Nevada City Hospital d/b/a Nevada Regional Medical Center A Component Unit of the City of Nevada, Missouri

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1 Accountants Report and Financial Statements

2 Contents Independent Accountants Report on Financial Statements and Supplementary Information... 1 Management s Discussion and Analysis... 2 Financial Statements Balance Sheets... 6 Statements of Revenues, Expenses and Changes in Net Assets... 7 Statements of Cash Flows... 8 Notes to Financial Statements Required Supplementary Information Schedule of Funding Progress Supplementary Information Patient Accounts Receivable Net Patient Service Revenue Other Revenue Expenses... 34

3 Independent Accountants Report on Financial Statements and Supplementary Information Board of Directors Nevada, Missouri We have audited the accompanying balance sheets of, d/b/a Nevada Regional Medical Center, a component unit of the City of Nevada, Missouri, as of, and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Medical Center s management. 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 of America. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of,, as of, and the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and pension information listed in the table of contents be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements and other knowledge we obtained during our audits of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audits were performed for the purpose of forming an opinion on the basic financial statements as a whole. The patient accounts receivable, net patient service revenue, other revenue and expenses information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audits of the basic financial statements and accordingly, we do not express an opinion or assurance on it. October 25, 2012

4 Management s Discussion and Analysis Years Ended Introduction This management s discussion and analysis of the financial performance of, d/b/a Nevada Regional Medical Center (the Medical Center ), provides an overview of the Medical Center s financial activities for the years ended. It should be read in conjunction with the accompanying financial statements of the Medical Center. Financial Highlights Total cash and internally designated funds decreased by $124,775 and $112,761, or approximately 1%, in 2012 and 2011, respectively. Capital assets, net, decreased in 2012 and 2011 by $482,474 (2.3%) and $1,442,506 (6.5%), respectively. The Medical Center reported operating income in 2012 of $2,673,993 and an operating loss in 2011 of $507,882. Using This Annual Report The Medical Center s financial statements consist of three statements a balance sheet; a statement of revenues, expenses and changes in net assets; and a statement of cash flows. These statements provide information about the activities of the Medical Center, including resources held by the Medical Center but restricted for specific purposes by creditors, contributors, grantors or enabling legislation. The Medical Center is accounted for as a business-type activity and presents its financial statements using the economic resources measurement focus and the accrual basis of accounting. The Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets One of the most important questions asked about any Medical Center s finances is Is the Medical Center as a whole better or worse off as a result of the year s activities? The balance sheet and the statement of revenues, expenses and changes in net assets report information about the Medical Center s resources and its activities in a way that helps answer this question. These statements include all restricted and unrestricted assets and all liabilities using the accrual basis of accounting. Using the accrual basis of accounting means that all of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the Medical Center s net assets and changes in them. The Medical Center s total net assets the difference between assets and liabilities is one measure of the Medical Center s financial health or financial position. Over time, increases or decreases in the Medical Center s net assets are an indicator of whether its financial health is improving or deteriorating. Other nonfinancial factors, such as changes in the Medical Center s patient base, changes in legislation and regulations, measures of the quantity and quality of services provided to its patients and local economic factors should also be considered to assess the overall financial health of the Medical Center. 2

5 The Statement of Cash Flows The statement of cash flows reports cash receipts, cash payments and net changes in cash and cash equivalents resulting from four defined types of activities. It provides answers to such questions as where did cash come from, what was cash used for and what was the change in cash and cash equivalents during the reporting period. The Medical Center s Net Assets The Medical Center s net assets are the difference between its assets and liabilities reported in the Balance Sheet, as shown in Table 1. Table 1: Assets, Liabilities and Net Assets Assets Patient and other accounts receivable, net $ 6,743,456 $ 5,279,505 $ 6,030,106 Other current assets 9,381,998 8,896,829 7,512,564 Capital assets, net 20,459,031 20,941,505 22,384,011 Other noncurrent assets 10,245,865 11,279,610 12,358,275 Total assets $ 46,830,350 $ 46,397,449 $ 48,284,956 Liabilities Long-term debt $ 17,744,625 $ 18,349,115 $ 19,016,088 Current liabilities 4,127,303 3,756,236 3,603,447 Total liabilities 21,871,928 22,105,351 22,619,535 Net Assets Invested in capital assets, net of related debt 4,187,620 4,282,129 5,077,031 Restricted expendable 762, , ,966 Unrestricted 20,008,218 19,234,019 19,818,424 Total net assets 24,958,422 24,292,098 25,665,421 Total liabilities and net assets $ 46,830,350 $ 46,397,449 $ 48,284,956 The Medical Center s net assets increased by $666,324 in 2012 and decreased by $1,373,323 in Increased volume along with Medicaid electronic health record incentive revenue contributed to the increase in 2012 compared to Decreased volume resulting in an inability of net patient revenue to keep up with increasing operating costs contributed to the decline in 2011 compared to A significant change in the Medical Center s assets in 2012 was the increase in patient accounts receivable of $1,463,951. The increase was due to higher net patient service revenue in 2012 and certain estimate changes on components of accounts receivable. In 2011, the patient accounts receivable decreased by $750,601 from 2010 due to increased collection efforts in the revenue cycle. 3

6 Operating Results and Changes in the Medical Center s Net Assets The Medical Center s net assets increased by $666,324, or 2.7%, in 2012 and decreased by $1,373,323, or 4.4%, in 2011, as shown in Table 2. Table 2: Operating Results and Changes in Net Assets Operating Revenues Net patient service revenue $ 34,094,819 $ 30,813,870 $ 30,831,391 Other operating revenues 2,372, , ,614 Total operating revenues 36,466,971 31,810,359 31,737,005 Operating Expenses Nursing services 6,767,236 6,424,670 6,312,702 Other professional services 10,852,057 10,630,843 10,358,546 General services 2,949,548 2,919,943 3,031,689 Administrative services 10,498,273 9,622,893 9,079,837 Depreciation 2,725,864 2,719,892 2,853,090 Total operating expenses 33,792,978 32,318,241 31,635,864 Operating Income (Loss) 2,673,993 (507,882) 101,141 Nonoperating Revenues (Expenses) Contributions 82,439 77, ,313 Investment income 52,082 94, ,771 Interest and amortization expense (1,010,261) (1,037,371) (1,064,510) Total nonoperating revenues (expenses) (875,740) (865,441) (768,426) Excess (Deficiency) of Revenues Over Expenses 1,798,253 (1,373,323) (667,285) Special Item Loss on asset impairment (1,131,929) - - Increase (Decrease) in Net Assets $ 666,324 $ (1,373,323) $ (667,285) Operating Income The first component of the overall change in the Medical Center s net assets is its operating income generally, the difference between net patient service and other operating revenues and the expenses incurred to perform those services. The operating results for 2012 increased by $3,181,875 compared to The primary reason for the increase was the $4,956,612 increase in operating revenues as compared to the prior year, with operating expenses increasing only $1,474,737. A significant cause of the increase in operating revenue is an increase in other operating revenues, which is due in part to $1,023,063 of Medicaid funds received in 2012 for incentive payments related to electronic health record implementation. 4

7 The operating results for 2011 decreased by $609,023 compared to The primary component of the decrease was the similar operating revenues as compared to the prior year, combined with operating expenses increasing 1.4%. A significant cause of the increase in operating expense was an increase in administrative services, which was due in part to an increase in employee health insurance and pension expense. Nonoperating Revenues and Expenses Nonoperating revenues and expenses consist primarily of contributions, investment income and interest expense on debt. Contributions increased from 2011 to Investment income decreased in 2012 and 2011 primarily due to decreases in the rate of return. Interest expense has been relatively consistent in 2010, 2011 and Special Item During 2012, the Medical Center recognized an impairment on the current information technology system in use in the amount of $1,131,929 due to the planned replacement of this asset prior to the end of its estimated useful life. The Medical Center s Cash Flows Changes in the Medical Center s cash flows are consistent with changes in patient accounts receivable, operating results and nonoperating revenues and expenses discussed earlier. Capital Asset and Debt Administration Capital Assets At, the Medical Center had $20,459,031 and $20,941,505, respectively, invested in capital assets, net of accumulated depreciation, as detailed in Note 5 to the financial statements. During 2012 the Medical Center has been incurring and capitalizing costs associated with the acquisition of a new information technology system, which includes financial reporting and billing modules among others throughout the Medical Center. It is anticipated that this system will be placed in service in Debt At, the Medical Center had approximately $20 million and $21 million, respectively, in revenue bond debt, as detailed in Note 7 to the financial statements. Except for capital leases of $475,617 initiated in 2012, the Medical Center issued no new debt in 2012 or Contacting the Medical Center s Financial Management This financial report is designed to provide our patients, suppliers and creditors with a general overview of the Medical Center s finances and to show the Medical Center s accountability for the money it receives. Questions about this report and requests for additional financial information should be directed to the President/CEO or the Vice-President of Business Support/CFO by telephoning

8 Balance Sheets Assets Current Assets Cash $ 6,221,452 $ 5,411,663 Restricted cash and investments current 723, ,433 Patient and other accounts receivable, net of allowance; $3,160,754, $2,391,843 6,743,456 5,279,505 Estimated amounts due from third-party payers 1,114,025 1,425,371 Due from related party 105, ,867 Supplies 898, ,934 Prepaid expenses and other 318, ,561 Total current assets 16,125,454 14,176,334 Noncurrent Cash and Investments Restricted Held by trustee for debt service 2,274,222 2,284,438 By donors for nurse education loans 39,517 39,517 2,313,739 2,323,955 Less amount required to meet current obligations 723, ,433 1,590,672 1,587,522 Held by Foundation 296, ,926 Internally designated 7,531,083 8,465,647 9,418,339 10,410,095 Capital Assets, Net 20,459,031 20,941,505 Deferred Financing Costs, Net 827, ,515 Total assets $ 46,830,350 $ 46,397,449 See Notes to Financial Statements

9 Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 842,299 $ 666,973 Accounts payable 1,343,083 1,420,258 Accrued payroll and payroll taxes 304, ,066 Accrued vacation pay 751, ,146 Accrued expenses 606, ,799 Accrued interest payable 211, ,869 Funds held for others 68,987 71,125 Total current liabilities 4,127,303 3,756,236 Long-Term Debt 17,744,625 18,349,115 Total liabilities 21,871,928 22,105,351 Net Assets Invested in capital assets, net of related debt 4,187,620 4,282,129 Restricted expendable for Debt service 723, ,433 Nurse education loans 39,517 39,517 Unrestricted 20,008,218 19,234,019 Total net assets 24,958,422 24,292,098 Total liabilities and net assets $ 46,830,350 $ 46,397,449 6

10 Statements of Revenues, Expenses and Changes in Net Assets Years Ended Operating Revenues Net patient service revenue, net of provision for uncollectible accounts; $4,915,320, $4,394,074 $ 34,094,819 $ 30,813,870 Other 2,372, ,489 Total operating revenues 36,466,971 31,810,359 Operating Expenses Nursing services 6,767,236 6,424,670 Other professional services 10,852,057 10,630,843 General services 2,949,548 2,919,943 Administrative services 10,498,273 9,622,893 Depreciation 2,725,864 2,719,892 Total operating expenses 33,792,978 32,318,241 Operating Income (Loss) 2,673,993 (507,882) Nonoperating Revenues (Expenses) Contributions 82,439 77,690 Investment income 52,082 94,240 Interest and amortization expense (1,010,261) (1,037,371) Total nonoperating revenues (expenses) (875,740) (865,441) Excess (Deficiency) of Revenues Over Expenses 1,798,253 (1,373,323) Special Item Loss on asset impairment (1,131,929) - Increase (Decrease) in Net Assets 666,324 (1,373,323) Net Assets, Beginning of Year 24,292,098 25,665,421 Net Assets, End of Year $ 24,958,422 $ 24,292,098 See Notes to Financial Statements 7

11 Statements of Cash Flows Years Ended Operating Activities Receipts from and on behalf of patients $ 32,942,214 $ 31,351,661 Payments to suppliers and contractors (15,149,396) (14,003,218) Payments to employees (15,753,917) (15,581,397) Other receipts, net 2,408, ,252 Net cash provided by operating activities 4,447,302 2,745,298 Noncapital Financing Activities Contributions 82,439 77,690 Net cash provided by noncapital financing activities 82,439 77,690 Capital and Related Financing Activities Principal payments on long-term debt (1,005,291) (835,707) Interest paid on long-term debt (874,523) (903,423) Purchase of capital assets (2,897,342) (1,231,881) Net cash used in capital and related financing activities (4,777,156) (2,971,011) Investing Activities Interest on investments 59,458 80,347 Purchase of investments (3,181,250) (10,066,988) Proceeds from disposition of investments 3,223,394 10,834,615 Net cash provided by investing activities 101, ,974 Increase (Decrease) in Cash and Cash Equivalents (145,813) 699,951 Cash and Cash Equivalents, Beginning of Year 6,729,674 6,029,723 Cash and Cash Equivalents, End of Year $ 6,583,861 $ 6,729,674 See Notes to Financial Statements 8

12 Statements of Cash Flows Years Ended Reconciliation of Cash and Cash Equivalents to the Balance Sheets Cash $ 6,221,452 $ 5,411,663 Cash and cash equivalents in noncurrent cash and investments 362,409 1,318,011 Total cash and cash equivalents $ 6,583,861 $ 6,729,674 Reconciliation of Operating Income (Loss) to Net Cash Provided by Operating Activities Operating income (loss) $ 2,673,993 $ (507,882) Depreciation 2,725,864 2,719,892 Changes in operating assets and liabilities Patient accounts receivable, net and other receivables (1,463,951) 750,601 Supplies (42,996) (98,230) Prepaid expenses and other assets 42,904 (90,332) Estimated amounts due from and to third-party payers 311,346 (212,810) Accounts payable and accrued expenses 200, ,059 Net cash provided by operating activities $ 4,447,302 $ 2,745,298 Supplemental Cash Flows Information Capital assets acquisitions included in accounts payable $ 63,168 $ 60,808 Capital assets acquired through capital lease obligations $ 475,617 $ - Loss on asset impairment $ 1,131,929 $ - See Notes to Financial Statements 9

13 Notes to Financial Statements Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations and Reporting Entity, (the Medical Center ), is a component unit of the City of Nevada, Missouri, which owns and operates an acute care hospital in Nevada, Missouri. The Medical Center primarily earns revenue by providing inpatient, outpatient and emergency care services to patients in Nevada, Missouri, and the surrounding area. The Medical Center also operates a psychiatric unit, a home health agency and provides physician clinic services in the same geographic area. As required by accounting principles generally accepted in the United States of America, these financial statements present the Medical Center and its component units, entities for which the Medical Center is considered to be financially accountable. The determination of financial accountability includes consideration of a number of criteria, including: (1) the Medical Center s ability to appoint a voting majority of another entity s governing body and to impose its will on that entity, (2) the potential for that entity to provide specific financial benefits to or impose specific financial burdens on the Medical Center and (3) that entity s fiscal dependency on the Medical Center. The Nevada Regional Medical Center Foundation, Inc. (Foundation) is included in the Medical Center s financial statements as a component unit. The Foundation is a legally separate not-forprofit corporation that is, in substance, a part of the Medical Center s operations. It is organized exclusively to benefit the Medical Center by raising charitable contributions on behalf of and holding the proceeds thereof for the Medical Center. Board members include the Medical Center s chief executive officer, a member of the Medical Center s Board of Directors, a member of the Nevada Regional Medical Center Auxiliary and between 15 and 19 elected members who are nominated by an appointed nominating committee. Data of the Foundation is combined with data of the Medical Center for financial reporting purposes using the blending method. Transactions between the Medical Center and the Foundation are eliminated in combination. Separately issued financial statements of the Foundation can be obtained by calling or writing to Nevada Regional Medical Center Foundation, 800 South Ash, Nevada, Missouri Basis of Accounting and Presentation The financial statements of the Medical Center have been prepared on the accrual basis of accounting using the economic resources measurement focus. Revenues, expenses, gains, losses, assets and liabilities from exchange and exchange-like transactions are recognized when the exchange transaction takes place. Operating revenues and expenses include exchange transactions. 10

14 Notes to Financial Statements Investment income and interest on capital assets related debt are included in nonoperating revenues and expenses. The Medical Center first applies restricted net assets when an expense or outlay is incurred for purposes for which both restricted and unrestricted net assets are available. The Medical Center prepares its financial statements as a business-type activity in conformity with applicable pronouncements of the Governmental Accounting Standards Board (GASB). Pursuant to GASB Statement No. 20, the Medical Center has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB) that were issued on or before November 30, 1989, and do not conflict with or contradict GASB pronouncements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Medical Center considers all liquid investments with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market accounts. Risk Management The Medical Center is exposed to various risks of loss from torts; theft of, damage to and destruction of assets; business interruption; errors and omissions and natural disasters. Commercial insurance coverage is purchased for claims arising from such matters. Settled claims have not exceeded this commercial coverage in any of the three preceding years. The Medical Center is exposed to various risks of loss from employee health benefits. The Medical Center self-insures against these claims (see Note 12). Annual estimated provisions are accrued for the self-insured portion of the claims and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported. Investments and Investment Income Investments in U.S. Treasury, agency and instrumentality obligations with a remaining maturity of one year or less at time of acquisition and in nonnegotiable certificates of deposit are carried at amortized cost. All other investments are carried at fair value. Fair value is determined using quoted market prices. 11

15 Notes to Financial Statements Investment income includes dividend and interest income, realized gains and losses on investments carried at other than fair value and the net change for the year in the fair value of investments carried at fair value. Patient Accounts Receivable The Medical Center reports patient accounts receivable for services rendered at net realizable amounts from patients, third-party payers and others. The Medical Center provides an allowance for uncollectible accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Supplies Supply inventories are valued at the lower of cost, determined using the first-in, first-out method, or market. Capital Assets Capital assets are recorded at cost at the date of acquisition, or fair value at the date of donation if acquired by gift. Depreciation is computed using the straight-line method over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. The following estimated useful lives are being used by the Medical Center: Land improvements Buildings, improvements and fixed equipment Major moveable equipment 15 to 20 years 20 to 40 years 3 to 10 years At June 30, 2012, work in progress represents costs primarily incurred in connection with new information technology systems. The total estimated cost to complete the projects is anticipated to be approximately $2,000,000. The information technology projects are being funded through internally designated cash and investments, and are expected to be completed in 2013 (Note 10). Special Item Due to management s decision to replace the current information technology system before the end of its estimated useful life an impairment loss of $1,131,929 is recorded in the 2012 financial statements. 12

16 Notes to Financial Statements Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the life of the respective debt using the straight-line method. Compensated Absences Medical Center policies permit most employees to accumulate vacation, holiday, personal and sick leave benefits that may be realized as paid time off or, in limited circumstances, as a cash payment. Expense and the related liability are recognized as benefits are earned whether the employee is expected to realize the benefit as time off or in cash. Compensated absence liabilities are computed using the regular pay and termination pay rates in effect at the balance sheet date plus an additional amount for compensation related payments such as social security and Medicare taxes and retirement computed using rates in effect at that date. Net Assets Net assets of the Medical Center are classified in three components. Net assets invested in capital assets, net of related debt, consist of capital assets, net of accumulated depreciation and reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. Restricted expendable net assets are noncapital assets that must be used for a particular purpose, as specified by creditors, grantors or contributors external to the Medical Center, including amounts deposited with trustees as required by bond indentures, reduced by the outstanding balances of any related borrowings. Unrestricted net assets are remaining assets less liabilities that do not meet the definition of invested in capital assets, net of related debt or restricted expendable. Net Patient Service Revenue The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments and a provision for uncollectible accounts. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known. 13

17 Notes to Financial Statements Charity Care The Medical Center provides charity care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. Electronic Health Records Incentive Program The Electronic Health Records Incentive Program, enacted as part of the American Recovery and Reinvestment Act of 2009, provides for one-time incentive payments under both the Medicare and Medicaid programs to eligible hospitals that demonstrate meaningful use of certified electronic health records technology (EHR). Payments under the Medicare program are generally made for up to four years based on a statutory formula. Payments under the Medicaid program are generally made for up to four years based upon a statutory formula, as determined by the state, which is approved by the Centers for Medicare and Medicaid Services. Payment under both programs are contingent on the hospital continuing to meet escalating meaningful use criteria and any other specific requirements that are applicable for the reporting period. The final amount for any payment year is determined based upon an audit by the fiscal intermediary. Events could occur that would cause the final amounts to differ materially from the initial payments under the program. The Medical Center recognizes revenue ratably over the reporting period starting at the point when management is reasonably assured it will meet all of the meaningful use objectives and any other specific requirements for the reporting period. In 2012, the Medical Center completed the first-year requirements under the Medicaid program and has recorded revenue of approximately $1,020,000, which is included in other revenue within operating revenues in the statement of revenues, expenses and changes in net assets. Income Taxes As an essential government function of the County, the Medical Center is generally exempt from federal and state income taxes under applicable sections of the Internal Revenue Code and a similar provision of state law. However, the Medical Center is subject to federal income tax on any unrelated business taxable income. 14

18 Notes to Financial Statements Note 2: Net Patient Service Revenue The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established rates. These payment arrangements include: Medicare. Inpatient acute care services and substantially all outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge or procedure, respectively. These rates vary according to patient classification systems that are based on clinical, diagnostic and other factors. Swing bed services are paid at prospectively determined per diem rates that are based on the patients acuity. The Medical Center is reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by the Medicare administrative contractor. The Medical Center has been designated a Medicare Dependent Hospital under the Medicare program, however, effective July 1, 2012 this designation has expired. The additional reimbursement from Medicare Dependent Hospital status is approximately $450,000. The American Recovery and Reinvestment Act of 2009 includes additional Medicare payments for hospitals with under 1,600 discharges. Revenue of approximately $450,000 and $500,000 was received for 2012 and 2011, respectively. The program is scheduled to expire on September 30, Medicaid. Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed based on prospectively established rates. The Medical Center receives reimbursement from the Medicaid program in relation to the percentage of Medicaid and indigent population they serve. Funding received in excess of costs to provide these services may be refunded. As of June 30, 2012, no amounts have been recorded. It is reasonably possible that this estimate could materially change in the near term. Approximately 57% and 60% of net patient service revenues are from participation in the Medicare and state-sponsored Medicaid programs for the years ended, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. The Medical Center has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Medical Center under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. 15

19 Notes to Financial Statements Note 3: Deposits and Investments Deposits Custodial credit risk is the risk that in the event of a bank failure, a government s deposits may not be returned to it. While the Medical Center does not have a written deposit policy, its practice has been to comply with the provisions of state law with regard to custodial credit risk. State law requires collateralization of all deposits with federal depository insurance; bonds and other obligations of the U.S. Treasury, U.S. agencies or instrumentalities or the state of Missouri, bonds of any city, county, school district or special road district of the state of Missouri; bonds of any state; or a surety bond having an aggregate value at least equal to the amount of the deposits. At, none of the Medical Center s bank balances of $14,517,174 and $14,549,581, respectively, were exposed to custodial credit risk as uninsured and uncollateralized. Investments The Medical Center may legally invest in direct obligations of and other obligations guaranteed as to the principal by the U.S. Treasury and U.S. agencies and instrumentalities in bank repurchase agreements. It may also invest to a limited extent in equity securities. At, the Medical Center had the following investments and maturities: June 30, 2012 Maturities in Years Fair Less More Type Value Than Than 10 U.S. agency obligations $ 1,547,781 $ - $ 1,547,781 $ - $ - Money market mutual funds 726, , Equity mutual funds 142, , $ 2,416,492 $ 868,711 $ 1,547,781 $ - $ - 16

20 Notes to Financial Statements June 30, 2011 Maturities in Years Fair Less More Type Value Than Than 10 U.S. agency obligations $ 1,553,286 $ - $ 1,553,286 $ - $ - Money market mutual funds 731, , Equity mutual funds 149, , $ 2,434,084 $ 880,798 $ 1,553,286 $ - $ - Interest Rate Risk As a means of limiting its exposure to fair value losses arising from rising interest rates, the Medical Center s investment policy limits its investment portfolio to maturities of less than one year. The money market mutual funds are presented as an investment with a maturity of less than one year because they are redeemable in full immediately. Credit Risk Credit risk is the risk that the issuer or other counterparty to an investment will not fulfill its obligations. The Medical Center does not have a written policy addressing credit risk. At June 30, 2012, the Medical Center s money market mutual funds, held by its bond trustee, were rated AAA by Standard & Poor s and Aaa by Moody s Investors Service. Custodial Credit Risk For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Medical Center will not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. Certain Medical Center investments are held by the counterparties in other than the Medical Center s name. Concentration of Credit Risk The Medical Center places no limit on the amount that may be invested in any one issuer. At, the Medical Center s investment in one money market fund constituted 30% of its total investments. The Medical Center s investment in U.S. agencies obligations at, consists of one security. Due to the level of risk associated with certain investment securities, including the underlying securities held by mutual funds, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheets. 17

21 Notes to Financial Statements Summary of Carrying Values The carrying values of deposits and investments shown above are included in the balance sheets as follows: Carrying value Deposits $ 13,946,366 $ 14,124,107 Investments 2,416,492 2,434,084 $ 16,362,858 $ 16,558,191 Included in the following balance sheet captions Cash $ 6,221,452 $ 5,411,663 Restricted cash and investments current 723, ,433 Noncurrent cash and investments 9,418,339 10,410,095 $ 16,362,858 $ 16,558,191 Investment Income Investment income for the years ended, consisted of: Interest income $ 52,082 $ 94,240 18

22 Notes to Financial Statements Note 4: Patient and Other Accounts Receivable The Medical Center grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. Other receivables include amounts due from physicians and miscellaneous receivables. Accounts receivable at, consisted of: Medicare $ 2,179,289 $ 1,207,472 Medicaid 1,413,604 1,532,755 Other third-party payers 1,524,076 1,299,944 Patients 4,472,120 3,294,365 9,589,089 7,334,536 Less allowance for uncollectible accounts 3,160,754 2,391,843 6,428,335 4,942,693 Other receivables 315, ,812 $ 6,743,456 $ 5,279,505 Note 5: Capital Assets Capital assets activity for the years ended, was: 2012 Beginning Balance Additions Impairment Transfers Ending Balance Land and land improvements $ 915,812 $ - $ - $ - $ 915,812 Buildings 29,987, , ,121 30,682,660 Equipment 14,266, ,553 2,056, ,039 13,977,040 Work in progress 225,739 2,201,470 - (1,288,160) 1,139,049 45,395,378 3,375,319 2,056,136-46,714,561 Less accumulated depreciation Land and land improvements 140,106 19, ,111 Buildings 14,520,485 1,486, ,007,340 Equipment 9,793,282 1,220, ,207-10,089,079 24,453,873 2,725, ,207-26,255,530 Capital assets, net $ 20,941,505 $ 649,455 $ 1,131,929 $ - $ 20,459,031 19

23 Notes to Financial Statements 2011 Beginning Balance Additions Disposals Transfers Ending Balance Land and land improvements $ 915,812 $ - $ - $ - $ 915,812 Buildings 29,603,448 47,244 21, ,963 29,987,243 Equipment 13,557, , , ,407 14,266,584 Work in progress 231, ,199 - (551,370) 225,739 44,308,883 1,277, ,891-45,395,378 Less accumulated depreciation Land improvements 113,124 26, ,106 Buildings 13,050,642 1,491,255 21,412-14,520,485 Equipment 8,761,106 1,201, ,479-9,793,282 21,924,872 2,719, ,891-24,453,873 Capital assets, net $ 22,384,011 $ (1,442,506) $ - $ - $ 20,941,505 Note 6: Medical Malpractice Claims The Medical Center purchases medical malpractice insurance under a claims-made policy on a retrospective-rated premium basis. Adjustments of estimated to actual expense, if any, after the policy term, are included in the period such adjustments are determined. Accounting principles generally accepted in the United States of America require a health care provider to accrue the expense of its share of malpractice claim costs, if any, for any reported and unreported incidents of potential improper professional service occurring during the year by estimating the probable ultimate costs of the incident. Based upon the Medical Center s claim experience, no such accrual has been made. It is reasonably possible that this estimate could change materially in the near term. 20

24 Notes to Financial Statements Note 7: Long-Term Obligations The following is a summary of long-term obligation transactions for the Medical Center for the years ended : 2012 Beginning Balance Additions Deductions Ending Balance Current Portion Long-Term Debt Missouri Department of Natural Resources Energy Loan $ 92,483 $ - $ 92,483 $ - $ - Series 2007 Hospital Refunding and Improvement Revenue Bonds 21,005, ,000 20,330, ,000 Capital lease obligation - 475, , , ,809 Total long-term debt 21,097, ,617 1,005,291 20,567, ,809 Less unamortized bond discount and deferred amount on refunding 2,081, ,510 1,980, ,510 $19,016,088 $ 475,617 $ 904,781 $18,586,924 $ 842, Beginning Balance Additions Deductions Ending Balance Current Portion Long-Term Debt Missouri Department of Natural Resources Energy Loan $ 273,190 $ - $ 180,707 $ 92,483 $ 92,483 Series 2007 Hospital Refunding and Improvement Revenue Bonds 21,660, ,000 21,005, ,000 Total long-term debt 21,933, ,707 21,097, ,483 Less unamortized bond discount and deferred amount on refunding 2,181, ,510 2,081, ,510 $19,751,285 $ - $ 735,197 $19,016,088 $ 666,973 21

25 Notes to Financial Statements Energy Loan Missouri Department of Natural Resources Energy Loan with interest at 3.2%, paid in semiannual installments of $95,533 through August 2011, uncollateralized. This loan was paid in full during Revenue Bonds Payable The Series 2007 Revenue Bonds payable consists of Health Facilities Revenue Bonds (Bonds) in the original amount of $21,730,000 dated March 15, 2007, which bear interest at 3.700% to 4.375%. The Bonds are payable in graduated annual installments commencing October 1, 2009, and ending October 1, The Medical Center is required to make minimum monthly deposits of one-sixth of the amount of interest becoming due on all Bonds on the next succeeding interest payment date and one-twelfth of the principal of the Bonds becoming due on the next October 1 to the debt service fund held by the trustee. The Bonds are payable, both as to principal and interest, solely out of the net income and revenues arising from the operation of the facility after providing for the costs of operation and maintenance thereof, and from all other income made available to the Board of Directors including investment income and gifts, bequests, contributions, grants and all other monies, except to the extent otherwise limited by the donor or grantor. The City and Board of Directors have pledged said net income and revenues and other income for the payment of such principal and interest. Payments of bond principal are also secured by an insurance policy issued by a commercial insurer. The indenture agreement requires that certain funds be established with the trustee. Accordingly, these funds are included as assets held by trustee for debt service in the balance sheets. The indenture agreement also requires the Medical Center to comply with certain restrictive covenants including minimum insurance coverage, maintaining a historical debt-service coverage ratio of at least 1.15, certain days cash on hand and restrictions on incurrence of additional debt. Upon issuance and delivery of the Bonds, the Medical Center defeased its outstanding Series 2001 bonds in the total principal amount of $19,030,000. Proceeds from the Bonds were used to purchase securities that were deposited in trust under an escrow agreement sufficient in amount to pay future principal, interest and redemption premiums on the defeased bonds. This advance refunding transaction resulted in an extinguishment of debt since the Medical Center was legally released from its obligation on the Series 2001 bonds at the time of the defeasance. The Series 2001 bonds, aggregating $17,620,000 at June 30, 2011, were outstanding, but were excluded from the Medical Center s balance sheets. The Series 2001 bonds were redeemed in full during The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $2.5 million. This difference, reported in the accompanying financial statements as a deduction from bonds payable, is being charged to operations through the year 2031 using the straight-line method. The Medical Center completed the advance refunding to 22

26 Notes to Financial Statements reduce its total debt service payments over the next 25 years by $5.4 million and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $2.8 million. The debt service requirements as of June 30, 2012, on the Bonds are as follows: Year Ending June 30, Total to be Paid Principal Interest 2013 $ 1,546,562 $ 705,000 $ 841, ,543, , , ,539, , , ,544, , , ,542, , , ,603,699 4,525,000 3,078, ,465,502 5,430,000 2,035, ,315,170 6,575, ,170 $ 30,102,072 $ 20,330,000 $ 9,772,072 Capital Lease Obligation The Medical Center is obligated under a lease for equipment that is accounted for as a capital lease. Assets under capital lease at, totaled $420,128 and $0, respectively, net of accumulated depreciation of $55,489 and $0, respectively. The following is a schedule by year of future minimum lease payments under capital lease including interest at 0.74% together with present value of future minimum lease payments as of June 30, 2012: Year ending June 30, 2013 $ 241,416 Less amount representing interest 3,607 Present value of future minimum lease payments $ 237,809 23

27 Notes to Financial Statements Note 8: Designated Net Assets At, $7,531,083 and $8,465,647, respectively, of unrestricted net assets have been designated by the Medical Center s Board of Directors for capital acquisitions. Designated net assets remain under the control of the Board of Directors, which may at its discretion later use these net assets for other purposes. Note 9: Charity Care Charges excluded from revenue under the Medical Center s charity care policy were $1,354,132 and $1,308,678 for the years ended, respectively. The estimated cost to provide these services was approximately $570,000 for 2012 and Note 10: Commitments The Medical Center has entered into a ten year agreement with a software provider for the purchase of a new information technology system. Under this agreement the Medical Center is required to make a payment of approximately $1,620,000 during 2013 for implementation and service costs and annual payments of approximately $700,000 each of the remaining nine years for service fees. Payments are anticipated to be made from the Medical Center s operating cash flows. Note 11: Defined Benefit Pension Plan Plan Description The Medical Center participates in the Missouri Local Government Employees Retirement System (LAGERS), an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for local government entities in Missouri. LAGERS is a defined benefit pension plan which provides retirement, disability and death benefits to plan members and beneficiaries. LAGERS was created and is governed by statute, RSMo Sections As such, it is the system s responsibility to administer the law in accordance with the expressed intent of the General Assembly. The plan is qualified under Internal Revenue Code Section 401(a), and it is tax-exempt. 24

28 Notes to Financial Statements The Missouri Local Government Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to LAGERS, P.O. Box 1665, Jefferson City, Missouri or by calling Funding Policy The Medical Center s full-time employees do not contribute to the pension plan. The Medical Center is required by state statute to contribute at an actuarially determined rate; the current rate is 6.4% of annual covered payroll. The contribution requirements of plan members are determined by the governing body of the Medical Center. The contribution provisions of the Medical Center are established by state statute. Annual Pension Cost For 2012 and 2011, the Medical Center had annual pension cost of $858,871 and $853,428, respectively. This exceeded the actual contributions for 2012 and 2011 of $747,249 and $614,468, respectively, resulting in a net pension obligation of $350,362 and $238,960, which is included in accrued expenses at, respectively. Three-Year Trend Information Fiscal Annual Percentage Net Year Pension of APC Pension Ended Cost (APC) Contributed Obligation 6/30/ , % - 6/30/ ,428 72% 238,960 6/30/ ,651 87% 350,362 The required contribution was determined as part of the February 28, 2010, annual actuarial valuation using the entry age actuarial cost method. The actuarial assumptions as of February 29, 2012, included (a) a rate of return on the investment of present and future assets of 7.25% per year, compounded annually, (b) projected salary increases of 3.5% per year, compounded annually, attributable to inflation, (c) additional projected salary increases ranging from 0.0% to 6.0% per year, depending on age, attributable to seniority/merit, (d) preretirement mortality based on 75% of the RP-2000 Combined Healthy Table set back 0 years for men and 0 years for women and (e) postretirement mortality based on 105% of the 1994 Group Annuity Mortality table set back 0 years for men and 0 years for women. The actuarial value of assets was determined using 25