LOYOLA UNIVERSITY HEALTH SYSTEM

Transcription

1 LOYOLA UNIVERSITY HEALTH SYSTEM CONTINUING DISCLOSURE QUARTERLY REPORT Through the3rd fiscal quarter ended 3/31/2011 Fiscal Year 2011 LOYOLA UNIVERSITY HEALTH SYSTEM Loyola University Chicago

2 This Continuing Disclosure Quarterly Report is prepared by Loyola University Health System ( LUHS ) in compliance with the Continuing Disclosure Agreements (the Continuing Disclosure Agreement ) dated December 1, 2006 and October 1, 2001 between LUHS and US Bank as Dissemination Agent, entered into in connection with the Illinois Financing Authority (the Authority ) Revenue Bonds Series 2006 (A, B, & C) and Series 2001A of Loyola University Health System (the Bonds ) and the Loan Agreement (the Loan Agreement ) dated April 7, 2010 between LUHS and The Northern Trust, entered into in connection with a working capital line of credit. The quarterly report includes the members of the Obligated Group and system affiliates. Overview of Loyola University Health System LUHS is an Illinois not-for-profit corporation, which is exempt from federal income taxes as an organization described in Section 501 (c) (3) of the Internal Revenue Code. LUHS is a regional integrated health care delivery system providing a full continuum of health care services and competencies in primary care and tertiary care medicine. LUHS provides services to patients in various settings, including a tertiary care hospital, a community hospital, outpatient specialty service practice sites, ambulatory surgical centers, primary care practice sites, home care and hospice services, home infusion services and a durable medical equipment service. It also includes a physician faculty group (formerly functioning within Loyola University Physician Foundation (LUPF). Loyola University of Chicago (the University) is the sole corporate member of LUHS, and LUHS is the sole corporate member of Loyola University Medical Center (LUMC), Gottlieb Memorial Hospital (Gottlieb), and Loyola University of Chicago Insurance Company Ltd. (LUCIC). LUMC and Gottlieb are Illinois not-for-profit corporations exempt from federal income taxes as an organization described in Section 501(c)(3) of the Internal Revenue Code. LUCIC is a for-profit Cayman Island insurance company, which provides primary and patient general liability insurance to LUMC. On January 25, 2008, LUHS and Gottlieb Health Resources (GHR) entered into a Membership Substitution Agreement (the Agreement). The Agreement represents the coming together of two not-for-profit health care institutions that complement each other and enhance health care in the geographic area served. The Agreement enhances the clinical capacity of LUMC and provides GHR the ability to expand its clinical services. Under the terms of the Agreement, on July 1, 2008, LUHS became the sole member of GHR and LUHS was substituted for GHR as the sole member of Gottlieb, an Illinois not-for-profit corporation. Prior to the Agreement, GHR was the sole member of Gottlieb, Gottlieb Community Health Services Corporation (GCHSC) and sole shareholder of Gottlieb Management Services, Inc. (GMS). As part of the Agreement, Gottlieb became the sole member of GCHSC and GCHSC became the sole shareholder of GMS. No consideration was paid by LUHS to GHR for the membership substitution. GHR was dissolved after the Agreement was consummated. On December 31, 2008, LUHS, LUMC, and LUPF entered into an Integration Agreement (the LUPF Agreement). LUPF is a an Illinois not-for-profit corporation, which is exempt from federal income taxes as described in Section 501(c)(3) of the Internal Revenue Code. The purpose of this agreement was to integrate the clinical practice of the 2

3 physician organization with the clinical operations of LUHS. LUPF provided billing, collection, and distribution services of professional fees generated by the University s Stritch School of Medicine (SSOM) physicians from their private practice of medicine at LUMC and other approved locations. Under the terms of the LUPF Agreement, LUPF contributed certain of its assets and liabilities to LUMC. The agreement resulted in the integration of the physician faculty group into LUMC with the physicians becoming employees of LUMC on January 1, On March 31, 2011, a Definitive Agreement was approved by both Loyola University Chicago ( the University ) and Trinity Health Corporation ( Trinity Health ), which provides a framework for an ongoing relationship and contemplates the consolidation of Loyola University Health System ( LUHS ), a wholly-owned subsidiary of the University, with Trinity Health upon the effective date, which is currently planned for July 1, The University s Health Science enterprise, which is comprised of Stritch School of Medicine ( SSOM ) and the Marcella Niehoff School of Nursing ( MNSON ), will continue to be schools of the University. The University and Trinity Health will enter into an Academic Affiliation Agreement, which will describe the relationship between the University, LUHS and Trinity Health. Trinity Health will replace the University as sole member of LUHS. As such, Trinity Health, will govern and provide oversight to all of LUHS affiliates, including Loyola University Medical Center ( LUMC ) and Gottlieb Memorial Hospital ( Gottlieb ). This was approved on May 11, 2011 by the Illinois Health Facilities and Services Review Board. The University and LUMC are participants in an Affiliation and Operating Agreement (the LUMC Affiliation Agreement) which provides for financial, operating, and shared services relationships between the entities. LUMC owns a 50% interest in RML Health Providers Limited Partnership Corporation, d/b/a RML Specialty Hospitals, which provides long term acute care, specializing in the care of ventilator-dependent patients. Advocate Health and Hospitals Corporation owns the remaining interest. LUMC s investment in RML is recorded using the equity method. In addition, LUHS has guaranteed 50% of certain outstanding debt of RML. As of March 31, 2011 LUHS s guarantee was $1,200. Through Loyola Ambulatory Centers, LLC, LUMC holds a 49% general partnership interest in Loyola Ambulatory Surgical Center at Oak Brook ( LASCO ), which provides ambulatory surgery services in four operating rooms. Several LUMC clinical practices concentrate their surgery at LASCO, including ENT, Gynecology, Hand, Ophthalmology, Orthopaedics, Pain Management, Plastics, Podiatry and Urology. LUMC s investment in LASCO is recorded using the equity method. For ease of identification, a graphical representation follows: 3

4 Corporate Structure Loyola University of Chicago Operating Units: Niehoff School of Nursing Stritch School of Medicine SSOM Loyola University Health System Obligated Group Member Operating Units: Loyola Hospital Ctr. for Home Care & Hospice Ronald McDonald Children s Hospital Cardinal Bernardin Cancer Center Loyola Outpatient Center Emergency Medical Serivces Satellite Ambulatory Care Sites Loyola University Medical Center Obligated Group Member Gottlieb Memorial Hospital System Affiliate Loyola University of Chicago Insurance Co. System Affiliate Loyola Ambulatory Centers LLC 100% Ownership RML Health Providers Limited Partnership, d/b/a RML Specialty Hospital RML Joint Venture (50%) Ownership Gottlieb Community Health Services Corporation Loyola Ambulatory Surgery Center at Oakbrook LASCO Joint Venture (49%) Gottlieb Management Services, Inc. Key: Corporation Other Business 4

5 Consolidated Financial Statements The following are LUHS s unaudited consolidated financial for the quarters ended March 31, 2011 and All significant intercompany balances have been eliminated. 5

6 LOYOLA UNIVERSITY HEALTH SYSTEM CONSOLIDATED STATEMENTS OF OPERATIONS (In $000's) March 2011 Nine Months Ended March 31, 2011 Budget Prior Year Loyola University Health System Budget Prior Year Actual Budget Variance Prior Year Variance Actual Budget Variance Prior Year Variance REVENUES: $ 73,707 $ 70,808 $ 2,899 $ 73,451 $ 256 Net patient service revenue $ 630,619 $ 620,629 $ 9,990 $ 605,185 $ 25,434 13,998 13, ,937 1,061 Faculty professional fees, net 113, ,438 2, ,613 5,592 3,195 3,227 (32) 3,282 (87) Physician professional fees, net 25,487 27,549 (2,062) 30,804 (5,317) 1,328 1,639 (311) 2,626 (1,298) Capitation 10,706 14,745 (4,039) 14,337 (3,631) 3,277 3,605 (328) 7,777 (4,500) Other revenues 25,157 31,415 (6,258) 31,694 (6,537) 95,505 92,679 2, ,073 (4,568) TOTAL OPERATING REVENUES 805, , ,633 15,541 EXPENSES: 32,709 31,548 (1,161) 31,511 (1,198) Salaries 278, ,999 (3,093) 271,563 (6,529) 8,935 9, , Employee benefits 78,602 82,014 3,412 79, ,644 40,703 (941) 40,964 (680) Salaries and employee benefits 356, , ,877 (5,817) 8,398 7,581 (817) 7,908 (490) Faculty salaries and benefits 73,342 68,230 (5,112) 66,709 (6,633) 1,575 1, ,568 (7) Professional compensation 13,623 14, , ,962 10,144 (818) 9,752 (1,210) Supplies - medical and other 89,352 86,805 (2,547) 89,335 (17) 5,740 4,725 (1,015) 6, Supplies - pharmaceutical 45,139 40,380 (4,759) 47,780 2,641 11,057 10,092 (965) 11, Purchased services 87,258 88,635 1,377 88, ,218 3, ,818 4,600 Insurance 26,803 33,537 6,734 33,674 6,871 1,869 1, ,870 1 IL Healthcare and Family Services Assessment 16,831 16, ,830 (1) 4,835 4,755 (80) 4, Provision for bad debts and collection expense 43,012 40,313 (2,699) 41,479 (1,533) 3,492 3, , Depreciation and amortization 31,676 32, ,947 2, (11) Excellence in Medicine (125) Other (117) 577 (288) Interest expense 6,539 6, ,320 (1,219) (806) (936) (130) (841) (35) University shared services, net (7,256) (8,418) (1,162) (8,536) (1,280) 92,860 88,709 (4,151) 96,532 3,672 TOTAL EXPENSES 783, ,038 (6,100) 780,244 (2,894) OPERATING INCOME BEFORE ACADEMIC SUPPORT 2,645 3,970 (1,325) 3,541 (896) AND TREASURY 22,036 27,738 (5,702) 9,389 12,647 1,501 2, , ACADEMIC SUPPORT 13,506 19,474 5,968 19,891 6,385 1,144 1,737 (593) 1,148 (4) OPERATING (LOSS) INCOME 8,530 8, (10,502) 19,032 TREASURY: REVENUE (EXPENSE) Interest and dividends 2,535 2, ,595 (60) 1, (7) 1,128 Realized gains (losses) on investments 9,207 1,184 8,023 1,688 7, ,962 (1,119) Change in unrealized gains and losses on investments and swap 26,869-26,869 28,604 (1,735) (85) 60 5 Contributions 970 1,894 (924) 1,383 (413) (209) (444) 235 (331) 122 Other (3,992) (3,994) 2 (3,107) (885) 2, ,026 1, TOTAL TREASURY 35,589 1,567 34,022 31,163 4,426 $ 3,284 $ 1,851 $ 1,433 $ 3,103 $ 181 EXCESS OF REVENUES OVER EXPENSES $ 44,119 $ 9,831 $ 34,288 $ 20,661 $ 23,

7 LOYOLA UNIVERSITY HEALTH SYSTEM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In $000's) ASSETS March 31, June 30, CURRENT ASSETS: Cash and cash equivalents $ 121,630 $ 126,666 Short-term investments 28,746 28,838 Patient accounts receivable - net of allowance for uncollectible accounts: March 31, $13,871 June 30, $26, , ,987 Inventories 18,470 18,266 Estimated third-party payer settlements receivable 1,880 1,347 Other current assets 19,544 35,863 Due from Loyola University Chicago Total current assets 328, ,535 INVESTMENTS: Board designated 230, ,648 Held by trustee 2,221 2,660 Donor and other restricted 14,428 16,748 LAND, BUILDINGS, AND EQUIPMENT - Net 409, ,478 OTHER ASSETS 30,710 30,906 TOTAL ASSETS $ 1,015,370 $ 994,975 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Current portion of long-term debt $ 162,238 $ 10,867 Current portion of self-insurance reserves 27,452 27,452 Accounts payable 27,514 34,476 Accrued expenses 81,329 60,474 Estimated third-party payer settlements 47,418 69,877 Due to Loyola University Chicago 2,193 - Total current liabilities 348, ,146 LONG-TERM DEBT - Net of current portion 177, ,229 SELF-INSURANCE RESERVES 119, ,978 PENSION & POST RETIREMENT PLAN OBLIGATIONS 134, ,493 OTHER LIABILITIES 18,496 20,291 Total liabilities 798, ,137 NET ASSETS: Unrestricted 185, ,461 Temporarily restricted 24,516 19,737 Permanently restricted 6,671 6,640 Total net assets 216, ,838 TOTAL LIABILITIES AND NET ASSETS $ 1,015,370 $ 994,

8 LOYOLA UNIVERSITY HEALTH SYSTEM CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (In $000's) Nine Months Ended Twelve Months Ended March 31, June 30, UNRESTRICTED NET ASSETS: Excess of revenues over expenses $ 44,119 $ 21,632 Retirement plan-related change other than net periodic retirement plan expense - (24,709) Transfer (to) from Loyola University Chicago - (7) Net assets released from restrictions - capital acquisitions 1,147 1,328 Increase (decrease) in unrestricted net assets 45,266 (1,756) TEMPORARILY RESTRICTED NET ASSETS: Contributions 6,200 6,807 Endowment earnings 110 (75) Net assets released from restrictions (1,531) (1,684) Increase (decrease) in temporarily restricted net assets 4,779 5,048 INCREASE IN PERMANENTLY RESTRICTED NET ASSETS: Contributions for endowment funds Increase in permanently restricted net assets INCREASE (DECREASE) IN NET ASSETS 50,076 3,323 NET ASSETS, BEGINNING OF PERIOD 166, ,515 NET ASSETS, END OF PERIOD $ 216,914 $ 166,

9 LOYOLA UNIVERSITY HEALTH SYSTEM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ONE MONTH AND YEAR-TO-DATE PERIODS ENDED MARCH 31, 2011 (In thousands) Month Ended Nine Months Ended March 31, 2011 March 31, 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 4,279 $ 50,075 Adjustments to reconcile change in net assets to cash provided by operating activities: Depreciation and amortization 3,492 31,676 Net realized and unrealized (gains) losses on investments and swap agreements (1,810) (45,068) Provision for retirement costs 2,262 19,289 Restricted contributions and transfers to affiliates (1,054) (6,341) Provision for bad debts 4,835 43,012 Net investment (purchases) sales (8) (12,764) Changes in: Patient accounts receivable (10,587) (46,596) Other assets 15,420 15,795 Accounts payable and accrued expenses (7,145) 3,108 Other liabilities (4,178) (36,609) Net cash (used in) provided by operating activities 5,506 15,577 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of land, buildings, and equipment,net (2,824) (16,992) Net cash used in investing activities (2,824) (16,992) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of debt principal - (9,962) Issuance of new debt - - Restricted contributions and transfers to affiliates 1,054 6,341 Net cash (used in) provided by financing activities 1,054 (3,621) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 3,736 (5,036) CASH AND CASH EQUIVALENTS Beginning of period/year 117, ,666 CASH AND CASH EQUIVALENTS March 31 $ 121,630 $ 121,

10 LOYOLA UNIVERSITY HEALTH SYSTEM CONSOLIDATING STATEMENTS OF OPERATIONS Nine Months Ended March 31, ACTUAL (In $000's) LUMC Reclasses & excluding FCO FCO Gottlieb LUHS LUCIC Subtotal Eliminations Combined REVENUES: Inpatient: Routine $ 198,726 $ 73,936 $ - $ - $ 272,662 $ 272,662 Ancillary 513, , , ,612 Outpatient ancillary 606, , , ,443 TOTAL PATIENT SERVICE REVENUES 1,319, ,654 1,852,717 1,852,717 DEDUCTIONS: Contractual adjustments (758,965) (423,997) (1,182,962) (1,182,962) Charity care (25,918) (13,218) (39,136) (39,136) TOTAL DEDUCTIONS (784,883) (437,215) (1,222,098) (1,222,098) NET PATIENT SERVICE REVENUES 534,180 96, , ,619 Hospital access improvement program FCO overhead 13,086 (13,086) - Faculty professional fees, net 113, , ,205 Physician professional fees, net 22,968 2,519 25,487 25,487 Capitation 4,965 6,424 11,389 (683) 10,706 LUMC operational support - - Faculty support 3,753 3,753 (3,753) - Strategic support 2,457 2,457 (2,457) - Other revenues 11,934 2,135 8,065 2,882 23,949 48,965 (23,808) 25,157 TOTAL OPERATING REVENUES 587, , ,023 2,882 23, ,875 (30,701) 805,174 EXPENSES: Salaries 220,452 16,225 41, , ,092 Employee benefits 61,167 4,226 13,209 78,602 78,602 Salaries and employee benefits 281,619 20,451 54, , ,694 Faculty salaries and benefits 73,342 73,342 73,342 Faculty support 3,753 3,753 (3,753) - Strategic support 2,457 2,457 (2,457) - Resident compensation - Professional compensation 10, ,385 13,623 13,623 Supplies - medical and other 74,993 1,079 13, ,352 89,352 Supplies - pharmaceutical 41, ,760 45,139 45,139 Purchased services 65,310 6,657 14,327 1,951 88,245 (987) 87,258 Insurance 13,191 8,911 4,072 23,949 50,123 (23,320) 26,803 IL HC and Family Svcs Assessment 14,321 2,510 16,831 16,831 Provision for bad debts & collection expense 26,381 11,290 5,341 43,012 43,012 Depreciation and amortization 25, , ,676 31,676 Excellence in Medicine Other expense - Interest expense 6, ,816 (277) 6,539 University shared services, net (7,256) (7,256) (7,256) TOTAL EXPENSES 558, , ,741 2,740 23, ,932 (30,794) 783,138 OPERATING INCOME BEFORE ACADEMIC SUPPORT AND TREASURY 28,536 (7,017) , ,036 ACADEMIC SUPPORT 11,393 2,113 13,506 13,506 OPERATING INCOME 17,143 (9,130) , ,530 TREASURY: Interest and dividends 2, ,812 (277) 2,535 Realized gains (losses) 8,332 8,332 8,332 Net unealized gains (losses) on investments & swap 16,983 9,886 26,869 26,869 Equity income on investments Interest expense - - Contributions and other Contribution from LUPF - - Other expense (3,992) (3,992) (3,992) Total Treasury 25, ,886 35,682 (93) 35,589 Reclass net unrealized loss on impaired investmen - - Net unrealized gain/(loss) on investments and swap - - Reclass net unrealized (loss) on trading securities - - EXCESS OF REVENUES OVER EXPENSES $ 42,679 $ (9,130) $ 542 $ 142 $ 9,886 $ 44,119 $ - $ 44,

11 LOYOLA UNIVERSITY HEALTH SYSTEM CONSOLIDATING STATEMENTS OF FINANCIAL POSITION March 31, 2011 (In $000's) ASSETS Reclasses & LUMC Gottlieb LUHS LUCIC Sub-Total Eliminations Consolidated CURRENT ASSETS: Cash and cash equivalents $ 80,972 $ 39,875 $ 120 $ 663 $ 121,630 $ - $ 121,630 Restricted cash Short-term investments 1,294 1,294 27,452 28,746 Patient accounts receivable - net of allowance for doubtful accounts 122,622 15, , ,857 Inventories 15,686 2,784 18,470 18,470 Due from related parties - - Estimated third-party payer settlements 1, ,904 (24) 1,880 Due from Loyola University Chicago - Other current assets 28,019 2,644 5,802 36,465 (16,921) 19,544 Total current assets 250,473 60, , ,620 10, ,127 INVESTMENTS: Board designated 127, , ,273 (27,452) 230,821 Held for future capital projects and interest 2,221 2,221 2,221 Donor and other restricted 14,428 14,428 14,428 LAND, BUILDINGS, AND EQUIPMENT - Net 343,218 57,401 8, , ,063 PREPAID PENSION COSTS DUE FROM RELATED PARTIES Estimated third-party payer settlements - - OTHER 18, ,861 31,414 (704) 30,710 TOTAL ASSETS $ 755,846 $ 118,571 $ 9,300 $ 149,302 $ 1,033,019 $ (17,649) $ 1,015,370 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Line of credit $ - $ - $ - $ - $ - $ - Current portion of long-term debt 162, , ,238 Current portion of self-insurance reserves 1,520 14,000 15,520 11,932 27,452 Accounts payable 22,559 5, ,514 (1,000) 27,514 Accrued expenses 68,144 10, ,827 81,730 (401) 81,329 Due to (from) related parties (21,320) 21,320 Due to University 2,193 2,193 2,193 Estimated third-party payer settlements 31,845 15,597 47,442 (24) 47,418 Total current liabilities 267,179 46,022 21,609 2, ,637 10, ,144 LONG-TERM DEBT - Net of current portion 177, , ,950 RESERVE FOR INSURANCE LOSSES 840 6, , ,300 (27,452) 119,848 PENSION & POST RETIREMENT PLAN OBLIGATIONS 102,493 31, , ,018 OTHER 18, ,496 18,496 Total liabilities 566,719 83,822 21, , ,401 (16,945) 798,456 NET ASSETS: Unrestricted 158,215 34,474 (12,548) 6, ,431 (704) 185,727 Temporarily restricted 24, ,516 24,516 Permanently restricted 6,671 6,671 6,671 NET ASSETS 189,127 34,749 (12,548) 6, ,618 (704) 216,914 TOTAL LIABILITIES AND NET ASSETS $ 755,846 $ 118,571 $ 9,300 $ 149,302 $ 1,033,019 $ (17,649) $ 1,015,

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13 Management s Discussion Financial Results (In $000 s) Operating Results Loyola University Health System For the nine months ending March 31, 2011 Loyola University Health System (LUHS) is reporting net income from operations of approximately $8.5 million, which is $266,000 favorable to the FY2011 budget. These results highlight the continued improvement over FY2010 by $19.0 million. This performance results in an operating margin for the first nine months of 1.06%. Patient volumes rebounded during the month of March as revenues exceeded budget by $2.8M. However, purchased services were greater than budget due to out-of-period expenses related to snow removal from February, as well as certain maintenance agreements that related to prior periods expensed in March by $355K. Year-to-date March LUMC admissions remain strong at 564 or 3.2% greater than budget and 825 or 4.7% greater than this same time last year resulting in net patient service revenue being favorable to budget by $14.3M or 2.8%. Gottlieb year-to-date clinical activity measures continue to remain below budget, with the exception of home health visits. Total admissions year-to-date are 330 or 4.3% below the budget target (this includes medical/surgical inpatient down 13.4%). Charity care and bad debt have also seen an unfavorable increase this fiscal year compared to budget. This combination of decreased admissions and change in mix results in a $4.3 million or 4.3% shortfall to budget in net patient service revenue. Management continues to control operating expenses to mitigate the revenue decline as demonstrated by total operating expenses under budget by $1.9 million or 1.8%. Salaries were under budget by $910,000 or 2.2% due mainly to the mandatory time off program for non-direct caregivers. Faculty Clinical Operations (FCO) net revenue is favorable to budget through the first nine months of the fiscal year, due primarily to improved collections and the addition of Pathology component billing. WRVU volume is up by 2.8% over last fiscal year, but 0.7% below budget. Payments, however, are up by 9.0% over last year and are 1.6% above budget. Payment per WRVU is also favorable compared to last year and to budget by 5.7% and 2.4%, respectively. FCO year-to-date faculty professional fees (net) are favorable to budget by $2.8M. Unfavorable variances in faculty salaries and benefits of $5.1M and greater than expected bad debt and collection expenses of $1.9M result in an operating loss of $9.1M which is $5.2M unfavorable to budget. 13

14 BALANCE SHEET/KEY FINANCIAL RATIOS LUHS Free Cash Flow from operations (defined as operating income, adding back depreciation expense) through March fiscal year-to-date is $40.1 million, of which $16.9 million has been utilized for capital purchases and $10 million to pay down debt during FY2011. The decrease in the current ratio from 1.72 as of June 30, 2010 to.94 is a result of the reclassification of the debt from long term to short term of $150M. This reclassification is necessary as the $150M is supported by letters of credit that expire in December of Excluding this $150M puts the current ratio for March at Days Cash on Hand ended at 94.9 days, which is the third consecutive month this key financial measure has been above 90 days. Academic Costs As part of the LUMC Affiliation Agreement, LUMC agreed to provide economic support to the University for the SSOM and other academic operations of the University. This support includes payments received by LUMC for direct medical education reimbursement, a portion of the salaries and benefits of the SSOM faculty, other support equal to any operating deficit of SSOM, provided that such amount shall not exceed the operating surplus of LUMC and an amount based upon a percentage of LUMC s operating performance. Additional funding for capital and other programmatic support is provided based upon agreement of the parties. Support totaled $13,506 and $19,891 for quarter ended March 31, 2011 and 2010, respectively. Net Patient Service Revenues LUMC and GHR have agreements with third-party payers that provide for payments to LUMC at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, per diem payments, discounted charges, and reimbursed costs. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods, as final settlements are determined. The activity of the physician faculty group is included within the accounts receivable reported in the consolidated statements of financial position. These revenues are also subject to agreements with third party-payers and include payments at amounts different from the established fee schedule. Services to Medicare patients are paid based upon the Resource Based Relative Value (RBRVS) fee schedule. Medicaid services are reimbursed using the Medicaid fee schedule. In addition, there are different fee schedule arrangements with the various managed care payors. The physician faculty group also provides care to certain patients under capitated agreements. LUHS bears the risk to the extent the cost of providing the covered services exceed the capitation 14

15 payments. An accrual for the incurred but not reported liability for out of network services has been recorded. The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Compliance with these laws and regulations, specifically those relating to the Medicare and Medicaid programs, can be subject to review and interpretation, as well as regulatory actions unknown and unasserted at this time. Federal government activity continues with respect to investigations and allegations concerning possible violations by health care providers of regulations, which could result in the imposition of significant fines and penalties, as well as significant repayments of previously billed and collected revenues from patient services. Management believes that LUMC is in compliance with current laws and regulations. In addition to the agreements with third-party payers, LUHS is dedicated to providing high-quality care to the community it serves. Patients who cannot afford to pay may receive charity care as described below. Consistent with LUMC s charitable mission, patients without health insurance are provided a discount from established rates. Below is a chart showing the payor mix for LUHS based on gross patient revenues and net patient revenues: 15

16 It is an inherent part of LUHS s mission to provide necessary medical care free of charge, or at a discount, to individuals without insurance or other means of paying for such care. As the amounts determined to qualify as charity care are not pursued for collection, they are not 16

17 reported as patient service revenues. LUHS also incurs losses related to the unreimbursed costs of providing services to Medicaid patients. The charges foregone associated with the provision of charity care are $39,136 and $37,396 for the quarter ended March 31, 2011 and 2010, respectively. LUHS also incurs losses related to the unreimbursed costs of providing services to Medicaid and Medicare patients. Cash, Cash Equivalents and Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated statements of financial position. The real estate investment is valued at cost and represents land not used in current operations. Investment income or loss (including realized gains and losses on investments, interest and dividends, and other than temporary investment declines) is included in the excess of revenues over expenses unless the income or loss is restricted by donor or law. Investments classified as noncurrent include long-term investments, investments held for future capital projects, real estate, and investments restricted by donors and others. LUHS board of directors-designated investments include $130,976 and $94,552 at March 31, 2011 and June 30, 2010, respectively, held by LUCIC for the payment of general and professional liability claims, of which $27,452 are reported as short-term investments at March 31, 2011 and June 30, 2010, respectively. Cash, cash equivalents, and investments at March 31, 2011 and June 30, 2010, include less than $1 million in a private equity investment and consisted of the following: Quarter ended 3/31/2011 Cash and Fixed Cash Equity Income Real Equivalents Securities Securities Estate Total Unrestricted $ 121,630 $ 111,386 $ 140,561 $ 7,620 $ 381,197 Held by trustee 2,221 2,221 Donor and other restricted 7,210 4,621 2,598 14,428 Total cash, cash equivalents, and investments $ 128,840 $ 116,007 $ 145,379 $ 7,620 $ 397,846 Fiscal Year Ended 6/30/2010 Cash and Fixed Cash Equity Income Real Equivalents Securities Securities Estate Total Unrestricted $ 126,666 $ 77,788 $ 116,092 $ 7,606 $ 328,152 Held by trustee 2,660 2,660 Donor and other restricted 8,890 4,686 3,172 16,748 Total cash, cash equivalents, and investments $ 135,556 $ 82,474 $ 121,924 $ 7,606 $ 347,560 17

18 Fair Value Measurements ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. LUHS uses the market approach to value its financial assets and liabilities, and there were no changes in valuation techniques during the year ended June 30, There were no purchases or sales of any level 3 assets during the fiscal year. The increase in the Level 3 assets is solely due to a change the valuation of the assets. The following table presents information about the financial assets and liabilities, measured at fair value on a recurring basis as of March 31, 2011 and June 30, 2010 respectively: March 31, 2011 Fair Value Measurement Level 1 Level 2 Level 3 Total Assets: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ - $ 14,936 $ - $ 14,936 U.S. Corporate bonds 15,663 6,327-21,990 Non-U.S. Corporate bonds Mutual Funds 38,067 94, ,849 U.S. Equity securities 67, ,926 Non-U.S. Equity securities 9, ,247 Asset-backed securities Collateralized Mortgage Obligations - 1,015-1,015 Mortgage-backed securities - 8,727-8,727 Cash and cash equivalents 128, ,840 Other 2, ,221 Total cash and investments, excluding real estate and accrued interest $ 261,992 $ 127,139 $ 972 $ 390,103 Liabilities: Interest rate SWAP liability $ - $ 7,210 $ - $ 7,210 18

19 June 30, 2010 Fair Value Measurement Level 1 Level 2 Level 3 Total Assets: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ - $ 11,504 $ - $ 11,504 U.S. Corporate bonds 14,933 9,156-24,089 Non-U.S. Corporate bonds Mutual Funds 24,634 72,522-97,156 U.S. Equity securities 50, ,030 Non-U.S. Equity securities 7, ,349 Asset-backed securities Collateralized Mortgage Obligations - 1,183-1,183 Mortgage-backed securities - 7,361-7,361 Cash and cash equivalents 135, ,556 Other 2, ,660 Total cash and investments, excluding real estate and accrued interest $ 235,190 $ 103,397 $ 972 $ 339,559 Liabilities: Interest rate SWAP liability $ - $ 8,890 $ - $ 8,890 The Level 3 holdings consist of common stock with a non-listed energy company located in Texas and incorporated in Delaware, involved in the exploration, production and operation of oil and natural gas in California and Oklahoma. A description of the inputs used in the valuation of assets and liabilities summarized in the preceding table follows: Level 1 Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets. Level 2 Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that are considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves that are observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks and defaults rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs include unobservable inputs that cannot be corroborated by other observable market data. 19

20 Long-Term Debt A summary of LUHS s long-term debt at March 31, 2011 and June 30, 2010, is as follows: 3/31/2011 6/30/2010 Illinois Finance Authority Tax Exempt Revenue Refunding Bonds, Series 2006A, due annually beginning in April 2012 through 2035, interest at a variable rate (0.23% and 0.23% at March 31, 2011 and June 30, 2010, respectively) $ 85,145 $ 85,145 Illinois Finance Authority Tax Exempt Revenue Bonds, Series 2006B, due annually beginning in April 2025 through 2041, interest at a variable rate (0.22% and 0.21% at March 31, 2011 and June 30, 2010, respectively) 75,000 75,000 Illinois Finance Authority Tax Exempt Revenue Bonds, Series 2006C, due annually beginning in April 2025 through 2041, interest at a variable rate (0.45% and 0.45% at March 31, 2011 and June 30, 2010, respectively) 75,000 75, % Illinois Health Facilities Authority Tax Exempt Revenue Bonds, Series 2001A, due annually beginning on July 1, 2006 through 2011, less unamortized bond discount of $9 at March 31, 2011 and $36 at June 30, 2010, respectively 2,891 5, % to 6.0% Illinois Health Facilities Authority Tax Exempt Revenue Bonds, Series 1997A, due annually on July 1 through 2024, less unamortized bond discount of $476 at March 31, 2011 and $503 at June 30, 2010, respectively 97, ,103 Illinois Health Facilities Authority Tax Exempt Revenue Bonds, Series 1997B, beginning October 6, 2009 principal is due quarterly on July 1, October 1, January 1 and April 1 through March of Previously, Series 1997B principal was due annually on July 1 through 2024, interest is at a variable rate 6.25% at March 31, 2011 (bank bond rate); and 6.25% at June 30, 2010 (bank bond rate). 4,528 7, , ,096 Less current portion of long-term debt 162,238 10,867 Long-term debt $ 177,950 $ 339,229 LUHS long-term debt is issued under a System Trust Indenture (STI) that created an Obligated Group. The Obligated Group is comprised of LUHS and LUMC. Gottlieb is a System Affiliate as defined under the STI but not a member of the Obligated Group. Obligations issued under the STI, including bonds, bank obligations and swaps, are secured by a pledge and grant of a security interest in the unrestricted receivables of the Obligated Group. Interest payable on the Series 2006 A, B &C (Series 2006) bonds may, at the option of the LUHS and subject to the terms and conditions of the bond indenture agreements, be converted to 20

21 alternative variable rate modes or into fixed rates. While the Series 2006 bonds operate in a variable rate mode, holders of the bonds have a put option that allows them to redeem the bonds prior to maturity. LUHS has an agreement with two financial institutions to remarket any bonds redeemed pursuant to the exercise of put options. The Series 2006 variable rate bonds are secured by irrevocable letter of credit agreements with three commercial banks. The Series 2006A agreement expires on December 19, 2013 while the Series 2006B and Series 2006C agreements expire on December 19 and 20, 2011, respectively. Under these agreements, the financial institutions would make liquidity advances to LUHS in the amount necessary to purchase the Variable Rate Demand Bonds in the event the bonds are not remarketed. The repayment of any liquidity advance resulting from a failed marketing of the Series 2006 bonds would not become due until the earlier of a successful remarketing of the Bonds, or the expiration of the Letter of Credit Agreement. The maturity date on the Series 2006 bonds may be accelerated upon the occurrence of specified events. As of March 31, 2011, the letters of credit supporting the Series 2006B and 2006C have yet to be renewed. These facilities have been reclassified as short term debt until such time as the facilities are either renewed or retired as a result of the impending replacement of the University as sole member of LUHS and all of its affiliates, including Loyola University Medical Center (LUMC) and Gottlieb Memorial Hospital (Gottlieb) with Trinity Health Corporation. LUHS is currently in negotiations with both letter of credit providers on renewal terms. During fiscal year 2010 and fiscal year to date March 31, 2011 there were no failed remarketings. In June of 2008, the bond insurer for the 1997B bonds was downgraded. On June 5, 2009, the bond insurer was downgraded by a second rating agency. The bond insurer failed to have a permitted minimum bond insurer rating for a period of 90 consecutive days from at least one of the recognized rating agencies, causing an insurer event of default. The commercial bank providing the Standby Bond Purchase Agreement executed a mandatory tender on October 6, 2009, due to the lack of a permitted minimum bond insurer rating. LUHS has elected to repay the bonds quarterly through March of 2012 per the term out provision of the Standby Bond Purchase Agreement that expires in March of The terms of the debt agreements require LUHS to maintain compliance with various financial ratios and covenants. LUHS was in compliance with the financial debt covenants as of March 31, 2011and June 30, The letter of credit agreements securing the Series 2006 bonds provide that a downgrade of the unenhanced, long-term rating of LUHS below Baa3 by Moody s Investor Services (Moody s) would result in an event of default under each of the reimbursement agreements. The current LUHS rating by Moody s is Baa3 with an outlook of positive. Any downgrade below Baa3 would be an event of default and could result in a mandatory tender of the Series 2006 bonds with amounts outstanding becoming immediately due and payable. LUHS paid $6,492 and $7,179 for interest on long-term debt for the quarter ended March 31, 2011 and 2010, respectively. Bond discount and costs incurred in connection with the issuance of bonds are deferred and amortized over the life of the related indebtedness using the bonds outstanding method. 21

22 At December 31, 2010 and June 30, 2010, the carrying value of long-term debt was $340,188 and $350,096., respectively, and the fair value of long-term debt was $336,818 and $349,993, respectively. The fair value of long-term debt is determined based on quoted market prices when available or discounted cash flows, using interest rates currently available to LUHS on similar borrowings. Scheduled principal repayments on long-term debt are as follows: Years Ending June 30 Amount 2011-Paid through 3/31/2011 $ 10, , , , ,880 Thereafter 303,535 Total $ 350,634 As of June 30, 2009, $20,000 was outstanding on a $20,000 unsecured bank line of credit. The line of credit was entered into in October of The interest rate on the line of credit was prime less 1.35% or 2%. The line of credit was repaid in August of This facility was allowed to expire in October of 2009 and was not renewed. On April 7, 2010 LUMC signed an agreement for a $20,000 line of credit with The Northern Trust Bank. Currently there are no amounts outstanding. Total interest paid on the previous line of credit was $142 for the year ended June 30, The line of credit with The Northern Trust Bank expired on April 6, This line will be renewed for $30,000 with The Northern Trust Bank on June 1, LUHS has two interest rate swap agreements to offset future fluctuations in interest rates related to LUHS s variable rate debt. The terms of the swap agreements are as follows (Securities Industry and Financial Markets Associates SIFMA ): Notional Effective Amount Date Maturity LUHS Receives LUHS Pays $ 125,000 May 20, years 63.00% of one-month LIBOR, SIFMA plus.705% 85,145 December 19, years 61.80% of one-month LIBOR, % plus.31% The fair value of the swap agreements at March 31, 2011 and June 30, 2010, representing an unrealized loss of $7,210 and $8,890, respectively, is recorded as a component of other liabilities on the accompanying statement of financial position. There is currently $7,210 on deposit with the counterparty and is recorded within donor and other restricted investments in the consolidated statement of financial position. LUHS recorded the net mark to market fair value 22

23 adjustment on the swaps as a gain of $1,680 at March 31, 2011 and a gain of $2,113 at June 30, 2010 within the excess of revenues over expenses in the consolidated statements of operations and changes in net assets. LUHS has elected to not apply hedge accounting to these agreements. The net amounts received under the interest rate swap agreements increased interest expense by $874 for quarter ended March 31, 2011 and reduced interest expense $393 for the quarter ended March 31, On 10/13, LUHS executed the termination of its $100M Constant Maturity Swap and received a termination payment of over $6M. Management is considering options to restructure the remaining swaps to reduce collateral requirements and risk exposure. This Quarterly Report contains updated unaudited financial and operating data in accordance with the reporting requirements of the Continuing Disclosure Agreement. This Quarterly Report is not intended to, and does not represent a complete discussion of all the affairs of LUHS for the past quarter. 23