0 1 if A Certified Public Accountants
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- Lucinda Marsh
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1 1 : al 0 1 if A Certified Public Accountants Audited Consolidated Financial Statements (Supplemental Schedules and Other Information) Pikeville Medical Center, Inc. and Subsidiaries Years Ended September 30, 2017 and 2016
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3 Audited Consolidated Financial Statements (Supplemental Schedules and Other Information) Years Ended September 30, 2017 and 2016 Independent Auditor's Report 1 Audited Consolidated Financial Statements Consolidated Balance Sheets 4 Consolidated Statements of Operations and Changes in Net Assets 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Supplemental Schedules Consolidating Balance Sheet 22 Consolidating Statement of Operations and Changes in Net Assets 24 Note to Supplemental Schedules 25 Other Information Report 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 - Independent Auditor's Report 26 Schedule of Expenditures of Federal Awards 28 Notes to Schedule of Expenditures of Federal Awards 29 Schedule of Findings and Questioned Costs 30 Schedule of Prior Audit Findings 32 Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance in Accordance with the Uniform Guidance Independent Auditor's Report 33
4 PYA Certified Public Accountants PYA, P.C. One Cherokee Mills, 2220 Sutherland Avenue Knoxville, TN p: (865) I f: (865) INDEPENDENT AUDITOR'S REPORT To the Board of Directors of Pikeville Medical Center, Inc.: We have audited the accompanying consolidated financial statements of Pikeville Medical Center, Inc. and subsidiaries (the Hospital), which comprise the consolidated balance sheets as of September 30, 2017 and 2016, 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 accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 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 of America 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Hospital's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Hospital's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. ATLANTA KANSAS CITY KNOXVILLE I NASHVILLE I TAMPA
5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pikeville Medical Center, Inc. and its subsidiaries as of September 30, 2017 and 2016, and the results of their operations, changes in net assets, and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Report on Supplementary Information: Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplemental consolidating information 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 audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplemental consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Other Information: Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements of Federal Awards (Uniform Guidance), and is not a required part of the consolidated financial statements. The Schedule of Expenditures of Federal Awards 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. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Expenditures of Federal Awards 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 have also issued our report dated January 30, 2018 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 solely to describe the scope of our testing of internal 2
6 control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Hospital's 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 fmancial reporting and compliance. fa PC. Knoxville, Tennessee January 30, 2018, except for our report on Other Information which is dated June 26,
7 Consolidated Balance Sheets ASSETS September 30, CURRENT ASSETS Cash and cash equivalents $ 154,357,208 $ 170,182,848 Assets limited as to use 6,674,144 6,112,395 Patient accounts receivable, less estimated allowances for doubtful accounts of approximately $24,598,000 and $20,675,000 for 2017 and 2016, respectively 80,221,167 82,548,696 Inventories 14,980,269 14,346,998 Prepaid expenses and other current assets 16,665,392 11,434,820 Estimated amounts due from third-party payers, net 704,363 Grant receivable 2,425,869 TOTAL CURRENT ASSETS 276,028, ,625,757 INVESTMENTS 4,325,636 3,758,941 ASSETS LIMITED AS TO USE, less amounts required to meet current obligations 4,995,346 6,027,329 PROPERTY, BUILDINGS AND EQUIPMENT, net 252,047, ,546,627 OTHER ASSETS Beneficial interest in charitable remainder trust 479, ,368 Other assets 1,285,617 1,380,060 TOTAL OTHER ASSETS 1,765,556 1,826,428 TOTAL ASSETS $ 539,162,615 $ 533,785,082 See notes to consolidated financial statements. 4
8 Consolidated Balance Sheets - Continued LIABILITIES AND NET ASSETS September 30, CURRENT LIABILITIES Current portion of long-term debt $ 3,858,264 $ 4,931,015 Current portion of other liabilities 244, ,536 Accounts payable 19,612,126 21,680,616 Accrued expenses 35,259,548 27,847,190 Estimated amounts due to third-party payers, net 1,497,551 Deferred grant revenue 2,425,869 CURRENT LIABILITIES 61,400,544 56,254,908 OTHER LIABILITIES Long-term debt, less current portion 179,611, ,717,775 Other liabilities, less current portion 9,308,931 8,351,694 COMMITMENTS AND CONTINGENCIES - Note K TOTAL LIABILITIES 250,320, ,324,377 NET ASSETS Unrestricted 288,155, ,808,337 Temporarily restricted 479, ,368 Permanently restricted 206, ,000 TOTAL NET ASSETS 288,841, ,460,705 TOTAL LIABILITIES AND NET ASSETS $ 539,162,615 $ 533,785,082 See notes to consolidated financial statements. 5
9 PIKEvuLE MEDICAL CENTER, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Changes in Net Assets Year Ended September 30, CHANGES IN UNRESTRICTED NET ASSETS: Unrestricted revenue, gains, and support: Patient service revenue, net of contractual allowances $ 553,798,974 $ 504,691,435 Estimated provision for bad debts (45,944,176) (37,258,719) Net patient service revenue 507,854, ,432,716 Other revenue, gains, and support 21,947,816 20,653,932 Net investment gain 2,032,564 1,496,673 TOTAL REVENUE, GAINS AND SUPPORT 531,835, ,583,321 EXPENSES: Salaries and wages 223,388, ,131,886 Employee benefits, including payroll taxes 88,294,888 69,407,230 Supplies and drugs 105,127,334 99,123,030 Purchased services 28,742,701 28,665,668 Professional fees 15,150,896 6,578,732 Administrative and other 49,352,530 43,072,090 Depreciation and amortization 23,535,912 23,152,373 Provider taxes 3,252,537 3,234,696 Interest 6,641,777 6,151,777 TOTAL EXPENSES 543,487, ,517,482 EXCESS (DEFICIT) OF REVENUE, GAINS AND SUPPORT OVER EXPENSES AND INCREASE (DECREASE) IN UNRESTRICTED NET ASSETS (11,652,382) 29,065,839 CHANGE IN TEMPORARILY RESTRICTED NET ASSETS: Change in value of assets held in charitable remainder trust 33,571 27,746 INCREASE IN TEMPORARILY RESTRICTED NET ASSETS 33,571 27,746 INCREASE (DECREASE) IN NET ASSETS (11,618,811) 29,093,585 NET ASSETS, BEGINNING OF YEAR 300,460, ,367,120 NET ASSETS, END OF YEAR $ 288,841,894 $ 300,460,705 See notes to consolidated financial statements. 6
10 Consolidated Statements of Cash Flows Year Ended September 30, CASH FLOWS FROM OPERATING ACTIVITIES: Increase (decrease) in net assets $ (11,618,811) $ 29,093,585 Adjustments to reconcile increase (decrease) in net assets to cash provided by operating activities: Depreciation and amortization 23,535,912 23,152,373 Estimated provision for bad debts 45,944,176 37,258,719 Amortization of bond premium (290,167) (538,011) Change in unrealized gains on assets limited as to use and investments (186,276) (322,246) Increase in beneficial interest in charitable remainder trust (33,571) (27,746) Change in present value of future medical services to other liabilities 60,915 52,521 (Gain) loss on disposal of property, buildings and equipment (139,558) 194,985 (Increase) decrease in cash due to changes in: Patient accounts receivable (43,616,647) (61,701,422) Inventories (633,271) (1,189,165) Prepaid expenses and other assets 126,320 (668,632) Accounts payable (3,002,086) 7,682,048 Accrued expenses 2,192,111 4,290,803 Estimated amounts due to third-party payers, net (2,201,914) (3,174,378) Other liabilities 940,583 1,018,963 Total adjustments 22,696,527 6,028,812 NET CASH PROVIDED BY OPERATING ACTIVITIES 11,077,716 35,122,397 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, buildings and equipment, net (37,140,778) (26,970,422) Proceeds from disposals of property, buildings and equipment 383,769 80,971 Purchase of intangible asset (50,000) Purchases of assets limited as to use and investments (53,310,111) (10,893,808) Proceeds from sale of assets limited as to use and investments 53,399,926 14,180,036 NET CASH USED IN INVESTING ACTIVITIES (36,717,194) (23,603,223) See notes to consolidated financial statements. 7
11 Consolidated Statements of Cash Flows - Continued Year Ended September 30, CASH FLOWS FROM FINANCING ACTIVITIES: Payments on other liabilities for settlement agreement (98,060) (89,666) Payment of debt issuance costs (306,945) Proceeds from issuance of long-term debt 59,842,913 2,649,350 Principal payments on long-term debt (49,931,015) (4,587,449) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,813,838 (2,334,710) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,825,640) 9,184,464 CASH AND CASH EQUIVALENTS, beginning of year 170,182, ,998,384 CASH AND CASH EQUIVALENTS, end of year $ 154,357,208 $ 170,182,848 SUPPLEMENTAL INFORMATION AND NON-CASH TRANSACTIONS: INFORMATION Cash paid for interest $ 6,813,318 $ 7,186,612 Capital related payables in accounts payable $ 4,005,740 $ 3,072,144 Deferred revenues for federal grant $ 2,425,869 $ Change in estimated insurance recovery receivable $ 5,220,247 $ (363,768) See notes to consolidated financial statements. 8
12 Notes to Consolidated Financial Statements Years Ended September 30, 2017 and 2016 NOTE A--THE ENTITY Organization: The consolidated financial statements include the financial statements of Pikeville Medical Center, Inc. (the Medical Center) and its wholly owned subsidiaries Pikeville Medical Center Foundation for Quality Healthcare, Inc., Pikeville Medical Development Corporation and Landmark Properties of Pikeville, Inc. (collectively, the Hospital). Pikeville Medical Center, Inc. was incorporated in 1922 as a Christian benevolent and charitable institution and currently has 300 licensed beds. Patient services include acute, rehabilitative, intensive, neonatal, nursery, trauma, and outpatient care. For presentation purposes, all transactions are classified as operating as the Hospital considers all transactions to be central to the provision of healthcare services. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Hospital and its subsidiaries after elimination of all significant intercompany accounts and transactions. Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash and cash equivalents include non-designated investments with original terms to maturity of three months or less when purchased. Cash and cash equivalents also include repurchase agreements with a financial institution which have contractual terms in excess of 90 days, but which settle frequently. The repurchase agreements are classified as cash and cash equivalents in Level 2 of the fair value hierarchy at Note J. Cash and cash equivalents designated as assets limited as to use or uninvested amounts included in investment portfolios are not included in the consolidated balance sheets as cash and cash equivalents. Substantially all of the Hospital's cash and cash equivalents are covered by federal depository insurance or collateralized with securities held by the bank. At year end and times throughout the year, the Hospital may maintain bank account balances in excess of the Federal Deposit Insurance Corporation insured limit or which are not collateralized with securities held by the bank. Management believes the credit risk associated with these deposits, if any, is not significant. Inventories: Inventories, consisting primarily of medical supplies, are stated at the lower of cost or market on a first-in, first-out basis. 9
13 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Assets Limited as to Use and Investments: Assets limited as to use consist of investments held by a trustee under the terms of bond indentures. Assets limited as to use that are required for obligations classified as current liabilities or amounts to be paid during the subsequent year are reported as current assets. These funds are invested primarily in cash equivalents and U.S. government and agency securities. At September 30, 2017, 66% of assets limited as to use were held in one federal government obligation fund, and 33% were held in U.S. Treasury bonds. Investments consist of mutual funds and other securities related to a 457(b) deferred compensation plan, although such amounts are not restricted as to use (Note G). All assets limited as to use and investments are reported at fair value. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in the excess of revenue, gains and support over expenses. Realized and unrealized gains and losses on investments were a net gain of approximately $186,000 and $322,000 for the years ended September 30, 2017 and 2016, respectively. Gains and losses on the sale of investments and assets whose use is limited are computed using the specific identification method for cost determination. Property, Buildings, and Equipment: Property, buildings, and equipment is stated on the basis of cost, or if donated, at the fair value at the date of gift. Depreciation expense is computed by the straight-line method over the estimated useful lives of the related assets (4-40 years for buildings and improvements and 5-15 years for equipment). Equipment held under capital lease obligations is amortized under the straight-line method over the shorter of the lease term or estimated useful life. Amortization of equipment held under capital leases is shown as a part of depreciation expense and accumulated depreciation in the accompanying consolidated financial statements. Renewals and betterments are capitalized and depreciated over their estimated useful lives, whereas repair and maintenance expenditures are expensed as incurred. Net interest cost incurred on borrowed funds during the period of construction of capital assets of approximately $526,000 and $538,000 for the years ended September 30, 2017 and 2016, respectively, is capitalized as a component of the cost of acquiring those assets. The Hospital reviews capital assets for indications of potential impairment when there are changes in circumstances related to a specific asset. When required, impairment losses are recognized based on the estimated fair value of the asset. There were no impairments recognized by the Hospital during the years ended September 30, 2017 and Property, buildings, and equipment to be disposed of by sale are reported at the lower of their carrying amount or fair value less cost to sell. Debt Issuance Costs: Debt issuance costs are being amortized over the life of the debt issue using a method that approximates the interest method and are reported as a component of long-term debt. Debt issuance costs are net of accumulated amortization of approximately $483,000 and $591,000 as of September 30, 2017 and 2016, respectively. 10
14 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Beneficial interest in charitable remainder trust: The Hospital has been named as a beneficiary in an interest in a charitable remainder trust. All assets named in the trust are administered by an independent trustee. Changes in the estimated value of the trust are recognized in the consolidated statements of operations and changes in net assets. Net Patient Service Revenue/Receivables: Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments due to 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. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Patient accounts receivable are reported net of both an estimated allowance for uncollectible accounts and an allowance for contractual adjustments. The contractual allowance represents the difference between established billing rates and estimated reimbursement from Medicare, Medicaid and other third-party payment programs. Current operations include an allowance for uncollectible accounts estimated based upon the age of the patient accounts receivable, historical writeoffs and recoveries and any unusual circumstances (such as local, regional or national economic conditions) which affect the collectibility of receivables, including management's assumptions about conditions it expects to exist and courses of action it expects to take. Additions to the allowance for uncollectible accounts result from the provision for bad debts. Patient accounts written off as uncollectible are deducted from the allowance for uncollectible accounts. Patient service revenue is recorded prior to assessing the patient's ability to pay and as such, the estimated provision for bad debts is recorded as a deduction from patient service revenue, net of contractual allowances in the accompanying consolidated statements of operations and changes in net assets. The Hospital's policy does not require collateral or other security for patient accounts receivable. The Hospital routinely accepts assignment of, or is otherwise entitled to receive, patient benefits payable under health insurance programs, plans or policies. Charity Care: The Hospital's financial assistance policy is designed to provide care to patients regardless of their ability to pay. Patients who meet certain criteria for charity care are provided healthcare without charge. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, charges at established rates are not reported as revenue. Charges foregone, based on established rates, totaled approximately $17,782,000 and $17,211,000 in 2017 and 2016, respectively. The estimated direct and indirect cost ofproviding these services totaled approximately $3,769,000 and $3,471,000 in 2017 and 2016, respectively. Such costs are determined using a ratio of cost to charges analysis with indirect cost allocated. 11
15 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Temporarily and Permanently Restricted Net Assets: Temporarily restricted net assets are those whose use by the Hospital has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Hospital in perpetuity. Donor-Restricted Gifts: Unconditional promises to give cash and other assets to the Hospital are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. 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 and are reported in the consolidated statements of operations and changes in net assets as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as other revenue, gains, and support in the accompanying consolidated financial statements. Gifts, grants and bequests not restricted by donors are reported as unrestricted donations. Provider Tax: The Hospital is required to pay a healthcare provider tax based on gross revenues pursuant to legislation passed by the Commonwealth of Kentucky. The tax levied is for the purpose of providing funding for the Commonwealth of Kentucky Medicaid Program. Income Taxes: The Medical Center and Pikeville Medical Center Foundation for Quality Healthcare, Inc. are exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. Pikeville Medical Center Development Corporation and Landmark Properties of Pikeville, Inc. are taxable entities to which applicable corporate income taxes apply. No income taxes were owed by Pikeville Medical Center Development Corporation or Landmark Properties of Pikeville, Inc. for the years ended September 30, 2017 and The Hospital had no uncertain tax positions at September 30, 2017 and At September 30, 2017, tax returns filed for 2014 through 2016 are subject to examination by the Internal Revenue Service. Electronic Health Record (EHR) Incentives: The American Recovery and Reinvestment Act of 2009 (ARRA) provides for incentive payments under the Medicare and Medicaid programs for certain hospitals and physician practices that demonstrate meaningful use of certified EHR technology. The incentive payments are calculated based upon estimated discharges, charity care and other input data and are recorded upon the Hospital's attainment of program and attestation criteria. The incentive payments are subject to regulatory audit. The Hospital incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. The amount and timing of these expenditures does not directly correlate with the timing of the Hospital's receipt or recognition of the EHR incentive payments. During the years ended September 30, 2017 and 2016, the Hospital recognized EHR incentive revenues of approximately $316,000 and 12
16 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 $1,235,000, respectively. EHR incentive revenues are included in other revenue, gains and support in the accompanying consolidated statements of operations and changes in net assets. Deferred Grant Revenue: In 2017, the Hospital and the City of Pikeville were awarded a grant of approximately $2,426,000 by the United States Department of Commerce Economic Development Administration to purchase equipment. The equipment must be purchased within 24 months of the award date of September 28, The grant funds will be paid to the Hospital on a reimbursable basis as the equipment is purchased. At September 30, 2017, no equipment had been purchased, and the entire grant amount is recorded as deferred grant revenue that will be recognized as grant conditions are met. Reclassifications: Certain 2016 amounts have been reclassified to conform with the 2017 presentation in the accompanying consolidated financial statements. Recently Issued Accounting Principles: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers (Topic 606), (ASU ). ASU requires the recognition of revenue when services are performed at an amount equal to what the entity expects to receive for those services. This update defines a five-step process for revenue recognition that may require more judgmental estimates than required under existing generally accepted accounting principles. The guidance within this ASU will be effective for fiscal years beginning after December 15, 2017 and will require implementation using either a retrospective approach that adjusts all prior years or a retrospective approach within the cumulative effect reported in the year of adoption. Management is currently evaluating this ASU to determine its potential impact on the consolidated financial statements. In February 2016, the FASB issued ASU No , Leases, which requires balance sheet recognition of a liability and right-to-use asset for substantially all leases. ASU is effective for fiscal years beginning after December 15, 2018 and requires a modified retrospective transition approach for leases existing at the date of adoption. Management is currently evaluating the impact of the adoption of this standard on the consolidated financial statements. In August 2016, the FASB issued ASU No , Not-for-Profit Entities: Presentation of Financial Statements ofnot-for-profit Entities (ASU ), which requires not-for-profit entities to present two classes of net assets in the financial statements, rather than the three classes required by current standards. ASU also adds enhanced disclosures, including the composition of net assets with donor restrictions and quantitative and qualitative information that communicate the availability of financial assets to meet cash expenditures within one year of the balance sheet date. ASU is effective for fiscal years beginning after December 15, 2017, and early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements. 13
17 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Newly Adopted Accounting Principle: In April 2015, the FASB issued ASU No , Interest- Imputation of Interest (Topic ) Simplifying the Presentation of Debt Issuance Costs, (ASU ). ASU requires the reporting of debt issuance costs as a deduction from the carrying amount of the related debt liability rather than as an asset. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This ASU was implemented in 2017 and impacted the 2016 presentation of the related assets and liabilities on the Consolidated Balance Sheets (see Note E). NOTE C--NET PATIENT SERVICE REVENUE Patient service revenue, net of contractual allowances, is composed of the following for the years ended September 30: Third-party payers $ 504,912,755 $ 463,740,698 Patients 48,886,219 40,950,737 Patient service revenue $ 553,798,974 $ 504,691,435 The Hospital provides services to uninsured and underinsured patients that do not qualify for financial assistance. Based on historical experience, a significant portion of uninsured and underinsured patients are unable or unwilling to pay the portion of their bill for which they are financially responsible, and a significant provision for bad debts is recorded in the period the services are provided. Estimated allowances for doubtful accounts increased approximately $3,923,000 during the year ended September 30, The increase was primarily related to an increase in the amount of outstanding accounts receivable due from patients as compared to third-party payers. The Hospital is located in Pikeville, Kentucky, and the Hospital grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payer agreements. Admitting physicians are primarily practitioners in the local area. The percentages of gross receivables from patients and third-party payers as of September 30 were as follows: Medicare 40% 39% Medicaid 30% 35% Other third-party payers 24% 21% Patients 6% 5% Total 100% 100% 14
18 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 NOTE D--PROPERTY, BUILDINGS, AND EQUIPMENT Property, buildings, and equipment consist of the following at September 30: Land Buildings and improvements Equipment Less: Accumulated depreciation Construction-in-progress $ 15,237,608 $ 15,151, ,990, ,212, ,883, ,017, ,112, ,380,975 (198,569,340) (180,403,431) 234,542, ,977,544 17,504,846 11,569,083 $ 252,047,665 $ 237,546,627 Depreciation expense for the years ended September 30, 2017 and 2016 was approximately $23,233,000 and $22,656,000, respectively. The estimated cost to complete the Hospital's outstanding capital projects at September 30, 2017 is approximately $28,501,000. NOTE E--LONG-TERM DEBT Long-term debt consists of the following at September 30: Outstanding Balance Description Maturities Rates $45,000,000 United States Department of Agriculture, Rural Development promissory notes $114,000,000 United States Department of Agriculture, Rural Development promissory notes 2016 Hospital Improvement Refunding Revenue Bond Anticipation Notes, net of unamortized premium of $270,562 at September 30, 2016 $44,602,500 United States Department of Agriculture, Rural Development promissory notes Interest payments only through December 21, 2018; annual principal and interest payments of $1,811,251 thereafter with final payment due December 21, 2056 Interest payments only through December 21, 2019; annual principal and interest payments of $607,369 thereafter with final payment due December 21, 2056 $45,000,000 term certificate, due March 1, 2017 Annual interest payments through March 20, 2016; annual principal and interest payments of $2,050,823 thereafter with fmal payment due March 20, % $ 45,000,000 $ 2.38% 14,842, % 45,270, % 43,929,632 44,586,623 15
19 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Outstanding Balance Description Maturities Rates Hospital Improvement and Refunding Revenue Bonds, net of unamortized premium of $237,422 and $257,027 at September 30, 2017 and 2016, respectively Notes payable, collateralized by real estate with a net book value of $1,925,352 and $1,987,030 at September 30, 2017 and 2016, respectively $22,400,000 serially, through March I, 2024 $8,190,000 term certificates, due March 1, 2026 $15,245,000 term certificates, due March 1, 2031 $30,890,000 term certificates, due March 1, 2041 Monthly principal and interest payments of $10,908 beginning February 2012, maturing January % to 6.25% 76,962,422 79,602, % 6.25% 6.50% 4.00% 1,426,126 1,498,398 Notes payable, collateralized by real estate Monthly payments of $19,777 beginning July % 1,786,518 1,958,046 with a net book value of $2,804,473 and through June 2026 $2,876,196 at September 30, 2017 and 2016, respectively Note payable, collateralized by real estate with Monthly principal and interest payments of $22, % 174,170 a net book value of $6,322,458 at September beginning June 2012 maturing May , 2016 Note payable, collateralized by medical Monthly principal and interest payments of $99, % 871,867 equipment with a net book value of $832,003 beginning July 2012, maturing June 2017 at September 30, 2016 Note payable, unsecured Monthly payments of $1,844 beginning October 2.88% 225, , through July 2023 Capital leases and note payable secured by Various principal and interest payments Various 157, ,824 medical equipment Less current portion Less unamortized bond issuance costs 184,330, ,708,768 (3,858,264) (4,931,015) (860,991) (1,059,978) $ 179,611,246 $ 168,717,775 Series 2016 Notes: In February 2016, the Hospital issued $45,000,000 Improvement Refunding Revenue Bond Anticipation Notes (the Series 2016 Notes) through the City of Pikeville, Kentucky. Proceeds of the Series 2016 Notes were used to refinance, on an interim basis, the 2015 Hospital Improvement Refunding Revenue Bond Anticipation Notes, discussed below. USDA Notes: During the year ended September 30, 2017, the Hospital obtained permanent financing for the Series 2016 Notes from the United States Department of Agriculture (USDA) Rural Development in the amount of $45,000,000. Also in 2017, the Hospital obtained notes not to exceed $114,000,000 from the USDA Rural Development. The proceeds will be used to refund a portion of the existing bonds and to fund construction projects. As of September 30, 2017, $14,842,913 had been funded to the Hospital. Management anticipates drawing the full balance of these notes by 2021 when the 2011 Hospital Improvement and Refunding Revenue Bonds become callable. The notes will be loaned to the Hospital in multiple advances and have a forty-year term and bear interest at a fixed rate of 2.375%. Annual interest-only payments are due through December 21, 2018 for the $45,000,000 USDA notes and through December 21, 2019 for the $114,000,000 USDA issuance. Fixed annual principal and interest payments are then due through maturity in December
20 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Early Redemption: Certain of the Hospital's bonds and notes are subject to redemption prior to maturity, including optional, mandatory sinking fund and extraordinary redemption, at various dates and prices as described in the respective Bond indentures and other documents. The required annual principal payments on long-term debt for the years subsequent to September 30, 2017 are as follows: Year Ending September 30, 2018 $ 3,858, ,877, ,811, ,172, ,425,665 Thereafter 160,947, ,093,079 Net premium 237,422 $ 184,330,501 The Medical Center has granted and pledged to the Master Trustee a security interest in all gross receipts (as defined in the Master Indenture) and a mortgage on, and security interest in, certain of its medical facilities related to the payment of obligations issued or secured under the Master Indenture. The terms of the Master Indenture and related debt agreements contain financial and other covenants with which the Medical Center must comply. Management believes the Medical Center was in compliance with all such covenants at September 30, NOTE F--OPERATING LEASES Rental expense under operating leases was approximately $1,312,000 and $1,320,000 in 2017 and 2016, respectively. The Hospital has certain equipment which is leased under non-cancelable operating leases. Approximate future minimum rental payments are as follows: Year Ending September 30, 2018 $ 1,071, , , , ,600 Total $ 1,903,541 17
21 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 NOTE G--EMPLOYEE BENEFIT PLANS The Hospital sponsors a 403(b) defined contribution plan and matches 50% of employees' contributions up to 10% of an employee's salary. The Hospital's expense related to this plan was approximately $3,026,000 and $2,274,000 during 2017 and 2016, respectively. The Hospital also sponsors a 457(b) deferred compensation plan for certain employees. During the years ended September 30, 2017 and 2016, approximately $541,000 and $698,000, respectively, was expensed as compensation in connection with this plan. NOTE H--RELATED PARTY TRANSACTIONS The Hospital enters into transactions in the normal course of business with various companies, certain of whose directors, officers, or their immediate family members are also directors or immediate family members of the directors at the Hospital. Donations, advertising revenue, and interest and dividends earned from related parties totaled approximately $1,032,000 and $665,000, in 2017 and 2016, respectively. Purchased services and rental payments associated with related parties totaled approximately $3,463,000 and $4,354,000 in 2017 and 2016, respectively. Board members refrain from discussion and abstain from voting on transactions with entities with which they are related. NOTE I--FUNCTIONAL EXPENSES The Hospital does not present expense information by functional classification because its resources and activities are primarily related to providing healthcare services. Further, since the Hospital receives substantially all of its resources from providing healthcare services in a manner similar to a business enterprise, other indicators contained in these consolidated financial statements are considered important in evaluating how well management has discharged their stewardship responsibilities. NOTE J--FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments has been estimated by the Hospital using available market information as of September 30, 2017 and 2016, and valuation methodologies considered appropriate. The estimates presented are not necessarily indicative of amounts the Hospital could realize in a current market exchange. The carrying value of substantially all financial instruments approximates fair value due to the nature or term of the instruments, except as described below. Other Liabilities: It is not practical to estimate the fair market value of other liabilities due to uncertainty of when these amounts may be paid. 18
22 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Long-Term Debt: The fair value of long-term debt is estimated based upon quotes obtained from brokers for bonds and discounted future cash flows using current market rates for other debt and would be classified in Level 2 in the fair value hierarchy. The estimated fair value and carrying value of long-term debt was approximately $177,712,000 and $180,472,000, respectively, at September 30, The estimated fair value and carrying value of long-term debt was approximately $184,807,000 and $169,778,000, respectively, at September 30, The Hospital classifies its investments into three levels as follows: Level 1, which refers to securities valued using quoted prices from active markets for identical assets; Level 2, which refers to securities not traded on an active market but for which observable market inputs are readily available; and Level 3, which refers to securities valued based on significant unobservable inputs. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At September 30, 2017 and 2016, the fair value of the Hospital's financial instruments that are required to be measured at fair value on a recurring basis is as follows: Level 1 Level 2 Level 3 Total September 30, 2017 Cash and cash equivalents $ 8,215,481 $ 154,162,662 $ - $ 162,378,143 U.S. Treasury and agency obligations 3,983,585 3,983,585 Mutual funds - Domestic Funds 3,219,934 3,219,934 Mutual funds - International Funds 576, ,126 Total assets $ 12,011,541 $ 158,146,247 $ - $ 170,157,788 September 30, 2016 Cash and cash equivalents $ 8,320,865 $ 167,000,000 $ - $ 175,320,865 U.S. Treasury and agency obligations 4,297,090 4,297,090 Mutual funds - Domestic Funds 2,777,968 2,777,968 Mutual funds - International Funds 502, ,742 Total assets $ 11,601,575 $ 171,297,090 $ - $ 182,898,665 NOTE K--COMMITMENTS AND CONTINGENCIES There are certain lawsuits or claims pending against the Hospital resulting from the ordinary course of its business. The Hospital provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. While it is not possible to predict with certainty the ultimate outcome of these pending matters, management believes that the ultimate resolution of such matters will not have a material adverse effect on the financial position, operations, or cash flows of the Hospital. 19
23 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 Insurance: The Hospital maintains commercial insurance for medical malpractice liabilities. The policy has no deductible on individual claims up to a maximum liability of $1,000,000 and $3,000,000 in the aggregate annually. In addition, the Hospital maintains umbrella policies in the amount of $11,000,000, individually and in the aggregate. The Hospital is substantially self-insured for workers' compensation claims and has excess coverage insurance covering claims exceeding $1,000,000. Hospital management has estimated and accrued for the cost of asserted claims based on historical data. No accrual for claims incurred but not reported is recorded in the accompanying consolidated financial statements as management is not able to estimate such amounts. The Hospital maintains a line of credit of approximately $4,861,000, as required for the self-insured plan. No amounts were drawn on the line as of September 30, Settlement Agreement: In 2004, the Hospital entered into a settlement agreement with a patient, providing for a cash payment of $3,250,000, annual payments of $300,000 for 11 years, and an agreement to provide certain medical services for the life of the patient. The liability has been reduced by the cost savings of performing the services at the Hospital and is recorded in other liabilities in the accompanying consolidated balance sheets. The liability is updated annually based on payments made and adjustments to net present value. The summary of activity for the related liability is as follows: Balance, October 1, 2015 $ 1,116,599 Payments (89,666) Change in present value for future medical services 52,521 Balance, September 30, ,079,454 Payments (98,060) Change in present value for future medical services 60,915 Balance, September 30, 2017 $ 1,042,309 Employee Benefits: The Hospital is self-insured for employee health claims under a health insurance program. Claims payable, as well as management's estimate for claims incurred but not reported is included as part of accrued expenses in the accompanying consolidated balance sheets. Third-Party Reimbursement: The Hospital has agreements with various third-party payers that provide for payments to the Hospital at amounts different from established rates. The difference between the rates charged and the estimated payments from third-party payers is recorded as a reduction of gross patient service charges. Revenue for patient service charges has been adjusted to the amounts estimated to be receivable under third-party payer arrangements. Amounts recorded under these contractual arrangements are subject to review and final determination by various program intermediaries. Management believes that adequate provision has been made for any 20
24 Notes to Consolidated Financial Statements - Continued Years Ended September 30, 2017 and 2016 adjustments which may result from such reviews. However, due to uncertainties in the estimates, it is at least reasonably possible that management's estimates will change in Net patient service revenue for the years ended September 30, 2017 and 2016 increased by approximately $948,000 and decreased by approximately $994,000, respectively, due to adjustments of estimates or final settlements of prior periods. Healthcare Industry: Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. NOTE L--SUBSEQUENT EVENTS Subsequent events have been evaluated through the date of the Independent Auditor's Report, which is the date the financial statements were available to be issued. During this period management did not note any material recognizable subsequent events that required recognition or disclosure in the September 30, 2017 consolidated financial statements. 21
25 Supplemental Schedules
26 Consolidating Balance Sheet September 30, 2017 ASSETS Obligated Group* Non-Obligated Group Eliminations Total CURRENT ASSETS Cash and cash equivalents $ 153,424,501 $ 932,707 $ $ 154,357,208 Assets limited as to use 6,674,144-6,674,144 Patient accounts receivable, less estimated allowances for doubtful accounts 80,221, ,221,167 Inventories 14,814, ,578-14,980,269 Prepaid expenses and other assets 18,293, ,226 (1,784,989) 16,665,392 Estimated amounts due from third-party payers, net 704, ,363 Grant receivable 2,425,869 2,425,869 TOTAL CURRENT ASSETS 276,557,890 1,255,511 (1,784,989) 276,028,412 INVESTMENTS 9,429,496 - (5,103,860) 4,325,636 ASSETS LIMITED AS TO USE, less amounts required to meet current obligations 4,995, ,995,346 PROPERTY, BUILDINGS AND EQUIPMENT, net 247,972,395 4,075, ,047,665 OTHER ASSETS Beneficial interest in charitable remainder trust 479, ,939 Other assets 1,285,617 1,285,617 * Pikeville Medical Center, Inc. TOTAL OTHER ASSETS 1,765,556 1,765,556 TOTAL ASSETS $ 540,720,683 $ 5,330,781 $ (6,888,849) $ 539,162,615 See Independent Auditor's Report and Note to Supplemental Schedules. 22
27 Consolidating Balance Sheet - Continued September 30, 2017 LIABILITIES AND NET ASSETS Obligated Group* Non-Obligated Group Eliminations Total CURRENT LIABILITIES Current portion of long-term debt $ 3,858,264 $ - $ - $ 3,858,264 Current portion of other liabilities 244, ,737 Accounts payable 19,643,893 54,128 (85,895) 19,612,126 Accrued expenses 35,214,182 1,744,460 (1,699,094) 35,259,548 Deferred grant revenue 2,425,869 2,425,869 TOTAL CURRENT LIABILITIES 61,386,945 1,798,588 (1,784,989) 61,400,544 OTHER LIABILITIES Long-term debt, less current portion 179,611, ,611,246 Other liabilities, less current portion 9,308,931 9,308,931 TOTAL LIABILITIES 250,307,122 1,798,588 (1,784,989) 250,320,721 NET ASSETS Unrestricted 289,727,622 3,532,193 (5,103,860) 288,155,955 Temporarily restricted 479, ,939 Permanently restricted 206, ,000 TOTAL NET ASSETS 290,413,561 3,532,193 (5,103,860) 288,841,894 TOTAL LIABILITIES AND NET ASSETS $ 540,720,683 $ 5,330,781 $ (6,888,849) $ 539,162,615 * Pikeville Medical Center, Inc. See Independent Auditor's Report and Note to Supplemental Schedules. 23
28 Consolidating Statement of Operations and Changes in Net Assets Year Ended September 30, 2017 Obligated Group* Non-Obligated Group Eliminations Total CHANGES IN UNRESTRICTED NET ASSETS: Unrestricted revenue, gains and support: Patient service revenue, net of contractual allowances $ 553,798,974 $ - $ - $ 553,798,974 Estimated provision for bad debts (45,944,176) (45,944,176) Net patient service revenue 507,854, ,854,798 Other revenue, gains, and support 21,026,752 3,143,813 (2,222,749) 21,947,816 Net investment gain 2,032, ,032,564 TOTAL REVENUE, GAINS AND SUPPORT 530,914,107 3,143,820 (2,222,749) 531,835,178 EXPENSES: Salaries and wages 222,481, , ,388,985 Employee benefits, including payroll taxes 87,731, ,000-88,294,888 Supplies and drugs 104,603, , ,127,334 Purchased services 29,531,404 36,147 (824,850) 28,742,701 Professional fees 15,178,604 (27,708) 15,150,896 Administrative and other 49,280,151 1,442,920 (1,370,541) 49,352,530 Depreciation and amortization 23,178, ,683 23,535,912 Provider taxes 3,252,537 3,252,537 Interest 6,641,777 6,641,777 TOTAL EXPENSES 541,879,824 3,830,835 (2,223,099) 543,487,560 EXCESS (DEFICIT) OF REVENUE, GAINS AND SUPPORT OVER EXPENSES AND INCREASE (DECREASE) IN UNRESTRICTED NET ASSETS (10,965,717) (687,015) 350 (11,652,382) CHANGE IN TEMPORARILY RESTRICTED NET ASSETS: Change in value of assets held in trust 33,571 33,571 * Pikeville Medical Center, Inc. INCREASE (DECREASE) IN NET ASSETS (10,932,146) (687,015) 350 (11,618,811) NET ASSETS, BEGINNING OF YEAR 301,345,707 3,900,805 (4,785,807) 300,460,705 NET ASSET TRANSFER 318,403 (318,403) - NET ASSETS, END OF YEAR $ 290,413,561 $ 3,532,193 $ (5,103,860) $ 288,841,894 See Independent Auditor's Report and Note to Supplemental Schedules. 24
29 Note to Supplemental Schedules Year Ended September 30, 2017 NOTE A--OBLIGATED GROUP In accordance with the Master Trust Indenture between Pikeville Medical Center, Inc. and Community Trust Bank, Inc., as Master Trustee, Pikeville Medical Center, Inc. (the Medical Center) is the sole member of the Obligated Group. As described in Note E to the consolidated financial statements, the Medical Center has granted and pledged to the Master Trustee a security interest in all gross receipts (as defined in the Master Indenture) and a mortgage on, and security interest in, certain of its medical facilities related to payment of obligations issued or secured under the Master Indenture. Wholly-owned subsidiaries of the Medical Center: Pikeville Medical Center Foundation for Quality Healthcare, Inc., Pikeville Medical Development Corporation and Landmark Properties of Pikeville, Inc. are not pledged to secure the payment of the outstanding bonds as they are not part of the Obligated Group. As such, the Medical Center has not accounted for its investment in these subsidiaries in the supplemental consolidating balance sheet and consolidating statement of operation and changes in net assets. See Independent Auditor's Report. 25
30 Other Information
31 PYA Certified Public Accountants PYA, P.C. One Cherokee Mills, 2220 Sutherland Avenue Knoxville, TN p: (865) I f: (865) REPORT 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 To the Board of Directors of Pikeville Medical Center, Inc.: INDEPENDENT AUDITOR'S REPORT We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the consolidated financial statements of Pikeville Medical Center, Inc. and its subsidiaries (the Hospital) which comprise the consolidated balance sheet as of September 30, 2017, and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated January 30, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Hospital's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Hospital's internal control. Accordingly, we do not express an opinion on the effectiveness of the Hospital's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Hospital's consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention to those charged with governance. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we ATLANTA 1 KANSAS CITY 1 KNOXVILLE 1 NASHVILLE 1 TAMPA 26
32 consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Hospital's consolidated financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of the Hospital's consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Hospital's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Hospital's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Knoxville, Tennessee January 30,
33 Schedule of Expenditures of Federal Awards Year Ended September 30, 2017 Grantor Pass-Through Grantor Agency CFDA Program Name Number Award Number Total Federal Expenditures U.S. Department of N/A Community Facilities Loans and Grants N/A $ 59,842,913 Agriculture - Rural Development Total U.S. Department of Agriculture - Rural Development 59,842,913 U.S. Department of Health Kentucky Hospital Research and Ebola Preparedness and N/A 4,967 and Human Services Education Foundation, Inc. Response Activities Total U.S. Department of Health and Human Services 4,967 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 59,847,880 See notes to schedules of expenditures offederal awards. 28
34 Notes to Schedule of Expenditures of Federal Awards Year Ended September 30, 2017 NOTE A--BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards includes the federal loan and grant activity of Pikeville Medical Center and subsidiaries (the Hospital) and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. NOTE B--SIGNIFICANT ACCOUNTING POLICIES Loan Balance Outstanding: Amounts expended under the Community Facilities program represent loan proceeds received and expended by the Hospital during the year ended September 30, The balance of the loans outstanding at September 30, 2017 is $59,842,913. De Minimis Indirect Cost Rate: The Hospital has elected not to use the 10-percent de minimis cost rate allowed under the Uniform Guidance. NOTE C--CONTINGENCIES The Hospital's federal programs are subject to financial and compliance audits by grantor agencies which, if instances of material noncompliance are found, may result in disallowed expenditures and affect the Hospital's continued participation in specific programs. The amount, if any, of expenditures which may be disallowed by the grantor agencies cannot be determined at this time, although the Hospital expects such amounts, if any, to be immaterial. 29
35 Schedule of Findings and Questioned Costs Year Ended September 30, 2017 Section I - Summary of Auditor's Results FINANCIAL STATEMENTS The auditor's report expressed an unmodified opinion on the consolidated financial statements of Pikeville Medical Center, Inc. and Subsidiaries. Internal control over financial reporting: Material weaknesses identified? Significant deficiencies identified? Noncompliance material to consolidated financial statements noted? Yes [ ] No [X] None reported Yes [ ] No [X] FEDERAL AWARDS The auditor's report on compliance for the major federal award programs for Pikeville Medical Center, Inc. and Subsidiaries expresses an unmodified opinion on its major federal programs. Internal control over major programs: Material weakness(es) identified? Yes [ ] No [X] Significant deficiencies identified? None reported Any audit findings disclosed that are required to be reported in accordance Yes [ ] No [X] with 2 CFR (a)? Identification of Major Programs: CFDA Number(s) Name of Federal Program or Cluster U.S. Department of Agriculture - Rural Development Dollar threshold used to distinguish between Type A and Type B programs: $ 1,795,436 Auditee qualified as low-risk auditee? Yes [ ] No [X] Section II Financial Statement Findings This section identifies the significant deficiencies, material weaknesses, fraud, illegal acts, violations of provisions of contracts and grant agreements, and abuse related to the consolidated financial statements for which Government Auditing Standards require reporting. Not applicable, no financial statement findings. 30
36 Schedule of Findings and Questioned Costs - Continued Year Ended September 30, 2017 Section III - Federal Award Findings This section identifies the audit findings required to be reported by 2 CFR 200 Section 516(a) of the Uniform Guidance (for example, significant deficiencies, material weaknesses, and material instances of noncompliance, including questioned costs), as well as any abuse findings involving federal awards that are material to a major program. Not applicable, no findings. 31
37 Schedule of Prior Audit Findings Year Ended September 30, 2017 There were no prior audit findings. 32
38 PYA Certified Public Accountants PYA, P.C. One Cherokee Mills, 2220 Sutherland Avenue Knoxville, TN p: (865) I f: (865) REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH THE UNIFORM GUIDANCE To the Board of Directors of Pikeville Medical Center, Inc.: INDEPENDENT AUDITOR'S REPORT Report on Compliance for Each Major Federal Program We have audited Pikeville Medical Center, Inc. and its subsidiaries' (the Hospital) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of the Hospital's major federal programs for the year ended September 30, The Hospital's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of the Hospital's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Hospital's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Hospital's compliance. ATLANTA I KANSAS CITY I KNOXVILLE I NASHVILLE I TAMPA 33
39 Opinion on Each Major Federal Program In our opinion, the Hospital complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal programs for the year ended September 30, Report on Internal Control Over Compliance Management of the Hospital is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Hospital's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Hospital's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. PKA, P c. Knoxville, Tennessee June 26,
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