Hallmark Health Corporation and Affiliates

Transcription

1 Hallmark Health Corporation and Affiliates Consolidated Financial Statements as of and for the Years Ended September 30, 2016 and 2015, Schedule of Expenditures of Federal Awards for the Year Ended September 30, 2016, and Independent Auditors Reports in accordance with Government Auditing Standards and the Uniform Guidance

2 HALLMARK HEALTH CORPORATION AND AFFILIATES TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 1 2 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015: Balance Sheets 3 Statements of Operations 4 Statements of Changes in Net Assets 5 Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 34 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 36 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, SUMMARY SCHEDULE OF PRIOR-YEAR AUDIT FINDINGS FOR THE YEAR ENDED SEPTEMBER 30, STATUS OF PRIOR-YEAR AUDIT FINDINGS FOR THE YEAR ENDED SEPTEMBER 30,

3 INDEPENDENT AUDITORS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS To the Board of Trustees of Hallmark Health Corporation: We have audited the accompanying consolidated financial statements of Hallmark Health Corporation and affiliates (the Corporation ), which comprise the consolidated balance sheets as of September 30, 2016 and 2015, 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 Consolidated 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. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the 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 consolidated financial position of the Corporation as of September 30, 2016 and 2015, and the results of its operations, changes in net assets, and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards for the year ended September 30, 2016, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) is presented for purposes of additional analysis and is not a required part of basic consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 27, 2016, on our consideration of the Corporation s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Corporation s internal control over financial reporting and compliance. December 27,

5 HALLMARK HEALTH CORPORATION AND AFFILIATES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2016 AND 2015 ASSETS LIABILITIES AND NET ASSETS CURRENT ASSETS: CURRENT LIABILITIES: Cash and cash equivalents $ 15,754,321 $ 10,081,598 Accounts payable and accrued liabilities $ 42,721,532 $ 44,686,950 Investments 198,594, ,170,393 Estimated settlements with third-party payors 10,340,855 8,159,146 Patient accounts receivable less allowance for Current portion of long-term debt 9,151,143 8,975,349 uncollectible accounts of $7,682,000 in 2016 and $8,268,000 in ,076,830 27,994,549 Total current liabilities 62,213,530 61,821,445 Inventories 3,021,670 2,967,391 Prepaid expenses and other current assets 5,957,749 6,420,634 Total current assets 249,404, ,634,565 LONG-TERM DEBT Net of current portion 98,462, ,516,254 ASSETS WHOSE USE IS LIMITED: ACCRUED PENSION LIABILITY 14,412,805 13,207,526 Federal student loan funds 668, ,556 Assets held by trustees under debt agreement 10,720,406 22,816,170 OTHER LONG-TERM LIABILITIES 8,994,087 8,377,112 Total assets whose use is limited 11,388,686 23,542,726 Total liabilities 184,082, ,922,337 PROPERTY, PLANT, AND EQUIPMENT Net 84,574,492 86,666,266 COMMITMENTS AND CONTINGENCIES (Note 8) OTHER ASSETS: NET ASSETS: Investments 6,092,407 18,523,117 Unrestricted 178,115, ,260,510 Other 10,737,963 9,816,173 Temporarily restricted 3,454,505 3,532,873 Permanently restricted 15,006,087 14,476,692 Total other assets 16,830,370 28,339,290 DONOR-RESTRICTED ASSETS 18,460,592 18,009,565 Total net assets 196,576, ,270,075 TOTAL $ 380,658,799 $ 393,192,412 TOTAL $ 380,658,799 $ 393,192,412 See notes to consolidated financial statements

6 HALLMARK HEALTH CORPORATION AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND OPERATING REVENUE: Net patient service revenue (net of contractual allowances and discounts) $ 282,323,206 $ 283,719,354 Provision for bad debts (8,447,850) (8,260,642) Net patient service revenue less provision for bad debts 273,875, ,458,712 Other operating revenue 20,691,440 19,319,844 Total operating revenue 294,566, ,778,556 OPERATING EXPENSES: Salaries and wages 163,992, ,774,196 Employee benefits 33,903,709 31,549,260 Supplies, purchased professional services, and other 100,829,807 94,342,691 Depreciation and amortization 16,819,983 17,756,373 Interest 3,004,708 2,442,972 Total operating expenses 318,550, ,865,492 LOSS FROM OPERATIONS (23,984,191) (9,086,936) NONOPERATING GAINS, LOSSES, AND EXPENSES: Investment income and realized gains and losses 8,954,478 9,990,479 Other 644,084 1,160,219 Nonoperating gains, losses, and expenses net 9,598,562 11,150,698 (DEFICIENCY) EXCESS OF REVENUE AND GAINS OVER EXPENSES AND LOSSES (14,385,629) 2,063,762 OTHER CHANGES IN UNRESTRICTED NET ASSETS: Change in cumulative net unrealized gains and losses on investments 8,683,783 (16,263,480) Net assets released from restriction used for purchase of property, plant, and equipment 454, ,608 Pension-related adjustments (897,683) (2,525,127) DECREASE IN UNRESTRICTED NET ASSETS $ (6,144,810) $ (16,188,237) See notes to consolidated financial statements

7 HALLMARK HEALTH CORPORATION AND AFFILIATES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Temporarily Permanently Unrestricted Restricted Restricted Total NET ASSETS October 1, 2014 $ 200,448,747 $ 3,318,317 $ 15,388,253 $ 219,155,317 Excess of revenue and gains over expenses and losses 2,063,762 2,063,762 Restricted gifts, pledges, and grant awards 2,492, ,492,873 Restricted investment income and realized gains 590, ,104 Change in cumulative net unrealized gains and losses on investments (16,263,480) (703,757) (16,967,237) Change in beneficial interests in perpetual trusts (911,961) (911,961) Net assets released from restriction used for purchase of property, plant, and equipment 536,608 (536,608) - Net assets released from restriction used for operations (1,627,656) (1,627,656) Pension-related adjustments (2,525,127) (2,525,127) (Decrease) increase in net assets (16,188,237) 214,556 (911,561) (16,885,242) NET ASSETS September 30, ,260,510 3,532,873 14,476, ,270,075 Deficiency of revenue and gains over expenses and losses (14,385,629) (14,385,629) Restricted gifts, pledges, and grant awards 1,996, ,389 2,194,142 Restricted investment income and realized gains 464, ,612 Change in cumulative net unrealized gains and losses on investments 8,683, ,407 9,356,190 Change in beneficial interests in perpetual trusts 332, ,006 Net assets released from restriction used for purchase of property, plant, and equipment 454,719 (454,719) - Net assets released from restriction used for operations (2,757,421) (2,757,421) Pension-related adjustments (897,683) (897,683) (Decrease) increase in net assets (6,144,810) (78,368) 529,395 (5,693,783) NET ASSETS September 30, 2016 $ 178,115,700 $ 3,454,505 $ 15,006,087 $ 196,576,292 See notes to consolidated financial statements

8 HALLMARK HEALTH CORPORATION AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND CASH FLOWS FROM OPERATING ACTIVITIES: Decrease in net assets $ (5,693,783) $ (16,885,242) Adjustments to reconcile decrease in net assets to net cash (used in) provided by operating activities: Net realized gains on unrestricted investments (2,152,957) (943,217) Change in cumulative net unrealized gains and losses on investments and restricted assets (9,688,196) 17,879,198 Restricted investment income and realized gains (464,612) (590,104) Provision for bad debts 8,447,850 8,260,642 Depreciation and amortization 16,819,983 17,756,373 Noncash interest expense 98,433 89,094 Restricted gifts and grant awards (2,194,142) (2,492,873) Pension-related adjustments 897,683 2,525,127 Equity interest in earnings of joint ventures (624,051) (715,097) Loss (gain) on sale of property 36,805 (18,000) (Decrease) increase in cash resulting from a change in: Patient accounts receivable (6,530,131) (5,577,748) Inventories (54,279) 20,871 Prepaid expenses and other current assets 462, ,624 Accrued pension liability 307,596 3,389 Accounts payable and accrued liabilities (2,151,234) 1,887,335 Estimated settlements with third-party payors 2,181,709 (4,676,065) Other assets and liabilities 645,324 (1,162,092) Net cash (used in) provided by operating activities 344,883 15,552,215 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant, and equipment (14,712,395) (20,838,487) Purchases of investments (72,993,801) (96,647,295) Sales of investments 98,925,290 72,478,353 Proceeds from sale of property, plant, and equipment 133,195 18,000 Investment in joint venture (299,395) Proceeds from distributions of equity in joint ventures 593, ,000 Net cash provided by (used in) investing activities 11,645,894 (44,394,429) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 30,000,000 Repayment of long-term debt (8,976,808) (9,640,750) Debt financing costs (269,000) Restricted gifts and grant awards 2,194,142 2,492,873 Restricted investment income and realized gains 464, ,104 Net cash (used in) provided by financing activities (6,318,054) 23,173,227 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,672,723 (5,668,987) CASH AND CASH EQUIVALENTS Beginning of year 10,081,598 15,750,585 CASH AND CASH EQUIVALENTS End of year $ 15,754,321 $ 10,081,598 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 2,853,922 $ 2,322,792 Capital purchases included in accounts payable and accrued liabilities $ 1,545,130 See notes to consolidated financial statements

9 HALLMARK HEALTH CORPORATION AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization The accompanying consolidated financial statements include the accounts of Hallmark Health Corporation (the Parent ) and its affiliates (collectively, the Corporation ). Hallmark Health System, Inc. (the Hospital Corporation ), an affiliate of the Parent, includes two acute care hospitals located north of Boston, Massachusetts: Melrose-Wakefield Hospital in Melrose, Massachusetts, and Lawrence Memorial Hospital of Medford in Medford, Massachusetts. In addition to the Parent and the Hospital Corporation, the following affiliated organizations are included in the accompanying consolidated financial statements: Entity Principal Activity Hallmark Health Medical Associates, Inc. (HHMA) Physician practices Hallmark Health Visiting Nurse Association & Hospice, Inc. (VNA) Home care LM Long-Term Care Services, Inc. Long-term care Savin Long-Term Care Corporation Long-term care Hallmark Health Properties, Inc. (HHP) Real estate management Hallmark Health Enterprises, Inc. (HHCLC) Other health services Hallmark Health Indemnity Professional Captive insurance company professional Services, Ltd. (HHIPS) liability insurance Effective June 30, 2016, the Corporation approved a letter of intent to join Wellforce, Inc. ( Wellforce ), the parent company of Tufts Medical Center, Inc., and Circle Health, Inc. Effective August 30, 2016, a definitive agreement by and between Wellforce and the Corporation was executed. As of the closing, Wellforce will be the sole corporate member of the Corporation. Wellforce is amending its articles of incorporation and bylaws to make the Corporation a founding member of Wellforce. The anticipated completion date of the affiliation is January 1, Principles of Consolidation The consolidated financial statements include the accounts of the Parent and its controlled affiliates. Such controlled affiliates are disclosed in the additional consolidating information using the cost method of accounting. Significant intercompany balances and transactions have been eliminated in consolidation. Assets of individual organizations within the consolidated group may not be available to satisfy the obligations of other members of the consolidated group. Basis of Presentation The consolidated financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (GAAP) and consistent with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 954, Health Care Entities, and other pronouncements applicable to health care organizations. For purposes of display, transactions deemed by management to be ongoing, major, or central to the provision of health care services are reported as operating revenue and operating expenses. Peripheral or incidental transactions are reported as nonoperating gains, losses, and expenses

10 Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Significant estimates include the allowances for uncollectible accounts and contractual allowances, estimated settlements with third-party payors, self-insurance program liabilities, pension costs and related obligations, asset retirement obligations, and the valuation of investments. Actual results could differ from those estimates. Revenue Recognition The Corporation has entered into agreements with Medicare, Medicaid, and certain indemnity and managed care payors. The basis for payment to the Corporation under these agreements includes prospectively determined rates per discharge or per visit, discounts from established charges, costs (subject to limits), fee screens, and prospectively determined per diem rates. Under certain agreements, the Corporation is reimbursed at interim rates with final settlement in subsequent periods. Under the terms of various agreements, regulations, and statutes, certain elements of third-party reimbursement are subject to negotiation, audit, and/or final determination by third-party payors. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. The Corporation s management believes that the accompanying consolidated balance sheets reflect reasonable estimates of final settlements due to and due from third-party payors. Variances between preliminary estimates of net patient service revenue and final third-party settlements are recorded as adjustments to net patient service revenue in the year in which the final settlement or change in estimate occurs. During 2016 and 2015, the Corporation recognized adjustments to prior-year estimates of approximately $5,540,000 and $10,205,000, respectively, which increased net patient service revenue. The Corporation recognizes patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for free care, the Corporation recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). 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 provision for bad debts related to uninsured patients and patients with insurance who are responsible for a portion of their bill in the period the services are provided

11 Net patient service revenue (net of contractual allowances and discounts) recognized during the years ended September 30, 2016 and 2015, from major payor sources, is as follows: Third-Party Total 2016 Payors Self-Pay All Payors Net patient service revenue (net of contractual allowances and discounts) $ 280,137,397 $ 2,185,809 $ 282,323, Net patient service revenue (net of contractual allowances and discounts) $ 280,680,440 $ 3,038,914 $ 283,719,354 Allowance for Uncollectible Accounts Accounts receivable are reduced by an allowance for uncollectible accounts. In evaluating the collectibility of accounts receivable, the Corporation analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for uncollectible accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for uncollectible 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 uncollectible accounts and a provision for bad debts, if necessary. For receivables associated with self-pay patients, the Corporation records a significant provision for bad debts in the period in which the services are rendered on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bills for which they are financially responsible. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for uncollectible accounts. During the year ended September 30, 2015, the Corporation outsourced self-pay collections. During the year ended September 30, 2016, the Corporation brought self-pay collections back in-house resulting in improved collections of outstanding self-pay accounts and a decrease in bad debt write-offs from $9,703,299 during 2015 to $8,733,861 in The Corporation has experienced a decrease in the level of free care because of the Affordable Care Act requirement that individuals must maintain health insurance. The Corporation s allowance for uncollectible accounts for all patients remained consistent at 23% of accounts receivable (net of contractual allowance) as of September 30, 2016 and The Corporation has not changed its free care or uninsured discount policies during fiscal years 2016 or The Corporation does not maintain a material allowance for uncollectible accounts from third-party payors, nor did it have significant write-offs from third-party payors for the years ended September 30, 2016 and (Deficiency) Excess of Revenue and Gains over Expenses and Losses The consolidated statements of operations include the caption (deficiency) excess of revenue and gains over expenses and losses. Changes in unrestricted net assets, which are excluded from this caption, consistent with industry practice, include unrealized gains and losses on investments, pension-related adjustments, permanent transfers of assets 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 purposes of acquiring such assets)

12 Other Operating Revenue Other operating revenue consists of nonpatient service revenue, including meaningful use incentive payments from Medicare and Medicaid related to the implementation of Electronic Health Record technology as provided for under the Health Information Technology for Economic and Clinical Health Act, grants, tuition, and management services. Assets Whose Use Is Limited or Restricted Assets whose use is limited include assets held by trustees under debt agreements and amounts receivable from students of the Hospital Corporation s nursing school for student loans funded from federal loan programs. Investments that are temporarily or permanently restricted by donors are reported as donor-restricted assets. Investments held by the Corporation s captive insurance company are reported as other unrestricted assets in the amount of approximately $6,092,000 and $5,456,000 as of September 30, 2016 and 2015, respectively, and current investments in the amount of approximately $8,781,000 and $8,981,000 as of September 30, 2016 and 2015, respectively. Net Assets Funds to be used for operating purposes have been classified as, and are a component of, unrestricted net assets in the accompanying consolidated balance sheets. Temporarily restricted net assets are those whose use by the Corporation has been limited by donors or law to a specific time period or for a specific purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Corporation in perpetuity. Gifts Unrestricted gifts and bequests made to the Corporation are recorded as nonoperating gains. Unconditional promises to give cash and other assets to the Corporation are reported at fair market value at the date the promise is received. Conditional promises to give and indications or intentions to give are reported at fair market value at the date the gift is received. Gifts are reported as either temporarily or permanently restricted if they are received with a donor stipulation that limits the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restriction and included in other revenue if used for operations and included an increase to unrestricted net assets if used for the purchase of property, plant, and equipment. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with remaining maturities of three months or less at the date of purchase, excluding amounts classified as investments, assets whose use is limited, or donor-restricted assets. Investments and Investment Income Investments in equity securities and mutual funds with readily determinable fair values and all investments in debt securities are reported at fair value. The Corporation reports investment income (i.e., interest, dividends, and realized gains and losses) as nonoperating gains, losses, and expenses, unless the income or gain (loss) is restricted by donor or by law. Unrealized gains and losses on investments are excluded from (deficiency) excess of revenue and gains over expenses and losses and reported as a change in net assets, except that declines in fair value that are judged to be other than temporary are reported as realized losses. Certain investments are maintained in an investment pool by Hallmark Health Corporation Investment LLC, a master trust. Assets, investment income, realized gains and losses, and unrealized gains and losses are allocated to their respective companies and net asset categories based on a calculated share of the investment pool

13 Restricted investment income, realized gains and losses on sales of donor-restricted assets, and unrealized gains and losses on donor-restricted assets are recorded directly to temporarily or permanently restricted net assets. Generally, income earned on permanently restricted assets is either unrestricted or temporarily restricted by donors and recorded accordingly. Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. As such, it is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the consolidated balance sheets and consolidated statements of operations and changes in net assets. Beneficial Interests in Perpetual Trusts Beneficial interests in perpetual trusts consist of the Corporation s proportionate share of the fair value of assets held by trustees in trust for the benefit of the Corporation in perpetuity, the income from which is available for distribution to the Corporation periodically. The assets held in trust consist primarily of cash equivalents and marketable securities. The fair values of perpetual trusts are measured using the fair value of the assets contributed to the trusts. Such amounts are included in donor-restricted assets in the accompanying consolidated balance sheets. Distributions from beneficial interests in perpetual trusts are included in nonoperating gains, unless restricted by the donors. Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. Obsolete and unusable items are written off. Property, Plant, and Equipment Property, plant, and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as recommended by the American Hospital Association. Construction-in-progress represents amounts expended or incurred toward property, plant, and equipment projects that have not been completed. No depreciation and amortization expense has been recorded for these items. Gifts of long-lived assets, such as land, buildings, or equipment, are recorded directly to unrestricted net assets and excluded from the excess of revenue and gains over expenses and losses, 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 an increase in temporarily restricted net assets. Absent explicit donor stipulations about how those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed into service. Other Assets Other assets consist primarily of the Corporation s interest in life insurance policies (stated at the lower of the policies cash value or the discounted value of expected cash flows), reinsurance recoverables, and investments in joint ventures (which are accounted for using the equity method of accounting). Impairment of Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets that are to be disposed of are reported at the lower of their carrying amount or fair value, less cost to sell

14 Accrual for Self-Insurance Liabilities The liabilities for outstanding losses and loss-related expenses and the related provision for losses and loss-related expenses include estimates for workers compensation claims and malpractice losses incurred but not reported, as well as losses pending settlement. Such liabilities are necessarily based on estimates and, while management believes that the amounts provided are adequate, the ultimate liability may be in excess of, or less than, the amounts provided. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Changes in these estimates are reflected in the period in which the change occurs. Costs of Borrowing Interest costs incurred on borrowed funds during the period of construction of capital assets, net of investment income on borrowed assets held by trustees, are capitalized as components of the cost of acquiring those assets. The amount of interest that was capitalized totaled approximately $0 and $48,000 in 2016 and 2015, respectively. Deferred financing costs consist of legal, administrative, financing, and other related costs incurred in connection with the issuance of long-term debt and are amortized using the straight-line method, which approximates the effective interest method, over the terms of the obligations (see Note 5). Functional Expenses Substantially all expenses in the accompanying consolidated statements of operations are related to the delivery of health care services. Income Taxes All corporations included in the accompanying consolidated financial statements (including the Corporation and the Hospital Corporation), except for HHIPS and HHCLC, have been previously determined by the Internal Revenue Service to be organizations described in Internal Revenue Code (the Code ) Section 501(c)(3) and, therefore, exempt from taxation on related income pursuant to Section 501(a) of the Code. HHIPS has received an undertaking from the Cayman Islands government exempting it from all local income, profits, and capital gains taxes until January 3, No such taxes are currently levied in the Cayman Islands. HHCLC is a for-profit entity that is subject to taxation. Due to available net operating loss carryforwards, no income taxes are payable by HHCLC. Accordingly, no provision for federal income taxes has been recorded in the accompanying consolidated financial statements. Other-Than-Temporary Impairment of Investments The Corporation reviews its investments to identify those for which market value is below cost. The Corporation then makes a determination as to whether the investment should be considered other-than-temporarily impaired. Losses of $1,408,000 and $0 were recognized in 2016 and 2015 and are included in investment income and realized gains and losses in the accompanying consolidated statements of operations. Accounting for Asset Retirement Obligations The Corporation recognizes a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation is factored into the measurement of the liability when sufficient information exists. The types of asset retirement obligations that the Corporation considers are those for which it has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within its control. The fair value of a liability for the legal obligation associated with an asset retirement obligation is recorded in the period in which the obligation is incurred. When the liability is initially recorded, the cost of the asset retirement obligation is capitalized

15 The estimated future undiscounted value of the asset retirement obligation as of September 30, 2016, is approximately $1,399,000. Substantially, all of the liability relates to estimated costs to remove asbestos that is contained within the Corporation s facilities. The initial asset retirement obligation was calculated using a discount rate of 4.71%. The discounted liability recorded as of September 30, 2016 and 2015, was approximately $935,000 and $861,000, respectively. The adjustments to the carrying amount of the asset retirement obligation in 2016 and 2015 were primarily attributable to remediation costs and accretion expense and were not significant. Accounting for Postretirement Benefit Plans The Corporation recognizes the overfunded or underfunded status of its defined benefit pension and other postretirement benefit plans (collectively, postretirement benefit plans ) as an asset or liability in its consolidated balance sheets. Changes in the funded status of the plans are reported as changes in unrestricted net assets presented below the line item, excess of revenue and gains over expenses and losses, in the consolidated statements of operations and changes in net assets in the year in which the changes occur. Meaningful Use The Corporation is in the process of fully implementing electronic health record technology (EHR). During 2016 and 2015, the Corporation qualified and applied for meaningful use incentive payments from Medicare and Medicaid related to the implementation of EHR as provided for under the Health Information Technology for Economic and Clinical Health Act (the HITECH Act ). As a result, the Corporation recognized approximately $189,000 and $896,000 in 2016 and 2015, respectively, in other operating revenue associated with these payments. Recent Accounting Standards In April 2015, the FASB issued Accounting Standards Update (ASU) No , Simplifying the Presentation of Debt Issuance Costs. This guidance requires debt issuance costs to be presented as a direct deduction from the related debt rather than as an asset. This guidance is effective for the Corporation beginning October 1, The Corporation elected to early adopt ASU No effective October 1, 2015, and has applied the ASU retrospectively, as required. The adoption resulted in a reduction in other assets and long-term debt of approximately $927,000 in the 2015 accompanying consolidated balance sheet; a reclassification of approximately $89,000 from depreciation and amortization expense to interest expense in the accompanying 2015 consolidated statements of operations and changes in net assets; and a reclassification of $89,000 from depreciation and amortization to noncash interest expense in the accompanying 2015 consolidated statement of cash flows. In May 2015, the FASB issued ASU No , Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which removes the requirement to categorize, within the fair value hierarchy, certain investments for which the fair value is measured using the net asset value (NAV) per share practical expedient. This guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. ASU No is effective for the Corporation beginning on October 1, The Corporation elected to early adopt ASU No effective October 1, 2015, and has applied the ASU retrospectively, as required. The Corporation presents the investment disclosure required by this new guidance in Note 11, Fair Value Measurements. There are no effects on the consolidated balance sheets, consolidated statements of operations, consolidated statements of changes in net assets, or consolidated statements of cash flows

16 In August 2016, the FASB issued ASU No , Classification of Certain Cash Receipts and Cash Payments. This guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the consolidated statements of cash flows. This guidance is effective for the Corporation beginning on October 1, The Corporation is still evaluating the impact this guidance may have on its consolidated financial statements. In August 2016, the FASB issued ASU No , Presentation of Financial Statements of Not-for-Profit Entities. This guidance simplifies and improves how not-for-profit entities classify net assets, as well as the information presented in financial statements and notes about liquidity, financial performance, and cash flows. This guidance is effective for the Corporation beginning on October 1, The Corporation is still evaluating the impact this guidance may have on its consolidated financial statements. In February 2016, the FASB issued ASU No , Leases. This guidance introduces a lessee model that brings substantially all leases on the consolidated balance sheets. This guidance is effective for the Corporation beginning on October 1, Retrospective application is required. The Corporation is still evaluating the impact this guidance may have on its consolidated financial statements. In July 2015, the FASB issued ASU No , Revenue From Contracts With Customers (Topic 506): Deferral of the Effective Date, which defers the effective date of the FASB s revenue standard, ASU , Revenue From Contracts With Customers. This guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. After the deferral, this guidance is now effective for the Corporation beginning on October 1, The Corporation is still evaluating the impact this guidance may have on it consolidated financial statements. Subsequent Events The Corporation has evaluated subsequent events through December 27, 2016, which is the date the consolidated financial statements were available to be issued (see Note 12). 2. CHARITY CARE AND COMMUNITY BENEFIT Charity Care The Corporation provides care to patients regardless of their ability to pay. Consistent with its tax-exempt status and community service responsibilities, the Corporation provides financial assistance in the form of free or discounted care to patients who meet certain criteria under the Corporation s charity care policy. In assessing a patient s inability to pay, the Corporation utilizes federal poverty income guidelines and follows procedures set forth in its credit and collections policy, which has been approved by the Commonwealth of Massachusetts (the Commonwealth ) Division of Healthcare Finance and Policy. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as patient service revenue. During the years ended September 30, 2016 and 2015, the Corporation estimated that the cost associated with the charity care provided was approximately $506,000 and $332,000, respectively. Such costs have been estimated based on ratios of expenses to established patient service charges. Bad Debts The provision for bad debts in the accompanying consolidated statements of operations reflects the charges at established rates for services provided to those individuals who do not qualify for charity care under the guidelines described above, and who are otherwise unable or unwilling to pay the Corporation. The provision for bad debts of approximately $8,448,000 and $8,261,000 in 2016 and 2015, respectively, represents the charges for services provided that are deemed to be uncollectible. The estimated cost

17 of providing these services was approximately $3,691,000 and $3,489,000 in 2016 and 2015, respectively. Such costs have been estimated based on ratios of expenses to established patient service charges. Health Safety Net (HSN) The Commonwealth administers the HSN program to act as the payor of last resort for covered health care services provided by acute hospitals and community health centers in the Commonwealth. All hospitals have been assessed a uniform allowance based on estimates of their share of total HSN funding and have been reimbursed for a portion of the cost of actual uncompensated care which they provide, subject to certain limitations. Reimbursable uncompensated care includes net charity care and bad debts resulting from emergency services. Hospitals recoveries from the HSN are based on regulated payment rates. The Corporation has recorded its activity with the HSN as a component of net patient service revenue in the accompanying consolidated statements of operations. Management believes that the accompanying consolidated balance sheets reflect reasonable estimates of the Corporation s net obligation to the HSN as of September 30, 2016 and The Corporation s share of the total Commonwealth s assessment was $1,669,338 and $1,943,152 for 2016 and 2015, respectively. During 2016 and 2015, the Corporation received reimbursement from the HSN in the amounts of $193,424 and $313,745, respectively. Total uncompensated care provided by the Corporation for the years ended September 30, 2016 and 2015, was as follows: Provision for charity care (at cost) $ 505,725 $ 332,191 Provision for bad debts (at cost) 3,690,589 3,489,295 HSN (assessment net of reimbursement) 1,475,914 1,629,407 Total uncompensated care $ 5,672,228 $ 5,450,893 Community Benefit In furthering its charitable purpose, the Corporation provides a wide variety of health care services to the community in order to provide access to appropriate care for populations in need. The Corporation has developed a formal Community Benefit Plan, which responds to a comprehensive assessment of health care needs in the community. The Community Benefit Plan supports services that target not only the general population in the Corporation s service area, but also particular populations with special health care needs, including the poor, the elderly, children, and minority populations. Supported services include various clinics, health screening programs, health education programs, and support groups operated in the Corporation s service area. The Corporation works actively with other area service providers to facilitate the development of an effective community health network. The Corporation also participates in activities designed to foster and enhance the economic and civic environment of its service areas

18 3. INVESTMENTS Investments reported in the accompanying consolidated balance sheets as of September 30, 2016 and 2015, were as follows: Investments current $ 198,594,089 $ 189,170,393 Investments noncurrent 6,092,407 18,523,117 Assets held by trustee under debt agreement 10,720,406 22,816,170 Donor-restricted assets 18,460,592 18,009,565 Total investments $ 233,867,494 $ 248,519,245 The composition of these investments as of September 30, 2016 and 2015, was as follows: Cash investments (2016 and 2015 include $10,720,406 and $22,816,170, respectively, of cash held by trustee under debt agreement) $ 11,994,907 $ 26,514,942 US government securities and corporate bonds 77,812,971 75,535,734 Mutual funds 133,967, ,708,926 Beneficial interest in perpetual trusts 10,091,649 9,759,643 Total investments $ 233,867,494 $ 248,519,

19 For the years ended September 30, 2016 and 2015, investment income and realized and unrealized gains and losses consisted of the following: Unrestricted: Investment income (includes net realized gains on sale of investments) $ 8,954,478 $ 9,990,479 Change in cumulative net unrealized gains and losses on investments 8,683,783 (16,263,480) Total unrestricted 17,638,261 (6,273,001) Temporarily restricted: Investment income and realized gains on sale of investments 464, ,004 Change in cumulative net unrealized gains and losses on investments 672,407 (703,757) Total temporarily restricted 1,137,019 (113,753) Permanently restricted: Change in beneficial interest in perpetual trusts 332,006 (911,961) Investment income 100 Total permanently restricted 332,006 (911,861) Total realized and unrealized investment income $ 19,107,286 $ (7,298,615) Unrealized Gains and Losses The gross unrealized losses and fair value of the Corporation s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2016 and 2015, were as follows: 2016 Less Than 12 Months 12 Months or More Total Unrealized Unrealized Unrealized Description of Security Fair Value Losses Fair Value Losses Fair Value Losses US government securities $ 5,850,029 $ (33,778) $ 1,533,607 $ (40,201) $ 7,383,636 $ (73,979) Corporate bonds 6,717,388 (59,236) 4,553,233 (208,945) 11,270,621 (268,181) Mutual funds 24,352,998 (1,473,644) 24,352,998 (1,473,644) Total $ 12,567,417 $ (93,014) $ 30,439,838 $ (1,722,790) $ 43,007,255 $ (1,815,804) 2015 Less Than 12 Months 12 Months or More Total Unrealized Unrealized Unrealized Description of Security Fair Value Losses Fair Value Losses Fair Value Losses US government securities $ - $ - $ 2,064,983 $ (38,304) $ 2,064,983 $ (38,304) Corporate bonds 7,495,953 (132,172) 5,933,294 (271,112) 13,429,247 (403,284) Mutual funds 31,423,056 (4,842,067) 20,491,991 (2,096,021) 51,915,047 (6,938,088) Total $ 38,919,009 $ (4,974,239) $ 28,490,268 $ (2,405,437) $ 67,409,277 $ (7,379,676)

20 The unrealized losses on the Corporation s investments in US Treasury obligations and direct obligations of US government agencies, as well as on corporate bonds were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. Because the Corporation does not have the intent to sell these investments, does not expect to be required to sell these investments before a recovery of its amortized cost basis, and does not believe that there has been a credit loss, the Corporation did not consider these investments to be other-than-temporarily impaired as of September 30, 2016 or The Corporation s unrealized losses on its investments in mutual funds consist of unrealized losses in four diversified mutual funds. The Corporation has evaluated the near-term prospects of the investments in relation to the severity of the impairments, the duration of the impairments, and recent market trends. Based on that evaluation and the Corporation s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Corporation did not consider these investments to be other-than-temporarily impaired as of September 30, 2016 or The cost, gross unrealized gains, and estimated fair value of investments in securities classified as available for sale by HHIPS as of September 30, 2016, were $12,126,476, $2,746,411, and $14,873,186, respectively. The cost, gross unrealized gains, and estimated fair value of investments in securities classified as available for sale by HHIPS as of September 30, 2015, were $12,491,469, $1,944,814, and $14,436,283, respectively. These investments consist of mutual funds. 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment as of September 30, 2016 and 2015, consisted of the following: Land and land improvements $ 11,169,248 $ 11,110,547 Buildings and fixed equipment 238,534, ,157,971 Major movable and other equipment 160,509, ,720,400 Construction in progress 3,293,232 4,132,050 Total property, plant, and equipment 413,506, ,120,968 Accumulated depreciation and amortization (328,931,955) (314,454,702) Property, plant, and equipment net $ 84,574,492 $ 86,666,