C ONSOLIDATED F INANCIAL S TATEMENTS

Transcription

1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION Crozer-Keystone Health System and Controlled Affiliates Years Ended June 30, 2013 and 2012 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements and Supplementary Information Years Ended June 30, 2013 and 2012 Contents Report of Independent Auditors...1 Audited Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Operations...5 Consolidated Statements of Changes in Net Assets (Deficiency)...6 Consolidated Statements of Cash Flows...7 Notes to Consolidated Financial Statements...8 Supplementary Information Crozer-Keystone Health System and Controlled Affiliates Consolidating Balance Sheet...48 Consolidating Statement of Operations...49 Acute Care Affiliates Combining Balance Sheet...50 Combining Statement of Operations

3 Ernst & Young LLP One Commerce Square Suite Market Street Philadelphia, PA Tel: Fax: Board of Directors Crozer-Keystone Health System Report of Independent Auditors We have audited the accompanying consolidated financial statements of Crozer-Keystone Health System and Controlled Affiliates (CKHS), which comprise the consolidated balance sheets as of June 30, 2013 and 2012, and the related consolidated statements of operations, changes in net assets (deficiency), and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity 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 financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crozer-Keystone Health System and Controlled Affiliates at June 30, 2013 and 2012, and the consolidated results of their operations, changes in net assets (deficiency), and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating and combining balance sheets as of June 30, 2013, and consolidating and combining statements of operations for the year then ended, are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. September 23, 2013 EY A member firm of Ernst & Young Global Limited

5 Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents 60,371 June $ $ 60,495 Short-term investments 23,993 23,854 Current portion of assets limited as to use 3,812 3,715 Patient accounts receivable, net of estimated uncollectibles of $21,000 in 2013 and $51,000 in ,001 96,364 Other receivables 16,914 16,866 Inventories 8,694 8,416 Prepaid expenses and other current assets 8,638 10,186 Total current assets 225, ,896 Investments 63,337 57,047 Assets limited as to use: By board for capital improvements 83,223 78,122 Debt service reserve and project funds 9,642 9,617 Property and equipment, net 166, ,724 Investments restricted for donor purposes 8,868 8,158 Investments in joint ventures 46,424 45,417 Deferred financing costs, net 1,659 1,838 Other assets 30,888 19,484 Beneficial interest in perpetual trusts 5,138 4,833 Total assets $ 640,660 $ 621,

6 Liabilities and net assets (deficiency) Current liabilities: Current portion of long-term debt 8,712 June $ $ 12,080 Short-term borrowings 15,000 15,000 Current portion of notes payable 1,153 2,970 Accounts payable and accrued expenses 112, ,954 Estimated third-party payor settlements 10,030 12,219 Current portion of deferred gain Total current liabilities 148, ,742 Long-term debt, excluding current portion 183, ,830 Pension liability 219, ,265 Other accrued retirement benefits 19,686 28,220 Other liabilities 27,603 30,417 Deferred gain, excluding current portion 10,206 8,442 Notes payable, excluding current portion Total liabilities 608, ,700 Net assets (deficiency): Unrestricted net assets (deficiency) 17,277 (83,677) Temporarily restricted net assets 6,450 5,386 Permanently restricted net assets 8,111 7,727 Total net assets (deficiency) 31,838 (70,564) Total liabilities and net assets (deficiency) $ 640,660 $ 621,136 See accompanying notes

7 Consolidated Statements of Operations Unrestricted net assets Revenues, gains, and other support: Net patient service revenue 766,815 Year Ended June $ $ 811,088 Provision for bad debts (13,248) (52,787) Net patient service revenue less provision for bad debts 753, ,301 Other revenue 47,863 45,860 Investment income, net 6,058 5, , ,354 Expenses: Salaries, wages, and benefits 506, ,707 Supplies, purchased services, and other 232, ,334 Quality care assessment 14,352 14,653 Depreciation and amortization 24,250 24,753 Interest 7,987 8,361 Insurance 8,754 14, , ,442 Income from operations before other items 12,416 13,912 Other items: Income from joint ventures 1,712 2,919 Restructuring charges (12,113) Loss on extinguishment of debt (535) Excess of revenues, gains, and other support over expenses 14,128 4,183 Other changes in unrestricted net assets: Change in net unrealized gains and losses on investments 4,693 (626) Other changes in pension and other accrued retirement benefits liabilities 81,782 (143,756) Contributions for property and equipment 330 1,268 Net assets released from restrictions used for purchase of property and equipment Increase (decrease) in unrestricted net assets $ 100,954 $ (138,296) See accompanying notes

8 Consolidated Statements of Changes in Net Assets (Deficiency) Year Ended June Unrestricted net assets Excess of revenues, gains, and other support over expenses $ 14,128 $ 4,183 Other changes in unrestricted net assets: Change in net unrealized gains and losses on investments 4,693 (626) Other changes in pension and other accrued retirement benefits liabilities 81,782 (143,756) Contributions for property and equipment 330 1,268 Net assets released from restrictions used for purchase of property and equipment Increase (decrease) in unrestricted net assets 100,954 (138,296) Temporarily restricted net assets Contributions 2,268 1,380 Investment income, net Change in net unrealized gains and losses on investments 409 (233) Net assets released from restrictions (1,775) (2,358) Increase (decrease) in temporarily restricted net assets 1,064 (1,025) Permanently restricted net assets Change in net unrealized gains and losses on investments, including beneficial interest in perpetual trust 384 (192) Increase (decrease) in permanently restricted net assets 384 (192) Increase (decrease) in net assets 102,402 (139,513) Net (deficiency) assets, beginning of year (70,564) 68,949 Net assets (deficiency), end of year $ 31,838 $ (70,564) See accompanying notes

9 Consolidated Statements of Cash Flows Year Ended June Cash flows from operating activities Increase (decrease) in net assets $ 102,402 $ (139,513) Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities: Depreciation and amortization 24,250 24,753 Loss on extinguishment of debt 535 Net loss (gain) on sale of property and equipment 1,976 (531) Amortization of premium on bonds, net (339) (334) Provision for bad debts 13,248 52,787 Equity in earnings of joint ventures (1,712) (2,919) Cash distributions received from joint ventures 1, Net realized and unrealized gains and losses on unrestricted investments, net (6,516) 275 Restricted contributions and unrealized gains and losses on restricted investments, including beneficial interest in trusts (3,061) (955) Other changes in pension and other accrued retirement benefits liabilities (81,782) 143,756 Change in certain assets and liabilities: Net patient accounts receivable and other receivables (19,933) (45,350) Estimated third-party payor settlements (2,189) 1,107 Inventories and prepaid expenses and other current assets 394 (2,571) Accounts payable and accrued expenses 1,555 4,972 Pension liability 13,898 (16,411) Other assets and liabilities (6,119) 9,944 Net cash provided by operating activities 37,932 30,251 Cash flows from investing activities Expenditures for property and equipment (13,165) (27,647) Acquisition of businesses (12,231) (4,086) Increase in short-term investments, investments, and assets limited as to use, net (5,424) (5,630) Joint ventures activity, net (1,168) (6) Net cash used in investing activities (31,988) (37,369) Cash flows from financing activities Restricted contributions 2,268 1,380 Proceeds from short-term borrowings 180, ,000 Repayment on short-term borrowings (180,000) (180,000) Proceeds from long-term debt 31,000 Repayments on long-term debt (8,302) (29,670) Deferred financing fees incurred (34) (215) Net cash (used in) provided by financing activities (6,068) 2,495 Net decrease in cash and cash equivalents (124) (4,623) Cash and cash equivalents, beginning of year 60,495 65,118 Cash and cash equivalents, end of year $ 60,371 $ 60,495 Supplemental disclosures of cash flow information Cash paid for interest $ 8,335 $ 8,687 See accompanying notes

10 Notes to Consolidated Financial Statements June 30, Organization Crozer-Keystone Health System (CKHS) is a Pennsylvania not-for-profit corporation. CKHS is the sole corporate member of Crozer-Chester Medical Center (CCMC), Delaware County Memorial Hospital (DCMH), Crozer-Keystone Health Network (CKHN) and Crozer Keystone Physician Partners, LLC (CKPP). CCMC is the sole corporate member of Crozer-Chester Foundation (CCF). DCMH is the sole corporate member of Delco Memorial Foundation (DMF). CKHS also owns 100% of the stock of Crozer-Keystone Services, Inc. (CKS) and Pennsylvania Health Club, Inc. (PHC). These organizations are collectively referred to as controlled affiliates of CKHS in the accompanying consolidated financial statements. CKHS offers a wide range of health care services through its controlled affiliates to the residents of Delaware, Chester, Montgomery, and Philadelphia Counties, Pennsylvania, Southern New Jersey, and Northern Delaware. These services include: inpatient and outpatient acute care services, subacute care, emergency and trauma services, nursing and rehabilitative services, physician care services, and other health prevention/promotional services. CCF and DMF (the Foundations) accept gifts and bequests and engage in fundraising activities for the sole benefit of CCMC and DCMH, respectively. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of CKHS and its controlled or owned affiliates. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates

11 2. Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements The Financial Accounting Standards Board has issued Accounting Standards Update (ASU) , Fair Value Measurements (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in ASU change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, CKHS has adopted the provisions of ASU in fiscal year The adoption did not have an impact on the consolidated financial statements. Net Patient Service Revenue CKHS has agreements with Medicare, Medical Assistance, and other third-party payors that provide for payments at amounts different from published charges. The basis of payment under these agreements includes prospectively determined rates per discharge, discounts from established charges, prospectively determined daily rates and certain cost reimbursement methodologies. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period that related services are rendered and adjusted in future periods as final settlements are determined. In fiscal year 2013, CKHS provided a discount at the time of billing to uninsured patients who do not qualify for charity care. These discounts for uninsured patients are reflected as a reduction to gross patient service revenues, which is the primary reason for the provision for bad debts decreasing from $52,787 in 2012 to $13,248 in

12 2. Summary of Significant Accounting Policies (continued) Other Revenue Other revenue is reported for non-patient care and consists primarily of grant revenue, unrestricted contributions, 340b pharmacy retail revenue, and incentive payments related to the implementation and meaningful use of certified electronic health records technology. Receivables for Patient Care Patient accounts receivable for which CKHS receives payment under cost reimbursement, prospective payment formulae, or negotiated rates, which cover the majority of patient services, are stated as the estimated net amounts receivable from payors, which are generally less than the established billing rates of CKHS. Patient accounts receivable are reported net of provisions based on management s assessment of historical and expected collections, business and economic conditions, trends in healthcare coverage, and other collection indicators. Allowance for Doubtful Accounts CKHS provides an allowance for doubtful accounts for estimated losses resulting from the unwillingness or inability of patients to make payments for services. The allowance is determined by analyzing specific accounts, historical and expected data and trends, business and economic conditions, trends in healthcare coverage, and other collection indicators. Patient accounts receivable are charged off against the allowance for doubtful accounts when management determines that recovery is unlikely and CKHS ceases collection efforts. Periodically, management assesses the adequacy of the allowance for doubtful accounts based on historical write-off experience. The results of management s evaluation are then used to make modifications to the provision for bad debts to establish an appropriate allowance for uncollectible receivables. Additionally, CKHS follows established guidelines for placing certain past-due patient balances with collection agencies, which are subject to certain restrictions on collection efforts as determined by CKHS. For the years ended June 30, 2013 and 2012, the provision for bad debts includes favorable collection experience on accounts receivable from prior years of approximately $600 and $400, respectively

13 2. Summary of Significant Accounting Policies (continued) Electronic Health Record Incentive Program The American Recovery and Reimbursement Act of 2009 established incentive payments under the Medicare and Medicaid programs for certain professionals and hospitals that meaningfully use certified electronic health record technology. Payments under the program are calculated based upon estimated discharges, charity care and other input data and are predicated upon CKHS s attainment of program and attestation criteria and are subject to regulatory audit. CKHS has opted to follow a grant accounting method, which provides for ratable recognition over the respective attestation period. The amount recognized in the current period has been recorded as other revenue in the consolidated statements of operations. As a result, management estimated and recognized revenue of $5,167 and $7,260 within other revenue for the years ended June 30, 2013 and 2012, respectively. Amounts recognized are subject to change, with such changes impacting operations in the period in which they occur. EHR incentive receivables from Medicare and Medicaid, which are included in other receivables, were $2,870 and $1,885, respectively, at June 30, 2013 and Charity Care and Community Service CKHS provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than the established rates. Because CKHS does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Additionally, CKHS sponsors certain other programs which provide substantial benefit to the broader community. Such programs include services to needy populations including community service programs and services for school-aged children and the elderly. CKHS also actively sponsors programs on health education and wellness. Fair Value of Financial Instruments Financial instruments consist of cash equivalents, patient accounts receivable, investments, assets limited as to use, accounts payable and accrued expenses, and long-term debt. The carrying amounts reported in the consolidated balance sheets for cash equivalents, patient accounts receivable, and accounts payable and accrued expenses approximate fair value. Management s estimate of the fair value of other financial instruments is described elsewhere in the notes to the consolidated financial statements

14 2. Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid instruments with original maturities of three months or less, excluding amounts included with assets limited as to use. Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated balance sheets primarily by quoted market prices. Gain and loss on sales of investments are based on average cost. Investment income, net (including interest, dividends, and realized gains or losses) is included in the excess of revenues, gains, and other support over expenses unless the income is restricted by the donor or law. Unrealized gains and losses on investments, to the extent that such losses are temporary, are excluded from the excess of revenues, gains, and other support over expenses. Certain declines in market value that are deemed to be other-than-temporary are reported as impairment losses. Investments in hedge funds are primarily fund of fund investments that invest in other hedge funds that are limited partnerships and are reported using the equity method of accounting based on the net asset information provided by the respective hedge fund. Investments held by the limited partnerships consist of marketable equity securities, fixed income securities, currencies, as well as securities that do not have readily determinable values. The values of the securities held by the partnerships that do not have readily determinable fair values are determined by the general partner and are based on the partnership s own assumptions, which includes liquidity attributes, and specific and broad credit data. There is inherent uncertainty in such valuations, and the estimated fair values may differ from the values that would have been used had a ready market for the securities existed. Generally, the equity method balance of CKHS s holdings in hedge funds reflects net contributions to the funds and CKHS s share of the realized and unrealized investment income and expense. The investments may expose CKHS to securities lending, short sales, and trading in futures and forward contract options and other derivative products. CKHS s risk is limited to its carrying value. Hedge funds can be divested only at specified times in accordance with the terms of the agreements. The financial statements of the hedge funds are audited annually

15 2. Summary of Significant Accounting Policies (continued) Assets Limited as to Use Assets limited as to use include (a) assets held by trustees under the terms of the respective bond agreements for the payment of debt service and (b) assets set aside by the Board of Directors for future capital improvements, over which the Board retains control and may, at its discretion, subsequently use for other purposes. The current portion of assets limited as to use includes investments which will be used to satisfy current liabilities related to debt service. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment acquisitions are recorded at cost. Donated property and equipment are recorded as additions to the unrestricted net assets at fair value at the date of receipt. Interest cost incurred on borrowed funds during the period of construction of capital assets, net of investment income from borrowed funds, is capitalized as part of the cost of acquiring those assets. There was no interest capitalized for the years ended June 30, 2013 and Provisions for depreciation are made over the estimated lives of the respective assets using the straight-line method based on the following estimated useful lives: Land improvements Buildings and improvements Equipment 5 20 years 5 40 years 5 20 years Gains and losses resulting from the disposition of assets are recognized in the period of disposition. Impairment of Long-Lived Assets CKHS evaluates the recoverability of long-lived assets and the related estimated remaining lives at each balance sheet date. CKHS records an impairment charge or changes the useful life if events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed

16 2. Summary of Significant Accounting Policies (continued) Goodwill and Intangible Assets, Net Goodwill and intangible assets have been primarily generated from the acquisition of certain businesses, as well as the formation of certain joint ventures. Amortization of intangible assets is calculated on a straight-line basis over the estimated life of the specific intangible asset and range from a period of 1 to 7 years. During the year ended June 30, 2013, CKHS acquired a cardiology outpatient imaging practice and two ambulatory surgery centers. The total purchase price for these acquisitions was approximately $12,900 and resulted in the recording of additional goodwill of approximately $9,547 and additional identifiable intangible assets of $977. Amortization expense was $155 and $52 for the years ended June 30, 2013 and 2012, respectively. The following is a summary of goodwill and intangible assets, net: Carrying Amount Accumulated Amortization Net June 30, 2013 Identifiable intangible assets $ 1,123 $ (254) $ 869 Goodwill 15,410 15,410 Total $ 16,533 $ (254) $ 16,279 June 30, 2012 Identifiable intangible assets $ 146 $ (99) $ 47 Goodwill 5,863 5,863 Total $ 6,009 $ (99) $ 5,910 CKHS evaluates, at least annually, whether subsequent events or circumstances have occurred that may render the balance of goodwill not recoverable. CKHS records an impairment charge when the events or circumstances indicate that the carrying amount of the goodwill exceeds the estimated fair value. As of June 30, 2013, there was not an indication of impairment of goodwill

17 2. Summary of Significant Accounting Policies (continued) Deferred Financing Costs Deferred financing costs consist of bond issuance costs and other costs incurred in connection with issuance of debt and are being amortized using the interest method over the term of the obligation. Beneficial Interest in Perpetual Trusts CCMC and the Foundations are entitled to beneficial interests in perpetual trusts at various percentages, which are maintained by outside trustees. CCMC s and the Foundations shares of the market value of the trusts are recorded in permanently restricted net assets. Unrealized gains and losses are also recorded as permanently restricted. The periodic income distributions received from the trustees are recorded as unrestricted or restricted revenue, based on the donors intentions. Discounts or Premium on Long-Term Debt Discounts or premium on long-term debt are reported as a reduction or increase of the face amount of the outstanding bonds and are amortized using the effective interest method over the term of the obligation. Net Assets Net assets are classified for accounting and financial reporting into three net asset categories according to donor-imposed restrictions, if any. A description of the three net asset categories follows: Unrestricted Net Assets Those assets that are available for the support of operations and whose use is not externally restricted, although their use may be limited by other factors such as by contract or board designation

18 2. Summary of Significant Accounting Policies (continued) Temporarily Restricted Net Assets Temporarily restricted net assets include gifts for which donor-imposed restrictions have not been met and trust activity and pledges receivable for which the ultimate purpose of the proceeds is not permanently restricted. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets as a component of other revenue for gifts that are for operations and as other changes in unrestricted net assets for gifts that are for the purchase of property and equipment. Permanently Restricted Net Assets Permanently restricted net assets include gifts, trusts, and pledges which require by donor restriction that the corpus be invested in perpetuity and only the income be made available for operations in accordance with donor restrictions. Endowments CKHS follows the requirements of UMIFA as they relate to its endowments. CKHS s endowments consist of individual funds established for specific purposes and consist solely of donor-restricted endowment funds. As required by U.S. generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. CKHS has interpreted UMIFA 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. As a result of this interpretation, CKHS classifies as permanently restricted net assets (1) the original value of gifts donated to the permanent endowment, (2) the original value of subsequent gifts to the permanent endowment and, (3) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is characterized as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by UMIFA. In

19 2. Summary of Significant Accounting Policies (continued) accordance with UMIFA, CKHS considers the following factors in making a determination to appropriate or accumulate donor-restricted funds: The duration and preservation of the fund The purposes of CKHS and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of CKHS The investment policies of CKHS CKHS has adopted investment policies for its endowment assets that are consistent with the policies and objectives of its overall investments. The assets are invested in a manner that is intended to produce a positive rate of return while assuming a low level of risk. From time to time, the fair value of assets associated with the donor-restricted endowment funds may fall below the level that the donor requires CKHS to maintain in perpetual duration. Deficiencies of this nature are reported in unrestricted net assets in accordance with U.S. generally accepted accounting principles. Excess of Revenues, Gains, and Other Support Over Expenses The consolidated statements of operations include the excess of revenues, gains, and other support over expenses which represents all unrestricted revenues and expenses for the reporting period. Other changes in unrestricted net assets that are excluded from the excess of revenues, gains, and other support over expenses include assets released from restrictions for the purchase of property and equipment, other changes in pension and other accrued retirement benefits liabilities, and changes in unrealized gains and losses on investments, to the extent losses are considered temporary

20 2. Summary of Significant Accounting Policies (continued) Income Taxes CKHS and most of its controlled affiliates are nonprofit organizations as described in Sections 501(c)(3) and 509(a)(1) of the Internal Revenue Code and are exempt from taxes. Reclassifications Certain reclassifications have been made to the consolidated financial statements of the prior year to conform to the current-year presentation which had no impact on previously reported excess of revenue, gains, and other support over expenses or net assets. 3. Net Patient Service Revenue Net patient service revenue before the provision for bad debts by major payor source is as follows: June Medicare $ 175,625 $ 190,473 Medicaid and Medicaid HMO 185, ,021 Managed care and commercial 374, ,510 Self-pay 30,963 56,084 $ 766,815 $ 811,088 For patient receivables associated with self-pay patients, including patients with deductible and co-pay balances for which third-party coverage provides for a portion of the services provided, that do not qualify for charity care, CKHS records an estimated provision for bad debts in the year of service. The allowance for uncollectible accounts for self-pay patients as a percentage of self-pay accounts receivable decreased from 90% at June 30, 2012 to 86% at June 30, In fiscal year 2013, CKHS provided a discount at the time of billing to uninsured patients who do not qualify for charity care. Refer to Note 2 for a description of this change which has a direct impact on the percentages. CKHS does not maintain a material allowance for uncollectible accounts from third-party payors

21 3. Net Patient Service Revenue (continued) CKHS is reimbursed by Medicare for certain programs at a tentative rate with final settlement determined after submission of annual cost reports by CKHS and audits thereof by the program s fiscal intermediaries. CKHS s Medicare cost reports have not been audited by the fiscal intermediaries for the years ended June 30, 2010 through June 30, In the opinion of management, adequate provision has been made for estimated settlements and potential adjustments resulting from audit and final settlements with third-party payors. For the years ended June 30, 2013 and 2012, the excess of revenues, gains, and other support over expenses includes net favorable settlements and adjustments for cost reports from prior years in the net amount of $2,561 and $1,550, respectively. For the years ended June 30, 2013 and 2012, the excess of revenues, gains, and other support over expenses includes net favorable settlements for an appeal related to the wage index in the net amount of $0 and $3,818, respectively. Net revenue from traditional Medicare and traditional Medical Assistance constitutes approximately 29% and 30% for the years ended June 30, 2013 and 2012, respectively, of CKHS s net patient service revenue. Laws and regulations governing Medicare and Medical Assistance are complex and subject to interpretation. As a result, there is a possibility that recorded estimates may change by a material amount. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretations as well as significant regulatory action. In December 2010, the Department of Public Welfare (DPW) received approval from the Centers for Medicare and Medicaid Services (CMS) for the Pennsylvania state plan amendments pursuant to Pennsylvania Act 49 of 2010 that, among other things, established a new inpatient hospital fee-for-service payment system (using APR-DRG), established enhanced hospital payments through the state s Medical Assistance managed care program and secured additional matching Medicaid funds through the establishment of the Quality Care Assessment. In February 2011, the DPW received the approvals necessary from CMS on the final technical language for the DPW contracts with managed care organizations. CKHS recorded an operating income impact of $12,245 and $13,543 in its consolidated statements of operations for the years ended June 30, 2013 and 2012, respectively

22 4. Investments and Assets Limited as to Use June U.S. Government obligations: U.S. Government agency securities $ 4,172 $ 6,105 U.S. Treasury securities 10,616 12,111 Corporate bonds 7,915 4,270 Mutual funds: Fixed income 52,507 52,658 Domestic equity 6,303 7,255 International equity 14,309 12,902 Real estate 3,390 6,084 Commodities 80 2,501 Common and collective trusts: Fixed income 11,015 12,943 Equity 37,819 26,436 Hedge funds 19,914 13,714 Marketable equity securities Certificates of deposit 9,862 8,981 Cash and cash equivalents 14,661 14,239 Total $ 192,875 $ 180,513 Investment income is comprised of the following: Year Ended June Interest and dividend income $ 4,235 $ 4,842 Realized gains, net 1, $ 6,058 $ 5,

23 4. Investments and Assets Limited as to Use (continued) Over the past several years, the investment market has experienced significant volatility, which impacted investments and assets limited as to use held by CKHS. Management continually reviews its investment portfolio and evaluates whether declines in the fair value of securities should be considered other-than-temporary. Factored into this evaluation are the general market conditions, the recommendation of advisors, and the length of time and extent to which that fair value was less than cost. CKHS has the intent and ability to hold mutual funds and common and collective trusts whose fair values may be less than cost, and these securities are evaluated to determine whether declines in the fair value of securities should be considered other-thantemporary. The following table shows the gross unrealized losses and fair value of the CKHS investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and Less than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss June 30, 2013 Mutual funds fixed income $ 27,879 $ 1,333 $ $ $ 27,879 $ 1,333 Mutual funds international equity 2, , $ 30,325 $ 1,462 $ $ $ 30,325 $ 1,462 June 30, 2012 Mutual funds fixed income $ 6,133 $ 450 $ $ $ 6,133 $ 450 Mutual funds international equity 5, , Mutual funds commodities 2, , $ 13,958 $ 1,510 $ $ $ 13,958 $ 1,

24 5. Fair Value Measurements Fair value is defined as a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are applied based on the unit of account from CKHS s perspective. The unit of account determines what is being measured by reference to the level at which the asset or liability is aggregated (or disaggregated). The fair value hierarchy is comprised of three levels based on the source of inputs as follows: Level 1 Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2 Observable inputs that are based on inputs not quoted in active markets, but corroborated by market data. Level 3 Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. A financial instrument s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In determining fair value, CKHS uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers nonperformance risk in its assessment of fair value. In determining fair value, CKHS uses the market approach. The market approach utilizes prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

25 5. Fair Value Measurements (continued) The following tables present CKHS s financial assets measured at fair value on a recurring basis. Total Level 1 Level 2 Level 3 June 30, 2013 Cash and cash equivalents $ 75,032 $ 75,032 $ $ U.S. Government obligations: U.S. Government agency obligations 4,172 4,172 U.S. Treasury securities 10,616 10,616 Corporate bonds 7,915 7,915 Mutual funds: Fixed income 52,507 52,507 Domestic equity 6,303 6,303 International equity 14,309 14,309 Real estate 3,390 3,390 Commodities Common and collective trusts: Fixed income 11,015 11,015 Equity 37,819 37,819 Marketable equity securities Certificates of deposit 9,862 9,862 Beneficial interest in perpetual trusts* 5,138 5,138 $ 238,470 $ 161,795 $ 76,675 $

26 5. Fair Value Measurements (continued) Total Level 1 Level 2 Level 3 June 30, 2012 Cash and cash equivalents $ 74,734 $ 74,734 $ $ U.S. Government obligations: U.S. Government agency obligations 6,105 6,105 U.S. Treasury securities 12,111 12,111 Corporate bonds 4,270 4,270 Mutual funds: Fixed income 52,658 52,658 Domestic equity 7,255 7,255 International equity 12,902 12,902 Real estate 6,084 6,084 Commodities 2,501 2,501 Common and collective trusts: Fixed income 12,943 12,943 Equity 26,436 26,436 Marketable equity securities Certificates of deposit 8,981 8,981 Beneficial interest in perpetual trusts* 4,833 4,833 $ 232,127 $ 165,429 $ 66,698 $ * Beneficial interests in perpetual trusts consist of investments in various securities not under CKHS s control. During the year ended June 30, 2012, the fair value of U.S. Treasury securities was reported as Level 1. The prior period disclosure has been adjusted to reflect U.S. Treasury securities as Level 2. The total Level 1 securities as previously reported (in thousands) and as revised were $177,540 and $165,429, respectively. Total Level 2 securities as previously reported (in thousands) and as revised were $54,587 and $66,698, respectively. The revision of this disclosure is not considered material to the consolidated financial statements of the Health System

27 5. Fair Value Measurements (continued) Financial instruments are reflected in the consolidated balance sheets as follows: June Cash, cash equivalents, and investments measured at fair value $ 233,332 $ 227,294 Hedge funds accounted for under the equity method 19,914 13,714 Total cash, cash equivalents, and investments 253, ,008 Perpetual trusts 5,138 4,833 The following is a description of CKHS s valuation methodology for assets measured at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources including market participants, dealers, and brokers. The fair values of perpetual trusts were determined based on CKHS s beneficial interest in the investments held in the trust which are measured at fair value. 6. Property and Equipment June Land and land improvements $ 7,728 $ 7,743 Buildings and improvements 314, ,704 Equipment 321, , , ,826 Less accumulated depreciation (478,395) (456,957) 165, ,869 Construction in progress Property and equipment, net $ 166,058 $ 176,724 Depreciation expense for the years ended June 30, 2013 and 2012 was $23,831 and $24,261, respectively

28 7. Long-Term Debt June Obligated Group Hospital Revenue Bonds: Series 2012 Bonds (a) $ 29,980 $ 30,965 Series 2010 Bonds (b) 28,515 29,035 Series 2006A Bonds, net of unamortized premium of $1,709 in 2013 and $1,843 in 2012 (c) 59,075 60,328 Series 2006B Bonds, net of unamortized premium of $571 in 2013 and $738 in 2012 (d) 25,966 29,103 Series 2005 Bonds, net of unamortized premium of $228 in 2013 and $266 in 2012 (e) 16,678 17,821 Series 2002 Variable Rate Bonds (f) 4,920 5,440 Series 1996 Variable Rate Bonds (g) 9,940 10,410 Taxable Variable Rate Demand Bonds: Series 1996 (CKHS) (h) 6,220 6,565 Other obligations: Financing obligation (Note 17) 7,195 7,195 Mortgage obligation due April 2013, payments due monthly, interest at 6.5% 4,048 Mortgage obligation due March 2017, payments due monthly, interest at 4.59% 3,780 Total long-term debt 192, ,910 Less current portion of long-term debt 8,712 12,080 Total long-term debt, net of current portion $ 183,557 $ 188,

29 7. Long-Term Debt (continued) The Delaware County Authority (DCA) has issued Hospital Revenue Bonds and Taxable Variable Rate Demand Bonds on behalf of CCMC, DCMH and CKHS (the Obligated Group). (a) The Series 2012 Bonds include $29,980 of term bonds which mature in varying annual amounts through 2033 with an interest rate of 3.08% until April 11, 2019 and then is subject to a reset. The Series 2012 Bonds were privately placed with a financial institution. Their proceeds were used to refund $21,900 of the Series 1998 Bonds and fund certain capital expenditures. The Series 2012 Bonds are subject to optional redemption prior to maturity at the direction of the Obligated Group at a redemption price of the outstanding principal plus accrued interest. The private placement terminates on April 11, 2019 at which time the Series 2012 Bonds will be subject to a mandatory redemption at their par value unless the financial institution and the Obligated Group agree to an extension. (b) The Series 2010 Bonds include $28,515 of term bonds which mature in varying annual amounts through 2031 with a variable interest rate. These bonds were privately placed with a financial institution. The proceeds of the Series 2010 Bonds were used to refund $30,000 of the Series 2002 Variable Rate Bonds. The interest rate on these bonds is also subject to periodic rate changes. The next scheduled reset date is August 2, The interest rate was 1.30% and 1.34% at June 30, 2013 and 2012, respectively. The Series 2010 Bonds are subject to optional redemption prior to maturity at the direction of the Obligated Group at a redemption price of the outstanding principal plus accrued interest. The private placement terminates on August 2, 2017 at which time the Series 2010 Bonds will be subject to a mandatory redemption at their par value unless the financial institution and the Obligated Group agree to an extension. (c) The Series 2006A Bonds include $4,715 of serial bonds which mature in varying annual amounts through 2016 with interest rates of 5.0%; $3,660 of 5.0% term bonds due December 15, 2019, $16,070 of 5.0% term bonds due December 15, 2026, and $32,920 of 5.0% term bonds due December 15, The 2006A Bonds maturing after December 15, 2017 are subject to optional redemption prior to maturity at the direction of the Obligated Group, on or after December 15, 2016, at a redemption price of 100% of the principal amount plus accrued interest. The term bonds are subject to mandatory redemption at a redemption price of the outstanding principal amount plus accrued interest commencing in 2017 and each year thereafter

30 7. Long-Term Debt (continued) (d) The Series 2006B Bonds include $25,395 of serial bonds which mature in varying annual amounts through 2019 with interest rates of 5.0%. The 2006B Bonds maturing after December 15, 2017 are subject to optional redemption prior to maturity at the direction of the Obligated Group, on or after December 15, 2016, at a redemption price of 100% of the outstanding principal amount plus accrued interest. (e) The Series 2005 Bonds include $6,390 of serial bonds which mature in varying annual amounts through 2017 with interest rates of 5.0%, $4,575 of 4.25% term bonds due December 15, 2020, and $5,485 of 4.625% term bonds due December 15, The 2005 Bonds are subject to optional redemption prior to maturity at the direction of the Obligated Group, on or after December 15, 2015 at a redemption price of 100% of the principal amount plus accrued interest. The term bonds are subject to mandatory redemption at a redemption price of the outstanding principal amount plus accrued interest commencing in 2018 and each year thereafter. Principal and interest on these bonds are insured under a Financial Guaranty Insurance Policy. (f) The Series 2002 Variable Rate Bonds include $4,920 of term bonds which mature in varying annual amounts through 2020 with a variable interest rate subject to conversion to a fixed rate at the option of the Obligated Group. These bonds are subject to optional redemption prior to maturity at the direction of the Obligated Group, at a redemption price of the outstanding principal amount plus accrued interest. The interest rate was 0.06% and 0.18% at June 30, 2013 and 2012, respectively. Principal on the Series 2002 Variable Rate Bonds is secured by an irrevocable letter of credit from a commercial bank (see Note 8). (g) The Series 1996 Variable Rate Bonds include $9,940 of term bonds which mature in varying annual amounts through 2026 with a variable interest rate subject to conversion to a fixed rate at the option of the Obligated Group. The 1996 Bonds are subject to optional redemption prior to maturity at the direction of the Obligated Group, at a redemption price of the outstanding principal amounts plus accrued interest. The interest rate was 0.06% and 0.18% at June 30, 2013 and 2012, respectively. Principal on the Series 1996 Bonds is secured by an irrevocable letter of credit from a commercial bank (see Note 8). (h) The Taxable Variable Rate Demand Bonds Series 1996 (the 1996 Taxable Bonds) include $6,220 of serial bonds which mature in varying annual amounts through