RWJ BARNABAS HEALTH, INC. Consolidated Financial Statements. December 31, 2017 and (With Independent Auditors Report Thereon)

Transcription

1 Consolidated Financial Statements (With Independent Auditors Report Thereon)

2 Table of Contents Page Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 2 Consolidated Statement of Operations 3 Consolidated Statement of Changes in Net Assets 4 Consolidated Statement of Cash Flows 5 6

3 KPMG LLP 345 Park Avenue New York, NY Independent Auditors Report To the Board of Trustees RWJ Barnabas Health, Inc.: We have audited the accompanying consolidated financial statements of RWJ Barnabas Health Inc. (the Corporation), which comprise the consolidated balance sheets as of, and the related consolidated statement of operations, changes in net assets, and cash flows for the year ended December 31, 2017, 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 U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal controls 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. 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 auditors 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 controls relevant to the entity 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 entity s internal controls. 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RWJ Barnabas Health, Inc. as of, and the results of its operations and its cash flows for the year ended December 31, 2017, in accordance with U.S. generally accepted accounting principles. May 4, 2018 KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents $ 85,786 36,136 Investments 37,315 64,873 Assets limited or restricted as to use 65, ,979 Patient accounts receivable, net of allowance for doubtful accounts of $219,417 in 2017 and $222,774 in , ,929 Other current assets 174, ,763 Total current assets 863, ,680 Assets limited or restricted as to use, noncurrent portion 239, ,984 Investments 3,206,160 2,549,536 Property, plant, and equipment, net 2,040,076 1,977,544 Other assets, net 233, ,369 Total assets $ 6,581,911 5,875,113 Liabilities and Net Assets Current liabilities: Accounts payable $ 293, ,914 Accrued expenses and other current liabilities 631, ,178 Estimated amounts due to third-party payors, net 9,633 9,400 Long-term debt 16,701 49,278 Self-insurance liabilities 65,285 65,041 Total current liabilities 1,016, ,811 Estimated amounts due to third-party payors, net of current portion 48,571 47,311 Self-insurance liabilities, net of current portion 235, ,758 Long-term debt, less current portion 1,803,497 1,830,316 Accrued pension liability 79, ,173 Other liabilities 159, ,661 Total liabilities 3,342,628 3,294,030 Commitments and contingencies Net assets: Unrestricted 3,074,321 2,433,305 Temporarily restricted 131, ,439 Permanently restricted 33,494 30,339 Total net assets 3,239,283 2,581,083 Total liabilities and net assets $ 6,581,911 5,875,113 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statement of Operations Year ended December 31, 2017 Revenue: Patient service revenue (net of contractual allowances and discounts) $ 4,747,393 Provision for bad debts (165,499) Net patient service revenue less provision for bad debts 4,581,894 Other revenue, net 490,341 Total revenue 5,072,235 Expenses: Salaries and wages 1,872,037 Physician fees and salaries 461,174 Employee benefits 378,924 Supplies 935,268 Other 895,974 Interest 64,320 Depreciation and amortization 210,534 Total expenses 4,818,231 Income from operations 254,004 Nonoperating revenue (expenses): Investment income, net 335,082 Other, net (18,075) Total nonoperating revenue, net 317,007 Excess of revenue over expenses 571,011 Other changes: Net change in unrealized gains on available for sale investments 380 Pension changes other than net periodic benefit cost 32,519 Net assets released from restriction for purchases of property and equipment 32,129 Other, net 4,977 Increase in unrestricted net assets $ 641,016 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statement of Changes in Net Assets Year ended December 31, 2017 Temporarily Permanently Total Unrestricted restricted restricted net assets Net assets at December 31, 2016 $ 2,433, ,439 30,339 2,581,083 Changes in net assets: Excess of revenue over expenses 571, ,011 Net change in unrealized losses on investments 380 (75) 305 Pension changes other than net periodic benefit cost 32,519 32,519 Change in interest in restricted net assets of unconsolidated foundations 1,770 1,770 Net assets released from restriction 32,129 (42,953) (10,824) Restricted contributions 56, ,052 Investment income on restricted investments, net Change in interest in perpetual trust 3,111 3,111 Other 4,977 (1,229) 3,748 Change in net assets 641,016 14,029 3, ,200 Net assets at December 31, 2017 $ 3,074, ,468 33,494 3,239,283 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statement of Cash Flows Year ended December 31, 2017 Cash flows from operating activities: Change in net assets $ 658,200 Adjustments to reconcile change in net assets to net cash provided by operating activities: Pension changes other than net periodic benefit cost (32,519) Depreciation and amortization expense 210,534 Amortization of bond financing costs, premiums and discounts (5,355) Provision for bad debts 165,499 Net change in unrealized gains on investments (223,108) Realized gains on investments (63,970) Equity in income of joint ventures (26,652) Distributions received from investments in joint ventures 22,589 Distributions to noncontrolling interests 767 Gain on sale of assets (508) Contributions restricted for long-term use (36,053) Changes in operating assets and liabilities: Patient accounts receivable (170,947) Other assets (21,865) Accounts payable, accrued expenses, and other current liabilities 78,186 Estimated amounts due from and to third-party payors 1,493 Accrued pension liability (3,578) Self-insurance and other long-term liabilities 54,754 Net cash provided by operating activities 607,467 Cash flows from investing activities: Purchases of property, plant, and equipment, net (264,577) Proceeds from bond funds 104,250 Proceeds from the sale of investments and assets limited or restricted as to use 26,522 Purchases of investments and assets limited or restricted as to use (52,247) Purchases of trading securities (3,861,664) Proceeds from the sale of trading securities 3,515,137 Investment in joint venture (28,778) Proceeds from sale of assets 896 Net cash used in investing activities (560,461) Cash flows from financing activities: Repayments of long-term debt (54,041) Distributions to noncontrolling interests (767) Proceeds from contributions restricted for long-term use 36,053 Proceeds from contributions and grants 781 Net cash used in financing activities (17,974) Net increase in cash and cash equivalents 29,032 Cash, cash equivalents and restricted cash at beginning of year 75,779 Cash, cash equivalents and restricted cash at end of year $ 104,811 Supplemental disclosure of cash flow information: Cash paid for interest $ 47,727 Supplemental disclosures of noncash investing and financing activities: Change in noncash acquisitions of property, plant, and equipment 8,877 See accompanying notes to consolidated financial statements. 5

8 (1) Organization Effective April 1, 2016, Robert Wood Johnson Health Care Corp. and its affiliates (collectively, RWJ) and Barnabas Health, Inc. and its affiliates (collectively, Barnabas Health) completed a transaction pursuant to a merger agreement dated March 16, 2016, to form RWJ Barnabas Health, Inc. The parent corporations of RWJ and Barnabas Health agreed to jointly sponsor a newly formed organization comprised of all entities of both systems. The merger was accomplished through the establishment of a new system parent corporation as the sole member of the former parent corporations of each system (RWJ and Barnabas Health, respectively). The parent corporation of the newly merged health care system, RWJ Barnabas Health, Inc., (the Corporation), is a not-for-profit, tax-exempt corporation. The merger was effected to create an integrated health system that would expand the scope of, and access to, health care services within communities served by both RWJ and Barnabas Health. The services and facilities of the Corporation include 11 acute care hospitals, 3 acute care children s hospitals, a free standing behavioral health center and statewide behavioral health network, a pediatric rehabilitation hospital, ambulatory care centers, geriatric centers, comprehensive home care and hospice services, fitness and wellness centers, retail pharmacy centers, medical groups, diagnostic imaging centers, accountable care organizations, a burn treatment facility, comprehensive cardiac surgery services, including a heart transplant center, a lung transplant center, kidney transplant centers, comprehensive cancer services and comprehensive breast centers. Concurrent with the merger, trustees of both RWJ and Barnabas Health resigned at the effective date of the transaction, and a new board of trustees was formed. The Corporation has accounted for the combination as a merger of not-for-profit entities under Accounting Standards Codification (ASC) Subtopic , Not-for-Profit Entities: Business Combinations resulting in a new reporting entity effective April 1, 2016, with no activities before the merger. Therefore, the consolidated assets, liabilities and net assets of RWJ and Barnabas Health are included in the accompanying consolidated financial statements as of the effective date at their historical basis under the carryover method. Accordingly, no goodwill was recognized as a result of the transaction. The application of merger accounting to the combination as of April 1, 2016 required RWJ and Barnabas Health to conform certain accounting policies for consistency, including the accounting for the valuation of patient accounts receivable and investments in joint ventures. Adjustments of $38,600 were made to conform to the policies as of March 31, (Continued)

9 The major classes of assets, liabilities and net assets for RWJ and Barnabas Health that were consolidated at March 31, 2016 are as follows: Barnabas RWJ Health Total Assets: Cash and investments $ 746,866 1,533,221 2,280,087 Assets limited or restricted as to use 209, , ,778 Patient accounts receivable, net 203, , ,810 Property and equipment, net 826, ,331 1,818,111 Other assets 150, , ,924 Total assets $ 2,136,002 3,343,708 5,479,710 Liabilities: Accounts payable $ 113, , ,130 Accrued expenses and other current liabilities 166, , ,936 Long-term debt 612,712 1,137,452 1,750,164 Other liabilities 183, , ,155 Total liabilities 1,075,922 2,014,463 3,090,385 Net assets: Unrestricted 990,194 1,232,404 2,222,598 Temporarily restricted 55,473 82, ,453 Permanently restricted 14,413 13,861 28,274 Total net assets 1,060,080 1,329,245 2,389,325 Total liabilities and net assets $ 2,136,002 3,343,708 5,479,710 The following table presents supplemental pro forma information for the Corporation for the year ended December 31, 2016, as if the merger had occurred on January 1, The following supplemental pro forma information is not audited and is as follows: Change in Change in Change in temporarily permanently Total unrestricted restricted restricted revenue net assets net assets net assets RWJ $ 1,851,619 21, ,294 Barnabas Health 3,238, ,035 (25,089) (396) Total $ 5,089, ,687 (24,768) 4,898 7 (Continued)

10 The information above is presented only for purposes of additional analysis and not as a presentation of financial position and results of operations. This information does not reflect all eliminations and reclassifications as may be required by generally accepted accounting principles (GAAP) and is not necessarily indicative of what the financial position and results of operations would have been for the consolidated entity had the merger occurred on January 1, (2) Significant Accounting Policies (a) Basis of Accounting of Financial Statement Presentation The consolidated financial statements have been prepared on the accrual basis of accounting and include all affiliates and other entities for which operating control is exercised by the Corporation. Investments in entities where the Corporation does not have operating control are recorded under the equity or cost method of accounting. The Corporation has included its equity share of income or losses from investments in unconsolidated affiliates in other operating revenue. All significant intercompany balances and transactions have been eliminated. (b) Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting year. Actual results could differ from those estimates. (c) Cash and Cash Equivalents Cash and cash equivalents include investments in money market funds and highly liquid debt instruments with original maturities of three months or less, excluding assets limited or restricted as to use. (d) Patient Accounts Receivable and Patient Service Revenue The Corporation has agreements with third-party payors that provide for payment at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Management regularly reviews accounts and contracts and provides appropriate contractual allowances and discounts that are netted against patient accounts receivable in the consolidated balance sheets. Patient accounts receivable are further reduced by an allowance for doubtful accounts. The Corporation regularly reviews its past collection history and payment trends for each of its major payor sources of patient service revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. For patient accounts receivable associated with self-pay patients, which includes those patients without insurance coverage and patients with deductibles and copayment balances for which third-party coverage exists for a portion of the bill, the Corporation records a provision for bad debts for patients that are unable or unwilling to pay for the portion of the bill representing their financial responsibility. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted. 8 (Continued)

11 The following table sets forth the components of the change in the allowance for doubtful accounts for the year ended December 31, 2017: Balance, beginning of year $ 222,774 Provision for bad debts 165,499 Write-offs, net of recoveries (168,856) Balance, end of year $ 219,417 The Corporation grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor arrangements. The percentages of patient accounts receivable from patients, and third-party payors as of were as follows: December Medicare 17 % 18 % Managed Medicare 8 8 Medicaid 5 6 Managed Medicaid 9 11 Blue Cross Commercial and other managed care Self-pay patients and other % 100 % Patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated settlements under payment agreements with third-party payors. Settlements with third-party payors are accrued on an estimated basis in the period in which the related services are rendered and adjusted in future periods as final settlements are determined. The estimated percentages of patient service revenue by inpatient and outpatient services, net of the provision for bad debts, for the year ended December 31, 2017 are as follows: Inpatient services 59 % Outpatient services 41 9 (Continued)

12 The following table reflects the estimated percentages of patient service revenue, net of the provision for bad debts, for the year ended December 31, 2017: Medicare 26 % Managed Medicare 8 Medicaid 4 Managed Medicaid 14 Blue Cross 22 Commercial and other managed care 21 Self-pay patients and other % (e) Supplies Supplies are carried at the lower of cost or net realizable value, determined principally on an average cost basis. Supplies, totaling $81,096 and $77,735, are included in other current assets in the consolidated balance sheets at. (f) Assets Limited or Restricted as to Use Assets limited or restricted as to use include assets held by trustees under bond indenture agreements, assets restricted for self-insurance, assets held for supplemental retirement benefits, and assets restricted by donors for specific purposes or endowment. Amounts required to meet current liabilities of the Corporation are classified as current assets. (g) Investments and Investment Income A significant portion of the Corporation s investments are held in an investment portfolio maintained for the benefit of the Corporation and its affiliates and subsidiaries. Investments are classified as trading investments except for certain investments, which are limited or restricted as to use and are classified as investments available for sale. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value, based on quoted market prices. Donated investments are recorded at their fair value, based on quoted market prices at the date of receipt. Alternative investments (nontraditional, not readily marketable asset classes) within the investment portfolio are structured such that the Corporation holds interests in private investment funds, consisting of hedge funds and private equity funds. These investments are reported at fair value as estimated and reported by general partners, based upon the underlying net asset value of the fund or partnership as a practical expedient. Because of inherent uncertainty in these valuations, those estimated values may significantly differ from the values that would have been used had a ready market for the investments existed, and differences could be material. Most investment income and realized gains and losses are recorded as nonoperating revenue. Unrealized gains and losses on trading securities are recorded as nonoperating revenue. Unrealized 10 (Continued)

13 gains and losses on available for sale investments are recorded as other changes in net assets. Changes in the fair value of alternative investments are included in nonoperating revenue. Investment income and realized gains and losses on assets restricted by donors for specific purposes or endowment are included in temporarily restricted net assets. A decline in fair value, deemed other than temporary for available for sale investments, results in a reduction in carrying amount and the related loss is included in nonoperating revenue. (h) Property, Plant and Equipment Property, plant, and equipment expenditures are recorded at cost. Donated assets are recorded at fair value at the date of donation. Capitalized leases are recorded at the present value of the future minimum lease payments at the inception of the lease and are included in property, plant, and equipment. Depreciation expense is computed on a straight-line basis using estimated useful lives of the assets ranging from 2 to 40 years. Equipment held under capital leases and leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the related lease term. Such amortization is included in depreciation expense. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted net assets and are excluded from the excess of revenue over expenses in the consolidated statement of operations, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted net assets. Absent explicit stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. (i) Deferred Financing Costs Deferred financing costs represent costs incurred to obtain debt-financing arrangements. Amortization of these costs is provided using the effective-interest method over the terms of the applicable indebtedness. Deferred financing costs are presented as a reduction of the related debt. During 2016, the Corporation incurred $8,979 of deferred financing costs related to the issuance of Series 2016 and Series 2016A bonds (note 8). No deferred financing costs were incurred by the Corporation during the year ended December 31, (j) Donor-Restricted Gifts Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends and/or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of changes in net assets as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated statement of operations. 11 (Continued)

14 Pledges receivable represent an unconditional promise to give cash and other assets to the Corporation s affiliates over a period not greater than 20 years. Such amounts are recorded at their present value at the date the promise is received, net of an allowance for uncollectible pledges. Such amounts are included as externally designated or restricted noncurrent assets limited as to use in the consolidated balance sheets. (k) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets represent funds whose use has been restricted by donors to a specific period or purpose. Permanently restricted net assets represent funds that have been restricted by donors to be maintained in perpetuity. Generally, the donors of these permanently restricted assets permit the use of part of the income earned on related investments for specific purposes. Resources arising from the results of operations or assets set aside by the Board of Trustees are not considered to be donor restricted. Temporarily restricted net assets are available for the following purposes: December Healthcare services $ 51,084 34,174 Capital purchases 62,655 58,731 Health education and other services 17,729 24,534 $ 131, ,439 (l) Fair Value of Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents, patient accounts receivable, net, estimated amounts due to/from third party payors, net, other current assets, accounts payable, accrued expenses, and other current liabilities approximate fair value. (m) Performance Indicator The consolidated statement of operations includes a performance indicator, which is the excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from excess of revenue over expenses, include unrealized gains and losses on investments that are classified as available for sale, certain changes in pension obligations, capital contributions and other transactions. The Corporation differentiates its ongoing operating activities by providing income from operations as a subperformance indicator. Investment income, net (excluding unrealized gains and losses on available for sale investments), net periodic benefit costs other than service costs and other transactions, which are not considered to be components of the Corporation s ongoing activities are excluded from income from operations and reported as nonoperating revenue in the consolidated statement of operations. Investment income earned on assets limited as to use under bond indenture agreements is included in other revenue in the consolidated statement of operations. 12 (Continued)

15 (n) Charity Care The Corporation provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates (note 3). Since the Corporation does not pursue collection of amounts determined to qualify as charity care, such amounts are not reported as patient service revenue. (o) Other Revenue Other revenue consists of the following for the year ended December 31, 2017: Physician practice income, net $ 254,096 Grants 41,831 Pharmacy sales 46,465 Cafeteria and vending 9,011 Parking income 5,173 Equity in the income of joint ventures 26,652 Net assets released from restrictions for operations 17,925 Contributions 12,397 Rental income 14,645 Education and training 12,054 Other 50,093 $ 490,342 (p) Income Taxes The Corporation and its affiliates, excluding its for-profit subsidiaries and nominee owned captive professional medical services corporation, are not-for-profit corporations and are exempt from federal and state income taxes on related income under existing provisions of the Internal Revenue Code and State of New Jersey statutes. The Corporation s for-profit subsidiaries have recorded various deferred income tax assets and liabilities that reflect temporary differences between the amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. These amounts are not material to the consolidated financial position of the Corporation and are included as other assets or other liabilities in the consolidated balance sheets as appropriate. In addition, the provision for income taxes recorded by the Corporation s for-profit subsidiaries is not material to the consolidated results of operations of the Corporation and is included as other expenses in the consolidated statement of operations. 13 (Continued)

16 Certain for-profit subsidiaries have federal net operating loss (NOL) carryforwards of approximately $96,164 that expire through 2037 and State of New Jersey NOL carryforwards of approximately $50,969 that also expire through During the year ended December 31, 2017, a for-profit affiliate of the Corporation reduced certain tax attributes that included $66,399 and $62,024, respectively, of federal and State of New Jersey NOL carryforwards. At, all deferred tax assets related to these NOL carryforwards have been fully reserved due to the uncertainty of realizing the tax benefits associated with these amounts. The Corporation does not have any significant uncertain tax positions as of December 31, 2017 and (q) Self-Insurance Under the Corporation s self-insurance programs, claims are recorded based upon actuarial estimation, including both reported and incurred but not reported claims, taking into consideration the severity of incidents and the expected timing of claim payments. (r) Impairment of Long-Lived Assets Management routinely evaluates the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets, or related group of assets, may not be recoverable from estimated undiscounted cash flows generated by the underlying tangible assets. When the carrying value of an asset exceeds its estimated recoverability, an asset impairment charge is recognized for the difference between the fair value and carrying value of the asset. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining useful lives of its long-lived assets. If estimates are changed, the carrying value of affected assets is allocated over the remaining useful lives. In estimating the future cash flows for determining whether an asset is impaired, the Corporation groups its assets at the lowest level for which there are identifiable cash flows independent of other groups of assets. No impairment charge was recorded during the year ended December 31, (s) Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of net assets acquired in business combinations. It has an indefinite useful life and is not amortized, but is subjected to impairment tests. The Corporation performs impairment testing at least annually or more frequently if events or circumstances change creating a reasonable possibility that an impairment may exist. No impairment of goodwill was deemed necessary during the year ended December 31, At, other assets, net include approximately $5,717 of goodwill. 14 (Continued)

17 (t) Accounting Pronouncements In January 2016, Accounting Standards Update (ASU) No , Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic ) (ASU ) was issued. ASU makes targeted improvements to the accounting for, and presentation and disclosure of, financial instruments. ASU requires that most equity instruments be measured at fair value, with subsequent changes in fair value recognized in net income. ASU does not affect the accounting for investments that would otherwise be consolidated or accounted for under the equity method. The new standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This ASU is effective for fiscal years beginning after December 15, Early adoption is permitted and the Corporation has adopted this standard as of April 1, 2016, the effect of which was to eliminate the disclosures of the fair value of its debt instruments. In November 2016, the Financial Accounting Standards Board (FASB) issued ASU No , Restricted Cash. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash and restricted cash equivalents. Therefore, the amounts classified as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Corporation has elected to early adopt the standard for the year ended December 31, As required by the standard, the retrospective transition method has been applied. Restricted cash and cash equivalents of $19,025 and $39,643 as of, respectively, have been included on the cash, cash equivalents and restricted cash and cash equivalents, end of year and beginning of year balances on the consolidated statement of cash flows. Restricted cash is included in assets limited or restricted as to use, noncurrent portion in the consolidated balance sheets. In March 2017, the FASB issued ASU No , Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance amends ASC Topic 715, Compensation Retirement Benefits, to require employers that present a measure of operating income in their statement of operations to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost or credit, are to be included in nonoperating revenue (expenses). This ASU is effective for fiscal years beginning after December 15, Early adoption is permitted and the Corporation has adopted this standard as of December 31, As a result, the net periodic benefit cost other than service costs of $11,485 was recorded in other nonoperating activities and no service costs were recorded in fringe benefit expense in the consolidated statement of operations, as the plans are frozen. Upcoming Accounting Pronouncements In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606) (ASU ). This ASU establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Particularly, that an entity recognizes revenue to depict the 15 (Continued)

18 transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU is effective for fiscal years beginning after December 15, The Corporation does not expect the adoption of ASU to have a material impact on the consolidated financial statements for the year ended December 31, In February 2016, the FASB issued ASU No , Leases (ASU ), which will require lessees to recognize most leases on the balance sheets, increasing their reported assets and liabilities-sometimes very significantly. This update was developed to provide financial statement users with more information about an entity s leasing activities, and will require changes in processes and internal controls. The adoption of ASU is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively in the year of adoption. The Corporation is currently assessing the impact of the adoption of ASU , which is expected to have a significant impact on its financial position by recording right to use assets and related lease obligations but limited impact to the results of operations. In August 2016, the FASB issued ASU No , Presentation of Financial Statements for Not-for-Profit Entities (ASU ), which amends the requirements for financial statements and notes in ASC Topic 958, Not-for-Profit Entities (NFP). ASU will have the following impact on the financial statements of NFPs: Reduces the number of net asset classes presented from three to two: with donor restrictions and without donor restrictions; Requires NFPs to present expenses by their functional and their natural classifications in one location in the financial statements; Requires NFPs to provide quantitative and qualitative information about management of liquid resources and availability of financial assets to meet cash needs within one year of the balance sheet date; Retains the option to present operating cash flows in the statement of cash flows using either the direct or indirect method; Requires allocation methodology of allocating expenses; and Requires investment expenses to be recorded net against returns, both internal and external. The adoption of ASU is effective for fiscal years beginning after December 15, 2017 and is applied retrospectively in the year of adoption. The Corporation does not anticipate that the adoption of this ASU will have a significant impact on its financial position or its results of operations. (u) Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. (3) Charity Care and Community Benefit In accordance with the Corporation s mission and philosophy, the Corporation s hospitals commit substantial resources to both the indigent population and the broader community. The Corporation s charity 16 (Continued)

19 care policy is to provide care without regard to the patient s ability to pay for services rendered. To the extent that patients do not have the ability to pay, services rendered to those patients are reported as charity care. The Corporation s hospitals and affiliates also provide other benefits through a broad range of community service programs and charitable activities. The amount of charity care, community service programs, and charitable activities, at estimated cost, provided to the indigent population and broader community for the year ended December 31, 2017 is as follows: Cost of charity care and community benefit programs: Net estimated cost of charity care provided, less state subsidy funding $ 83,563 Unpaid cost of public programs, Medicaid, and other means tested programs 201,584 Other programs: Cash and in-kind donations $ 4,675 Education and research 83,717 Subsidized departments 53,593 Other community benefits 9,914 The Corporation s hospitals utilize a cost to charge ratio methodology to convert charity care to cost. The cost to charge ratio is calculated utilizing the Corporation s cost accounting system or filed cost reports. The State of New Jersey s regulations provide for the distribution of funds from a Charity Care Fund, which is intended to partially offset the cost of services provided to the uninsured. For the year ended December 31, 2017, the Corporation s hospitals received distributions from the Charity Care Fund of $35,412, which are included in net patient service revenue. (4) Healthcare Reimbursement System (a) The Corporation records patient service revenue at estimated net realizable value in the period in which services are performed. Patient service revenue consists of amounts charged for services rendered less estimated discounts for contractual and other allowances for patients covered by Medicare, Medicaid, and other health plans and discounts offered to patients under the Corporation s uninsured discount program. The Medicare program currently pays for most services at predetermined rates; however, certain services and specified expenses continue to be reimbursed on a cost basis. The Medicaid program also currently reimburses the Corporation at predetermined rates for inpatient services and on a cost reimbursement methodology for outpatient services. Regulations require annual retroactive settlements for cost-based reimbursement and other payment arrangements through cost reports filed by the Corporation. 17 (Continued)

20 The Corporation also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. These agreements have retrospective audit clauses, allowing the payor to review and adjust claims subsequent to initial payment. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is a possibility that recorded estimates could change by a material amount. In accounting for Medicare and Medicaid cost report settlements, the Corporation records all third-party receivables and liabilities at their estimated realizable values. Management periodically reviews recorded amounts receivable from, or payable to, third-party payors and adjusts these balances as new information becomes available. In addition, revenue received under certain third-party agreements is subject to audit. During the year ended December 31, 2017, certain of the Corporation s prior year third-party cost reports were audited and settled, or tentatively settled by third-party payors. Adjustments resulting from such audits, settlements, and management reviews are reflected as adjustments to patient service revenue in the period that the adjustments becomes known. Accordingly, the Corporation evaluated the results of these settlements on its open cost reports. The effect of cost report settlements and other adjustments increased patient service revenue by approximately $17,294 for the year ended December 31, Although certain other prior-year cost reports submitted to third-party payors remain subject to audit and retroactive adjustment, management does not expect any material adverse settlements. Medicare cost reports for all years prior to 2014, except for 2011, have been audited and settled. Medicaid cost reports for all years prior to 2014 have been audited and settled for all acute care hospitals. For the pediatric rehabilitation hospital, Medicaid cost reports have been audited by the fiscal intermediary through December 31, 2014, though the settlement has not been finalized for the year The fiscal intermediary may reopen certain years related to specific settlement items in the cost report year. The Corporation has a compliance program to monitor conformity with applicable laws and regulations, but the possibility of future government review and interpretation exists. The Corporation is not aware of any significant pending or threatened investigations involving allegations of potential wrongdoing. (b) The Corporation and others in the healthcare industry are subject to certain inherent risks, including the following: Substantial dependence on revenue derived from reimbursement by the Federal Medicare and State Medicaid programs that have been reduced in recent years and which entail exposure to various healthcare fraud statutes Government regulations, government budgetary constraints, and proposed legislative and regulatory changes Such inherent risks require the use of certain management estimates in the preparation of the Corporation s consolidated financial statements and it is reasonably possible that a change in such 18 (Continued)

21 estimates may occur. Management of the Corporation believes that adequate provision has been made in the consolidated financial statements for the matters discussed above and their ultimate resolution will not have a material effect on the consolidated financial statements. (5) Investments and Assets Limited or Restricted as to Use Investments and assets limited or restricted as to use consist of the following: December Investments and assets limited or restricted as to use: Cash and cash equivalents and money market funds $ 192, ,269 U.S. government obligations/municipal bonds 286, ,161 Corporate bonds 313, ,852 Certificates of deposit 755 8,817 Mutual funds 1,735,902 1,175,076 Equity securities 52,002 Asset backed securities 62,005 79,070 Mortgage-backed securities 41,074 52,247 Alternative investments 826, ,240 Pledges receivable, net 21,002 14,026 Other investments 11,285 7,904 Accrued interest 5,404 5,710 Total investments and assets limited or restricted as to use $ 3,547,834 3,013,372 These amounts are reflected in the consolidated balance sheets as follows: December Current portion: Investments $ 37,315 64,873 Assets limited or restricted as to use 65, ,979 Noncurrent assets limited or restricted as to use 239, ,984 Investments 3,206,160 2,549,536 $ 3,547,834 3,013, (Continued)

22 Investments and assets limited or restricted as to use are classified as follows: December Investments $ 3,243,475 2,614,409 Self-insurance funds 18,603 22,194 Donor-restricted funds and pledges receivable, net 136, ,970 Funds held by bond trustees under bond indenture agreements 71, ,539 Other limited use funds 78,372 59,260 $ 3,547,834 3,013,372 Assets held under bond indenture agreements are maintained for the following purposes: December Capital project funds $ 32, ,204 Interest funds 36,330 18,735 Principal funds 2,943 3,600 $ 71, ,539 The Corporation s investment return is as follows for the year ended December 31, 2017: Investment return included in other revenue: Interest and dividend income $ 911 Investment return included in nonoperating revenue: Interest and dividend income 48,384 Net realized gains 63,970 Net unrealized gains on trading investments 222, ,082 Net change in unrealized gains on available for sale investments 380 Restricted investment income and unrealized losses, net 433 Total investment return $ 336, (Continued)

23 The Corporation s investments are exposed to various kinds and levels of risk. Fixed income securities, including fixed income mutual funds, expose the Corporation to interest rate risk, credit risk, and liquidity risk. As interest rates change, the values of many fixed income securities are affected, particularly those with fixed interest rates. Credit risk is the risk that the obligor of the security will not fulfill its obligation. Liquidity risk is affected by the willingness of market participants to buy and sell given securities. Corporate bonds, equity mutual funds, and commercial mortgage-backed securities expose the Corporation to market risk, performance risk, and liquidity risk. Market risk is the risk associated with major movements of the equity markets, both foreign and domestic. Performance risk is the risk associated with a particular fund s operating performance. Liquidity risk, as previously defined, tends to be higher for international funds and small capitalization equity funds. The Corporation has incorporated an Investment Policy Statement (IPS) into its investment program. The IPS, which has been formally adopted by the Board of Trustees, contains standards designed to ensure adequate diversification by asset category and geography. The IPS also limits fixed income investments by credit rating, which serves to further mitigate the risk associated with the investment program. At, management believes that its investment positions are in accordance with guidelines established by the IPS. (6) Fair Value Measurements ASC Topic 820, Fair Value Measurement, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include cash and cash equivalents and debt and equity securities that are traded in an active exchange market. Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted market prices that are traded less frequently than exchange-traded instruments. This category generally includes certain U.S. government and agency mortgage-backed debt securities and corporate bonds. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The Corporation currently holds no Level 3 investments. 21 (Continued)

24 The following tables present the Corporation s fair value hierarchy for those assets measured at fair value on a recurring basis, and exclude pledges receivable, net, other investments, and accrued interest receivable as of : December 31, 2017 Fair value Level 1 Level 2 Level 3 Available for sale investments: Investment categories: Cash and cash equivalents and money market funds $ 132, ,804 Equity mutual funds 10,261 10,261 Fixed income mutual funds 45,119 45,119 Certificates of deposit Corporate bonds Total available for sale investments 189, ,184 1,254 Trading investments: Investment categories: Cash and cash equivalents and money market funds 59,397 59,397 Equity securities 52,002 52,002 Equity mutual funds 1,106,383 1,106,383 Fixed income mutual funds 574, , ,403 Commercial mortgagebacked securities 41,074 41,074 Corporate bonds 312, ,660 Asset-backed securities 62,005 62,005 Government bonds 167, ,908 Government mortgagebacked securities 97,499 97,499 Municipal bonds 21,571 21,571 Total investments trading 2,494,638 1,568, ,120 Total 2,684,076 $ 1,756, ,374 Investments measured at net asset value (a) 826,067 $ 3,510, (Continued)