Baptist Health. Independent Auditor s Report and Consolidated Financial Statements. December 31, 2017 and 2016

Transcription

1 Independent Auditor s Report and Consolidated Financial Statements

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5 Consolidated Balance Sheets (In thousands) Assets Current Assets Cash and cash equivalents $ 26,332 $ 33,123 Short-term investments and other 10,174 10,736 Patient accounts receivable, net of allowance 2017 $46,440; 2016 $50, , ,576 Estimated amounts due from third-party payers 21,238 20,194 Supplies, prepaid expenses and other 44,851 41,809 Total current assets 224, ,438 Assets Limited as to Use 454, ,415 Property and Equipment, Net 608, ,062 Other Assets 76,763 69,959 Total assets $ 1,364,177 $ 1,327,874 Liabilities and Net Assets Current Liabilities Line of credit and current maturities of long-term debt $ 32,313 $ 32,279 Accounts payable and accrued expenses 120, ,612 Estimated amounts due to third-party payers 2,065 1,447 Current portion of deposits by residents 999 2,368 Total current liabilities 155, ,706 Other Liabilities Long-term debt, net 250, ,894 Pension liabilities 51,108 57,399 Other liabilities 56,013 54,543 Total liabilities 512, ,542 Net Assets Unrestricted Baptist Health 823, ,002 Noncontrolling interests 4,508 2,478 Total unrestricted net assets 828, ,480 Temporarily restricted 18,210 21,361 Permanently restricted 4,534 3,491 Total net assets 851, ,332 Total liabilities and net assets $ 1,364,177 $ 1,327,874 See 3

6 Consolidated Statements of Operations and Changes in Net Assets Years Ended (In thousands) Unrestricted Revenues, Gains and Other Support Patient service revenue (net of contractual discounts and allowances) $ 1,017,692 $ 958,611 Provision for uncollectible accounts (24,970) (25,120) Net patient service revenue less provision for uncollectible accounts 992, ,491 Management fees, lease income and other 84,127 79,294 Total unrestricted revenues, gains and other support 1,076,849 1,012,785 Expenses and Losses Salaries and wages 526, ,585 Employee benefits 115, ,968 Supplies 203, ,866 Professional fees 36,271 36,370 Other operating expenses 160, ,238 Depreciation and amortization 60,177 50,054 Interest 4, Total expenses and losses 1,106,901 1,022,019 Operating Loss (30,052) (9,234) Other Income (Expense) Investment return 48,941 26,854 Gain on investment in equity investees 3,571 2,526 Other 141 (2,889) Change in fair value of interest rate swap agreement Total other income 52,653 26,795 Excess of Revenues Over Expenses $ 22,601 $ 17,561 See 4

7 Consolidated Statements of Operations and Changes in Net Assets (Continued) Years Ended (In thousands) Unrestricted Net Assets Excess of revenues over expenses $ 22,601 $ 17,561 Contributions for acquisition of property and equipment 6,806 9,499 Sales tax proceeds for acquisition of property and equipment 1,122 2,315 Other (31) 3,174 Change in fair value of cash flow hedge (4) 222 Change in defined benefit pension plan gains and losses 2,021 10,720 Contributions from noncontrolling interests 4,241 - Distributions to noncontrolling interests (3,767) (1,033) Increase in unrestricted net assets 32,989 42,458 Temporarily Restricted Net Assets Contributions received and other 1,634 1,798 Investment return 2,587 1,634 Change in unrealized gains and losses on investments (1,128) (193) Change in value of split-interest agreements Change in interest in net assets of affiliated foundations Net assets released from restriction (6,495) (8,789) Decrease in temporarily restricted net assets (3,151) (5,230) Permanently Restricted Net Assets Change in value of split-interest agreements 244 (18) Contributions and other 799 (133) Increase (decrease) in permanently restricted net assets 1,043 (151) Change in Net Assets 30,881 37,077 Net Assets, Beginning of Year 820, ,255 Net Assets, End of Year $ 851,213 $ 820,332 See 5

8 Consolidated Statements of Cash Flows Years Ended (In thousands) Operating Activities Change in net assets $ 30,881 $ 37,077 Items not requiring (providing) operating cash flow Depreciation and amortization 60,177 50,054 Gain on investment in equity investees (3,571) (2,526) Net gains on investments (43,424) (21,480) Restricted contributions, investment income received and other (4,386) (3,408) Contributions for acquisition of property and equipment and other (6,427) (14,988) Change in pension liabilities (6,291) (12,991) Contributions from noncontrolling interests (4,241) - Distributions to noncontrolling interests 3,767 1,033 Other (167) 208 Changes in Patient accounts receivable, net (13,068) (817) Supplies, prepaid expenses and other (4,303) (12,545) Accounts payable and accrued expenses 7,785 1,987 Estimated amounts due from and to third-party payers (426) (1,378) Net cash provided by operating activities 16,306 20,226 Investing Activities Purchase of property and equipment (89,634) (159,640) Net change in trading securities 17,743 39,269 Change in project fund 35,608 34,577 Distributions from equity investees and other investing activities (5,951) 12,223 Net cash used in investing activities (42,234) (73,571) Financing Activities Principal payments on long-term debt (13,462) (36,722) Proceeds from issuance of long-term debt 21,656 30,702 Net borrowings on line of credit 3,500 4,000 Net activity from entrance deposits (897) (694) Proceeds from restricted contributions, investment income and other 3,671 4,086 Proceeds from contributions for acquisition of property and equipment 7,928 12,847 Contributions from noncontrolling interests Distributions to noncontrolling interests (3,767) (1,033) Net cash provided by financing activities 19,137 13,186 Decrease in Cash and Cash Equivalents (6,791) (40,159) Cash and Cash Equivalents, Beginning of Year 33,123 73,282 Cash and Cash Equivalents, End of Year $ 26,332 $ 33,123 Supplemental Cash Flows Information Interest paid (net of amount capitalized) $ 4,690 $ 990 Change in capital expenditures included in accounts payable $ (6,310) $ 4,394 Finance agreement incurred for equipment acquisition $ 233 $ - Contributions from noncontrolling interest for acquisition of property $ 3,733 $ - See 6

9 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Baptist Health (the Corporation), is a not-for-profit charitable membership corporation that provides a wide range of health care related services in central Arkansas. The Corporation operates various divisions and companies providing these health care related services throughout Arkansas as described below. Baptist Health Medical Center Little Rock, Baptist Health Rehabilitation Institute, Baptist Health Medical Center North Little Rock, Baptist Health Medical Center Arkadelphia, Baptist Health Medical Center Heber Springs and Baptist Health Medical Center Hot Spring County are hospitals organized as divisions of the Corporation. Baptist Health Hospitals, Inc., a separate legal entity, operates Baptist Health Medical Center Stuttgart. Conway Community Services, a separate legal entity, operates Baptist Health Medical Center Conway. Baptist Health Extended Care Hospital Little Rock, Inc., also a separate legal entity, independently operates a long-term acute care hospital in Little Rock. When consolidated, these hospitals aggregate approximately 1,500 beds for patient care. The hospitals earn revenue by providing inpatient, outpatient and emergency services to patients in Little Rock, North Little Rock, Arkadelphia, Heber Springs, Malvern, Stuttgart, Conway and surrounding areas in Arkansas. The Corporation also owns 100% of Baptist Health Physician Partners, LLC; 100% of Baptist Health Medical Education Consortium, LLC; 51% of Ortho Arkansas Surgery Center, LLC; 60% of Complete Health with PACE; and 57% of American Data Network, LLC. The Corporation has an investment in the following unconsolidated subsidiaries, which are accounted for using the equity method in as much as control rests with other parties or there is no party with control: Entity Springhill Surgery Center, LLC The Partnership for a Healthy Arkansas, LLC A2 ACO, LLC d/b/a Baptist Health UAMS Accountable Care Alliance The Corporation is the sole member of Diamond Risk Insurance, LLC (Diamond Risk), which is a special purpose captive insurance company organized under Arkansas law that insures certain risks of the Corporation. Any intercompany premium revenue and expense has been eliminated in consolidation. The Corporation is the sole member of Parkway Village, Inc., Parkway Health Center, Inc. and Arkansas Health Group. Parkway Village, Inc. is a retirement community in Little Rock that provides residential and recreational facilities and certain medical services to residents under longterm rental agreements. Parkway Health Center, Inc. provides residential care nursing services to residents in and around Little Rock. Arkansas Health Group provides physician services from clinics located throughout the Corporation s service area. Baptist Health Foundation, Inc. (the Foundation) conducts fund-raising activities for the Corporation. 7

10 Multi-Management Services, Inc. (MMS) is a diversified holding company whose consolidated and unconsolidated subsidiaries primarily provide physician management services, radiology services, rental services and consulting services. MMS or its affiliates include the accounts of the following consolidated subsidiaries: Entity Hotel Properties, Inc. Baptist Medical System HMO, Inc. (BHMO) Baptist MedCare, Inc. d/b/a Practice Plus Baptist Imaging Benton, LLC Baptist Health Center for Clinical Research, LLC Autumn Road, LLC West Side Properties, Inc. Two Financial Centre Holding Company LLC MMS or its affiliates own investments in the following unconsolidated subsidiaries, which are accounted for using the equity method in as much as control rests with other parties: Entity Alliance Homecare, Inc. HMO Partners, Inc. d/b/a Health Advantage BHWC Corporation Maumelle Family Practice, LLC Surgical Pavilion, LLC Arkansas Medical Cyclotron, LLC (Relinquished December 7, 2016) Baptist-Urgent Team JV, LLC Dollar amounts included in tables throughout these footnotes are presented in thousands. Noncontrolling Interests Noncontrolling interests represent the following amounts not owned by the Corporation a 49% interest in Ortho Arkansas Surgery Center, LLC; a 49% interest in Baptist Health Center for Clinical Research, LLC; a 40% interest in Autumn Road, LLC; a 40% interest in Complete Health with PACE; a 43% interest in American Data Network, LLC; and a 35% interest in Two Financial Centre Holding Company LLC. Losses attributable to the noncontrolling interests are allocated to the noncontrolling interests even if the carrying amount of the noncontrolling interests is reduced below zero. 8

11 For the years ended, changes in consolidated unrestricted net assets attributable to the controlling financial interest of the Corporation and the noncontrolling interests are: Controlling Noncontrolling Total Interest Interests Balance, December 31, 2015 $ 753,022 $ 751,705 $ 1,317 Excess of revenues over expenses 17,561 16, Contributions for acquisition of property and equipment 9,499 9, Sales tax proceeds for acquisition of property and equipment 2,315 2,315 - Other 3,174 2, Change in fair value of cash flow hedge Change in defined benefit pension plan gains and losses 10,720 10,720 - Distributions to noncontrolling interests (1,033) - (1,033) Increase in unrestricted net assets 42,458 41,297 1,161 Balance, December 31, , ,002 2,478 Excess of revenues over expenses 22,601 21,331 1,270 Contributions for acquisition of property and equipment 6,806 6, Sales tax proceeds for acquisition of property and equipment 1,122 1,122 - Other (31) (31) - Change in fair value of cash flow hedge (4) (4) - Change in defined benefit pension plan gains and losses 2,021 2,021 - Contributions from noncontrolling interests 4,241-4,241 Distributions to noncontrolling interests (3,767) - (3,767) Increase in unrestricted net assets 32,989 30,959 2,030 Balance, December 31, 2017 $ 828,469 $ 823,961 $ 4,508 The change in temporarily restricted and permanently restricted net assets related solely to the controlling interest. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its wholly owned or controlled subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. 9

12 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents, other than those included in assets limited as to use or held in brokerage accounts. At, cash equivalents consisted primarily of certificates of deposit. At December 31, 2017, the Corporation s cash accounts included in cash and cash equivalents exceeded federally insured limits by approximately $35,047,000 and the Corporation s cash accounts included in assets limited as to use exceeded federally insured limits by approximately $7,095,000. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Investments in equity investees are reported using the equity method of accounting. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. Investments in private equity funds and hedge funds are recorded at net asset value (NAV), as a practical expedient. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. 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 in the consolidated statements of operations and changes in net assets as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Split-Interest Agreements Funds held in trust by others are recorded at fair value based on the Corporation s share of the trust. Irrevocable charitable remainder trusts held by others are recorded as a contribution in the year the trust is established. The contribution is recorded at the fair value of the trust less the present value of the estimated future cash payments to the beneficiaries. 10

13 Assets Limited as to Use Assets limited as to use include (1) assets held by trustees; (2) assets restricted by donors; (3) assets set aside by the Board of Trustees (the Board) for future capital improvements or other specific uses over which the Board retains control and may, at its discretion, subsequently use for other purposes; and (4) Parkway Village residents funds held in escrow. Amounts required to meet current liabilities of the Corporation are included in current assets. Patient Accounts Receivable Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Corporation analyzes its past history and identifies trends for each of its major payer sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for uncollectible accounts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, the Corporation analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for uncollectible accounts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payer has not yet paid, or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely). 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 Corporation records a significant provision 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 difference between the standard rates (or the discounted rates if negotiated or provided by policy, such as the uninsured discount policy as described in Note 2) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. Supplies The Corporation states supply inventories at the lower of cost, determined using the first-in, firstout method, or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated using the straight-line method over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. 11

14 The estimated useful lives for each major depreciable classification of property and equipment are as follows: Buildings and improvements Leasehold improvements Equipment 5 40 years 3 20 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. The Corporation capitalizes interest costs as a component of construction in progress, based on interest costs of borrowing specifically for the projects funded by tax-exempt debt, net of interest earned on investments acquired with the proceeds of the borrowing. Total interest capitalized and incurred during 2017 and 2016 was: Total interest expense incurred on borrowings for projects $ 6,802 $ 6,802 Interest income from investment proceeds of borrowings for projects Net interest cost capitalized $ 6,540 $ 6,781 Interest capitalized $ 4,951 $ 6,046 Interest charged to expense 1, Total interest incurred $ 6,802 $ 6,802 The Corporation also capitalizes interest costs as a component of construction in progress for projects not funded by tax-exempt debt, based on the weighted-average rates paid for long-term borrowing. Total such interest incurred was: Interest costs capitalized $ 735 $ 3,646 Interest costs charged to expense 2, Total interest incurred $ 3,562 $ 3,828 12

15 Long-lived Asset Impairment The Corporation 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. There was no impairment loss recorded during the years ended. Interest in Net Assets of Affiliated Foundations Baptist Health Foundation Cleburne County, Stuttgart Memorial Hospital Foundation and Hot Spring County Medical Foundation (collectively Foundations) and the Corporation are financially interrelated organizations. These Foundations seek private support for, and hold net assets on behalf of, the Corporation s facilities that are located in Heber Springs, Stuttgart and Malvern, Arkansas, respectively. The Corporation accounts for its interest in the net assets of the Foundations (Interest) in a manner similar to the equity method. Changes in the Interest are included in change in net assets. Transfers of assets between the Foundations and the Corporation are recognized as increases or decreases in the Interest. Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method. Deposits by Residents The nonrefundable portion of resident entrance deposits for Parkway Village, Inc. is 15% during the first year of residency agreements and increases by 5% each year thereafter until a maximum of 30% is reached. The maximum nonrefundable portion is dependent upon the residency agreement signed by each resident and the resident s length of stay. The total nonrefundable portion is recorded as deferred revenue and amortized to income over the remaining life expectancy of each resident. The refundable resident entrance deposits are recorded as a long-term liability except for the portion expected to be refunded within one year. In the event that resident agreements are terminated, the nonrefundable portion is recognized as revenue in the year of termination. Deposits from residents who have not yet taken occupancy are also recorded as long-term liabilities. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Corporation 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 Corporation in perpetuity. 13

16 Net Patient Service Revenue The Corporation has agreements with third-party payers that provide for payments to the Corporation at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such estimated amounts are revised in future periods as adjustments become known. Charity Care The Corporation provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Professional and General Liability and Workers Compensation Claims The Corporation recognizes an accrual for claim liabilities based on estimated ultimate losses and costs associated with settling claims. In addition, the Corporation recognizes a receivable for the estimated insurance recoveries, if any, for its subsidiaries that are for-profit corporations. A receivable is not recorded for the Corporation s not-for-profit subsidiaries based on Arkansas charitable immunity laws and case precedent. Professional and general liability and workers compensation claims are described more fully in Note 9. Income Taxes The Corporation and its wholly owned or controlled not-for-profit companies are exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law; however, they are subject to federal income tax on any unrelated business taxable income. 14

17 The Corporation accounts for income taxes for all other taxable subsidiaries in accordance with income tax accounting guidance (ASC 740, Income Taxes) depending on legal structure. The Corporation s C corporations are subject to income tax and the income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Corporation s limited liability companies are not directly subject to income taxes under the provisions of the Internal Revenue Code and applicable state law. Therefore, taxable income or loss is reported to the individual partners for inclusion in their respective tax returns, and no provision for federal and state income taxes has been included in the accompanying consolidated financial statements. The Corporation files tax returns in the U.S. federal jurisdiction. The Corporation and its subsidiaries are generally no longer subject to U.S. federal and state income tax examinations by tax authorities for income tax returns filed for years before There were no material deferred tax items as of December 31, 2017 or Total income tax expense (benefit) for the Corporation s taxable subsidiaries was approximately ($164,000) and $2,187,000 for 2017 and 2016, respectively, and is included in other nonoperating expenses on the consolidated statements of operations and changes in net assets. Excess of Revenues Over Expenses The consolidated statements of operations and changes in net assets include excess of revenues over expenses. Changes in unrestricted net assets that are excluded from excess of revenues over expenses, consistent with industry practice, include contributions of long-lived assets (including assets acquired using contributions, which by donor restriction were to be used for the purpose of acquiring such assets), distributions to noncontrolling interests, changes in fair value of cash flow hedge and changes in defined benefit pension plan gains and losses. Self-Insured Employee Health Claims The Corporation has elected to self-insure certain costs related to employee health claims. Costs resulting from uninsured losses are charged to income when incurred. The Corporation has purchased insurance that limits its annual exposure for individual claims to $500,000 per covered individual. 15

18 Transfers Between Fair Value Hierarchy Levels Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. Reclassifications Certain reclassifications have been made to the 2016 financial statements to conform to the 2017 financial statement presentation. These reclassifications had no effect on the change in net assets. Subsequent Events Subsequent events have been evaluated through April 24, 2018, which is the date the consolidated financial statements were available to be issued. Note 2: Net Patient Service Revenue The Corporation recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the Corporation recognizes revenue on the basis of discounted rates for services provided that equals the discount Medicare and all private health insurers receive on a combined average basis. This percentage must be re-calculated every January and reset based on the prior year s experience. On the basis of historical experience, a significant portion of the Corporation s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Corporation records a significant provision for uncollectible accounts related to uninsured patients in the period the services are provided. This provision for uncollectible accounts is presented on the consolidated statements of operations and changes in net assets as a component of net patient service revenue. The Corporation has agreements with third-party payers that provide for payments to the Corporation at amounts different from its established rates. A summary of the payment arrangements includes: Medicare Most inpatient acute care services and outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Baptist Health Medical Center Heber Springs and Baptist Health Medical Center Arkadelphia are critical access hospitals whose services are paid based on a cost reimbursement methodology. The Corporation is reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by the Corporation and audits thereof by the Medicare administrative contractor. 16

19 Medicaid Inpatient services rendered to Medicaid program beneficiaries are reimbursed under a cost reimbursement methodology subject to certain cost limitations. Outpatient services are reimbursed based on defined allowable charges. The Corporation is reimbursed at a tentative rate with final settlement determined after submission of annual cost reports by the Corporation and audits thereof by the Medicaid fiscal intermediary. In addition, the state of Arkansas enacted a form of Medicaid expansion, which uses the expansion funding to purchase private insurance policies on health care exchanges for qualifying beneficiaries beginning January 1, Arkansas Medicaid expansion is further described in Note 22. The Corporation participates in the Arkansas Medicaid provider assessment program. Fee assessments of up to 5.5% of net patient service revenue are required by the program and assessment proceeds are used to generate supplemental Medicaid funding from the federal government. The Corporation participates in this program and records the payments to be received, net of assessed fees paid, in net patient service revenue in the period earned. The net amounts recorded under this program were approximately $15,526,000 and $16,229,000 for 2017 and 2016, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. The Corporation also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Corporation under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. Patient service revenue, net of contractual allowances and discounts (but before the provision for uncollectible accounts), recognized in the years ended, was approximately: Medicare $ 455,641 $ 407,427 Medicaid 79,299 70,546 Other third-party payers 374, ,348 Exchange 90,239 91,259 Self-pay 17,662 22,031 $ 1,017,692 $ 958,611 17

20 Note 3: Concentration of Credit Risk The Corporation grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. The mix of net receivables from patients and thirdparty payers at, is: Medicare 38 % 39 % Medicaid 6 7 Other third-party payers Self-pay % 100 % Note 4: Investments and Investment Return Total investments at, include the following: Cash and cash equivalents $ 10,998 $ 53,540 Money market mutual funds 58, ,771 Marketable equity securities 78,478 75,773 Mutual funds 94,652 77,440 Alternative investments hedge funds 55,823 48,585 Alternative investments fund of funds 39,994 13,002 U.S. government and agency obligations 22,368 30,171 State and municipal obligations 28,899 23,281 Corporate debt obligations 54,290 42,774 Mortgage-backed securities 37,345 18,530 Held under split-interest agreements 3,247 3,241 Interest receivable 1,284 1,084 $ 485,509 $ 492,192 18

21 Total investments are summarized at, as follows: Current Assets Short-term investments and other $ 10,174 $ 10,736 Assets Limited as to Use Internally designated Capital improvements 365, ,330 Other uses 36,198 41,743 Held by trustee under indenture agreement Project fund 40,050 75,658 Externally restricted by donors 19,046 21,490 Other arrangements , ,411 Less amount required to meet current obligations 6,375 9, , ,415 Other Assets Investments 21,056 20,041 Total Investments $ 485,509 $ 492,192 Investment Return Total investment return is comprised of the following: Interest and dividend income $ 6,976 $ 6,815 Unrealized gains (losses) on trading securities 2,752 (8,921) Gains on alternative investments 9,399 9,702 Realized gains on sales of securities 31,273 20,699 $ 50,400 $ 28,295 19

22 Total investment return is reflected in the consolidated statements of operations and changes in net assets as follows: Unrestricted net assets Other nonoperating income $ 48,941 $ 26,854 Temporarily restricted net assets Investment return 2,587 1,634 Change in unrealized losses on investments (1,128) (193) $ 50,400 $ 28,295 Alternative Investments The fair value of alternative investments has been estimated using the NAV per share of the investments. Alternative investments held at December 31 consist of the following: Fair Value Redemption Frequency Redemption Notice Period Hedge funds (A) $ 55,823 $ 48,585 Quarterly and Monthly days Fund of funds (B) $ 39,994 $ 13,002 Suspendable days (A) (B) This category includes the following types of investments: 1) a hedge fund that is invested in equity securities of non-tobacco companies located in any country other than the United States or Canada; and 2) a hedge fund limited partnership that invests in any debt or equity securities with value to achieve long-term capital appreciation. The fund s composite portfolio includes investments in corporate bonds and publicly traded partnerships. This category includes the following types of investments: 1) a multi-strategy fund of funds based in the Cayman Islands that seeks to achieve long-term returns commensurate with the long-term returns in the general equity markets. The fund invests in four main sectors: long-short equity, event driven, relative value and global asset allocation; and 2) a multi-strategy fund of funds investing predominately in limited partnerships and similar pooled investment accounts. 20

23 Note 5: Deposits By Residents Deposits by residents of Parkway Village, Inc. consist of the following and are included under other long-term liabilities on the consolidated balance sheets at : Nonrefundable deposits $ 6,549 $ 7,622 Accumulated amortization (3,374) (4,199) Net nonrefundable deposits 3,175 3,423 Refundable deposits 14,419 15,713 Deposits from future residents ,615 19,161 Less current maturities 999 2,368 $ 16,616 $ 16,793 Note 6: Property and Equipment Property and equipment are stated at cost and are summarized at December 31 as follows: Land and land improvements $ 76,471 $ 75,344 Buildings 711, ,768 Equipment 450, ,410 Construction in progress 16,440 42,440 1,254,606 1,182,962 Less accumulated depreciation 645, ,900 $ 608,896 $ 582,062 21

24 Note 7: Investments in Equity Investees The Corporation invests in various joint ventures accounted for using the equity method of accounting and reported as a component of long-term other assets on the consolidated balance sheets. The equity investment amounts recorded in other long-term assets on the consolidated balance sheets were approximately $43,165,000 and $38,710,000 as of December 31, 2017 and 2016, respectively. The financial position and operating results of these investees are summarized below: Current assets $ 154,549 $ 133,302 Property and other long-term assets, net 9,043 8,743 Total assets $ 163,592 $ 142,045 Total liabilities $ 78,046 $ 65,029 Equity $ 85,546 $ 77,016 Net revenues $ 246,091 $ 230,005 Net income $ 10,512 $ 5,005 Distributions $ 3,246 $ 3,902 Note 8: Contributions Receivable Contributions receivable at, were $2,314,000 and $2,249,000, respectively. The current portion is presented in supplies, prepaid expenses and other, and the remaining amounts are recorded in other long-term assets on the consolidated balance sheets. Included in these amounts are amounts due under split-interest agreements of $1,825,000 and $1,307,000 at, respectively. 22

25 Note 9: Professional and General Liability and Workers Compensation Claims The Corporation is self-insured for the first $1,000,000 per occurrence and $5,000,000 in the aggregate of medical malpractice risks for substantially all hospital operations. The Corporation is responsible for the first $1,000,000 (known as the buffer) of claim expense, including expenses incurred associated with defense of claims, before the $1,000,000 per occurrence and $5,000,000 in the aggregate limits apply. These risks are insured by Diamond Risk. Diamond Risk obtains reinsurance from the commercial insurance industry to fulfill the excess umbrella policy of $75,000,000. Arkansas Health Group (AHG), a wholly owned subsidiary of the Corporation, has obtained a separate professional liability claims-made insurance policy on a fixed premium basis, which is used in conjunction with the excess umbrella policy of the Corporation. AHG s professional liability policy provides for coverage for the first $1,000,000 per claim and $3,000,000 in the aggregate for each employed physician and AHG with a shared limit of $1,000,000 per claim and $4,000,000 in the aggregate. This policy includes a deductible of $50,000 per claim with an annual limit of $150,000. The Corporation has also elected to self-insure workers compensation claims and has purchased insurance coverage to limit its exposure to $750,000 per occurrence and $1,000,000 in the aggregate. The Corporation records a liability and related receivable for any claims exceeding the self-insured retention limit. Professional and general liability and workers compensation reserve estimates represent the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. 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. Such adjustments are included in current operations. 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 can vary significantly. Although considerable variability is inherent in professional and general liability reserve estimates, management believes 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. The liabilities recorded on the consolidated balance sheets at, are summarized below: Current accrued expenses $ 4,466 $ 3,922 Long-term other liabilities 11,847 10,699 $ 16,313 $ 14,621 23

26 Note 10: Line of Credit The Corporation has a $30,000,000 unsecured revolving line of credit expiring on August 14, The Corporation has borrowed $22,500,000 and $19,000,000 against this line as of, respectively. Interest is payable quarterly at the BBA LIBOR daily floating rate plus 0.50%, which in total was 1.93% and 1.19% at, respectively. Note 11: Long-term Debt Long-term debt consists of the following: Revenue bonds (A) $ 150,375 $ 150,801 Revenue bonds (B) 5,628 6,051 Revenue bonds (C) 52,639 61,303 Line of credit (D) 44,365 30,200 Other obligations (E) 9,370 6, , ,841 Less unamortized debt issuance costs 2,529 2,668 Less current maturities 9,813 13,279 $ 250,035 $ 238,894 (A) (B) 2014 Revenue Bonds (2014 Bonds) of an Obligated Group of the Corporation (defined in the Master Trust Indenture as Baptist Health, an Arkansas nonprofit corporation) in the original amount of $138,910,000 plus net original premium of approximately $12,778,000; unamortized debt premium of $11,465,000 and $11,891,000 at, respectively; matures serially from 2022 through 2044; issued for the purpose of financing equipment and other personal property and for capital improvements to certain facilities of the Corporation; fixed interest rates ranging from 4.25% to 5.0%; subject to optional redemption in whole or in part beginning December 1, 2024, at 100% of the principal amount plus accrued interest; secured by revenues and/or accounts of the Obligated Group; as defined in the Master Trust Indenture, which became effective once the 2015 Healthcare Revenue Refunding Bonds included in (C) below were issued. Hospital Revenue Refunding Bonds maturing annually through October 1, 2029; fixed interest rates of 3.05% and 4.50%; secured by substantially all revenues of certain facilities and guaranteed by the Corporation. 24

27 (C) 2015 Healthcare Revenue Refunding Bonds (2015 Bonds) in the original amount of $61,730,000 plus net original premium of approximately $7,122,000; unamortized debt premium of $6,100,000 and $6,538,000 at, respectively; matures serially through 2031; issued for the purpose of advanced refunding several then outstanding revenue bond issues; fixed interest rates ranging from 1% to 5%; subject to optional redemption in whole or in part beginning December 1, 2025, at 100% of the principal amount plus accrued interest; secured on a parity basis with the 2014 Bonds discussed in (A) above and with certain other obligations as defined in the Master Trust Indenture outstanding at the time of issuance or subsequently issued or incurred by any member of the Obligated Group. Upon issuance and delivery of the 2015 Bonds, the Corporation defeased certain then existing Revenue Bonds (defeased Bonds) in the total principal amount of $70,515,000. Proceeds from the 2015 Bonds in conjunction with bond funds from the defeased revenue bonds and deposits by the Corporation were used to purchase securities that were deposited in trust under an escrow agreement sufficient in amount to pay future principal and interest on the defeased bonds. This advanced refunding transaction resulted in an extinguishment of debt since the Corporation was legally released from its obligations on the defeased Bonds at the time of the defeasance. Accordingly, the defeased Bonds, aggregating $25,410,000 at December 31, 2017, remain outstanding, but are excluded from the Corporation s consolidated balance sheets. (D) (E) Non-revolving line of credit that provides for borrowing up to $75,000,000 during the availability period, which is through March 2019; semi-annual interest payments beginning December 1, 2016, at the BBA LIBOR daily floating rate plus 0.75% through the availability period and subsequently at the monthly LIBOR plus 0.75%, which in total was 2.18% at December 31, 2017; annual principal payments beginning on December 1, 2019, based on a percentage of the total principal amount outstanding; matures on September 27, 2026; secured on a parity basis with the 2014 Bonds discussed in (A) above. Primarily comprised of various notes payable to banks and capital lease obligations; remaining balances mature at various dates through February 1, 2027; fixed interest rates ranging from 3.02% to 6%; secured primarily by real estate and certain equipment. Under the terms of the Master Trust Indenture, the Corporation is required to maintain certain deposits with a trustee. Such deposits are included with assets limited as to use in the consolidated financial statements. The Master Trust Indenture also places limits on the incurrence of additional borrowings and require that the Corporation satisfy certain measures of financial performance as long as the bonds are outstanding, including maintaining an annual debt-service coverage ratio of at least The financial institution that holds the line of credit and other notes payable requires, among other covenants, that the Corporation maintain a debt-service coverage ratio of at least 1.20 and a minimum of 90 days cash on hand. 25

28 Aggregate annual maturities and sinking fund requirements of long-term debt at December 31, 2017, are: 2018 $ 9, , , , ,201 Thereafter 195, ,812 Plus unamortized net bond premiums 17,565 Less unamortized bond issuance costs (2,529) $ 259,848 Note 12: Hedging Activities and Derivative Financial Instruments Cash Flow Hedge As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Corporation entered into an interest rate swap agreement for a portion of its floating rate debt. The agreement provides for the Corporation to receive interest from the counterparty at LIBOR and to pay interest to the counterparty at a fixed rate of 2.21% on a notional amount of $50,000,000 at December 31, 2016, with an effective date of July 1, Under the agreement, the Corporation pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. Management has designated the interest rate swap agreement as a cash flow hedging instrument. For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of unrestricted net assets and reclassified into excess of revenues over expenses in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current excess of revenues over expenses. The table below presents certain information regarding the Corporation s interest rate swap agreement designated as a cash flow hedge. Balance sheet location of fair value amount Other Assets $ 218 $ 222 Gain (loss) recognized in unrestricted net assets (effective portion) $ (4) $