Shands Teaching Hospital and Clinics, Inc. and Subsidiaries Consolidated Basic Financial Statements, Required Supplementary Information and

Transcription

1 Shands Teaching Hospital and Clinics, Inc. and Subsidiaries Consolidated Basic Financial Statements, Required Supplementary Information and Supplemental Consolidating Information

2 Index Page(s) Management's Discussion and Analysis (Unaudited) Report of Independent Certified Public Accountants Consolidated Basic Financial Statements Consolidated Basic Statements of Net Position Consolidated Basic Statements of Revenues, Expenses and Changes in Net Position Consolidated Basic Statements of Cash Flows Required Supplementary Information Schedule of Plan Funding Progress (Unaudited) Historical Summary of Actual and Required Pension Contributions (Unaudited) Supplemental Consolidating Information Consolidating Basic Statements of Net Position Consolidating Basic Statements of Revenues, Expenses and Changes in Net Position

3 Management's Discussion and Analysis (Unaudited) Introduction This section of the Shands Teaching Hospital and Clinics, Inc. and Subsidiaries ( Shands ) annual financial report presents Shands' analysis of its financial performance as of and for the year ended June 30, 2014 with comparative information as of and for the years ended June 30, 2013 and This discussion has been prepared by management and should be read in conjunction with the consolidated basic financial statements and related note disclosures. Shands is an affiliate of the University of Florida ( UF ) where by statute the President of the University has the right to appoint and remove members of the Shands Board of Directors. Shands controls or owns various affiliated entities that operate facilities and provide services that are part of Shands. In 2013, a branding campaign introduced University of Florida Health or UF Health, which encompasses the UF Health Science Center and the Shands family of hospitals and services. As a result, Shands and certain of its affiliated entities operate under d/b/a s beginning with UF Health. The following identifies the significant affiliates of Shands and their respective primary operations: UF Health Shands Hospital is a major tertiary care teaching institution licensed to operate an 875-bed teaching hospital which provides clinical settings for medical education programs at UF. UF Health Shands Psychiatric Hospital is a psychiatric and substance abuse facility licensed to operate 81 beds, of which 61 are psychiatric and 20 are substance abuse. UF Health Shands Rehab Hospital is a 40-bed rehabilitation hospital located on the same campus as UF Health Shands Psychiatric Hospital. UF Health Shands HomeCare is a hospital-based home care agency providing home care services to the citizens of north central Florida. Property Management leases properties in Gainesville, Florida. Elder Care of Alachua County, Inc. provides social and health care support to the elderly in Alachua County. Southeastern HealthCare Foundation, Inc. provides charitable aid to UF and to Shands and owns and leases various rental properties in Florida. Joint Ventures: Shands has a 40% minority interest with Community Health Systems, Inc. ( CHS ) in Lake Shore HMA, LLC, Starke HMA, LLC, and Live Oak HMA, LLC for three rural community hospitals (Shands Lake Shore located in Lake City, Florida; Shands Starke located in Starke, Florida; and Shands Live Oak located in Live Oak, Florida). CHS manages the operations of the three facilities. Prior to January 27, 2014, the interest was with Health Management Associates, Inc. ( HMA ). On January 27, 2014, CHS acquired all of HMA s issued and outstanding stock. However, the LLCs continue under the original names. In April 2014, Shands acquired a 5% minority interest with CHS in Munroe HMA Holdings, LLC (d/b/a Munroe Regional Medical Center ) for a regional medical center located in Ocala, Florida. CHS manages the operations of the facility. 1

4 Management's Discussion and Analysis (Unaudited) Shands has an equal interest with Solantic, LLC (d/b/a Care Spot ) in a walk-in urgent care center located in Gainesville, Florida. Care Spot manages the operations of the facility. Shands and the University of Florida Development Corporation ( UFDC ) are members in Innovation Square, LLC. Situated between the UF campus and downtown Gainesville, Innovation Square is a planned mixed-use research neighborhood that advances the national and global profile of UF with Shands and the local biotech industry. Shands financial interest results from assets transferred to the LLC, net of amounts received from UFDC representing their financial interest. Previously, Shands had an interest based upon membership levels with Shands Jacksonville Medical Center, Inc. ( SJMC ), a related party controlled by UF, in First Coast Advantage, LLC ( FCA ) which is a provider service network ( PSN ) established to provide services to Medicaid qualified individuals in certain regions of the state, as designated by the Agency for Health Care Administration ( AHCA ), the administrator of the Medicaid program in the State of Florida. In March 2013, FCA submitted a bid to AHCA to serve two (Regions 3 and 4) of the eleven regions under the Statewide Medicaid Managed Care Program. In September 2013, AHCA announced its selections, which included FCA. However, FCA was only successful in its bid for Region 4, which is served by SJMC, and was not awarded Region 3, which is served by Shands. Consequently, Shands has dissolved its interest in FCA and has recorded an impairment charge of $0.3 million, reflected in other nonoperating revenues, net in the accompanying consolidated basic statement of revenues, expenses and changes in net position for the year ended June 30, Shands has been reimbursed for the proposal submission fee of $1.6 million, previously recorded as a receivable at June 30, Any remaining amounts involving FCA are immaterial. Overview of the Consolidated Basic Financial Statements Along with management s discussion and analysis, the annual financial report includes the report of independent certified public accountants and the consolidated basic financial statements of Shands. The consolidated basic financial statements also include notes that explain in more detail some of the information in the consolidated basic financial statements. By referring to the accompanying notes to the financial statements, a broader understanding of issues impacting financial performance can be realized. Required Financial Statements The required statements are the consolidated statements of net position, the consolidated statements of revenues, expenses and changes in net position and the consolidated statements of cash flows. These statements offer short and long-term financial information about Shands activities. The consolidated statements of net position reflect all of Shands assets, liabilities, deferred inflows and outflows and provide information about the nature and amounts of investments in resources (assets) and the obligations to creditors (liabilities). Assets, liabilities and deferred activity are presented in a classified format, which distinguishes between their current and long-term time frame. The difference between the assets plus deferred outflows and liabilities plus deferred inflows is reported as net position. The consolidated statements of revenues, expenses and changes in net position present the change in net position resulting from revenues earned and expenses incurred. All changes in net position are reported as revenues are earned and expenses are incurred, regardless of the timing of related cash flows. The consolidated statements of cash flows report cash receipts, cash payments, and net changes in cash resulting from operating, financing (capital and non-capital), and investing activities. The purpose of the statements is to reflect the key sources and uses of cash during the reporting period. 2

5 Management's Discussion and Analysis (Unaudited) Financial Analysis of Shands Statements of Net Position The condensed consolidated basic statements of net position present the financial position of Shands as of June 30, 2014, 2013 and 2012 and include all assets, liabilities and deferred inflows and outflows of Shands. Shands net position is one indicator of the current financial condition of Shands. Changes in net position are an indicator of whether the overall financial condition of the organization has improved or worsened over a period of time. They also provide the basis for evaluating the capital structure, as well as assessing the liquidity and financial flexibility of Shands. However, the financial statement user should consider other nonfinancial factors, such as changes in economic conditions, population change, regulations, and government legislation affecting the health care industry. The following table presents Shands condensed consolidated basic statements of net position as of June , 2013 and 2012: (in thousands of dollars) Cash and cash equivalents and short-term investments $ 136,716 $ 156,506 $ 152,738 Other current assets 279, , ,766 Capital assets, net 728, , ,169 Other assets 548, , ,675 Total assets 1,692,712 1,651,176 1,487,348 Deferred outflows of resources 42,683 40,190 68,300 Current liabilities 171, , ,261 Long-term liabilities 614, , ,492 Total liabilities 786, , ,753 Deferred inflows of resources 11,668 12,578 14,399 Net position Net investment in capital assets 154, , ,390 Restricted Nonexpendable Expendable 7,848 7,357 8,750 Unrestricted 775, , ,259 Total net position $ 937,365 $ 870,674 $ 799,496 3

6 Management's Discussion and Analysis (Unaudited) During 2014, cash and cash equivalents and short-term investments decreased by $19.8 million, or 12.6%. Cash generated from operations was $108.9 million. Other sources of cash included the release of $21.0 million in funds for legal settlement payments totaling $21.4 million (refer to Legal Settlement paragraph). Cash uses included payments of $49.2 million in support of UF and its medical programs, purchase of capital assets of $73.1 million, principal and interest payments of $44.2 million on outstanding debt (including capital lease obligations), and payment of $10.0 million to acquire a minority interest in Munroe Regional Medical Center. During 2013, cash and cash equivalents and short-term investments increased by $3.8 million, or 2.5%. This increase was mainly due to cash generated from operations of $136.6 million, offset by payments of $47.3 million in support of UF and its medical programs, purchase of capital assets of $62.9 million, and principal and interest payments of $38.5 million on outstanding debt. Other current assets, including net patient accounts receivable, inventories, prepaid expenses and other current assets, and assets whose use is restricted, current portion decreased by $1.3 million, or 0.5% during Assets whose use is restricted, current portion, decreased by $20.4 million as funds were released for legal settlement payments totaling $21.4 million. Partially offsetting this decrease was an increase in accounts receivable, net, of $14.5 million. This increase in receivables was due to two factors: (1) increases in net patient service revenue and (2) the conversion to a new patient financial system in July In the early stages of a system conversion, accounts receivable levels tend to increase as improved work flows are implemented. Net accounts receivable has decreased in recent months due to increased collections and a reduction in receivable days outstanding. Also, prepaid expenses and other current assets increased by $4.3 million primarily due to the payment of AHCA assessments. During 2013, other current assets increased by $49.6 million, or 21.5%. The increase was primarily due to increases in patient accounts receivable, net, of $22.6 million resulting from increases in net patient service revenue and an increase in assets whose use is restricted of $28.5 million needed to offset current liabilities. Capital assets, net, increased by $23.0 million, or 3.3%, during 2014 reflecting purchases of $73.1 million, non-cash additions of $3.6 million and an increase in retainage payable of $0.8 million, partially offset by depreciation and amortization expense of $54.5 million. During 2014, capital asset additions include land purchases of $1.9 million, building renovations of $35.0 million, and equipment purchases of $36.2 million. Equipment acquisitions include $10.6 million for a replacement helicopter and $5.7 million for implementation costs related to the electronic medical records (EMR) system. Capital assets, net, decreased by $15.5 million, or 2.2%, during 2013 reflecting purchases of $62.9 million, offset by depreciation and amortization expense of $49.4 million and reimbursement of $14.3 million of construction costs associated with the Springhill medical office building. Shands had served as construction manager on behalf of a related party and the related construction costs were reflected in construction-in-progress ( CIP ). Also during 2013, $10.2 million of plant, property and equipment was transferred to Innovation Square, LLC, representing Shands interest in the joint venture. Other assets increased during 2014 by $39.7 million, or 7.8%, primarily due to Shands funding its defined-benefit plan in excess of pension expense by $18.1 million. Other activity included a $10.0 million acquisition of a minority interest in Munroe Regional Medical Center. Assets whose use is restricted, non-current portion increased by $16.6 million due to positive returns on Shands investment portfolio. Other assets increased by $126.0 million, or 32.9%, during 2013 due to $125.0 million of proceeds received from the Series 2013A notes to be used toward future capital projects and replacement needs. Deferred outflows of resources increased by $2.5 million, or 6.2%, during 2014 due to deterioration in the fair value of the hedged interest rate swaps. Deferred outflows of resources decreased by $28.1 million, or 41.2%, during 2013 due to improved fair value of the hedged interest rate swaps. 4

7 Management's Discussion and Analysis (Unaudited) Current liabilities decreased during 2014 by $7.0 million, or 3.9%, due to a decrease of $14.6 million in third-party settlement liabilities, partially offset by increases of $4.5 million in accounts payable and accrued expenses and $3.4 million in accrued salaries and leave payable. The decrease in third-party settlement liabilities is largely due to legal settlement payments totaling $21.4 million. Current liabilities decreased during 2013 by $7.7 million, or 4.1%, primarily due to decreased third-party settlement liabilities of $8.2 million. Long-term liabilities decreased during 2014 by $14.8 million, or 2.3%, primarily due to $19.6 million in principal payments for the long-term portion of debt, partially offset by an increase in other long-term liabilities of $4.5 million. Long-term liabilities increased during 2013 by $74.0 million, or 13.3%, primarily due to the issuance of the $125.0 million Series 2013A notes partially offset by routine principal payments on debt of $19.5 million and positive changes in the fair value of interest rate swaps of $32.7 million. Deferred inflows of resources decreased by $0.9 million, or 7.2%, and by $1.8 million, or 12.6%, during 2014 and 2013, respectively, due to amortization of deferred gains on debt refunding. Total net position increased by $66.7 million, or 7.7%, and by $71.2 million, or 8.9%, during 2014 and 2013, respectively, due to favorable operating performance. Statements of Revenues, Expenses and Changes in Net Position The following table presents Shands condensed consolidated basic statements of revenues, expenses and changes in net position for the years ended June 30, 2014, 2013 and 2012: (in thousands of dollars) Net patient service revenue $ 1,177,446 $ 1,143,193 $ 1,060,568 Other operating revenue 22,343 17,043 25,598 Total operating revenues 1,199,789 1,160,236 1,086,166 Operating expenses 1,114,905 1,041, ,843 Operating income 84, , ,323 Nonoperating revenues, net 27,069 7,104 6,093 Excess of revenues over expenses 111, , ,416 Other changes in net position Transfers and expenditures in support of the University of Florida and its medical programs (46,175) (47,812) (40,744) Other transfers, net - (6,100) - Capital contributions ,612 Other changes in net position 492 (1,394) 3,067 Increase in net position 66,691 71,178 84,351 Net position Beginning of year 870, , ,145 End of year $ 937,365 $ 870,674 $ 799,496 5

8 Management's Discussion and Analysis (Unaudited) Operating Revenues Total operating revenues increased by $39.6 million, or 3.4%, and $74.1 million, or 6.8%, during 2014 and 2013, respectively. The increase for both fiscal years was due to increased net patient service revenue. During 2014, net patient service revenue increased by $34.3 million, or 3.0%, reflecting continued increases in patient acuity, increases in admissions of 8.2% and outpatient visits of 4.5%, and modest rate increases from non-governmental payors, partially offset by an increase in bad debt expense of $7.6 million, an increase in observation cases, which yields lower reimbursement, and the full year impact of Medicare sequestration. In addition, during 2014 AHCA converted the Medicaid inpatient payment methodology from a per diem reimbursement system to a per discharge model. Based on data published by AHCA, the change in methodology is projected to reduce year over year reimbursement for Shands by approximately $27.3 million. During 2013, net patient service revenue increased by $82.6 million, or 7.8%, reflecting increases in the complexity and severity of inpatient cases, increases in admissions of 4.9% and outpatient visits of 8.5%, and rate increases. For 2014 and 2013, changes in prior year estimated third-party payor settlements increased net patient service revenue by approximately $7.3 million and $24.2 million, respectively. Other operating revenues increased during 2014 by $5.3 million, or 31.1%. The increase in other operating revenue is largely due to funding from Medicare and Medicaid totaling $2.4 million for meeting additional meaningful use benchmarks associated with implementation of the EMR system. Also contributing to the increase is a contract pharmacy arrangement in which Shands contracts with outside pharmacies to provide pharmacy services. This activity is new for Shands during 2014 and has yielded revenue of $1.7 million. Lastly, reimbursement for harvested organs increased by $1.0 million. Other operating revenues decreased by $8.6 million, or 33.4%, during 2013 as no funding was recognized from the Medicare and Medicaid programs toward installation of the electronic medical record system. Shands expects additional reimbursements in the future but must meet specific benchmarks. Operating Expenses Operating expenses increased during 2014 by $73.1 million, or 7.0%. Salaries and benefits increased by $43.4 million, or 8.6%, reflecting increases in staffing levels, wage increases, health benefits and pension expense. Supplies and services increased by $24.6 million, or 5.0%, resulting from the increased patient volume as well as cost increases associated with improved clinical technologies, pharmaceutical supplies and certain purchased services. Depreciation and amortization expense increased by $5.1 million, or 10.4%. Operating expenses increased by $70.0 million, or 7.2%, during Salaries and benefits increased by $25.5 million, or 5.3%, reflecting increases in health benefits of $9.0 million, or 20.0%, as well as wage increases. Supplies and services increased by $47.4 million, or 10.8%, reflecting the increased volume as well as cost increases associated with improved clinical technologies, pharmaceutical supplies and certain purchased services. Depreciation and amortization expense decreased by $3.0 million, or 5.7%. Nonoperating Revenues, net Nonoperating revenues, net increased during 2014 by $20.0 million, or 281.0%. Included in this category is investment performance and fair value changes on nonhedging interest rate swaps, which can vary significantly from year to year, and interest expense (due to Governmental Accounting Standards Board, or GASB, reporting requirements). Realized capital gains increased by $22.1 million due to favorable results in the financial markets and Shands investment portfolio. The fair value of derivative instruments improved by $6.6 million. Interest expense increased by $3.3 million, largely resulting from the $

9 Management's Discussion and Analysis (Unaudited) million Series 2013A Taxable Notes issued in March Nonoperating revenues, net increased by $1.0 million, or 16.6%, during State appropriations increased by $3.5 million and investment income (net) decreased by $2.5 million. Patient Volumes The following tables present the associated volumes of each facility on a comparative basis to the prior year. Net % Net % Change Change 2012 Change Change Inpatient Admissions (1) UF Health Shands Hospital 48,381 44,737 3, % 42,210 2, % UF Health Shands Psychiatric Hospital 3,195 2, % 3,146 (200) -6.4% UF Health Shands Rehab Hospital % 873 (68) -7.8% Total 52,480 48,488 3, % 46,229 2, % Net % Net % Change Change 2012 Change Change Outpatient Visits (2) UF Health Shands Hospital 810, ,510 35, % 713,964 61, % UF Health Shands Psychiatric Hospital 27,922 26,803 1, % 24,605 2, % UF Health Shands Rehab Hospital % 1,026 (794) -77.4% Total 839, ,545 36, % 739,595 62, % (1) Includes observation cases (2) Includes emergency room and trauma visits During 2014, inpatient admissions increased by 8.2% and outpatient visits increased by 4.5%. During 2013, inpatient admissions increased by 4.9% and outpatient visits increased by 8.5%. Statements of Cash Flows The consolidated basic statements of cash flows provide additional information in regards to Shands financial results by reporting the major sources and uses of cash. During 2014, cash and cash equivalents decreased by $17.0 million, or 54.0%. Cash in-flows were primarily a result of net cash provided by operating activities of $108.9 million as well as the release of $21.0 million in funds for legal settlement payments totaling $21.4 million (refer to Legal Settlement paragraph). Cash out-flows included payments of $49.2 million in support of UF and its medical programs, payments for acquisition of capital assets of $73.1 million, principal and interest payments of $44.2 million on outstanding debt, and payment of $10.0 million to acquire a minority interest in Munroe HMA Holdings, LLC. Shands also funded the defined benefit pension plan by $18.1 million in excess of pension expense as management proactively works toward improving the plan s funded status. At June 30, 2014, the funded status was 75.3%, up from 68.9% as of June 30, During 2013, cash and cash equivalents increased by $7.5 million, or 31.0%. Cash in-flows were primarily a result of net cash provided by operating activities, issuance of 2013A notes of $125.0 million, and the return of interest rate swap collateral of $18.4 million. Cash out-flows included capital asset acquisitions of $44.6 million, which is net of $18.3 million received as reimbursement for construction costs associated with the Springhill medical office building. Shands also funded the defined benefit pension plan by $14.5 million in excess of pension expense. 7

10 Management's Discussion and Analysis (Unaudited) Debt Outstanding As of June 30, 2014, Shands had approximately $572.9 million in debt outstanding compared to approximately $592.7 million at June 30, Long-term debt is comprised of tax exempt bond issues, taxable notes, and installment debt, described in more detail in Note 6 to the consolidated basic financial statements. During 2014, Shands increased its borrowings under an installment debt agreement by $2.7 million to finance a portion of the costs of an EMR system implementation. Shands utilizes interest rate swaps in order to synthetically convert certain variable rate bonds to fixed rate bonds. Including the effect of the interest rate swaps, approximately 77% of Shands bonds and notes outstanding are fixed while 23% are variable. The Series 1996A Bonds are fixed rate bonds insured by MBIA. The Series 2007A and Series 2007B Bonds, Series 2008A Bonds, and the Series 2008C Bonds are variable rate bonds with fixed rate payor interest rate swaps which synthetically convert them to fixed rate bonds. The Series 2008D1 and Series 2008D2 Bonds and the Series 2010B Bonds are unenhanced fixed rate bonds. The Series 2010A Bonds and the Series 2012A and Series 2012B Bonds are variable rate bonds. The Series 2013A Taxable Notes and the 2012 Bank Note are taxable fixed rate notes. As of June 30, 2013, Shands had approximately $592.7 million in debt outstanding compared to approximately $487.5 million in During 2013, Shands received $125.0 million in proceeds from the issuance of the Series 2013A Taxable Notes and Shands refinanced the Series 2008B and a portion of the Series 2008A Bonds at par with the issuance of the Series 2012A and Series 2012B Bonds. During 2012, Shands entered into a fixed rate taxable loan for $10.0 million to finance a property purchase, renovations, and equipment. GASB No. 68, Accounting and Financial Reporting for Pensions In June 2012, the GASB issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions, an Amendment of GASB Statement No. 27 ( GASB No. 68 ). GASB No. 68 results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and interperiod equity, and creating additional transparency. GASB No. 68 replaces the requirements of GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of GASB Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements that meet certain criteria. GASB No. 68 establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources, and expenses. For defined benefit pensions, GASB No. 68 identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. In addition, GASB No. 68 details the recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit pension plan and for employers whose employees are provided with defined contribution pensions. GASB No. 68 is effective for fiscal years beginning after June 15, 2014, with earlier application encouraged. Shands will adopt GASB No. 68 as of July 1, 2014 and as required, will adjust net position as of July 1, 2013 and restate the consolidated basic financial statements as of and for the year ended June 30, The impact of adopting GASB No. 68 will result in a decrease in net position of approximately $140.9 million as of July 1, 2013 and an increase in excess of revenues over expenses before transfers, capital contributions and other changes in net position of approximately $1.6 million for the year ended June 30,

11 Management's Discussion and Analysis (Unaudited) Remote Emergency Department In August 2013, Shands opened its remote, full-service, 24/7 emergency department. Located in the northwest section of Gainesville, the UF Health Shands Emergency Center Springhill is housed in a completely renovated 8,500-square-foot building, retrofitted to include all of the technology and diagnostic resources necessary for emergency care. Total project cost amounted to $5.6 million. The Center is staffed entirely by board-certified and board-eligible UF Health emergency medicine physicians and experienced emergency medicine nurses. The 911-receiving center is equipped with ten treatment spaces for patients, an onsite lab and diagnostic radiology services including X-ray and CT imaging systems. A permanently stationed ShandsCair ambulance transfers patients requiring hospitalization to UF Health Shands Hospital. For the year ended June 30, 2014, emergency and trauma visits totaled 96,750, an increase of 15,267 or 18.7% compared to the year ended June 30, Since opening, visit volume at the Center amounted to 13,195, accounting for 86.4% of the year-over-year volume increase. Legal Settlement Shands paid $21.4 million ($19.4 million in July 2013 and $2.0 million in June 2014) to resolve allegations made under the False Claims Act that billing practices at Shands hospitals resulted in overpayments by Medicare and Medicaid covering fiscal years 2003 through The settlement resulted from a whistleblower lawsuit filed in the U.S. District Court - Middle District of Florida - Jacksonville Division on April 30, 2008, which had been under court seal. The whistleblower was an independent consultant hired by Shands in 2006 and 2007 to conduct a routine audit of its billing practices. The audit showed inconsistent billing practices. In some instances, Shands billed Medicare and Medicaid for short overnight inpatient admissions rather than for outpatient or observation services. Shands officials fully cooperated with the state and federal investigation and negotiated the settlement agreement. While there has been no admission of liability, Shands paid $20.7 million to the federal government under the Medicare program and $0.7 million to the State of Florida under its Medicaid program. Payment of this settlement amount did not have a material impact on Shands net position, key financial metrics or results of operations. Credit Ratings Shands has received underlying credit ratings of A2 with a Stable outlook from Moody s Investor Services and A with a Stable outlook from Standard & Poor s on all of its rated debt. Standard & Poor s credit rating was affirmed in April 2014 and Moody s credit rating was affirmed in February

12 Report of Independent Certified Public Accountants To the Board of Directors of Shands Teaching Hospital and Clinics, Inc. and Subsidiaries We have audited the accompanying consolidated basic financial statements of Shands Teaching Hospital and Clinics, Inc. and Subsidiaries ( Shands ) as of and for the years ended, and the related notes to the consolidated basic financial statements, which collectively comprise the consolidated basic statements of net position, and the related consolidated basic statements of revenues, expenses and changes in net position and the consolidated basic statements of cash flows. Management s Responsibility for the Consolidated Basic Financial Statements Management is responsible for the preparation and fair presentation of the consolidated basic 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 basic financial statements that are free from material misstatement, whether due to fraud or error. Independent Certified Public Accountants Responsibility Our responsibility is to express an opinion on the consolidated basic 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 our audits to obtain reasonable assurance about whether the consolidated basic financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated basic financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated basic financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to Shands preparation and fair presentation of the consolidated basic 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 Shands 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 basic 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 basic financial statements referred to above present fairly, in all material respects, the respective financial position of Shands Teaching Hospital and Clinics, Inc. and Subsidiaries at, and the respective changes in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, 4040 West Boy Scout Boulevard, Suite 1000, Tampa, FL T: (813) , F: (813) ,

13 Other Matters The accompanying Management s Discussion and Analysis ( MD&A ) (Unaudited) for the years ended on pages 1 through 9, the Schedule of Plan Funding Progress (Unaudited) as of July 1, 2009 through March 31, 2014, and the Historical Summary of Actual and Required Pension Contributions (Unaudited) as of July 1, 2008 through June 30, 2014 on pages 48 and 49 are required by accounting principles generally accepted in the United States of America to supplement the consolidated basic financial statements. Such information, although not a part of the consolidated basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the consolidated basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the consolidated basic financial statements, and other knowledge we obtained during our audits of the consolidated basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming an opinion on the consolidated basic financial statements. The consolidating information is presented for purposes of additional analysis and is not a required part of the consolidated basic financial statements. The 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 basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated basic 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 basic financial statements or to the consolidated basic financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated basic financial statements taken as a whole. September 18,

14 Consolidated Basic Statements of Net Position (in thousands of dollars) Assets Current assets Cash and cash equivalents $ 14,494 $ 31,525 Short-term investments 122, ,981 Patient accounts receivable, net of allowance for uncollectibles of $51,574 and $47,312, respectively 185, ,959 Inventories 12,938 12,659 Prepaid expenses and other current assets 54,357 50,031 Assets whose use is restricted, current portion 26,340 46,733 Total current assets 415, ,888 Assets whose use is restricted, less current portion 325, ,359 Capital assets, net 728, ,648 Other assets 222, ,281 Total assets 1,692,712 1,651,176 Deferred outflows of resources Accumulated decrease in fair value of hedging derivatives 42,052 39,425 Deferred loss on debt refunding Total deferred outflows of resources 42,683 40,190 Liabilities Current liabilities Long-term debt, current portion 20,929 20,745 Capital lease obligations, current portion Accounts payable and accrued expenses 69,430 64,950 Accrued salaries and leave payable 47,306 43,896 Estimated third-party payor settlements 33,748 48,326 Total current liabilities 171, ,580 Long-term liabilities Long-term debt, less current portion 551, ,907 Capital lease obligations, less current portion 1, Other liabilities 61,607 57,126 Total long-term liabilities 614, ,534 Total liabilities 786, ,114 Commitments and contingencies Deferred inflows of resources Deferred gain on debt refunding 11,668 12,578 Net position Net investment in capital assets 154, ,754 Restricted Nonexpendable Expendable 7,848 7,357 Unrestricted 775, ,466 Total net position $ 937,365 $ 870,674 The accompanying notes are an integral part of these consolidated basic financial statements. 12

15 Consolidated Basic Statements of Revenues, Expenses and Changes in Net Position Years Ended (in thousands of dollars) Operating revenues Net patient service revenue, net of provision for bad debts of $95,344 and $87,792, respectively $ 1,177,446 $ 1,143,193 Other operating revenue 22,343 17,043 Total operating revenues 1,199,789 1,160,236 Operating expenses Salaries and benefits 548, ,333 Supplies and services 511, ,110 Depreciation and amortization 54,479 49,358 Total operating expenses 1,114,905 1,041,801 Operating income 84, ,435 Nonoperating revenues (expenses) State appropriations 7,050 7,500 Interest expense (20,372) (17,045) Net investment income, including change in fair value 36,829 9,131 (Loss) gain on disposal of capital assets, net (344) 1,510 Other nonoperating revenues, net 3,906 6,008 Total nonoperating revenues, net 27,069 7,104 Excess of revenues over expenses before transfers, capital contributions, and other changes in net position $ 111,953 $ 125,539 The accompanying notes are an integral part of these consolidated basic financial statements. 13

16 Consolidated Basic Statements of Revenues, Expenses and Changes in Net Position Years Ended (in thousands of dollars) Excess of revenues over expenses before transfers, capital contributions, and other changes in net position $ 111,953 $ 125,539 Transfers and expenditures in support of the University of Florida and its medical programs (46,175) (47,812) Other transfers, net - (6,100) Capital contributions Other changes in net position 492 (1,394) Increase in net position 66,691 71,178 Net position Beginning of year 870, ,496 End of year $ 937,365 $ 870,674 The accompanying notes are an integral part of these consolidated basic financial statements. 14

17 Consolidated Basic Statements of Cash Flows Years Ended (in thousands of dollars) Cash flows from operating activities Cash received from patients and third-party payors $ 1,171,116 $ 1,112,322 Other receipts from operations 20,530 19,596 Salaries and benefits paid to employees (544,966) (500,812) Payments to suppliers and vendors (537,732) (494,551) Net cash provided by operating activities 108, ,555 Cash flows from noncapital financing activities Payments received on notes receivable 9,123 6,025 Payments in support of the University of Florida and its medical programs (49,180) (47,334) Other transfers, net (2,000) (3,500) Donations and pledge receipts 6,466 8,297 Net cash used in noncapital financing activities (35,591) (36,512) Cash flows from capital and related financing activities Purchase of capital assets (73,055) (62,881) Medical office building construction project - 18,302 Proceeds from sale of capital assets 3 1,510 Proceeds from issuance of long-term debt - 196,820 Payments of long-term debt and capital lease obligations (22,231) (91,205) Interest payments (22,013) (19,062) Capital contributions Other capital and related financing activities (833) 1,400 Net cash (used in) provided by capital and related financing activities (117,708) 45,829 Cash flows from investing activities Investment income received 4,612 4,843 Interest in joint venture (10,000) - Purchase of short-term investments and assets whose use is restricted (72,404) (218,614) Sale of short-term investments and assets whose use is restricted 107,667 74,619 Other investing activity (2,555) 745 Net cash provided by (used in) investing activities 27,320 (138,407) Net (decrease) increase in cash and cash equivalents (17,031) 7,465 Cash and cash equivalents Beginning of year 31,525 24,060 End of year $ 14,494 $ 31,525 The accompanying notes are an integral part of these consolidated basic financial statements. 15

18 Consolidated Basic Statements of Cash Flows Years Ended (in thousands of dollars) Reconciliation of operating income to net cash provided by operating activities Operating income $ 84,884 $ 118,435 Adjustments to operating income to net cash provided by operating activities Depreciation and amortization 54,479 49,358 Provision for bad debts 95,344 87,792 Changes in: Patient accounts receivable (108,096) (110,491) Prepaid expenses and other current assets 3,298 14,044 Inventories (279) 75 Other assets (19,319) (10,883) Accounts payable and accrued expenses 8,686 (8,123) Accrued salaries and leave payable 3,410 4,232 Estimated third-party payor settlements (14,578) (8,173) Other liabilities 1, Total adjustments 24,064 18,120 Net cash provided by operating activities $ 108,948 $ 136,555 Supplemental noncash investing, capital and financing activities Capital assets financed through capital lease and installment debt $ 3,583 $ 669 The accompanying notes are an integral part of these consolidated basic financial statements. 16

19 1. Organization Shands Teaching Hospital and Clinics, Inc. and Subsidiaries ( Shands ) was incorporated on October 15, 1979 as a Florida not-for-profit corporation. The President of the University of Florida ( UF ), or his designee, serves as the President of Shands Board of Directors and retains appointment and termination rights over a majority of the members of Shands Board of Directors. The President of UF is deemed a state official as the position is appointed by a Board of Trustees that govern UF (the UF Board ), and the members of the UF Board are appointed by the Governor and the Board of Governors of the State of Florida. In 2013, a branding campaign introduced University of Florida Health or UF Health, which encompasses the UF Health Science Center and Shands. As a result, Shands and certain of its affiliated entities operate under d/b/a s beginning with UF Health. The accompanying consolidated basic financial statements consolidate the accounts of Shands and its subsidiaries. The following identifies the significant affiliates of Shands and their respective primary operations: UF Health Shands Hospital is a major tertiary care teaching institution located in Gainesville, Florida, licensed to operate an 875-bed teaching hospital. UF Health Shands Hospital is a leading referral center in the State of Florida and provides clinical settings for medical education programs at UF. UF Health Shands Psychiatric Hospital is a psychiatric and substance abuse facility located in Gainesville, Florida, licensed to operate 81 beds, of which 61 are psychiatric and 20 are substance abuse. UF Health Shands Rehab Hospital is a 40-bed rehabilitation hospital located on the same campus as UF Health Shands Psychiatric Hospital. UF Health Shands HomeCare is a hospital-based home care agency providing home care services to the citizens of north central Florida. Property Management leases properties in Gainesville, Florida. ElderCare of Alachua County, Inc. ( ElderCare ), a Florida not-for-profit corporation, provides social and health care support to the elderly in Alachua County, Florida, through the operations of a Senior Recreation Center and programs such as Meals on Wheels and an Alzheimer s Day Care Center. Shands is the sole corporate member of ElderCare. Southeastern HealthCare Foundation, Inc. ( Foundation ), a Florida not-for-profit corporation, provides charitable aid to UF and to Shands and owns and leases various rental properties in Florida. Shands is the sole corporate member of the Foundation. Shands has interests in various joint ventures, fully described in Note 2. 17

20 2. Summary of Significant Accounting Policies The following is a summary of the significant accounting policies followed by Shands in the presentation of these consolidated basic financial statements: Basis of Presentation The accompanying consolidated basic financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, including all applicable effective statements of the Governmental Accounting Standards Board ( GASB ), on the accrual basis of accounting and include the accounts of Shands and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of these consolidated basic financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated basic financial statements and accompanying notes. Actual results could differ from those estimates. Tax Status Shands and its subsidiaries are exempt from federal income taxes pursuant to Section 501(a) as organizations described in Section 501(c)(3) of the Internal Revenue Code and from state income taxes pursuant to Chapter 220 of the Florida Statutes. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid instruments with original maturities of three months or less when purchased, except those classified as assets whose use is restricted in the accompanying consolidated basic statements of net position. Investments Investments primarily consist of domestic and global fixed income funds, global equity funds, hedge funds, State of Florida Special Purpose Investment Account ( SPIA ), and a private equity partnership. Investments are carried at fair value. Interest, dividends, and gains and losses on investments, both realized and unrealized, are included in nonoperating revenues when earned. The estimated fair value of investments is based on quoted market prices, except for alternative investments, for which quoted market prices are not available. Alternative investments held by Shands include private equity and hedge funds. Shands classifies its alternative investments as assets whose use is restricted, less current portion in the accompanying consolidated basic statements of net position as management does not have the intent, and in the case of its investments in private equity, does not have the ability to sell a portion of the alternative investments in the near term. The estimated fair value of the private equity and hedge funds is based on valuations provided by the respective partnerships or funds. Shands reviews and evaluates the values provided by the partnerships or funds and agrees with the valuation methods and assumptions used in determining the fair value of the private equity and hedge fund investments. As of, these equity investments in hedge funds and private 18

21 equity made up approximately 5% and 4%, respectively, of total investments in the accompanying consolidated basic statements of net position. Because private equity and hedge funds are not readily marketable, their estimated value is subject to uncertainty and therefore, may differ materially from the value that would have been used had a ready market for such investments existed. Assets Whose Use is Restricted Assets whose use is restricted primarily include assets held by trustees under indenture agreements and designated assets set aside by the Board of Directors (the Board ). The Board retains control of the designated assets and may, at its discretion, subsequently determine their use for other purposes. Amounts required to meet current liabilities are reported as current assets. Inventories Inventories consist principally of medical, surgical, and pharmaceutical supplies that are stated at the lower of cost (average cost method) or market. Pledges Receivable Pledges receivable represent donor commitments to provide future funding, primarily in association with various capital construction projects at Shands and are generally due in five years or greater. Pledges receivable are recorded net of an estimated reserve for uncollectible pledges. The current portion of pledges receivable is reported in prepaid expenses and other current assets in the accompanying consolidated basic statements of net position. The long-term portion of pledges receivable is reported in other assets in the accompanying consolidated basic statements of net position. For the years ended, pledge discount rates range from 0.6% to 5.2%. Capital Assets Capital assets are recorded at historical cost at date of purchase or at fair market value at date of donation. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Routine maintenance and repairs are expensed when incurred. Expenditures that materially increase the value, change the capacity or extend the useful life of an asset are capitalized. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. Depreciation is computed using the straight-line method over the estimated useful lives of the related depreciable assets as recommended by the American Hospital Association. Equipment under capital leases is amortized using the straight-line method over the shorter period of the lease term or the estimated useful life of the related assets. Such amortization is included in depreciation and amortization expense in the accompanying consolidated basic statements of revenues, expenses and changes in net position. Gains and losses on disposition are recorded in the year of disposal and are reported as nonoperating revenues (expenses) in the accompanying consolidated basic statements of revenues, expenses and changes in net position. Joint Ventures Shands has a 40% minority interest with Community Health Systems, Inc. ( CHS ) in Lake Shore HMA, LLC, Starke HMA, LLC, and Live Oak HMA, LLC for three rural community hospitals (Shands Lake Shore located in Lake City, Florida; Shands Starke located in Starke, Florida; and Shands Live Oak located in Live Oak, Florida). Prior to January 27, 2014, the interest was with Health Management Associates, Inc. ( HMA ). On January 27, 2014, CHS acquired all of HMA s issued and outstanding stock. CHS manages the operations of the three facilities. Shands accounts for the investment under the equity method of accounting. At, an investment of approximately $10,567,000 and $11,901,000, respectively, was recorded in other assets in the 19