 2016 Audit are in compliance with the Master Indenture. GOOD SHEPHERD HEALTH SYSTEM, INC. D/B/A CHRISTUS GOOD SHEPHERD HEALTH SYSTEM

2 C ONSOLIDATED F INANCIAL S TATEMENT AND S UPPLEMENTARY I NFORMATION Good Shepherd Health System As of September 30, 2016 With Reports of Independent Auditors Ernst & Young LLP

3 Consolidated Financial Statement and Supplementary Information As of September 30, 2016 Contents Report of Independent Auditors...1 Consolidated Financial Statement Consolidated Balance Sheet...3 Notes to Consolidated Balance Sheet...5 Supplementary Information Independent Auditors Report on Supplementary Information...28 Balance Sheet of Good Shepherd Medical Center

4 Ernst & Young LLP One Victory Park Suite Victory Avenue Dallas, TX Tel: Fax: ey.com The Board of Directors Good Shepherd Health System Report of Independent Auditors We have audited the accompanying consolidated balance sheet of Good Shepherd Health System (the System) as of September 30, 2016, and the related notes to the consolidated balance sheet. Management s Responsibility for the Financial Statement Management is responsible for the preparation and fair presentation of this financial statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of this financial statement that is free from material misstatement. Auditor s Responsibility Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statement. 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

5 Opinion In our opinion, the financial statement referred to above presents fairly, in all material respects, the consolidated financial position of Good Shepherd Health System as of September 30, 2016, in accordance with accounting principles generally accepted in the United States of America. June 30, A member firm of Ernst & Young Global Limited

6 , Inc. Consolidated Balance Sheet (In thousands) September 30, 2016 Assets Current assets: Cash and cash equivalents $ 16,977 Short-term investments 2,256 Assets whose use is limited or restricted 268 Accounts receivable patient 111,874 Less: allowance for doubtful accounts (73,594) Net patient accounts receivable 38,280 Other accounts receivable 1,636 Inventories 7,733 Prepaid expenses 10,918 Assets held for sale 467 Total current assets 78,535 Property and equipment, net of accumulated depreciation 178,062 Assets limited as to use: By bond indenture debt service reserve 20,470 By board special purpose 3,110 By board capital improvement 74,557 98,137 Other assets 9,762 Total assets $ 364,

7 Liabilities and net assets Current liabilities: Accounts payable $ 32,880 Accrued expenses 25,469 Current portion of self-insured professional and general liabilities 942 Current maturities of long-term debt 8,351 Sale-leaseback obligation, current portion 458 Total current liabilities 68,100 Long-term debt, less current maturities 153,130 Sale-leaseback obligation 65,963 Other long-term liabilities 465 Long-term portion of self-insured professional and general liabilities 2,316 Total liabilities 289,974 Net assets: Unrestricted net assets attributable to GSHS 70,538 Unrestricted net assets attributable to non-controlling interests 3,329 Total unrestricted net assets 73,867 Temporarily restricted net assets 655 Total net assets 74,522 Total liabilities and net assets $ 364,496 See accompanying notes

8 Notes to Consolidated Balance Sheet September 30, Nature of Operations Good Shepherd Health System (the System or GSHS) provides a wide range of health care services to residents in Longview, Texas, and surrounding areas in northeast Texas. The System is the sole corporate member of Good Shepherd Health System, Inc. (GSHS, Inc.). GSHS Inc. is a member of the Obligated Group and was originally organized in 1984 to serve as the sole corporate member of Longview. It is now also the sole corporate member, sole shareholder, or owner of several of the affiliated organizations. The System is the sole corporate member of the Good Shepherd Hospital, Inc. d/b/a Good Shepherd Medical Center (the Medical Center). The Medical Center is a not-for-profit corporation that provides inpatient and outpatient acute care medical services to the residents of Gregg County, Texas, and surrounding areas. The System is the sole corporate member of the Good Shepherd Foundation, Inc. (the GSMC Foundation). The GSMC Foundation was organized to support the activities of the Medical Center. The GSMC Foundation Board of Directors are elected by the GSMC Foundation s executive officers. The GSMC Foundation primarily raises funds through soliciting charitable donations on behalf of the Medical Center. The System is the sole corporate member of Harrison County Hospital Association d/b/a Good Shepherd Medical Center Marshall (GSMC Marshall). GSMC Marshall is located in Marshall, Texas, providing inpatient and outpatient acute care medical services to the residents of Marshall and surrounding areas. GSMC Marshall s consolidated financial statements also include Marshall Health Services, a physician management organization, and Marshall Hospital Foundation, which raises funds on behalf of GSMC Marshall. The System is the sole stockholder of GSHS Enterprises, Inc. (Enterprises). Enterprises, through its various wholly owned subsidiaries, provides physician management services (providing lines of credit and holding assets that are subleased), operates physician clinics and leases space in its professional office buildings. Enterprises is also the majority owner of Good Shepherd Ambulatory Surgical Center, Ltd. (the Surgical Center), an ambulatory surgical center located in Longview, Texas. Non-controlling ownership interest in the Surgical Center is held by various physician investors, whose ownership interest was 28.2% at September 30, Enterprises is the general partner in Good Shepherd North Park, LP (North Park). The partnership owns a medical office building from which it earns rental income. Enterprises controls North Park through its right as the

9 1. Nature of Operations (continued) general partner, and consolidates North Park in its financial statements. Non-controlling ownership interest in North Park is held by various physician investors, whose ownership interest is 93.3% at September 30, The System is the sole stockholder of GSMC Linden Foundation, Inc. (the GSMC Linden Foundation). GSMC Linden Foundation was organized to support certain System activities. The System is the sole stockholder of GSHS Administrative Service Organization, Inc. (GSHS ASO). GSHS ASO was created to provide administrative services to the various System affiliates. Customer Service Center, LLC and Customer Service Center, Ltd. (collectively, CSC) are owned by the System and are organized to hold certain property used in the System s operations. The Medical Center owns a 50.0% member interest in Champion EMS. Champion EMS provides ambulance services in northeast Texas. GSMC Marshall owns a 33.0% interest in a separate joint venture home health company, GSHS Home Health LP (Home Health), which provides home health services in and around Marshall, Texas. Each of these investments is accounted for using the equity method. The Medical Center, GSMC Marshall and GSHS, Inc. are the obligors under the terms of the revenue bond indenture and loan agreements (the Obligated Group) (see Note 6). All other subsidiaries of the System are excluded from this group. 2. Summary of Significant Accounting Policies Liquidity The System has recurring losses from operations and negative cash flows from operating activities. CHRISTUS Health has agreed to support the System s cash flow needs as necessary through July 1, 2018 (see Note 13). Principles of Consolidation The consolidated financial statements include the accounts of the System, the Medical Center, GSMC Marshall, GSHS ASO, CSC, Enterprises, North Park, the GSMC Foundation and the GSMC Linden Foundation. Control of these corporations rests with the System either through

10 2. Summary of Significant Accounting Policies (continued) corporate membership, appointment of Board of Directors (the Board) positions or stock ownership. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the accompanying consolidated financial statement in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management of the System to make assumptions, estimates, and judgments that affect the amounts reported in the consolidated financial statement, including the notes thereto, and related disclosures of commitments and contingencies, if any. The System considers critical accounting policies to be those that require significant judgments and estimates in the preparation of its financial statements, including the following: including the contractual and bad debt allowances; estimates for reimbursement under the disproportionate share and Medicaid 1115 waiver programs; reserves for losses and expenses related to health care professional and general liabilities; accruals for claims incurred but not yet reported related to the System s self-insured medical plan; and determination of fair values of certain financial instruments. Management relies on historical experience and on other assumptions believed to be reasonable under the circumstances in making its judgments and estimates. Actual results could differ materially from these estimates. Non-controlling Interests Non-controlling interest represents the 28.2% interest in the Surgical Center and the 93.3% interest in North Park that the System does not own at September 30, Income attributable to the noncontrolling interest is allocated to the non-controlling interest, even if the carrying amount of the non-controlling interest is reduced below zero. Patient Accounts Receivable The System has agreements with third-party payers that provide for payments to the System at amounts different from established rates. Patient revenue and related accounts receivable is reported at the estimated net realizable amounts from third-party payers and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with thirdparty payers. Amounts subject to retroactive adjustments are estimated and recorded in the period the related services are rendered and adjusted in future periods as final settlements are determined. The estimated settlements recorded at September 30, 2016, could differ from actual settlements

11 2. Summary of Significant Accounting Policies (continued) Inpatient acute care services and outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. Inpatient and outpatient services rendered to Medicaid program beneficiaries are paid under cost reimbursement methodologies, prospectively determined rates per discharge, and prospectively determined or negotiated rates. For receivables associated with self-pay patients (which include both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the System records a significant allowance for uncollectible accounts 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 System provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the System does not pursue collection of amounts determined to qualify for charity care, these amounts are not reported as patient revenues and related accounts receivable. Allowance for Doubtful Accounts The difference between the standard rates (or the discounted rates if negotiated or provided by policy) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. Accounts receivable are reduced by an allowance for doubtful accounts. The System s recorded allowance for doubtful accounts is based on expected net collections, after contractual adjustments, primarily from patients. Management routinely assesses the sufficiency of the recorded allowances relative to changes in payer mix, cash collections, write-offs, recoveries, and market dynamics. Cash Equivalents The System considers all short-term, highly liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. At September 30, 2016, cash equivalents consisted primarily of money market accounts with brokers. At September 30, 2016, the System s cash accounts exceeded federally insured limits by approximately $16.7 million

12 2. Summary of Significant Accounting Policies (continued) Investments Investments in equity securities having a readily determinable fair value, and all debt securities are carried at fair value. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. The investments in Champion EMS and Home Health joint ventures are reported on the equity method of accounting. Changes in the investments in the joint ventures accounted for under the equity method of accounting are reflected in the accompanying consolidated balance sheet as other assets. Assets Limited as to Use Assets limited as to use include: (1) assets held by trustees under bond indenture agreements, (2) assets set aside by the Board under self-insurance trust agreements, (3) assets set aside by the Board for future capital improvements and debt service over which the Board retains control and may, at its discretion, subsequently use for other purposes, and (4) certificates of deposit that are assets set aside that are not readily available for conversion. Amounts required to meet current liabilities of the System are included in current assets. Supplies Supply inventories, which consist principally of medical supplies and pharmaceuticals, are stated at the lower of cost or market, and determined using the first-in, first-out method. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated using the straightline method over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives

13 2. Summary of Significant Accounting Policies (continued) The estimated useful lives for each major depreciable classification of property and equipment are as follows: Land improvements Buildings and improvements Equipment 2 25 years 5 40 years 3 20 years Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long-lived Asset Impairment The System evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No asset impairment was recognized during the year ended September 30, Assets Held for Sale Assets are classified as held for sale when their carrying amount will be recovered principally through a sale transaction rather than through continuing use. At September 30, 2016, the System has classified as assets held for sale certain buildings in Linden, Texas, with a total carrying value of $0.5 million. Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are amortized over the term of the respective debt using the straight-line method, which approximates the effective interest method. Deferred financing costs are reflected in the accompanying consolidated balance sheet as other assets

14 2. Summary of Significant Accounting Policies (continued) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the System has been limited by donors to a specific time period or purpose. Temporarily restricted net assets also include the System s beneficial interest in the net assets of affiliated and financially interrelated organizations, whose use has been limited by grant agreements and donors to a specific time period or use. Permanently restricted net assets are restricted by donors to be maintained by the System in perpetuity. At September 30, 2016, the System had no permanently restricted net assets. Unconditional promises to give cash and other assets are reported at fair value on the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value on the date the conditions are satisfied. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are recorded as unrestricted net assets. Electronic Health Records Incentive Program The Electronic Health Records Incentive Program, enacted as part of the American Recovery and Reinvestment Act of 2009, provides for one-time incentive payments under both the Medicare and Medicaid programs to eligible hospitals that demonstrate meaningful use of certified electronic health records (EHR) technology. Payments under the Medicaid program are generally made for up to four years based upon a statutory formula, as determined by the state, which is approved by the Centers for Medicare and Medicaid Services. Payment under both programs is contingent on the System continuing to meet escalating meaningful use criteria and any other specific requirements that are applicable for the reporting period. The final amount for any payment year is determined based upon an audit by the fiscal intermediary. Events could occur that would cause the final amounts to differ materially from the initial payments under the program. The System recognizes revenue at the end of the reporting period when management is reasonably assured it will meet all of the meaningful use objectives and all other contingencies have been met. At September 30, 2016, there were no receivables outstanding

15 2. Summary of Significant Accounting Policies (continued) Estimated Self-insured General and Professional Liabilities An annual estimated provision is accrued for the self-insured portion of medical malpractice claims and includes an estimate of the ultimate costs for both reported claims and claims incurred but not reported. The estimated provision is determined through the use of a third-party actuary service during the year. Self-funded Health Insurance The System maintains a self-insured health care plan covering substantially all full-time employees. Contributions are made to the administrator of the plan as health care claims are paid while expenses are accrued as incurred. An estimated liability for incurred but not reported and unpaid claims has been recorded in accrued expenses in the accompanying consolidated balance sheet. The estimated liability is determined through the use of a third-party actuary service during the year. Income Taxes The authoritative guidance in Accounting Standards Codification (ASC) Topic 740, Income Taxes, creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Under the requirements of this guidance, taxexempt organizations could be required to record an obligation as the result of a tax position they have historically taken on various tax exposure items. The System, GSHS ASO, the Medical Center, GSMC Marshall, the GSMC Foundation and the GSMC Linden Foundation are exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code and a similar provision of state law. These entities are subject to federal income tax on any unrelated business income. Enterprises is a taxable corporation. CSC is taxed as a partnership. Deferred tax assets and liabilities are recognized for Enterprises for the tax effects of differences between the financial statements and tax bases of assets and liabilities. At September 30, 2016, the System has net operating loss carryforwards of $137.0 million, which result in deferred tax assets of $48.0 million. The System has recorded a full valuation allowance for the same amount, as it is more likely than not that the deferred tax asset will not be realized

16 2. Summary of Significant Accounting Policies (continued) New and Pending Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Not-for-Profit Entities Consolidation (Subtopic ), to clarify when a not-for-profit entity (NFP) that is a general partner or limited partner should consolidate a for-profit limited partnership or similar legal entity once the amendments in ASU , Consolidation (Topic 810): Amendments to the Consolidation Analysis, become effective. ASU , issued in February 2015, eliminates the presumption that a general partner should consolidate a limited partnership. ASU reinstates that presumption. ASU is effective for fiscal year, and interim periods within those fiscal years, beginning after December 15, ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. However, ASU notes that NFPs that have not yet adopted the amendments in ASU are required to adopt ASU at the same time they adopt ASU The System has adopted ASU and ASU and concluded North Park should be consolidated into the financial statements. In August 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958), to improve the current net asset classification requirements and the information presented in financial statements and notes about a NFP s liquidity, financial performance and cash flows. The amendments within ASU make improvements that address many of the identified issues about the current financial reporting of NFPs. ASU is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018, with early adoption permitted. The System is evaluating the guidance of ASU and the impact that the adoption of this update will have on its consolidated financial statements. In February 2016, the FASB issued ASU No , Leases (Topic 842), to require a lessee to recognize a right-of-use asset and a lease liability for both operating and finance leases, whereas previous U.S. GAAP required the asset and liability be recognized only for capital leases. The amendment also requires qualitative and specific quantitative disclosures. ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The System is evaluating the guidance of ASU and the impact that the adoption of this update will have on its consolidated financial statements

17 2. Summary of Significant Accounting Policies (continued) In April 2015, the FASB issued authoritative guidance (ASU ) to simplify the presentation of debt issuance costs under Subtopic , Interest Imputation of Interest. Consequently, the updated guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the guidance. Further, the amortization of debt issuance costs shall be reported as interest expense. The updated guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the guidance is permitted. The new guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The updated guidance will result in a reclassification of the deferred debt issuance costs in other assets to long-term debt. No other material impact is expected. In April 2015, the FASB issued ASU as an update to Subtopic , Intangibles Goodwill and Other Internal Use Software. The update provides guidance on accounting for fees paid in a cloud computing arrangement. Previously, there was no such guidance under U.S. GAAP resulting in diversity in practice. The amendments in the update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. The updated guidance will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, Early adoption is permitted. The guidance can be adopted either (1) prospectively for all arrangements entered into or materially modified after the effective date or (2) retrospectively. The System is evaluating the guidance in ASU and the impact that the adoption of this update will have on its consolidated financial statements. In August 2014, the FASB issued ASU No as an update to Subtopic , Presentation of Financial Statements Going Concern. The update provides guidance for management, as part of preparing annual financial statements, to evaluate whether there are conditions or events that raise substantial doubt about the entity s ability to continue as a going concern within one year after the date of the financial statements. The updated guidance will be effective for annual periods ending after December 15, 2016, and for all annual and interim periods thereafter. Early adoption is permitted. The System is evaluating the guidance in ASU and the impact that the adoption of this update will have on its consolidated financial statements

18 2. Summary of Significant Accounting Policies (continued) In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). The core principle of the new guidance 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. ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted. The System is evaluating the guidance in ASU and the impact that the adoption of this update will have on its consolidated financial statements. 3. Investments Assets Limited as to Use Assets limited as to use at September 30 include (in thousands): 2016 Internally designated by Board for capital improvements: Cash and money market funds $ 947 U.S. equity index mutual funds 18,185 U.S. government obligations 27,394 Corporate bonds 27,814 Accrued interest 217 $ 74, Internally designated short-term investments: Certificate of deposit $

19 3. Investments (continued) 2016 Internally designated for self-insurance trust reserve: Cash and money market funds $ 568 U.S. equity index mutual funds 790 U.S. government obligations 409 Corporate bonds 1,336 Accrued interest 7 $ 3, Held by trustee under bond indenture agreement: Cash and money market funds $ 20,470 Other Investments Other investments at September 30 include (in thousands): 2016 U.S. equity index mutual funds $ 2,077 Other short-term investments 179 $ 2,

20 4. Property and Equipment Property and equipment at September 30, 2016, consisted of the following (in thousands): 2016 Land $ 13,310 Land improvements 5,149 Buildings and fixed equipment 252,400 Major movable equipment 142,098 Less: accumulated depreciation and amortization (244,293) Net depreciable assets 168,664 Construction-in-progress 9,398 Total $ 178,062 Construction-in-progress outstanding as of September 30, 2016, represents project costs incurred for hospital floor and kitchen renovations. The remaining construction commitment amount is expected to be approximately $3.8 million. Construction-in-progress is not depreciated until placed into service. 5. Risk Management The Medical Center is self-insured for professional and general liability risks. The Medical Center purchases commercial insurance for losses that exceed self-insured limits. The reserve for medical malpractice claims was $3.3 million at September 30, The current portion of the reserves, $0.9 million at September 30, 2016, is presented within current liabilities under current portion of malpractice reserves in the accompanying consolidated balance sheet. The estimated provision is determined through the use of a third-party actuary service during the year. Medical malpractice reserve estimates represent the estimated ultimate cost of all reported and unreported losses incurred through the balance sheet date. The reserves for unpaid losses and loss expenses are estimated using individual case-basis valuations and actuarial analyses. Those estimates are subject to the effects of trends in loss severity and frequency. The estimates are continually reviewed and adjustments are recorded as experience develops or new information becomes known. The time period required to resolve these claims can vary depending upon whether the claim is settled or litigated. The estimation of the timing of payments beyond a year

21 5. Risk Management (continued) can vary significantly. Although considerable variability is inherent in medical malpractice reserve estimates, we believe the reserves for losses and loss expenses are adequate based on information currently known. It is reasonably possible that this estimate could change materially in the near term. GSMC Marshall and Enterprises purchase medical malpractice insurance under claims-made policies on a fixed premium basis. Accounting principles generally accepted in the United States of America require a health care provider to accrue the expense of its share of malpractice claim costs, if any, for any reported and unreported incidents of potential improper professional service occurring during the year by estimating the probable ultimate costs of the incidents. Based upon the claims experience of these entities, no such accrual is necessary. It is reasonably possible that this estimate could change materially in the near term. The System, excluding the Surgical Center, is self-insured for employee health care claims. The accrual for incurred but unpaid health claims, totaling $2.4 million at September 30, 2016, is reflected as a component of accrued expenses in the accompanying consolidated balance sheet. A provision is accrued for self-insured employee health claims, including both claims reported and claims incurred but not yet reported. The accrual is estimated based on consideration of prior claims experience, recently settled claims, frequency of claims and other economic and social factors. It is reasonably possible that the System s estimates will change by a material amount in the near term

22 6. Long-term Debt Long-term debt at September 30 consisted of the following (in thousands): 2016 Series 2006 revenue bonds payable (A) $ 5,285 Series 2010 revenue bonds payable GSMC Marshall (B) 33,025 Series 2012 revenue bonds payable (C) 30,880 Series 2015 revenue bonds payable (D) 78,000 North Park, LP bond payable (E) 14,282 Capital lease obligations and other 9 161,481 Less current maturities of long-term debt 8,351 $ 153,130 (A) $98.9 million original issue Gregg County Health Facilities Development Corporation Revenue Bonds (the 2006 Bonds) dated November 1, 2006, issued in Series A ($13.9 million fixed rate bonds with interest rates ranging from 4.3% to 5.0%, which is paid semiannually). The Series A Bonds are secured by gross revenues of the Obligated Group and mature in various amounts through (B) $44.0 million original issue Harrison County Health Facilities Development Corporation Revenue Bonds (the Marshall 2010 Bonds) dated September 2, 2010; principal payable in annual installments through July 1, 2028; fixed interest rates ranging from 3.0% to 5.3%, which is paid semiannually. The Marshall 2010 Bonds are secured by the gross revenues of the Obligated Group. (C) $32.5 million original issue Gregg County Health Facilities Development Corporation Hospital Revenue Bonds (the 2012C Bonds) dated September 5, 2012; principal payable in annual installments through July 1, 2042; fixed interest rates ranging from 3.8% to 5.0%, which is paid semiannually. The 2012C Bonds are secured by the gross revenues of the Obligated Group. The portion of the 2012C Bonds due after July 1, 2022, is subject to optional early redemption in whole or in part on July 1, 2022, or any date thereafter by the Medical Center at a price equal to 100.0% of the principal amount of the bonds to be redeemed, plus accrued interest at the redemption date

23 6. Long-term Debt (continued) (D) On February 1, 2015, the System issued Gregg County Health Facilities Development Corporation Hospital Revenue Refunding Bonds (the 2015A Bonds) totaling $88.0 million. The bonds are initially indexed at the LIBOR Index Mode plus 3.9%, principal payments vary, interest is due and payable monthly at a variable rate (4.0% at September 30, 2015) and the bonds mature on October 1, The 2015 Bonds were purchased by a financial institution upon issuance, based on a purchase agreement, with a mandatory tender in 2029, with an obligation of the Obligated Group to purchase the 2015 Bonds in 2029 if the bonds are not able to be remarketed or refinanced. The 2015 Bonds are secured by the gross revenues of the Obligated Group. The 2015 Bonds are subject to optional early redemption in whole or in part on February 1, 2015, or any date thereafter by the Medical Center at a price equal to 103.0% of the principal amount of the bonds to be redeemed, plus accrued interest at the redemption rate through August 31, 2015; 102.0% through February 29, 2016; and 100.0% through February 28, (E) On June 30, 2015, North Park initiated a note with Mutual of Omaha Bank totaling $14.7 million, with the proceeds of the note being used to refinance the construction of improvements and other related costs and expenses with principal and interest payments made on a monthly basis. The rate of the note is equal to the lesser of the maximum lawful rate or the LIBOR plus the spread (2.5% per annum), and the bond matures on June 30, At September 30, 2016, obligations and security related to 2006, 2010, 2012, and 2015 Bonds rest with the Obligated Group, which is comprised of the Medical Center, GSMC Marshall, and GSHS, Inc. Under the terms of the revenue bond indenture and loan agreements, the Obligated Group is required to maintain certain deposits with a trustee. Such deposits are included with assets limited as to use in the accompanying consolidated balance sheet. The agreements place limits on the incurrence of additional borrowings, limit the System s ability to dispose of or transfer assets outside of the Obligated Group and require that the Obligated Group satisfy certain measures of financial performance as long as the 2006, 2010, 2012, and 2015 Bonds are outstanding. As of September 30, 2016, the System was not in compliance with the covenants established under the master trust indenture related to incurring additional debt and financial covenant calculations. In February 2017, the master trust indenture was amended to waive certain of these financial covenants through fiscal 2018 as well as consented to non-compliance (see Note 13)

24 6. Long-term Debt (continued) Aggregate annual maturities of long-term debt at September 30, 2016, are (in thousands): 2017 $ 8, , , , ,325 Thereafter 111,995 $ 161, Sale-Leaseback Transaction During fiscal 2015, the System sold and concurrently leased back certain real estate and medical office buildings with a carrying value of $46.1 million and received net proceeds from the transaction of $44.6 million. The terms of the lease agreements range from 10 to 15 years. The System was deemed to have continuing involvement based on certain contingencies in the agreements, which precluded the de-recognition of the assets from the consolidated balance sheet when the transaction closed. The resulting leases are accounted for as financing leases and the System has recorded a corresponding lease obligation as a component of current and non-current liabilities totaling $65.8 million at September 30, The System will amortize the lease obligation over the lease term and depreciate the assets over their remaining useful life in accordance with the System s policy. Future commitments under the sale-leaseback obligations for each of the following five years and thereafter are as follows (in thousands): 2017 $ 5, , , , ,540 Thereafter 32,999 $ 60,

25 8. Related-Party Transactions The Medical Center transferred cash of $2.6 million during 2016 to Champion EMS (Joint Venture). The Joint Venture has entered into notes payable agreements with a bank with principal balances of $1.5 million at September 30, The Medical Center and the System guaranteed 50.0% of the outstanding debt obligation. Another member of the Joint Venture is the guarantor on the remaining 50.0% of this debt on behalf of the Joint Venture. As of September 30, 2016, the Medical Center has also committed to provide unlimited funding to the Joint Venture to meet its cash flow needs. 9. Disclosures About Fair Value of Assets and Liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1: Quoted prices in active markets for identical assets or liabilities Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

26 9. Disclosures About Fair Value of Assets and Liabilities (continued) Recurring Measurements The following table presents the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheet measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2016 (in thousands): Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value 2016 Cash and cash equivalents $ 16,977 $ 16,977 $ $ Short-term investments: Other short-term investments U.S. equity index mutual funds 2,077 2,077 Assets limited as to use: Money market funds 21,985 21,985 U.S. equity index mutual funds 18,975 18,975 Corporate bonds 29,150 29,150 U.S. government obligations 27,803 27,803 $ 117,146 $ 60,193 $ 56,953 $ Long-term debt during the year was determined to have a carrying value of $161.5 million and a fair value of $145.3 million. The fair value of long-term debt was estimated based on the currently traded value or the borrowing rates currently available to the System for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model

27 9. Disclosures About Fair Value of Assets and Liabilities (continued) Following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheet, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended September 30, Investments Where quoted market prices are available in an active market, investments are classified within Level 1 of the valuation hierarchy. Level 1 investments include money market mutual funds, equity investments, mutual funds and other exchange-traded funds. If quoted market prices are not available, investments are classified within Level 2 of the valuation hierarchy and estimated by using pricing models and quoted prices of investments with similar characteristics. Level 2 investments include U.S. government obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, investments are classified within Level 3 of the hierarchy. There were no Level 3 investments held at September 30, Concentration of Credit Risk Accounts Receivable The System grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. The table below shows the mix of net receivables from patients and third-party payers at September 30, 2016: 2016 Medicare 40.6% Medicaid 19.2 Commercial 12.1 Managed care 12.2 Other third-party payers 7.1 Self-pay %

28 11. Commitments and Contingencies Operating Leases The System leases equipment and facilities under noncancelable operating leases expiring at various dates. The System s leases have varying terms, which may include renewal or purchase options and escalation clauses that are factored into determining minimum lease payments. The following is a schedule by year of future minimum lease payments under operating leases (excluding sale-leaseback obligations see Note 7) as of September 30, 2016, that have initial or remaining lease terms in excess of one year (in thousands): 2017 $ 4, , , Thereafter 536 Total $ 12, Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purpose or periods (in thousands): 2016 Investments restricted by donors for specific health care services $ 651 Promises receivable available for use in future periods 4 $ Subsequent Events The System evaluated events and transactions occurring subsequent to September 30, 2016, through June 30, 2017, the date of issuance of the financial statement. During this period, there were subsequent events requiring disclosure in the consolidated financial statement