EMORY/SAINT JOSEPH S, INC. AND AFFILIATES. Combined Financial Statements. August 31, 2017 and (With Independent Auditors Report Thereon)

Transcription

1 Combined Financial Statements (With Independent Auditors Report Thereon)

2 KPMG LLP Suite Peachtree Street, N.E. Atlanta, GA Independent Auditors Report The Board of Directors Emory/Saint Joseph s, Inc.: Report on the Financial Statements We have audited the accompanying combined financial statements of Emory/Saint Joseph s, Inc. and its affiliates (the System), which comprise the combined balance sheets as of, and the related combined statements of operations, changes in net assets, and cash flows for the years then ended, respectively, and the related notes to the combined financial statements. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined 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 combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the combined 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 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 combined 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Emory/Saint Joseph s, Inc. and affiliates as of, and the results of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. 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.

3 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2017 on our consideration of Emory/Saint Joseph s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of Emory/Saint Joseph s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Emory/Saint Joseph s internal control over financial reporting and compliance. Atlanta, Georgia December 15,

4 Combined Balance Sheets (In thousands) Assets Current assets: Cash and cash equivalents $ 112,984 78,974 Investments Receivables: Patients, less allowance for uncollectible accounts of $35,973 and $36,238 in 2017 and 2016, respectively 54,819 56,371 Other receivables Other current assets 5,350 4,607 Total current assets 173, ,507 Assets limited as to use 6,522 4,494 Property and equipment, net 268, ,803 Other assets 25,796 26,361 Total assets $ 474, ,165 Liabilities and Net Assets Current liabilities: Current portion of long-term debt $ 5,908 5,741 Due to related party 217 1,873 Accounts payable, accrued liabilities, and other 26,264 16,117 Third-party settlements 8,229 7,182 Total current liabilities 40,618 30,913 Long-term debt, excluding current portion 185, ,443 Accrued general and professional liability costs 1,516 1,390 Due to related party, excluding current portion 12,559 Other long-term liabilities 46,311 63,670 Total liabilities 286, ,416 Net assets: Unrestricted 181, ,192 Temporarily restricted 5,256 3,372 Permanently restricted 1,356 1,185 Total net assets 188, ,749 Commitments and contingencies Total liabilities and net assets $ 474, ,165 See accompanying notes to combined financial statements. 3

5 Combined Statements of Operations Years ended (In thousands) Revenue, gains, and other support: Net patient service revenue (net of provision for uncollectible accounts of $37,811 in 2017 and $44,132 in 2016) $ 518, ,669 Other revenue 40,580 38,557 Total revenue, gains, and other support 559, ,226 Expenses: Salaries and wages 180, ,402 Employee benefits 41,813 41,392 Professional fees medical 31,441 21,922 Supplies 119, ,109 Purchased services 14,349 14,943 Rent, utilities, and maintenance 29,217 27,886 Interest 10,098 10,295 Insurance 4,190 3,793 Depreciation and amortization 30,330 29,972 Emory University overhead Emory Healthcare services 50,959 52,169 Other expenses 9,285 16,061 Reimbursements (492) 94 Total expenses 522, ,358 Operating income 37,399 10,868 Nonoperating gains (losses): Change in fair value of interest rate swap 505 (279) Net realized and unrealized gains (losses) on investments 139 (10) Other 457 3,651 Total nonoperating gains, net 1,101 3,362 Revenue, gains, and other support in excess of expenses and losses 38,500 14,230 Net unrestricted transfer to Emory Healthcare, Inc. (12,559) Net effect of change in pension obligation 3,245 (6,632) Net assets released from restriction and contributions used for capital expenditures Change in unrestricted net assets $ 29,251 8,434 See accompanying notes to combined financial statements. 4

6 Combined Statements of Changes in Net Assets Years ended (In thousands) Temporarily Permanently Unrestricted restricted restricted Total Net assets, August 31, 2015 $ 143,758 3, ,944 Revenue, gains, and other support in excess of expenses and losses 14,230 14,230 Net effect of change in pension obligation (6,632) (6,632) Net assets released from restriction and contributions used for capital expenditures 836 (1,206) (370) Contributions and other ,577 Change in net assets 8,434 (229) 600 8,805 Net assets, August 31, ,192 3,372 1, ,749 Revenue, gains, and other support in excess of expenses and losses 38,500 38,500 Net unrestricted transfer to Emory Healthcare, Inc. (12,559) (12,559) Net effect of change in pension obligation 3,245 3,245 Net assets released from restriction and contributions used for capital expenditures 65 (65) Contributions and other 1, ,120 Change in net assets 29,251 1, ,306 Net assets, August 31, 2017 $ 181,443 5,256 1, ,055 See accompanying notes to combined financial statements. 5

7 Combined Statements of Cash Flows Years ended (In thousands) Cash flows from operating activities: Change in net assets $ 31,306 8,805 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 30,330 29,972 Gain on disposal of property and equipment (4) (3,266) Provision for uncollectible accounts 37,811 44,132 Net realized and unrealized (gains) losses on investments (79) 10 Change in fair value of interest rate swap (505) 279 Changes in operating assets and liabilities: Receivables (36,301) (40,180) Other assets (1,034) (149) Accounts payable, accrued liabilities, and other 10,147 (4,684) Accrued general and professional liability costs Due to related party 10,903 1,730 Other long-term liabilities (16,854) 5,259 Third-party settlements 1, Net cash provided by operating activities 66,893 42,042 Cash flows from investing activities: Capital expenditures (25,303) (23,965) Proceeds from disposal of property and equipment 7 7,928 Change in assets limited as to use (2,028) (342) Net cash used in investing activities (27,324) (16,379) Cash flows from financing activity repayments of long-term debt (5,559) (13,461) Change in cash and cash equivalents 34,010 12,202 Cash and cash equivalents at beginning of year 78,974 66,772 Cash and cash equivalents at end of year $ 112,984 78,974 Supplemental disclosure of cash flow information: Cash paid for interest $ 10,099 10,296 Supplemental disclosure of noncash financing activity: Net unrestricted transfer to Emory Healthcare, Inc. $ 12,559 See accompanying notes to combined financial statements. 6

8 (1) Organization and Summary of Significant Accounting Policies Emory/Saint Joseph s, Inc. and affiliates (the System), located in Atlanta, Georgia, is a comprehensive healthcare system that provides inpatient, outpatient, physician care, and emergency care services to patients in the north metro Atlanta area. The System was formed on December 31, 2011 as a joint operating company (JOC) between Emory Healthcare, Inc. (EHC) and Saint Joseph s Health System (SJHS) upon the two parties entering into an agreement (the Contribution Agreement). The System was formed to further the respective missions of Emory University, the sole corporate member of EHC, and CHE Trinity Health (f/k/a Catholic Health East), the sole corporate member of SJHS, to deliver high-quality healthcare services to patients in the north metro Atlanta area. Under the Contribution Agreement, EHC transferred to the System the assets and liabilities of EHCA Johns Creek Hospital, LLC (EJCH) in exchange for a 51% controlling membership interest. SJHS transferred to the System the assets and liabilities of then-existing Saint Joseph s Hospital of Atlanta, subsequently referred to as Emory Saint Joseph s Hospital (ESJH), then-existing Saint Joseph s Translational Research Institute, subsequently referred to as T3 Laboratories (T3), and certain medical group practices. In addition, on the eighteen-month anniversary of the closing date of the transaction, SJHS contributed and delivered to the System $5,000, which was deemed a deferred payment of the SJHS contribution in consideration of the membership interest in the System upon acquisition. The Contribution Agreement attributed to SJHS a 49% noncontrolling membership interest in the System. Descriptions of the System s organization and the significant accounting policies used in preparing and presenting its combined financial statements are as follows: (a) Organization The accompanying combined financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of ESJH, EJCH, medical group practices referred to as Emory Specialty Associates Joint Operating Company (ESA-JOC), and T3 (sold in 2016). All significant intercompany accounts and transactions have been eliminated in combination. ESJH is a 410-bed acute care hospital located in the north metro Atlanta area. EJCH is a general 110-bed acute-care hospital in the Johns Creek area of north Fulton County. ESJH and EJCH are sometimes referred to collectively herein as the Hospitals. ESA-JOC is a clinically integrated medical group with physicians serving patients in the Atlanta area. ESA-JOC physicians have expertise in the specialties of cardiology, internal medicine, gynecology, gynecologic oncology, and cardiothoracic surgery. T3 was a not-for-profit organization which operated a preclinical research institute. The institute gathered scientists, industry partners, leading physicians, and a collaborative network of international experts to develop, test, and deploy new device and drug therapies, as well as diagnostic and biotechnology procedures. During 2016, ESJ sold its sole membership interest in T3 to Global Center for Medical Innovation, Inc., an unrelated not-for-profit corporation, for a nominal purchase price of one dollar. A loss on disposal of approximately $9,473 was incurred as a result of this transaction and is included in other expenses in the accompanying combined statement of operations for the year ended August 31, (Continued)

9 (b) Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid instruments with maturities of three months or less when purchased, excluding amounts limited as to use by board, management, or donor designation and amounts included in certain debt reserve funds. (c) Investments, Assets Limited as to Use, and Investment Income The System participates in Emory University s centralized treasury management process. As such, Emory University is responsible for System investment management in accordance with the System s defined investment policies, which themselves are overseen by the Investment Committee of the Board. System management does not make individual investment decisions and, consistent with Emory University policy and process, relies on the centralized treasury function to make routine investment decisions consistent with the System s defined policies regarding credit risk, rate risk, maturity ladder, return-on-investment targets, and other criteria. Pooled investments held at Emory University comprise a diversified portfolio of debt securities, equity securities, and other investments (including alternative investment vehicles). Participation in or withdrawal from the investment pool is based on the estimated fair value per unit at monthly intervals during the year. Estimated fair value per unit is determined based on the estimated fair value of the underlying investments in the pooled investments held at Emory University. Assets limited as to use include funds subject to donor restrictions and assets set aside as required by related debt agreements. Investments and assets limited as to use are reported at estimated fair value in the combined balance sheets. Fair value is measured in accordance with relevant accounting literature and discussed in note 1(s) to the combined financial statements. Investment income from assets limited as to use is included in other revenue in the accompanying combined statements of operations. Unrealized gains and losses on trading investments and realized gains and losses on investments are included in nonoperating gains (losses), unless donors, or law restricts the income or loss. (d) Contributions The System records contributions upon receipt of associated cash or other assets or receipt of unconditional promises to give at estimated fair value. Promises to give that are expected to be collected within one year are recorded at net realizable value. Promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts on amounts expected to be received are computed using risk-adjusted rates for promises to give. Amortization of the discounts is included in changes in temporarily or permanently restricted net assets. Gifts, bequests, and unconditional promises to give that are restricted by donors as to use or to be received in excess of one year are recorded as temporarily restricted net assets until used in the manner designated or upon expiration of the time period over which the assets are to be received. As expenditures are incurred to satisfy donor restrictions, the related net assets are reclassified to unrestricted net assets as net assets released from restrictions. Gifts, bequests, and unconditional promises to give that are restricted by donors for endowment are recorded as permanently restricted net assets. Unrestricted contributions are included in unrestricted net assets when contributed. 8 (Continued)

10 (e) Inventories Inventories, consisting principally of medical supplies and pharmaceuticals, are stated at the lower of cost (first-in, first-out method) or market and are recorded within other current assets in the accompanying combined balance sheets. (f) Property and Equipment Property and equipment acquisitions are recorded at cost. Expenditures for renewals and improvements are charged to the property accounts. For properties sold or retired, the cost and related accumulated depreciation are removed from the property accounts. Any resulting gains or losses are included in other nonoperating gains (losses). Provisions for depreciation are computed using the straight-line method based on the estimated useful lives of the depreciable assets. Useful lives for property and equipment are: land improvements 7 to 39.5 years, buildings 10 to 40 years, leasehold improvements lesser of the term of the lease or the estimated useful lives of the improvement, and equipment 3 to 20 years. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support at estimated fair value and are excluded from expenses and losses in excess of revenue, gains, and other support, 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 support. Absent explicit donor stipulation about how long those long-lived assets must be maintained, expirations of donor restrictions are recognized when the donated or acquired long-lived assets are placed into service. Contributions restricted to the purchase of property and equipment, which restrictions are met within the same year as received, are reported as increases in unrestricted net assets in the accompanying combined financial statements. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. (g) Long-Lived Assets Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the System first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Assets to be disposed of are separately presented in the combined balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale are presented separately in the appropriate asset-and-liability sections of the combined balance sheet. There was no impairment of long-lived assets during the years ended. 9 (Continued)

11 (h) Goodwill and Indefinite-Lived Intangible Assets Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Indefinite-lived intangible assets are assets that are not amortized because there is no foreseeable limit to cash flows generated from them. If it is more likely than not that the asset is impaired, the System records the amount that the carrying value exceeds the fair value as an impairment expense. The System performed its annual impairment review of indefinite lived intangible assets at August 31, 2017 and 2016 and determined that it is not more likely than not that the fair values were less than the carrying values. Goodwill and intangible assets are included in other assets in the accompanying combined balance sheets. (i) Revenue, Gains, and Other Support in Excess of Expenses and Losses The combined statement of operations includes revenue, gains and other support in excess of expenses and losses. Changes in unrestricted net assets, which are excluded from revenue, gains and other support in excess of expenses and losses include permanent transfers of assets to and from affiliates for other than goods and services, certain pension plan accounting adjustments, and contributions of long-lived assets (including assets acquired using contributions, which by donor restriction were to be used for the purpose of acquiring such assets). (j) Income Taxes The System, ESJH, and T3 have been recognized as exempt from federal income tax under Internal Revenue Code (IRC) Section 501(a) as organizations described in IRC Section 501(c)(3) and, therefore, related income is generally not subject to federal or state income taxes. EJCH and ESA-JOC are both single-member limited liability companies, wholly owned by the System, and as such are disregarded entities for tax purposes. The System applies FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes, which addresses the accounting for uncertainties in income tax positions. It also provides guidance on when tax positions are recognized in an entity s financial statements and how the values of these positions are determined. There is currently no impact on the System s combined financial statements as a result of the application of ASC 740. (k) Use of Estimates The preparation of combined financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires that management make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue, and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the determination of the allowances for uncollectible accounts and contractual adjustments, useful lives assigned to capital assets, reserves for employee healthcare and workers compensation claims, accrued professional and general liability costs, estimated third-party settlements, and actuarially determined employee benefit liabilities related to the System s pension plan. 10 (Continued)

12 In addition, laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates related to these programs will change by a material amount in the near term. (l) Net Patient Service Revenue, Charity Care, and Third-Party Settlements Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. The System classifies the provision for uncollectible accounts associated with patient service revenue as a deduction from patient service revenue (net of contractual adjustments and discounts) rather than an operating expense. The System also provides disclosure about its policies for recognizing revenue and assessing uncollectible accounts, and disclosures of patient service revenue and qualitative and quantitative information about changes in the allowance for uncollectible accounts in note 6. Regarding the Hospitals reserves for third-party payor cost report audits and anticipated settlements (note 6), the Hospitals provide such reserves in recognition of the complexity of relevant reimbursement regulations, the volatility of related settlement processes, and an increasingly provocative overall healthcare regulatory environment. The Hospitals estimates of third-party settlements provide for the Hospitals routine exposures in this area consistent with industry-specific accounting principles and practices. Management believes that the outcome of these uncertainties could have a material adverse effect on the financial condition, cash flows, or operating results of the System. During fiscal years 2017 and 2016, management recorded a favorable change in estimate to net patient service revenue of approximately $821 and $1,121, respectively, due to the adjustment of previously estimated third-party payor reserves that are no longer necessary as a result of final settlements and years that are no longer subject to audits, reviews, and investigations. Prior to fiscal year 2011, the Hospitals cost reports were filed on a calendar-year basis. The System provides care to patients who meet certain criteria under its charity care policies without charge or at amounts less than established rates. Because the System does not pursue collection of amounts determined to qualify as charity/indigent care, such amounts are not included in net patient service revenue. The System applies the provisions of FASB ASU , Health Care Entities (Topic 954): Measuring Charity Care for Disclosure. ASU amends ASC Subtopic , Health Care Entities Revenue Recognition, and requires that cost be used as the measurement basis for charity care disclosure purposes. The method used to estimate such costs is disclosed in note 7. (m) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the System is restricted by donors for a specific time period or purpose. Permanently restricted net assets are those restricted by donors to be maintained by the System in perpetuity. 11 (Continued)

13 (n) Investments in Joint Ventures The System accounts for investments in joint ventures over which it has significant influence but not a controlling financial interest using the equity method of accounting. Investments in joint ventures are generally included in other assets in the accompanying combined balance sheets. Regarding investments in which the System has guaranteed obligations of a joint venture or is otherwise committed to provide further financial support for the joint venture for additional losses in excess of the System s contributed capital, investment in the related unconsolidated joint venture is included in other long-term liabilities in the accompanying combined balance sheets. (o) Functional Expense Classification In all material respects, expenses in the accompanying combined statements of operations were incurred for or related to the provision of healthcare services by the System. (p) Guarantees The System applies the provisions of FASB ASC Topic 460, Guarantor s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (ASC 460). ASC 460 requires entities to disclose additional information about certain guarantees, or groups of similar guarantees, even if the likelihood of the guarantor having to make any payments under the guarantee is remote. For certain guarantees, a guarantor is required to recognize a liability equal to the fair value of the guarantee upon its issuance. ASC 460 accounting has had no impact on any amounts reported in the accompanying combined financial statements, and the applicable disclosures required by ASC 460 are provided in the notes to these combined financial statements. (q) Retirement Benefits The System applies the recognition and disclosure provisions of FASB ASC Topic 715, Compensation Retirement Benefits (ASC 715). ASC 715 requires that the System recognize the unfunded status of its defined-benefit pension plan on its combined balance sheet. ASC 715 also requires measurement of plan assets and benefit obligations as of the System s fiscal year-end, including disclosures related to the fair value of the plan assets. (r) Derivative Instruments and Hedging Activities The System accounts for its derivatives and hedging activities in accordance with FASB ASC Topic 815, Derivatives and Hedging. All derivative instruments are recognized on the System s combined balance sheet at their estimated fair value. On the date a derivative contract is established, the System designates the derivative as either (a) a fair value hedge of a recognized asset or liability, (b) a cash flow hedge of a forecasted transaction, or (c) a nondesignated derivative instrument. For those instruments designated as hedging derivatives, the System formally assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Changes in fair values of effective hedging derivatives are accumulated in the System s net assets. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the System discontinues hedge accounting prospectively. To the extent that the 12 (Continued)

14 hedge ineffectiveness is associated with these changes in fair value, it is recognized in unrestricted revenue, gains, and other support in excess of expenses and losses. Should hedge accounting be discontinued because it is determined that the derivative no longer qualifies as an effective hedge, the System continues to carry the derivative on the combined balance sheet at its fair value with subsequent changes in fair value included in unrestricted revenue, gains and other support in excess (deficit) of expenses and losses. Gains and losses that were accumulated in unrestricted net assets are amortized on a straight-line basis over the remaining life of the derivative in the determination of unrestricted revenue, gains and other support in excess (deficit) of expenses and losses. The System does not currently apply hedge accounting to any of its derivative instruments. (s) Fair Value Accounting Standard The System applies FASB ASC Topic 820, Fair Value Measurement (ASC 820), which establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market at the measurement date. In accordance with ASC 820, the System has categorized its financial instruments into a three-level fair value hierarchy, based on the priority of inputs used in related valuation techniques. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within multiple levels of the hierarchy, the categorization is based on the lowest-level input that is significant to the fair value measurement of the instrument. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 Financial assets and liabilities whose values are based on significant unadjusted quoted prices for identical assets and liabilities in an active market that the System has the ability to access as of the measurement date. The types of investments that would generally be included in Level 1 include listed equity securities, mutual funds and money market funds. Level 2 Financial assets and liabilities whose values are based on pricing inputs that are either directly observable or that can be derived or supported from observable data as of the measurement date. The types of investments that would generally be included in this category include publicly traded securities with restrictions on disposition, nontraded mutual funds, corporate obligations, U.S. government and agency treasury inflation protected securities, and interest rate derivatives primarily valued using pricing models that rely on market observable inputs, such as yield curves. 13 (Continued)

15 Level 3 Financial assets and liabilities whose values are based on pricing inputs that are unobservable as of the measurement date. The inputs into the determination of fair value require significant judgment or estimation. The types of investments that would generally be included in this category include debt and equity securities issued by private entities and partnerships. When the data is available, the System generally uses quoted market prices to measure fair value and classifies such items as Level 1. The System s Level 2 securities may at times include bonds whose estimated fair values are determined by independent vendors, or nontraded mutual funds whose underlying securities would otherwise be considered Level 1. Vendors may compile prices from various sources and may apply matrix pricing for similar bonds, loans, or other securities where no price is observable in an actively traded market. If available, the vendor may also use quoted prices for recent trading activity of assets with similar characteristics to the investment being valued. The carrying amounts of cash and cash equivalents, receivables, and accounts payable and accrued expenses approximate their estimated fair values (and are classified largely as Level 1 within the fair value hierarchy described below), in all significant respects, at, given the short-term nature of these financial instruments. The fair value of the interest rate swap is the estimated amount the System would receive or pay to terminate the agreement at the financial reporting date, taking into account current interest rates and the current credit worthiness of the exchange counterparties. The fair value measurement of the derivative instrument described above is classified by the System as Level 2 within the fair value hierarchy. The System applies ASU , Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent), which permits, as a practical expedient, fair value of investments within its scope to be estimated using NAV or its equivalent. The practical expedient was applied to the System s pooled investments held at Emory University that do not have readily determinable fair values. NAV, in many instances, may not equal fair value that would be calculated pursuant to ASC 820. There are no redemption restrictions on the System with respect to its investments. In accordance with ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), investments that are valued using the practical expedient as described above are labeled as NAV and are not categorized within the ASC 820 hierarchy in the tables included in note 2. (t) Subsequent Events The System has evaluated subsequent events and transactions for potential recognition or disclosure in the combined financial statements through December 15, 2017, the date at which the combined financial statements were available to be issued, and noted that there are no other items to disclose. (u) Endowment Accounting Standard The System applies the provisions of FASB ASC Topic 958, Not-for-Profit Entities, which provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional 14 (Continued)

16 Funds Act of 2006 (UPMIFA) and also requires disclosures about endowment funds (both donor-restricted and board-designated). The System has historically and to-date received limited donor-restricted endowment funds, and does not maintain any board-designated endowments. The System s Board has interpreted Georgia s State Prudent Management of Institutional Funds Act (SPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary. In all material respects, income from the System s donor-restricted endowment funds is itself restricted to specific donor-directed purposes and is, therefore, accounted for within temporarily restricted net assets until expended in accordance with the donor s wishes. The System oversees individual donor-restricted endowment funds to ensure that the fair value of the original gift is preserved. The System invests donor-restricted endowment funds within the framework of the System s overall investment management program as previously described. (v) Recently Issued Accounting Standards In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the 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. An entity also should disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for the System for fiscal years beginning after December 15, 2017 (as amended in August 2015 by ASU No , Deferral of Effective Date). The System will implement the provisions of ASU during fiscal year The System has not yet completed its assessment of the impact of the new guidance on its combined financial statements. The FASB issued ASU , Inventory (Topic 330), Simplifying the Measurement of Inventory, in July 2015, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. Management plans to adopt ASU beginning September 1, The System does not expect ASU to have a material effect on the combined financial statements. In January 2016, the FASB issued ASU No , Recognition and Measurement of Financial Assets and Liabilities (ASU ). ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for not-for-profit entities for fiscal years beginning after December 15, 2017, with early adoption restricted to certain provisions and within certain time periods. Under the ASU, not-for-profit entities are no longer required to disclose fair value information concerning financial instruments measured at amortized cost such as long-term debt. This provision of ASU may be early adopted for financial statements, which have not yet been issued or made available for issuance. The System implemented the aforementioned provision during fiscal 2017 and will implement the remaining provisions of ASU during fiscal year The System has not yet determined the impact of the new standard on its current policies. 15 (Continued)

17 In February 2016, the FASB issued ASU No , Leases (Topic 842) (ASU ). The amendments in ASU create FASB ASC Topic 842, Leases, and supersede the requirements in ASC Topic 840, Leases. ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under ASC Topic 840. Under the guidance of ASU , a lessee should recognize in the balance sheet a liability to make lease payments (lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor under ASU is largely unchanged from that applied under ASC Topic 840. The ASU is effective for all business entities for fiscal years beginning after December 15, The System will implement the provisions of ASU during fiscal year The System has not yet determined the impact of the new standard on its current policies for lessee accounting. In August 2016, the FASB issued ASU No , Presentation of Financial Statements of Non-for-Profit Entities (ASU ). ASU (1) reduces the number of net asset classes presented from three to two; (2) requires the presentation of expenses by functional and natural classification in one location; and (3) requires quantitative and qualitative disclosures about liquidity and availability of financial assets. The ASU is effective for annual financial statements issued for fiscal years beginning after December 15, The System will implement the provisions of ASU during fiscal year The System has not yet determined the impact of the remaining provisions of the new standard on its current policies. In March 2017, the FASB issued ASU , Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU ), which requires companies to present the service cost component of net benefit cost in the income statement line items where they report compensation cost, and all other components of net benefit cost in the income statement separately from the service cost component and outside of operating income, if this subtotal is presented. Additionally, the service cost component will be the only component that can be capitalized. ASU is effective in annual periods in fiscal years beginning after December 15, The standard requires retrospective application for the amendments related to the presentation of the service cost component and other components of net benefit cost, and prospective application for the amendments related to the capitalization requirements for the service cost components of net benefit cost. (2) Investments, Assets Limited as to Use, and Investment Income (a) Investments The System s investments of $105 and $26 comprise of pooled investments held at Emory University as of, respectively. 16 (Continued)

18 (b) Assets Limited as to Use As of, the System s assets limited as to use comprise the following: 2017 Level 1 Level 2 NAV Total Limited by donor direction for specifically defined patient care and related objectives: Cash $ 5,151 5,151 Pooled investments held at Emory University 1,356 1,356 5,151 1,356 6,507 Cash limited by bond agreement $ 5,166 1,356 6, Level 1 Level 2 NAV Total Limited by donor direction for specifically defined patient care and related objectives: Cash $ 3,294 3,294 Pooled investments held at Emory University 1,185 1,185 3,294 1,185 4,479 Cash limited by bond agreement $ 3,309 1,185 4,494 (c) Interest and Dividend Income and Net Realized and Unrealized Gains(Losses) on Investments Interest and dividend income for the years ended totaled $682 and $198, respectively, and is included in other revenue in the accompanying combined statements of operations. Net realized and unrealized gains (loss) on investments was $139 and $(10) for the years ended, respectively, and is included as a component of nonoperating gains (losses) in the accompanying combined statements of operations. 17 (Continued)

19 (d) Pooled Investments Held at Emory University As of, the System had pooled investments held at Emory University totaling $1,461 and $1,211, respectively, which represents a nominal ownership interest in total pooled investments held at Emory University. (3) Property and Equipment A summary of property and equipment as of is as follows: Land and land improvements $ 24,795 24,639 Buildings and leasehold improvements 221, ,882 Equipment 231, ,134 Construction in progress 11,368 5, , ,850 Less accumulated depreciation (220,577) (193,047) $ 268, ,803 Construction in progress at August 31, 2017 is mainly related to facility renovation projects at ESJH and EJCH and has an estimated total remaining cost to complete of approximately $5,900. Capitalized interest is not significant in fiscal years 2017 and (4) Other Assets The composition of other assets as of is as follows: Intangible assets $ 25,565 26,238 Equity method investment in partnership Other 31 2 $ 25,796 26,361 Intangible assets primarily include certificates of need, licenses, trade names, medical records, and technological patents. Accumulated amortization related to these intangible assets was $7,731 and $6,874 as of, respectively. Amortization expense related to these intangible assets was $857 and $877 for the years ended, respectively. The System s investment in partnership relates to Gwinnett Cardiovascular Services, LLC (GCS). GCS was formed in April 2008 by Gwinnett Hospital System, Inc. (GHS) and ESJH to promote cardiovascular health and wellness in Gwinnett County. At the time of its formation, each partner contributed $200 to the joint venture, and ESJH and GHS each obtained a 50% membership interest in the joint venture. ESJH s 18 (Continued)

20 investment in GCS was contributed to the System as part of the System s formation described in note 1. GCS has a contract with GHS to provide clinical and operational oversight services to the cardiovascular programs at GHS. Payments are made by GHS to GCS based on meeting certain financial, clinical quality, and customer service targets. GCS then makes distributions to its partners, ESJH and GHS, based on contribution margin earned, as defined in the joint venture agreement. During the years ended August 31, 2017 and 2016, GCS did not make any contributions or distributions to ESJH. ESJH is also not responsible for any losses of GCS in excess of ESJH s original contribution to the joint venture. (5) Business and Credit Concentrations The System grants credit to patients, substantially all of whom reside in the Southeast United States The System generally does not require collateral or other security in extending credit to patients; however, it routinely obtains assignment of (or is otherwise entitled to receive) patients benefits payable under their health programs, plans, or policies (e.g., Medicare, Medicaid, Blue Cross, and other preferred provider arrangements and commercial insurance policies). The mix of net patient accounts receivables is as follows: Managed care and other third-party payors 54 % 57 % Medicare Medicaid 1 2 Patients % 100 % (6) Net Patient Service Revenue The System has agreements with governmental and other third-party payors that provide for reimbursement to the System at amounts different from established billing rates. Contractual adjustments under third-party reimbursement programs represent the difference between the System s billings at established rates for services and amounts reimbursed by third-party payors. A summary of the basis of reimbursement with major third-party payors follows: Medicare Substantially all acute care and professional services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to patient classification systems that are based on clinical, diagnostic, and other factors. Certain types of exempt services and other defined payments related to Medicare beneficiaries are paid based upon cost reimbursement or other retroactive-determination methodologies. The System is paid for retroactively determined items at tentative rates, with final settlement determined after submission of annual cost reports by the System and audits by the Medicare fiscal intermediary. The Hospitals Medicare cost reports have been audited and substantially settled for all fiscal years through December 31, Revenue from the Medicare program accounted for approximately 41% and 42% of the System s net patient service revenue for the years ended, respectively. Medicaid Inpatient and professional services rendered to Medicaid program beneficiaries are paid at prospectively determined rates. Outpatient services are generally paid based upon cost reimbursement 19 (Continued)

21 methodologies. The Hospitals Medicaid cost reports have been audited and substantially settled for all fiscal years through December 31, Revenue from the Medicaid program accounted for approximately 2% of the System s net patient service revenue for both of the years ended August 31, 2017 and 2016, respectively. The System contracts with certain managed care organizations in providing services to Medicaid beneficiaries. Payment arrangements with these managed care organizations consist primarily of prospectively determined rates per discharge, discounts from established charges, or prospectively determined per diem rates. The System participates in the State of Georgia Indigent Care Trust Fund (ICTF) program. Net amounts received from the ICTF program are recognized as additional Medicaid inpatient reimbursement and, therefore, are reflected in net patient service revenue. The related net reimbursement benefit recognized by the System for the years ended was approximately $358 and $323, respectively. The System has also entered into other reimbursement arrangements providing for payment methodologies, which include prospectively determined rates per discharge, discounts from established charges, and prospectively determined per diem rates. The composition of net patient service revenue (excluding charity care) for the years ended August 31, 2017 and 2016 is as follows: Gross patient service revenue $ 1,646,662 1,519,107 Less provisions for contractual and other adjustments (1,089,886) (997,306) Less provision for uncollectible accounts (37,810) (44,132) Net patient service revenue $ 518, ,669 The System recognizes patient service revenue associated with services provided to patients with third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients who do not qualify for community financial aid, the System recognizes revenue on the basis of its discounted rates for services provided. On the basis of historical experience, a significant portion of the System s uninsured patients are unable or unwilling to pay for the services provided. Thus, the System records a significant provision for uncollectible accounts related to uninsured patients in the period the services are provided. Patient service revenue, net of contractual allowances and discounts (but before the provision for uncollectible accounts), recognized during the years ended from these major payor sources is as follows: 2017 Third-party payors Self-pay Total Patient service revenue, net of contractual adjustments and discounts $ 525,002 31, , (Continued)