Blanchard Valley Health System and Subsidiaries Independent Auditor s Reports and Consolidated Financial Statements December 31, 2015 and 2014

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1 Blanchard Valley Health System and Subsidiaries Independent Auditor s Reports and Consolidated Financial Statements

2 Contents Independent Auditor s Report... 1 Consolidated Financial Statements Balance Sheets... 3 Statements of Operations... 4 Statements of Changes in Net Assets... 5 Statements of Cash Flows Independent Auditor s Report on Supplementary Information Supplementary Information Consolidating Information Balance Sheet Consolidating Information Results of Operations and Changes in Net Assets Hospital Statistics (Unaudited) Blanchard Valley Regional Health Center... 43

3 Independent Auditor's Report Board of Trustees Findlay, Ohio We have audited the accompanying consolidated financial statements of Blanchard Valley Health System and Subsidiaries (Corporation), which comprise the consolidated balance sheets as of, and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Corporation s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of as of December 31, 2015 and 2014, and the results of their operations, the changes in their net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Fort Wayne, Indiana April 26,

5 Consolidated Balance Sheets Assets Current Assets Cash and cash equivalents $ 15,462 $ 24,435 Accounts receivable Patient, net of allowance; $9,275, $8,343 34,307 31,016 Other 8,858 7,066 Contributions receivable 1,207 1,208 Inventories 7,979 7,133 Prepaid expenses 1,804 1,963 Total current assets 69,617 72,821 Assets Limited as to Use Internally designated 269, ,449 Externally restricted by donors 9,883 9,801 Held by trustee 16,208 17, , ,263 Property and Equipment, net 197, ,602 Other Assets Contributions receivable, less current portion Investments in equity investees 898 1,066 Beneficial interest in perpetual trusts 18,276 20,011 Deferred financing costs 1,419 1,592 Other ,488 23,319 Total assets $ 583,794 $ 577,005 See

6 Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 5,767 $ 7,375 Accounts payable and accrued expenses 15,933 14,385 Accrued wages, withholdings and payroll taxes 12,297 16,860 Estimated amounts due to third-party payers 3,669 5,028 Other 1,225 1,354 Total current liabilities 38,891 45,002 Other Liabilities Long-term debt 137, ,090 Deferred revenue Pension liability 38,519 49,221 Interest rate swap agreement 23,279 22,101 Other long-term obligations 7,884 8,978 Total liabilities 246, ,997 Net Assets Unrestricted 309, ,770 Noncontrolling interest (2,496) 1,723 Temporarily restricted 8,899 9,342 Permanently restricted 21,143 22,173 Total net assets 337, ,008 Total liabilities and net assets $ 583,794 $ 577,005 3

7 Consolidated Statements of Operations Years Ended Unrestricted Revenue, Gains and Other Support Patient service revenue (net of contractual discounts and allowances) $ 314,521 $ 301,820 Provision for uncollectable accounts (13,800) (12,878) Net patient service revenue less provision for uncollectable accounts 300, ,942 Rental revenue Other revenue 7,913 8,443 Net assets released from restrictions used for operations Total unrestricted revenue, gains and other support 309, ,160 Expenses and Losses Compensation, contract wages and benefits 158, ,016 Purchased and contracted services 20,480 17,518 Medical and professional fees 7,126 5,994 Medical and pharmacy supplies 50,656 44,519 Insurance 598 1,243 Depreciation and amortization 14,345 14,558 Interest 6,761 7,152 Other and allocated costs 19,914 19,040 Loss on disposal of property and equipment Total expenses and losses 278, ,410 Operating Income 31,124 36,750 Nonoperating Gains and Other Investment return (4,742) 5,530 Gain on investment in equity investee Change in fair value of interest rate swap agreement (1,178) (3,787) Net fundraising activity and other (2,241) (1,700) Total nonoperating gains and other (7,191) 51 Excess of Revenue Over Expenses 23,933 36,801 Excess of Revenue Over Expenses Attributable to Noncontrolling Interest (2,408) (7,346) Excess of Revenue Over Expenses Attributable to Blanchard Valley Health System and Subsidiaries 21,525 29,455 Other Changes in Unrestricted Net Assets Net assets released from restriction used for purchase of property and equipment 2, Defined benefit pension plan Change in gains and losses and prior service cost 11,002 (29,748) Change in noncontrolling interest (4,219) 83 Other changes in net assets 265 Total other changes in unrestricted net assets 9,205 (28,889) Increase in Unrestricted Net Assets $ 30,730 $ 566 See 4

8 Consolidated Statements of Changes in Net Assets Years Ended Unrestricted Net Assets Excess of revenue over expenses attributable to Blanchard Valley Health System and Subsidiaries $ 21,525 $ 29,455 Net assets released from restriction used for purchase of property and equipment 2, Defined benefit pension plan Change in gains and losses and prior service cost 11,002 (29,748) Change in noncontrolling interest (4,219) 83 Other changes in net assets 265 Total other changes in unrestricted net assets 9,205 (28,889) Increase in unrestricted net assets 30, Temporarily Restricted Net Assets Donations 2,384 3,486 Investment return (113) 130 Net assets released from restrictions (2,714) (524) Increase (decrease) in temporarily restricted net assets (443) 3,092 Permanently Restricted Net Assets Donations Change in beneficial interest in perpetual trusts (1,735) 163 Increase (decrease) in permanently restricted net assets (1,030) 211 Change in Net Assets 29,257 3,869 Net Assets, Beginning of Year 308, ,139 Net Assets, End of Year $ 337,265 $ 308,008 See 5

9 Consolidated Statements of Cash Flows Years Ended Operating Activities Change in net assets $ 29,257 $ 3,869 Change in net assets attributable to noncontrolling interests 4,219 (83) Change in net assets attributable to the Corporation 33,476 3,786 Items not requiring (providing) operating cash flow Loss on disposal of property and equipment Depreciation and amortization 14,345 14,558 Gain on equity investments (970) (8) Net losses on assets limited as to use 15,922 3,748 Change in fair value of interest rate swap agreement 1,178 3,787 Change in beneficial interest in perpetual trusts 1,735 (163) Provision for uncollectable accounts 13,800 12,878 Noncontrolling interest 2,408 7,346 Change in defined benefit pension plan liability (10,702) 25,863 Contributions and investment return received restricted for long-term investment or for acquisition of long-term assets (3,089) (3,534) Changes in Accounts and contributions receivable (19,127) (17,702) Prepaid expenses and other current assets (687) (803) Other assets and liabilities (1,271) 386 Accounts payable and accrued expenses (4,243) 769 Deferred revenue 29 (64) Net cash provided by operating activities 42,895 51,217 Investing Activities Net change in assets limited as to use (12,870) (38,552) Purchases of property and equipment (28,084) (11,243) Net cash used in investing activities (40,954) (49,795) Financing Activities Contributions and investment return received restricted for longterm investment or for acquisition of long-term assets 3,089 3,534 Principal payments on long-term debt and line of credit (7,376) (6,733) Distributions to minority interest holders (6,627) (6,764) Net cash used in financing activities (10,914) (9,963) Decrease in Cash and Cash Equivalents (8,973) (8,541) Cash and Cash Equivalents, Beginning of Year 24,435 32,976 Cash and Cash Equivalents, End of Year $ 15,462 $ 24,435 Supplemental Cash Flows Information Interest paid $ 6,765 $ 8,221 Property and equipment included in accounts payable 1,228 See 6

10 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations, Organization, Principles of Consolidation and Noncontrolling Interest Blanchard Valley Health System (Corporation) is a nonprofit, integrated regional health system based in Findlay, Ohio and provides a wide range of health care services to the residents in Findlay and the surrounding areas of northwest Ohio. The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries: Blanchard Valley Regional Health Center (Health Center), Blanchard Valley Continuing Care Services, Inc. (Continuing Care Services), Blanchard Valley Health Foundation (Foundation), Blanchard Valley Medical Practice, LLC (BVMP) and CITAS, Inc. (CITAS). The Corporation provides executive administrative support, strategic planning and oversight to all subsidiaries. The Corporation also is the sole shareholder of Hanco Ambulance, Inc. (Hanco), a local pre-emergency medical care and transportation ambulance company that serves the residents of Findlay, Ohio and Hancock County. The Health Center operates a 150-bed general acute care, hospital in Findlay, Ohio (Blanchard Valley Hospital) and a 25-bed critical access hospital in Bluffton, Ohio (Bluffton Hospital). The Health Center has a 51% interest in Blanchard Valley Pain Management, LLC (BVPM), which owns and operates a pain management center, a 67% interest in TechniCore Clinical Engineering Services, LLC (TCES), a biomedical engineering services company and a 60% interest in Creighton Dialysis LLC (Creighton), which owns and operates an outpatient dialysis center. Continuing Care Services operates a 190,000 square foot retirement community in Findlay (Birchaven Village), consisting of a 164-bed licensed skilled nursing facility, including 136 Medicare and Medicaid beds and a 105-unit congregate and assisted living facility as well as a separate 50-bed licensed skilled nursing facility and a 27-unit senior living apartment facility in Fostoria (Independence House). Continuing Care Services is also the sole member of Blanchard Valley Home Care Services, LLC (Bridge), which provides home health, hospice and private care services and Birchaven Estates at Eastern Woods, Ltd. (Estates), which is a condominium development for seniors on approximately 16 acres adjacent to Birchaven. Continuing Care Services has a 73% interest in Northwest Ohio Medical Equipment (NOME), a provider of home medical and oxygen equipment. The Foundation solicits and manages donations in support of the operation of the Corporation and its subsidiaries. BVMP operates several family practice physician offices and specialty physician offices that are primarily located in Findlay and the surrounding communities, as well as an urgent care center and a radiation therapy center. CITAS currently performs physician recruiting on behalf of the Corporation. Significant intercompany accounts and transactions have been eliminated in consolidation. Noncontrolling interest represents the 49% interest in BVPM, the 33% interest in TCES and the 40% interest in Creighton that the Health Center does not own and the 27% interest in NOME that Continuing Care Services does not own. 7

11 Mission Statement and Nonoperating Gains and Losses The Corporation s mission statement is Caring for a lifetime. The Corporation s primary mission is to provide exceptional health care services through its acute care, long-term care and ambulatory facilities. Primarily those activities directly associated with the furtherance of this purpose are considered to be operating activities. Other activities that result in gains or losses unrelated to the Corporation s primary mission are considered to be nonoperating. Nonoperating gains and losses include realized and unrealized investment earnings other than on trustee-held investments related to borrowed funds, unrestricted gifts and bequests, gains and losses on equity investments, net fundraising activities and changes in the market value of interest rate swap agreements. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Corporation considers all liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market accounts and certificates of deposit. At December 31, 2015, the Corporation s cash accounts exceeded federally insured limits by approximately $16,229. Investments, Investment Return and Assets Limited as to Use Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. The investments in equity investees are reported on the equity method of accounting. Other investments are valued at fair value. Management s estimate of the fair value of investments without quoted market prices is determined based on valuations provided by the external investment managers. The valuations for these investments without quoted market prices necessarily involve estimates, appraisals, assumptions and methods which are reviewed by the Corporation. 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. 8

12 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. Assets limited as to use include: (1) assets held by trustees, including medical malpractice trust, (2) assets restricted by donors and (3) assets set aside by the Board of Trustees for future capital improvements over which the Board retains control and may at its discretion subsequently use for other purposes. 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 includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Corporation records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated or provided by policy) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Corporation s allowance for doubtful accounts for self-pay patients decreased from 92% of self-pay accounts receivable at December 31, 2014, to 85% of self-pay accounts receivable at December 31, In addition, the Corporation s write-offs increased $922 from $12,878 for the year ended December 31, 2014, to $13,800 for the year ended December 31, Both changes were the result of increased self-pay activity for the year as well as continuing trends experienced in the collection of amounts from both primary and secondary coverage of self-pay patients. 9

13 Inventories The Corporation states supplies inventories at the lower of cost, using the first-in, first-out method or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. Expenditures for renewals or betterments are capitalized and expenditures for maintenance and repairs are charged to expense. Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. The cost and related accumulated depreciation of property and equipment that is sold or retired are removed from the consolidated financial statements and the resulting gain or loss is recorded as operating expense. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long-Lived Asset Impairment The 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. No asset impairment was recognized during the years ended. Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt and are amortized on the bonds outstanding method over the term of the debt. Deferred Revenue In 2004, Continuing Care Services received approximately $1,000 for advanced rental payments for space, which was recorded as deferred revenue and is being recognized in income over a 25- year period ending in The remaining amount of deferred revenue to be recognized in future periods was $470 and $510 at, respectively. Other revenues which relate to future periods is also included in deferred revenue. 10

14 Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets contain donor-imposed restrictions of a particular time period or purpose that permit the Corporation to use or expend the assets as specified. Permanently restricted net assets contain donor-imposed restrictions that stipulate the resources, including original donation, unrealized net gains and undistributed investment income, be maintained permanently, but permit the Corporation to use or expend part or all of the income derived from the donated assets for either specified or unspecified purposes. For many restricted assets, the Corporation receives the higher of traditional trust income or 5% of the Applicable Fund Value (average market value), in accordance with the Institutional Trust Fund Act. 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 accepts all patients regardless of their ability to pay. A patient is classified as a charity patient by reference to certain established policies of the Corporation. Essentially, these policies define charity care as those services for which no payment is anticipated. In assessing a patient s inability to pay, the Corporation utilizes generally recognized poverty income levels but also includes certain cases where incurred charges are significant when compared to income. Charity care provided in 2015 and 2014, measured at estimated cost, approximated $1,920 and $3,154, respectively, with the decline in current year activity associated with increased third-party insurance coverage associated with Medicaid expansion. Estimated cost is derived from a ratio of total operating expenses as a percentage of gross charges. 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 promises to give cash and other assets are accrued at estimated fair value at the date each promise is received. 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 restricted contributions and released from restriction. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. 11

15 Self-Funded Insurance The Corporation maintains self-funded health insurance and workers compensation insurance plans covering substantially all employees. Contributions are made to the administrators of these plans as claims are paid, while expenses are accrued as incurred. The Corporation has purchased insurance that limits its exposure for individual health claims to $250 per employee. Estimated Malpractice Costs An annual estimated provision is accrued for the self-insured portion of medical malpractice claims and includes an estimate of the ultimate costs for both reported claims and claims incurred, but not reported. 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 period beginning date. Income Taxes The Corporation and its subsidiaries are incorporated under the laws of the state of Ohio. The Corporation, the Health Center, Continuing Care Services, the Foundation and BVMP are not-forprofit corporations. CITAS is a for-profit corporation. The Internal Revenue Service has determined the not-for-profit corporations to be exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. However, the Corporation s tax-exempt entities are subject to federal income tax on any unrelated business taxable income. Excess of Revenue Over Expenses The consolidated statements of operations include excess of revenue over expenses. Changes in unrestricted net assets which are excluded from excess of revenue over expenses, consistent with industry practice, include permanent transfers to and from affiliates for other than goods and services and 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), changes in noncontrolling interests and changes in the defined benefit pension plan. 12

16 Electronic Health Records Incentive Program The Electronic Health Records Incentive Program, enacted as part of the American Recovery and Reinvestment Act of 2009, provides for one-time incentive payments under both the Medicare and Medicaid programs to eligible hospitals and eligible professionals that demonstrate meaningful use of certified electronic health records technology (EHR). Payments under the Medicare program are generally made for up to four years based on a statutory formula. Payments under the Medicaid program are generally made for up to four years based upon a statutory formula, as determined by the state, which is approved by the Centers for Medicare and Medicaid Services. Payment under both programs are contingent on the hospital and professionals continuing to meet escalating meaningful use criteria and any other specific requirements that are applicable for the reporting period. The final amount for any payment year is determined based upon an audit by the fiscal intermediary. Events could occur that would cause the final amounts to differ materially from the initial payments under the program. The Corporation recognizes revenue ratably over the reporting period starting at the point when management is reasonably assured it will meet all of the meaningful use objectives and any other specific grant requirements applicable for the reporting period. In 2015, the Corporation completed the third-year requirements under the Medicare program and the fourth-year requirements under the Medicaid program and has recorded revenue of $1,352, which is included in other revenue within operating revenues in the consolidated statement of operations. In 2014, the Corporation completed the second-year requirements under the Medicare program and the third-year requirements under the Medicaid program and has recorded revenue of $2,073, which is included in other revenue within operating revenues in the consolidated statement of operations. 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 its standard rates for services provided. 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 statements of operations as a component of net patient service revenue. The Health Center and certain other subsidiaries of the Corporation have agreements with thirdparty payers that provide for payments at amounts different from established rates. A summary of the payment arrangements with third-party payers follows: Medicare and Medicaid The Health Center and certain other subsidiaries of the Corporation are providers of services under the Medicare and Medicaid programs. 13

17 Inpatient and most outpatient services rendered to Medicare and Medicaid program beneficiaries of Blanchard Valley Hospital are paid at prospectively determined rates per discharge or encounter. These prospectively determined rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Other Medicare outpatient services are reimbursed at established fee schedules. Medicaid outpatient services are reimbursed on a prospectively determined fixed rate. While Medicaid inpatient operations costs are paid using a prospectively determined rate, capital costs for Medicaid inpatient services are reimbursed based on a cost reimbursement methodology. Bluffton Hospital is certified as a critical access hospital (CAH) by Medicare. As a CAH, the Bluffton Hospital is reimbursed for substantially all inpatient and outpatient services to Medicare beneficiaries based on reasonable costs. Additionally, as a CAH, Bluffton Hospital s licensed beds are limited to 25 and acute average length of stay may not exceed 96 hours. Bluffton Hospital is reimbursed for substantially all services at tentative rates with final settlement determined after submission of annual cost reports by Bluffton Hospital and audits thereof by the Medicare Administration Contractors. Continuing Care Services is reimbursed for skilled nursing services to Medicare patients under prospectively determined per diem rates that vary based on a patient s acuity and assistance needed in activities of daily living. Reimbursement for Medicaid patients of Birchaven is based on prospectively determined per diem rates. Other Payers The Health Center, Continuing Care Services and certain divisions of the Corporation have also entered into agreements with certain commercial carriers, health maintenance organizations and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per service, discounts from established charges and prospectively determined daily rates. Provision is made currently in the consolidated financial statements for estimated settlements under third-party reimbursement contracts. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Management is of the opinion that adequate provision has been made for the unsettled cost reports. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Health Center, Continuing Care Services and certain divisions of the Corporation believe that they are in compliance with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing. Noncompliance with such laws and regulations can be subject to regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs. As a result, it is reasonably possible that recorded estimates will change materially in the near term. 14

18 Patient service revenue, net of contractual allowances and discounts (but before the provision for uncollectible accounts), recognized in the years ended, respectively, was approximately: Medicare $ 79,531 $ 72,772 Medicaid 34,729 33,304 Other third-party payers 172, ,767 Self-pay 23,492 23,977 Total $ 309,955 $ 301,820 The 2015 and 2014 net patient service revenue increased approximately $1,400 and $105, respectively, due to changes of previously estimated amounts as a result of final settlements. Note 3: Concentration of Credit Risk The Health Center and certain other subsidiaries of the Corporation grant credit without collateral to patients, most of whom are local residents and are insured under third-party payer agreements. The mix of gross receivables from patients and third-party payers for the Health Center and certain other subsidiaries of the Corporation at, are as follows: Medicare 34% 33% Blue Cross Commercial Medicaid Self-pay and other % 100% Self-insured patients include patients with no insurance, co-payments and deductibles for patients with insurance and patients under contract. 15

19 Note 4: Investments and Investment Return Assets Limited as to Use Assets limited as to use at December 31 are as follows: Cash $ 572 $ 386 Money market mutual funds 1,581 2,901 Domestic equity mutual funds 135, ,586 International equity mutual funds 50,449 54,237 Pooled investment and limited partnership funds, at fair value 52,224 52,635 Corporate bonds 2,591 2,572 Municipal bonds 1, Domestic fixed income mutual funds 37,298 37,167 International fixed income mutual funds 13,114 13,803 $ 295,211 $ 298,263 The following table presents information regarding the nature and significant terms of the Corporation s pooled investment and limited partnership funds at : Investments Fair Value 2015 Unfunded Commitments Redemption Frequency (if Eligible) Redemption Notice Period Limited partnerships (A) $ 4,015 $ 261 None N/A Quarterly to Pooled investment funds (B) 48,209 annually days Investments Fair Value 2014 Unfunded Commitments Redemption Frequency (if Eligible) Redemption Notice Period Limited partnerships (A) $ 5,036 $ 392 None N/A Quarterly to Pooled investment funds (B) 47,599 annually days (A) This category includes several private equity funds that invest in early stage, high-growth private companies, growth equity financing, leverage buyouts, securities and other obligations of distressed businesses and financially troubled companies. These investments can never be redeemed with the funds. Instead, the nature of the investments in this category is that distributions are received through the liquidation of the underlying assets of the funds. These investments are planned to be held and it is estimated that the underlying assets of the funds will be liquidated in approximately ten years. The fair value of the investments in this category have been estimated using the Corporation s ownership interests in partners capital. 16

20 (B) This category includes investments in hedge funds that invest primarily in other hedge funds, limited partnerships and investment companies. Management of these funds employs a variety of strategies and has the ability to shift investments based on market, economic, political and government driven events. The fair values of the investments in this category have been estimated using the net asset value per share of the investments. These investments can be redeemed and currently there are no restrictions. Most of the Corporation s investments are pooled into one managed account. Invested amounts relate to the unrestricted, temporarily restricted and permanently restricted net assets and each net asset category receives an allocation of asset type and income based on its relative contribution to the managed accounts. The types of investments and credit risks associated with the managed accounts are limited through the Corporation s investment policy (Policy), which is to provide for long-term growth of capital without undue exposure to risk. To achieve this objective, the Policy provides for a predetermined asset allocation method, which is reviewed annually. Total investment return is comprised of the following: Interest and dividend income $ 12,728 $ 16,328 Net settlement payments under interest rate swap agreement (1,661) (6,920) Realized gains on trading securities 1, Unrealized losses on trading securities (17,119) (4,341) $ (4,855) $ 5,660 Total investment return is reflected in the consolidated statements of operations and changes in net assets as follows: Unrestricted net assets Other nonoperating income $ (4,742) $ 5,530 Temporarily restricted net assets (113) 130 $ (4,855) $ 5,660 17

21 Note 5: Property and Equipment Property and equipment and related accumulated depreciation at, are as follows: Land $ 10,376 $ 10,376 Land improvements 12,462 12,396 Building 191, ,153 Leasehold improvements 3,150 3,150 Equipment 121, ,610 Construction in progress (estimated cost to complete of $7.3 million at December 31, 2015) 28,878 8, , ,361 Less allowance for depreciation and amortization (170,658) (156,759) $ 197,478 $ 182,602 Note 6: Beneficial Interest in Perpetual Trusts The Corporation is an income beneficiary of several perpetual trusts controlled by unrelated thirdparty trustees. The beneficial interests in the assets of these trusts are included in the Corporation s consolidated financial statements as permanently restricted net assets. Income is distributed in accordance with the individual trust documents and is included in investment return. The estimated value of the expected future cash flows is $18,276 and $20,011, which represents the fair value of the trust at, respectively. Trust income distributed to the Corporation for the years ended, was $1,511 and $825, respectively. Note 7: Medical Malpractice Claims Prior to March 22, 2004, the Corporation was covered under an occurrence-based policy for professional liabilities with an aggregate deductible of $150. Subsequent to that date, the Corporation provides for professional and general liability risk under a self-insured retention program (SIR). Under the SIR, the Corporation has self-insured the first $2,000 of losses related to each claim, with a $4,000 aggregate loss limit per year. The Corporation has established SIR trust to hold assets designated to pay losses. The fair value of the SIR trust assets was $15,471 (including unrealized losses of $710) and $16,108 (net of unrealized gains of $723) at, respectively. These assets were included in assets limited as to use as of. The Corporation has purchased umbrella insurance for claims exceeding the SIR retention amounts. The umbrella insurance is through an excess carrier that covers aggregate claims up to $15,000. Premium payments are amortized over the coverage period of the policy. Any liability for deductibles or claims exceeding coverage limits is recorded at the time it becomes probable and estimable. 18

22 The accrued medical malpractice claims liability was $7,551 and $8,598 at December 31, 2015 and 2014, respectively, and is included in the other long-term obligations liability in the accompanying consolidated balance sheets. The provision for expenses related to medical liability risks for 2015 and 2014, presented net of expected insurance recoveries in the consolidated statements of operations, are net gains of $1,047 and $38 for 2015 and 2014, respectively. The accrued medical malpractice claims liability represents the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. The liability for unpaid losses and loss expenses is estimated using actuarial analyses. Those estimates are subject to the effects of trends in loss severity and frequency. The estimates are continually reviewed and adjustments are recorded as experience develops or new information becomes known. The time period required to resolve these claims can vary depending upon whether the claim is settled or litigated. It is reasonably possible that this estimate could change materially in the near term. Note 8: Long-Term Debt Long-term debt at, consists of the following: 2012 Note, Health Center (A) $ 8,200 $ 8,525 Health Center Series 2011A Revenue Bonds (B) 103, , Notes, Continuing Care Services (C) 30,287 31, Note, Health Center (D) 2, Promissory Notes, Continuing Care Services (E) 1,202 1,330 Capital lease obligation (F) 1, , ,465 Less current maturities (5,767) (7,375) $ 137,322 $ 143,090 (A) In June 2012, the Health Center issued the 2012 Note (2012 Note, Health Center). In connection with the issuance of the 2012 Note, Fifth Third Bank (Lessor), The Village of Anna, Ohio (Lessee) and the Health Center (Sublessee) simultaneously entered into Master Lease-Purchase and Sublease-Purchase Agreements related to the financed project, consisting of the renovation of the Bluffton Hospital and for future equipment acquisitions, facility renovations and reimbursement of certain prior capital expenditures. Under the terms of the agreement, the Health Center is required to make semiannual payments to the Lessor which are sufficient to meet the rental payments as required by the agreement. The Health Center holds title to the project which it leases to the Lessor for $1. At the conclusion of the lease period and payment of all related lease amounts, the Health Center retains title to the project assets. 19

23 The semiannual principal payments range from $150 to $350 ($300 to $475 per annum), plus interest. The lease obligation has a variable monthly interest payment that is calculated based on a factor of the one-month LIBOR rate (1.33% at December 31, 2015) and matures in December The Lessor, in its sole discretion, may require the Sublessee to purchase the project for the remaining principal payments due on the lease on October 31, 2021, and on any December 1 of each year thereafter, with 180-day notice. The Notes may be prepaid by the Sublessee at any time with no penalty. (B) The County of Hancock, Ohio (County) issued the Series 2011A Hospital Facilities Revenue Bonds (Series 2011A Bonds) in April The Series 2011A Bonds were issued to provide refunding of the Series 2004 Bonds. The Amended and Restated Lease dated March 1, 2011, required the Health Center to lease the Leased Premises from the County and make monthly basic rent payments sufficient to pay the principal and interest as they become due. The Series 2011A Bonds were issued in the form of Serial Bonds of $29,975 and Term Bonds of $78,700 with maturities continuing through December Annual principal payments range from $1,000 to $7,600. The interest rates on these Serial Bonds and Term Bonds range from 3.00% to 6.50%. The debt is subject to a Master Trust Indenture and a Supplemental Indenture (Master Indenture) which include various covenants. The Series 2011A Bonds are guaranteed by a pledge of gross receipts of each member of the Obligated Group (as defined in the Master Indenture) and a mortgage lien on certain facilities of the Health Center and Corporation. The Corporation, the Health Center, the Foundation, Continuing Care Services and BVMP are members of the Obligated Group. (C) In December 2010, Continuing Care Services issued the 2010 Notes (2010 Notes, Continuing Care Services). In connection with the issuance of the 2010 Notes, the Village of Bluffton (Lessee), Fifth Third Bank (Lessor) and Continuing Care Services (Sublessee) simultaneously entered into Master Lease-Purchase and Sublease-Purchase Agreements related to the financed projects. Continuing Care Services is required to make semiannual payments to the Lessee, which are sufficient to meet the rental payments as required by the Agreements. The Lessee holds the title to certain leasehold improvements, which Continuing Care Services subleases to operate and use certain improvements and additions from the financed projects, until the 2010 Notes mature, at which time ownership is transferred to the Sublessee. In addition, Continuing Care Services has agreed to maintain and properly insure the projects and pay other similar expenses. These agreements are secured by certain property, equipment and revenue of Continuing Care Services and are subject to the Master Trust Indenture including the various covenants. 20

24 (D) (E) (F) The lease obligations comprising these notes were issued in December 2010, in the amount of $37,380 to refund the entire outstanding principal amount of several lease obligations which were previously issued by the Village of Bluffton, the City of Findlay and the County of Hancock, Ohio. Semiannual principal payments range from $569 to $1,175 ($1,138 to $2,350 per annum), plus interest. The lease obligations have a variable monthly interest payment that is calculated based on a factor of the one-month LIBOR rate (these rates ranged from 1.45% to 1.60% at December 31, 2015) and mature in December The Lessor, in its sole discretion, may require the Sublessee to purchase the leased assets for the remaining principal payments due on the lease on December 1 of any year commencing December 1, 2021, with 180 days notice. The Notes may be prepaid by the Sublessee at any time with no penalty. In December 2010, the Health Center issued the 2010 Note (2010 Note, Health Center). In connection with the issuance of the 2010 Note, the Village of Bluffton (Lessee), Fifth Third Bank (Lessor) and the Health Center (Sublessee), simultaneously entered into Master Lease- Purchase and Sublease-Purchase Agreements related to the financed projects. Under the terms of the agreement, the Health Center was required to make semiannual payments to the Lessee which were sufficient to meet the rental payments as required by the agreement. The County of Hancock continued to hold the title to certain real estate which the Village leased and the Health Center subleased to operate and utilize certain improvements and additions for the term of the Note. In addition, the Health Center agreed to maintain and properly insure the Projects and pay other similar expenses. These notes were secured by certain property, equipment and revenue of the Health Center and were subject to the Master Indenture including various covenants. The lease obligation comprising this note was issued in December 2010, in the amount of $11,294 to refund the entire outstanding principal amount of several lease obligations which were previously issued by the Village of Bluffton, the City of Findlay and the County of Hancock, Ohio. Semiannual principal payments ranged from $1,021 to $1,226 ($2,042 to $2,452 per annum), plus interest. The lease obligation had a variable monthly interest payment that was calculated based on a factor of the one-month LIBOR rate and matured in In December 2007, Continuing Care Services entered into two promissory notes, related to the purchase of Independence House assets for $2,844 (2007 Promissory Notes, Continuing Care Services). Monthly principal and interest payments commenced in 2008 in the amount of $26 ($312 per annum). During 2011, one of the promissory notes was paid in full. The remaining promissory note is due in January 2023, bears interest at a rate of 7% and is unsecured. In December 2009, the Health Center entered into a capital lease obligation for two office suites of a medical office building near the Blanchard Valley Hospital campus. This obligation was amortized over five years with annual amortization ranging from $47 to $57, and a balloon payment associated with the required purchase of the suites in December This balloon payment was made in

25 Future principal payments based on stated terms of debt obligations by year and in the aggregate, for the long-term debt at December 31, 2015, consist of the following: 2012 Bonds 2011 Bonds 2010 Notes, Continuing Care Services 2007 Promissory Note Total 2016 $ 325 $ 3,700 $ 1,606 $ 136 $ 5, ,875 1, , ,025 1, , ,200 1, , ,350 1, ,781 Thereafter 6,625 83,250 21, ,826 $ 8,200 $ 103,400 $ 30,287 $ 1,202 $ 143,089 Fair values of the Corporation s notes payable and long-term debt approximate the carrying value amounts at. Note 9: Interest Rate Swap Agreement 2004 Swap In May 2004, the Health Center entered into an interest rate swap (2004 Swap) for a notional amount equal to the total amount of the 2004 Series Bonds. The 2004 Swap is a fixed rate payer swap that terminates in December 2034, and originally amortized in coordination with the 2004 Series Bonds. Under this agreement, the Health Center pays a fixed fee of 4.04% and receives a floating rate equal to 67% of one month of USD-LIBOR (0.287% at December 31, 2015). The original objective of the 2004 Swap was to hedge the risk of overall changes in the variable interest payments on the Series 2004 Bonds. The fair value of the 2004 Swap represents a payable to the counter party and is recorded as a liability of $23,279 and $22,101 at, respectively. Under the 2004 Swap agreement, the Corporation pays or receives the net interest amounts monthly, with the monthly settlement amounts included in investment return. The 2004 Swap was initially designated as a cash flow hedge and the effective portion of changes in the fair value of the 2004 Swap were recorded as a component of other changes in net assets through that date. 22