SAINT BARNABAS CORPORATION d/b/a BARNABAS HEALTH. December 31, 2011 and 2010

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1 Consolidated Financial Statements and Supplementary Information (With Independent Auditors Report Thereon)

2 Table of Contents Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Net Assets (Deficit) 5 Consolidated Statements of Cash Flows 6 7 Supplementary Information Consolidating Schedule Balance Sheet Information 58 Consolidating Schedule Statement of Operations and Changes in Net Assets Information 59 Combining Schedule Balance Sheet Information Hospitals 60 Combining Schedule Statement of Operations and Changes in Net Assets Information Hospitals 61 Combining Schedule Balance Sheet Information Nursing Homes 62 Combining Schedule Statement of Operations and Changes in Net Assets Information Nursing Homes 63 Combining Schedule Balance Sheet Information Nonacute Not-for-Profit Entities 64 Combining Schedule Statement of Operations and Changes in Net Assets Information Nonacute Not-for-Profit Entities 65 Combining Schedule Balance Sheet Information For-Profit Entities 66 Combining Schedule Statement of Operations and Changes in Net Assets Information For-Profit Entities 67 Combining Schedule Balance Sheet Information Other Entities 68 Combining Schedule Statement of Operations and Changes in Net Assets Information Other Entities 69 Combining Schedule Balance Sheet Information Foundations 70 Combining Schedule Statement of Operations and Changes in Net Assets Information Foundations 71 Combining Schedule Balance Sheet Information Saint Barnabas Corporation Combined Group 72 Combining Schedule Statement of Operations and Changes in Net Assets Saint Barnabas Corporation Combined Group 73 Combining Schedule Balance Sheet Information Saint Barnabas Corporation Obligated Group 74 Combining Schedule Statement of Operations and Changes in Net Assets Saint Barnabas Corporation Obligated Group 75 Page

3 KPMG LLP New Jersey Headquarters 150 John F. Kennedy Parkway Short Hills, NJ Independent Auditors Report The Board of Trustees Saint Barnabas Corporation: We have audited the accompanying consolidated balance sheets of Saint Barnabas Corporation d/b/a Barnabas Health (the Corporation) as of, and the related consolidated statements of operations, changes in net assets (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation s management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saint Barnabas Corporation d/b/a Barnabas Health as of, and the consolidated results of their operations, changes in their net assets (deficit), and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. As discussed in note 2(v) to the consolidated financial statements, the Corporation adopted the provisions of Financial Accounting Standard Board (FASB) ASU No , Measuring Charity Care for Disclosure, ASU No , Healthcare Topic (954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts for Certain Health Care Entities in 2011 and the provisions of ASU , Presentation of Insurance Claims and Related Insurance Recoveries, as of January 1, KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information is presented for purposes of additional analysis of the 2011 consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies. 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 2011 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 information is fairly stated in all material respects in relation to the 2011 consolidated financial statements as a whole. April 19,

5 Consolidated Balance Sheets December 31 Assets Current assets: Cash and cash equivalents $ 246, ,537 Investments 32,552 41,086 Assets limited or restricted as to use 53,676 59,872 Patient accounts receivable, net of allowance for doubtful accounts of $98,470 and $95, , ,037 Other current assets 102, ,991 Total current assets 692, ,523 Assets limited or restricted as to use, noncurrent portion: Under bond indenture agreements 79,119 38,879 Externally designated or restricted 142, ,786 Total noncurrent assets limited or restricted as to use 221, ,665 Investments 501, ,453 Property, plant, and equipment, net 707, ,290 Other assets, net 48,209 30,693 $ 2,171,362 1,933,624 Current liabilities: Accounts payable $ 185, ,077 Accrued expenses and other current liabilities 240, ,224 Estimated amounts due to third-party payors, net 2,166 22,061 Notes payable and long-term debt 38,326 48,315 Amounts due to U.S. Department of Justice 30,461 17,656 Self-insurance liabilities 38,119 36,308 Total current liabilities 534, ,641 Estimated amounts due to third-party payors, net of current portion 79,451 67,572 Self-insurance liabilities, net of current portion 170, ,260 Long-term debt, less current maturities 913, ,588 Amounts due to U.S. Department of Justice, net of current portion 29,325 59,103 Accrued pension liability 227, ,470 Other liabilities 53,926 60,921 Total liabilities 2,007,947 1,896,555 Commitments and contingencies Liabilities and Net Assets (Deficit) Net assets (deficit): Unrestricted 71,584 (35,589) Temporarily restricted 78,247 59,020 Permanently restricted 13,584 13,638 Total net assets (deficit) 163,415 37,069 Total liabilities and net assets (deficit) $ 2,171,362 1,933,624 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Operations Year ended December Revenue: Patient service revenue (net of contractual allowances and discounts) $ 2,348,727 2,172,991 Provision for bad debts (91,099) (90,714) Net patient service revenue less provision for bad debts 2,257,628 2,082,277 Other revenue, net 222, ,568 Total revenue 2,479,785 2,290,845 Expenses: Salaries and wages 893, ,341 Physician fees and salaries 178, ,565 Employee benefits 231, ,441 Supplies 493, ,944 Other expenses 404, ,634 Interest 42,866 47,103 Depreciation 87,122 89,733 Impairment of property, plant, and equipment 6,695 Severance and other expenses 2,476 3,546 Total expenses 2,341,253 2,210,307 Income from continuing operations before professional expenses related to creditor negotiations 138,532 80,538 Professional expenses related to creditor negotiations (7,367) Income from continuing operations 138,532 73,171 Nonoperating revenue (expenses): Investment income 17,800 23,259 Interest expense on settlement with U.S. Department of Justice (3,027) (3,620) Gains on early extinguishment of debt, net 23,801 Other, net (260) 1,676 Total nonoperating revenue, net 38,314 21,315 Excess of continuing revenue over expenses 176,846 94,486 Gain from discontinued operations 12,106 Excess of revenues over expenses 176, ,592 Net change in unrealized (losses) gains on investments (1,499) 14,935 Pension changes other than net periodic benefit cost (78,021) 25,030 Net assets released from restriction for purchases of property and equipment 9,713 6,061 Other 134 4,675 Increase in unrestricted net assets $ 107, ,293 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Changes in Net Assets (Deficit) Years ended Temporarily Permanently Total Unrestricted restricted restricted net assets Net assets (deficit) at December 31, 2009 $ (192,882) 60,512 13,361 (119,009) Changes in net assets (deficit): Excess of revenues over expenses 106, ,592 Net change in unrealized gains on investments 14, ,379 Pension-related changes other than net periodic benefit cost 25,030 25,030 Net assets released from restriction 6,061 (16,542) (150) (10,631) Restricted contributions 14, ,137 Investment income on restricted investments, net Other 4,675 (760) 3,915 Change in net assets (deficit) 157,293 (1,492) ,078 Net assets (deficit) at December 31, 2010 (35,589) 59,020 13,638 37,069 Changes in net assets (deficit): Excess of revenues over expenses 176, ,846 Net change in unrealized (losses) gains on investments (1,499) 79 (1,420) Pension-related changes other than net periodic benefit cost (78,021) (78,021) Net assets released from restriction 9,713 (9,944) (231) Restricted contributions 30, ,254 Investment income on restricted investments, net Other 134 (1,635) (105) (1,606) Change in net assets (deficit) 107,173 19,227 (54) 126,346 Net assets at December 31, ,584 78,247 13, ,415 See accompanying notes to consolidated financial statements. 5

8 Consolidated Statements of Cash Flows Years Ended Cash flows from operating activities: Change in net assets (deficit) $ 126, ,078 Adjustments to reconcile change in net deficit to net cash provided by operating activities: Pension-related changes other than net periodic benefit cost 78,021 (25,030) Depreciation and amortization of deferred financing costs 88,088 89,860 Bad debts expense 91,099 92,474 Net change in unrealized losses (gains) on investments 1,420 (15,379) Realized gains on investments (5,457) (14,091) Gain on sale of assets (6,676) (16,505) Accretion on capital appreciation bonds 13,443 13,901 Restricted contributions for long-term use (27,138) (1,633) Grant received for capital expenditures (4,826) Loss from impairment of property, plant, and equipment 6,695 Gains on early extinguishment of debt, net (23,801) Changes in operating assets and liabilities: Patient accounts receivable (104,836) (90,717) Other assets (27,106) (15,504) Accounts payable, accrued expenses, and other liabilities 51,939 13,911 Estimated amounts due from and to third-party payors (8,016) 12,554 Amounts due to U.S. Department of Justice (16,973) (6,380) Pension liability (40,451) (28,691) Self-insurance and other long-term liabilities 20,106 16,563 Net cash provided by operating activities 216, ,585 Cash flows from investing activities: Purchases of property, plant, and equipment, net (101,991) (50,406) Proceeds from the sale of investments and assets limited or restricted as to use 145,388 48,339 Purchases of investments and assets limited or restricted as to use (290,054) (151,773) Proceeds from sale of assets 17,002 43,667 Net cash used in investing activities (229,655) (110,173) Cash flows from financing activities: Repayments of long-term debt (426,322) (142,662) Proceeds from issuance of debt 450,061 47,300 Proceeds from line of credit 43,780 Repayments of line of credit (43,780) Payments for deferred financing costs (6,840) Restricted contributions for long-term use 27,138 1,633 Grant received for capital expenditures 4,826 Net cash provided by (used in) financing activities 44,037 (88,903) Net increase (decrease) in cash and cash equivalents 31,085 (22,491) Cash and cash equivalents at beginning of year 215, ,028 Cash and cash equivalents at end of year $ 246, ,537 Supplemental disclosures of cash flow information: Interest paid $ 32,453 37,478 Capital lease obligations incurred 19,766 8,027 See accompanying notes to consolidated financial statements. 6

9 (1) Organization Saint Barnabas Corporation (the Corporation) is a not-for-profit holding company located in Livingston, New Jersey. The Corporation, doing business as Barnabas Health, formerly doing business as Saint Barnabas Health Care System (Barnabas Health or System). Barnabas Health is the sole corporate member or sole shareholder of the Barnabas Health s affiliated organizations and subsidiaries. Barnabas Health was formally organized in May 1996 to develop and operate a multihospital healthcare system providing a comprehensive spectrum of healthcare services, principally to the residents of New Jersey and surrounding areas. Among the services and facilities of Barnabas Health are: acute care hospitals, ambulatory care facilities, geriatric centers and services, a free-standing inpatient psychiatric facility and state-wide behavioral health network, a burn treatment facility, comprehensive cardiac surgery services, including a heart transplant center, a lung transplant center, kidney transplant centers, comprehensive cancer services, comprehensive breast centers, and the Children s Hospital of New Jersey at Newark Beth Israel Medical Center and the Children s Hospital at Monmouth Medical Center. (2) Significant Accounting Policies A summary of the Corporation s significant accounting policies are as follows: (a) (b) Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting year. Actual results could differ from those estimates. Basis of Accounting of Financial Statement Presentation The consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of the Corporation and its controlled affiliates and subsidiaries. Affiliates and subsidiaries of the Corporation include all entities that the Corporation directly or indirectly controls, even if the Corporation has less than 50% of the ownership of membership interest in the entity. Investments in entities where the Corporation has 50% or less of an entity s operations and does not have operational control are accounted for under the equity or cost method of accounting. The Corporation has included its equity share of income or losses from investments in unconsolidated affiliates in nonoperating revenue and expenses. All significant intercompany balances and transactions have been eliminated. 7 (Continued)

10 (c) (d) Cash and Cash Equivalents Cash and cash equivalents include investments in money market funds and highly liquid debt instruments with maturities of three months or less at the time of purchase, excluding assets limited or restricted as to use. The Corporation maintains cash on deposit with major banks and invests in money market securities with multiple financial institutions. The Corporation generally limits the credit exposure to any one financial institution; however, such deposits exceed federally insured limits. Patient Accounts Receivable The Corporation has agreements with third-party payors that provide for payment at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Management regularly reviews accounts and contracts and provides appropriate contractual allowances and discounts that are netted against patient accounts receivable in the consolidated balance sheets. Patient accounts receivable are further reduced by an allowance for doubtful accounts. The Corporation analyzes its past collection history and identifies trends by each of its major payor sources of patient service revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about the major payor sources of patient service revenue in evaluating the adequacy of the allowance for doubtful accounts. The Corporation analyzes contractual amounts due from patients who have third-party coverage and provides an allowance for doubtful accounts and a provision for bad debts. For patient accounts receivable associated with self-pay patients, which includes those patients without insurance coverage and patients with deductibles and copayment balances for which third-party coverage exists for a portion of the bill, the Corporation records a significant provision for bad debts for patients that are unable or unwilling to pay for the portion of the bill representing their financial responsibility. Account balances are charged off against the allowance for doubtful accounts after all means of collection has been exhausted. 8 (Continued)

11 The following table sets forth the components of the change in the allowance for doubtful accounts for the year ended December 31, 2011: Balance at Write-offs, Balance at the beginning Provision net of the end of Primary payor of the period for bad debts recoveries the period Medicare fee for service $ 8,252 4,692 (7,237) 5,707 Medicare managed care fee for service 3,650 2,759 (2,051) 4,358 Medicaid fee for service 6,566 1,317 (957) 6,926 Medicaid managed care fee for service 6,178 1,382 (627) 6,933 Blue cross 12,150 13,216 (11,912) 13,454 Managed care 26,165 13,072 (16,199) 23,038 Commercial insurance 13,348 2,854 (6,696) 9,506 Patients and other 19,150 51,807 (42,409) 28,548 Grand total $ 95,459 91,099 (88,088) 98,470 The Corporation grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor arrangements. The percentage of patient accounts receivables from patient and third-party payors were as follows: December Medicare fee for service 19% 23% Medicare managed care fee for service 5 5 Medicaid fee for service 6 6 Medicaid managed care fee for service Blue Cross Managed care Commercial insurance 6 8 Patients and other % 100% (e) Supplies Supplies are carried at the lower of cost (first-in, first-out method) or market. Supplies, totaling $32,070 and $32,983, are included in other current assets in the consolidated balance sheet at, respectively. During 2010, the Corporation refined its methodology for recording supplies, which resulted in additional supplies on the balance sheet and a reduction of supplies expense totaling $8,122. There were no refinements in the methodology during (Continued)

12 (f) (g) Assets Limited or Restricted as to Use Assets limited or restricted as to use also include assets held by trustees under bond indenture agreements; assets restricted for self-insurance; assets held for supplemental retirement benefits; and assets restricted by donors for specific purposes or endowment. Investments and Investment Income Investments include cash, cash equivalents, and investments designated by the Board of Trustees, over which the Board retains control. The Board may, at its discretion, direct the use of such assets for other purposes. A significant portion of the Corporation s investments are held in an investment portfolio maintained for the benefit of the System and its affiliates and are classified as investments held-for-sale. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value, based on quoted market prices, in the accompanying consolidated balance sheets. Donated investments are recorded at their fair value, based on quoted market prices, at the date of receipt. Alternative investments (nontraditional, not readily marketable asset classes) within the investments are structured such that the Corporation holds limited partnership interests and other forms of ownership and are recorded using the equity method of accounting. Individual investment holdings may, in turn, include investments in both nonmarketable and market-traded securities. Valuation of the nonmarketable securities is determined by the investment manager or general partner and reviewed by management. These values may be based on historical cost, appraisals, or other estimates that require varying degrees of judgment. Generally, the carrying value of the Corporation s holdings reflects net contributions to the investee and an ownership share of realized and unrealized investment income and expenses. The investments may indirectly expose the Corporation to securities lending, short sales and trading in futures, and forward contract options and other derivative products. The Corporation s risk is limited to its carrying value. Amounts can be divested only at specified times during the year. The financial statements of the investees are audited annually by independent auditors. At December 31, 2011, the Corporation does not have any future commitments to invest in alternative investments. Investment income and realized gains and losses on investment transactions, other than investment income earned on assets limited as to use under bond indenture agreements, assets designated by the Board of Trustees to support the operations of pediatric cardiac surgery at the Children s Hospital of New Jersey at Newark Beth Israel Medical Center (CHONJ), and assets held by the Corporation s captive insurance companies, are included in the nonoperating revenue (expenses) as a component of excess of continuing revenue over expenses in the consolidated statement of operations. Unrealized gains and losses on investments, except for investments in alternative investments, are excluded from excess of continuing revenue over expenses and included as other changes in net assets, unless the unrealized losses are deemed to be other-than-temporary declines in fair value. A decline in the fair value that is deemed to be other than temporary results in a reduction in carrying amount. 10 (Continued)

13 (h) Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Donated assets are recorded at fair value at the date of donation. Capitalized leases are recorded at present value at the inception of the lease and included in property, plant, and equipment. Annual provisions for depreciation of property, plant, and equipment, including amortization of capital leases, are computed using the straight-line method over the shorter of the estimated useful lives of the assets or related lease terms. Amortization of equipment held under capital lease is included in depreciation expense. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted net assets and are excluded from the excess of continuing revenue over expenses in the consolidated statement of operations, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted net assets. Absent explicit stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. (i) Deferred Financing Costs Deferred financing costs represent costs incurred to obtain debt-financing arrangements. Amortization of these costs is provided using the effective-interest method over the terms of the applicable indebtedness. Deferred financing costs totaling approximately $12,341 and $12,998, net of accumulated amortization, are included in other assets, net in the consolidated balance sheet at, respectively. During 2011, the Corporation incurred $6,840 of deferred financing costs associated with the issuance of the Series 2011A, B, and C bonds (see note 8) and wrote off $6,487 of deferred financing costs which is included in gains on early extinguishment of debt, net in the consolidated statement of operations. (j) Deferred Revenue The Corporation sold the investment rights of the required quarterly debt service payments and debt service reserve funds related to the Saint Barnabas Realty Development Corporation s Series 1997A (Series 1997A) and Series 1993 (Series 1993) revenue bonds and the debt service reserve funds related to the Saint Barnabas Corporation s Series 2006A and B (Series 2006A and B) revenue bonds. The Corporation received approximately $12,226 related to the Series 1997A and Series 1993 transaction and $12,290 related to the Series 2006A and B transaction. During 2006, the Corporation refinanced a portion of the Series 1997A and Series 1993 revenue bonds, affecting the counterparties reinvestment rights. In February 2007, the Corporation renegotiated the counterparties investment rights and replaced the portion of the Series 1997A and 11 (Continued)

14 Series 1993 amounts that were refinanced with portions of the Series 2006A and B revenue bonds monthly debt service payments. As a result, no termination value payment was required. In November 2011, the Corporation refinanced additional Series 1997A bonds, affecting the counterparties investment rights. In December 2011, the Corporation renegotiated the counterparties investment rights and replaced the portion of the Series 1997A amount that were refinanced with a portion of the Series 2011 A, B, and C bonds monthly debt service payments and debt service reserve fund requirements (see note 8). As a result, no termination value payment was required. These investment rights have been deferred and are being amortized as investment income in other revenue in the statement of operations over the life of the bonds in a manner that approximates the interest method. Under the terms of the agreements, the Corporation retains the ability to redeem the bonds as provided in the bond indentures. However, in the event of redemption, the Corporation may be required to pay a termination value. Deferred revenue is included as other current liabilities and other liabilities in the consolidated balance sheets, as follows: December Current portion of deferred revenue included in other current liabilities $ Long-term portion of deferred revenue included in other liabilities 14,691 15,736 Total deferred revenue $ 15,684 16,729 (k) Donor-Restricted Gifts 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 and/or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of changes in net assets (deficit) as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received and reported as unrestricted contributions in the accompanying consolidated statement of operations. 12 (Continued)

15 Pledges receivable, net of an allowance for uncollectible pledges receivable, totaled $6,613 and $7,494 at, respectively. Pledges receivable represent an unconditional promise to give cash and other assets to the Barnabas Health s Foundations over a period not greater than five years. Such amounts are recorded at their present value at the date the promise is received (discount rates approximate 0.8% in 2011 and 2.0% in 2010), net of an allowance for uncollectible pledges receivable. Such amounts are included as externally designated noncurrent assets limited as to use in the consolidated balance sheets. (l) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets represent funds whose use has been restricted by donors to a specific period or purpose. Permanently restricted net assets represent funds that have been restricted by donors to be maintained in perpetuity. Generally, the donors of these permanently restricted assets permit the use or part of the income earned on related investments for specific purposes. Resources arising from the results of operations or assets set aside by the Board of Trustees are not considered to be donor restricted. Temporarily restricted net assets are available for the following purposes: December Healthcare services $ 18,894 17,441 Capital purchase 43,793 26,737 Health education and other services 15,560 14,842 $ 78,247 59,020 (m) Performance Indicator The consolidated statement of operations includes a performance indicator, which is the excess of continuing revenue over expenses. Changes in unrestricted net assets, which are excluded from excess of continuing revenue over expenses, consistent with industry practice, include net unrealized gains and losses on investments that are classified as other than trading, pension-related changes other than net periodic pension cost, income and losses from discontinued operations, and contributed capital. The Corporation differentiates its ongoing operating activities through the income from continuing operations before professional expenses related to creditor negotiations as a subperformance indicator. Professional expenses incurred during 2010 related to creditor negotiations (see note 8) are not considered part of the Corporation s ongoing operating activities. Investment income, other than investment income earned on assets limited as to use under bond indenture agreements, assets designated by the Board of Trustees to support the operations of pediatric cardiac surgery at CHONJ, and assets held by the Corporation s captive insurance companies, gains on early extinguishment of 13 (Continued)

16 debt, and other transactions, which are not considered to be components of the Corporation s ongoing activities, are excluded from the income from continuing operations and reported as nonoperating revenue and expenses in the consolidated statements of operations. Investment income earned on assets limited as to use under bond indenture agreements, assets designated by the Board of Trustees to support the CHONJ, and assets held by the Corporation s of captive insurance companies are included in other revenue in the consolidated statements of operations. (n) Patient Service Revenue The Corporation has agreements with third-party payors that provide for payment at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated settlements under payment agreements with third-party payors. Settlement with third-party payors are accrued on an estimated basis in the period in which the related services are rendered and adjusted in future periods as final settlements are determined. The estimated percentages of patient service revenue by inpatient and outpatient services for the years ended December 31 are as follows: Inpatient services 64% 64% Outpatient services 36% 36% The following table reflects the estimated percentages of patient service revenue, net of provision for bad debts, for the years ended December 31: Medicare fee for service 34% 36% Medicare managed care fee for service 6 5 Medicaid fee for service 3 4 Medicaid managed care fee for service Blue cross Managed care Commercial insurance 1 1 Patients and other % 100% 14 (Continued)

17 (o) (p) Charity Care The Corporation provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates (see note 3). Since the Corporation does not pursue collection of amounts determined to qualify as charity care, such amounts are not reported as patient service revenue. Other Revenue Other revenue includes income from physician revenue, gains on the sale of assets, grant revenue, cafeteria, parking lot and investment income on funds held under bond indenture agreements, assets designated by the Board of Trustees to suggest the operations of pediatric cardiac surgery at CHONJ, and assets held by the Corporation s captive insurance companies. During 2011, the Corporation recorded approximately $8,400 of grant revenue related to Medicaid Incentive Health Information payments for meeting criteria for electronic health records for the year ended December 31, 2011 (none in 2010) (see note 4(a)). (q) Income Taxes The Corporation and its affiliates, excluding its for-profit subsidiaries, are not-for-profit corporations and are exempt from federal and state income taxes on related income under existing provisions of the Internal Revenue Code and State of New Jersey statutes. The Corporation s for-profit subsidiaries have recorded various deferred income tax assets and liabilities that reflect temporary differences between the amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. These amounts are not material to the consolidated financial position of the Corporation and are included as other assets or other liabilities in the consolidated balance sheets as appropriate. In addition, the provision for income taxes recorded by the Corporation s for-profit subsidiaries is not material to the consolidated results of operations of the Corporation and is included as other expenses in the consolidated statements of operations. Certain for-profit subsidiaries have federal net operating loss carryforwards of approximately $57,671 that expire through 2031 and State of New Jersey net operating loss carryforwards of approximately $29,325 that expire through At December 31, 2011, all deferred tax assets related to these net operating loss carryforwards have been fully reserved due to the uncertainty of realizing the tax benefits associated with these amounts. During 2011, the Corporation recorded federal and state income tax expense totaling $1,300 related to the sale of its long-term care business unit (see note 11(a)). During 2010, the Corporation reserved an additional $1,300 related to these deferred tax assets due to continued operating losses. (r) Self-Insurance Under the System s self-insurance programs (professional/general liability, directors and officers liability, workers compensation, and employee health benefits), claims are recorded based upon 15 (Continued)

18 actuarial estimation, including both reported and incurred but not reported claims, taking into consideration the severity of incidents and the expected timing of claim payments. (s) Assets Impairment Management routinely evaluates the carrying value of its long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of assets, or related group of assets, may not be recoverable from estimated undiscounted cash flows generated by the underlying tangible assets. When the carrying value of an asset exceeds the estimated recoverability, an asset impairment change is recognized. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining useful lives of its long-lived assets. If estimates are changed, the carrying value of affected assets is allocated over the remaining useful lives. In estimating the future cash flows for determining whether an asset is impaired and if expected future cash flows used in measuring assets are impaired, the Corporation groups their assets at the lowest level for which there are identifiable cash flows independent of other groups of assets. Kimball Medical Center (Kimball), an affiliate of the Corporation, continues to sustain recurring operating losses. Consequently, the Corporation finalized a strategic review of Kimball s operations, including historical, current year, and projected future operating losses and cash flows to determine if an impairment loss should be recognized. The Corporation determined that Kimball s carrying value of long-lived assets exceeded its estimated fair value by $6,695. As a result, the Corporation recorded an impairment of long-lived assets in the consolidated statement of operations for the year ended December 31, No impairment charge was recorded during the year ended December 31, (t) (u) Discontinued Operations The Corporation accounts for discontinued operations under ASC Topic Property, Plant, and Equipment. ASC 360 requires that a component of an entity that has been disposed of or is classified as held-for-sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as discontinued operations. In the period that a component of an entity has been disposed of or classified as held-for-sale, the results of operations are reclassified to discontinued operations in the accompanying consolidated statements of operations. Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of assets acquired in a business combination. ASC Topic 350, Intangible - Goodwill and Other, requires that tangible and indefinite-lived assets, as well as goodwill, must be analyzed in order to determine whether the value has been impaired. Pursuant to ASC 350, the Corporation determined that it has one reporting unit, which is the aggregate of all the Corporation s affiliates and subsidiaries. At December 31, 2011, other assets, net includes $3,800 of goodwill related to two business combinations entered into 16 (Continued)

19 during No goodwill existed at December 31, No impairment of goodwill was recorded during the year ended December 31, (v) New Accounting Pronouncements In January 2010, the Financial Accounting Standards Board (FASB) issued Statement of Financial ASU , Improving Disclosure about Fair Value Measurements. ASU amends ASC 820, Fair Value Measurements and Disclosures, to require a number of additional disclosures regarding fair value measurement. Effective for annual reporting periods beginning after December 15, 2009, ASU requires the disclosure of the amounts of significant transfers in or out of Level 2 investments and disclosure of the policy for determining when transfers among levels are recognized. ASU also clarifies the requirement to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 measurements. Effective for annual reporting periods beginning after December 15, 2010, ASU also requires that information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements be provided on a gross basis. The Corporation adopted the provisions of ASU during The adoption of ASU required additional disclosure, which had no impact on the Corporation s consolidated financial statements (see note 6). In August 2010, the FASB issued ASU , Health Care Entities (Topic 954): Measuring Charity Care for Disclosure. ASU requires that cost be used as the measurement for charity care disclosure purposes and that cost be identified as the direct and indirect cost of providing charity care, and requires disclosure of the method used to identify or determine such costs. The Corporation adopted the provisions of ASU on January 1, Since the Corporation does not recognize revenue when charity care is provided, adoption of this guidance did not have an impact on the consolidated financial statements of the Corporation. ASC required additional disclosures, including the method used to estimate the cost of charity care (see note 3). In August 2010, the FASB issued ASU , Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries. ASU is intended to address current diversity related to the accounting by healthcare entities for medical malpractice claims and similar liabilities and their related anticipated insurance recoveries. Most healthcare entities had netted anticipated insurance recoveries against the related liability, although some entities had presented the anticipated insurance recovery and related liability on a gross basis. The existing guidance does not permit offsetting of conditional and unconditional liabilities with anticipated insurance recoveries from third parties. This update clarifies that a healthcare entity should not net insurance recoveries against related claim liability. Additionally, the amount of the claim liability should be determined without consideration of the insurance recoveries. The Corporation adopted the provisions of ASU on January 1, The adoption of this guidance resulted in the Corporation initially recording an additional accrual for medical malpractice claims liabilities and an insurance recovery receivable totaling $47,325 in the consolidated balance sheet. Subsequently, an outstanding medical malpractice claim included in the Corporation s additional accrual was settled and paid. As such, the Corporation recorded an adjustment to reduce the accrual by approximately $31,900. At December 31, 2011, the medical malpractice claims liabilities and related insurance recovery receivable totaled 17 (Continued)

20 $15,401. Such amount is included in other assets, net and noncurrent insurance claims liabilities at December 31, The Corporation did not retroactively adopt the provisions as of December 31, 2010 as permitted by ASU The adoption of this guidance did not have an impact on the Corporation s results of operations or cash flows (see note 10(a)). In July 2011, the Financial Accounting Standards Board (FASB) issued ASU , Health Care Topics (954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The guidance is intended to provide financial statement users with greater transparency about a healthcare entity s net patient service revenue and related allowance for doubtful accounts. The guidance provides information to assist financial statement users in assessing an entity s sources of patient service revenue and related changes in its allowance for doubtful accounts. The guidance requires certain healthcare entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those healthcare entities are required to provide enhanced disclosures about their policies for recognizing revenue and assessing bad debts. The guidance also requires disclosures of patient service revenue (net of contractual allowances and discounts), as well as qualitative information about changes in the allowance for doubtful accounts. As permitted, the Corporation adopted the guidance of ASU on January 1, As such, the Corporation reclassified the provision for bad debt expense, net totaling $91,099 and $90,714 for the years ended, respectively, from operating expenses to a reduction of patient service revenue in the Statement of Operations. In addition, the required disclosures related to the Corporation s sources of patient service revenue and changes in the allowance for doubtful accounts can be found at notes 2(d) and 2(n), respectively. In September 2011, the FASB issued ASU , Disclosures about an Employer s Participation in a Multiemployer Plan. The guidance is intended to provide financial statement users with greater transparency about an employer s participation in a multiemployer pension. The guidance requires additional qualitative and quantitative information disclosures to assist user of the financial statements in understanding the commitments and risks involved in participating in multiemployer pension plans, including the financial health of all the significant plans in which the employer participates. This ASU does not change the current recognition and measurement guidance for an employer s participation in a multiemployer pension plan. The Corporation adopted the provisions of ASU for the year ended December 31, Adoption of this guidance did not have an impact on the consolidated financial statements of the Corporation. ASU requires additional disclosures about the Corporation s participation in multi-employer pension plan (see note 9). (w) Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 18 (Continued)

21 (3) Charity Care and Community Benefit In accordance with its mission and philosophy the Corporation, Barnabas Health s hospitals commit substantial resources to both the indigent population and the broader community. The Corporation s charity care policy is to provide care without regard to the patient s ability to pay for services rendered. To the extent that patients do not have the ability to pay, services rendered to those patients are reported as charity care. The Corporation s hospitals and affiliates also provide other benefits through a broad range of community service programs and charitable activities. The amount of charity care, community service programs, and charitable activities, at cost, provided to the indigent population and broader community for the years ended December 31 is as follows: Cost of charity care and community benefit programs: Net cost of charity care provided $ 91,800 89,396 Unpaid cost of public programs, Medicaid, and other means tested programs 51,390 37,804 Other Programs: Cash and in-kind donations 2,296 1,860 Education and research 40,017 42,666 Subsidized departments 2,710 5,601 Other community benefit 1,968 2,092 The Corporation s hospitals utilize a cost to charge ratio methodology to convert charity care to cost. The cost to charge ratio is calculated utilizing the Corporation s cost accounting system. The State of New Jersey s regulations provide for the distribution of funds from a Charity Care Fund, which is intended to partially offset the cost of services provided to the uninsured, as well as a Hospital Relief Fund, which is intended to partially offset the cost of services provided for certain diagnosis, including mental health, substance abuse, maternity and complex neonatal cases, tuberculosis, and AIDS. These funds are distributed to the Corporation s hospitals based on their level of charity care and units of service in relation to all other New Jersey hospitals. For the years ended, Barnabas Health s hospitals received distributions from both funds totaling $90,476 and $85,238, respectively. (4) Healthcare Reimbursement System (a) The Corporation provides care to patients under Medicare, Medicaid, and other contractual arrangements. The Medicare program currently pays for most services at predetermined rates; however, certain services and specified expenses continue to be reimbursed on a cost basis. The Medicaid program also currently reimburses the Corporation at predetermined rates for inpatient services and on a cost reimbursement methodology for outpatient services. Regulations require annual retroactive settlements for cost-based reimbursement and other payment arrangements through cost reports filed by the Corporation. These retroactive settlements are estimated and 19 (Continued)

22 recorded in the consolidated financial statements in the year that they occur. The estimated settlements recorded at December 31, 2011 could differ from actual settlements based on the results of cost report audits. Medicare cost reports for all years prior to 2008 have been audited and settled, except for the component of the cost report related to Disproportionate Share (DSH reimbursement), which have been audited and settled through 2004 (see note 4(c)). Medicaid cost reports for all years prior to 2006 have been audited and settled. The fiscal intermediary may reopen certain years related to specific settlement items in the cost report. 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. These agreements have retrospective audit clauses, allowing the payor to review and adjust claims subsequent to initial payment. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the Health Reform Law), which was signed into law on March 23, 2010, will change how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital payments, and the establishment of programs in which reimbursement is tied to quality and integration. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. Because of the many variables involved with the Health Reform Law, management is unable to predict the net effect on the Corporation of the expected increases in insured individuals using Barnabas Health facilities, the reductions in Medicare spending and reductions in Medicare and Medicaid DSH funding, and numerous other provisions in the law that may affect the Corporation. During 2011, the Centers for Medicare and Medicaid Services (CMS) enacted two specific provisions of the Health Reform Law. On May 6, 2011, CMS issued the final rule establishing a hospital value-based purchasing program for acute care hospitals paid under the Medicare Inpatient Prospective Payment System. Beginning in federal fiscal year 2013, value-based incentive payments will be made based upon a provider s achievement of or improvement in a set of clinical and quality measures designed to foster improved clinical outcomes. On July 13, 2010, CMS issued rules implementing the Medicare and Medicaid electronic health record (EHR) incentive program established under the Health Information Technology for Economic and Clinical Health Act (HITECH Act). Certain hospitals and eligible healthcare professions that demonstrate meaningful use of certified EHR technology can qualify for Medicare payments beginning Medicaid requires that hospitals and eligible healthcare professionals adopt, implement or upgrade certified EHR, which includes purchasing the technology, in order to receive incentive payments in Beginning in federal fiscal year 2015, Medicare payment reduction penalties will be assessed against hospitals and eligible healthcare professionals that do not achieve meaningful use of EHR. During 20 (Continued)