Page 1/243 PRESENTED BY. I. CALL TO ORDER/ROLL CALL Dennis Chiu, Chair Finance Committee. 5:30-5:31 p.m. 5:31-5:36

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1 AGENDA Finance Committee Meeting of the Board Tuesday, September 24, 2013 at 5:30 p.m. Conference Room A, Ground Floor 2500 Grant Road, Mountain View, California MISSION: The purpose of the Finance Committee ( Committee ) is to provide oversight, information sharing and financial reviews related to budgeting, capital budgeting, long-range financial planning and forecasting, and monthly financial reporting for El Camino Hospital Board of Directors ( Board ). In carrying out its review, advisory and oversight responsibilities, the Finance Committee shall remain flexible in order to best define financial strategies that react to changing conditions. A copy of the agenda for the Regular Meeting will be posted and distributed at least seventy-two (72) hours prior to the meeting. In observance of the Americans with Disabilities Act, please notify us at forty-eight (48) hours prior to the meeting so that we may provide the agenda in alternative formats or to make disability related modifications and accommodations. PRESENTED BY I. CALL TO ORDER/ROLL CALL Dennis Chiu, Chair Finance Committee II. PUBLIC COMMUNICATION Dennis Chiu, Chair Finance Committee 5:30-5:31 p.m. 5:31-5:36 III. POTENTIAL CONFLICT OF INTEREST DISCLOSURES Dennis Chiu, Chair Finance Committee 5:36-5:37 IV. CONSENT CALENDAR All items listed on the Consent Calendar are considered to be routine matters or are considered formal documents covering previous Committee instructions. One motion, a second and a vote may approve, accept, or recommend all of the items listed on the Consent Calendar. There will be no separate discussion of Consent Calendar items unless members of the Committee, Hospital staff or the public request discussion on a specific item at the beginning of the consideration of the Consent Calendar. Approval: a. Minutes July 30, 2013 b. July Financials c. HR Process Improvement d. Intergovernmental Transfer ATTACHMENT 1 Dennis Chiu, Chair Finance Committee public comment motions required 5:37-5:38 V. FY2013 AUDIT a. ECHD Report of Independent Auditors b. ECHD Consolidated Financial Statements c. ECHD Communication with those Charged with Governance d. ECHD Internal Control Related Matters e. ECHD 2011 Benefit Plan Audits f. Financial Statements ECH Cash Balance Plan g. Financial Statements ECH 403(b) Retirement Plan Joelle Pulver & Bertha Minnihan, Moss Adams Page 1/243 discussion 5:38-6:05

2 Agenda: El Camino Hospital Finance Committee of the Board September 24, 2013 Page 2 h. Those Charged with Governance - ECH 403(b) Retirement Plan i. Those Charged with Governance - ECH Cash Balance Plan ATTACHMENT 2 VI. ADJOURN TO CLOSED SESSION The Board will adjourn to a Closed Session, pursuant to the sections of the California codes noted below: 1. Conflict of Interest disclosures relating to Items 2-4 on the Closed Session agenda pursuant to the code provisions listed below. 2. Approval of Minutes of the Closed Session Finance Committee Meeting of the Board (July 30, 2013) Govt. Code Section Information: Report involving health care facility trade secrets, Health and Safety Code Section 32106(b) Development of new services and programs: 1) Medical Director Palliative Care; 2) Medical Director Vascular Surgery; and 3) Medical Director Quality & Patient Safety 3. Report involving Govt. Code Section for discussion and report on personnel performance matters. Audit Executive Session 4. Report involving health care facility trade secrets, Health and Safety Code Section 32106(b) IT Case for Change 5. Adjourn to Open Session ATTACHMENTS 3-4 motion required VII. RECONVENE OPEN SESSION To report any required disclosure regarding permissible actions taken during Closed Session Dennis Chiu, Chair Finance Committee 7:00-7:01 VIII. MEDICAL DIRECTORSHIPS Palliative Care Vascular Surgery Quality & Patient Safety Eric Pifer, Chief Medical Officer public comment motions required 7:01-7:07 IX. FY 2013 AUDIT RECOMMENDATION Dennis Chiu, Chair Finance Committee public comment motion required 7:07-7:12 X. FINANCIAL STATEMENT REVIEW ATTACHMENT 5 Michael King Chief Financial Officer public comment motion required 7:12-7:25 XI COMMITTEE GOALS ATTACHMENT 6 Dennis Chiu, Chair Finance Committee public comment possible motion 7:25-7:30 XII. ADJOURNMENT Dennis Chiu, Chair Finance Committee 7:30 p.m. PLEASE NOTE: The CLOSED SESSION is limited to Finance Committee Members and invited Page hospital 2/243staff only.

3 Separator Page #1a MK DRAFT 7-30 Open Minutes.docx Page 4/243

4 EL CAMINO HOSPITAL FINANCE COMMITTEE OF THE BOARD Tuesday, July 30, 2013 MINUTES The Finance Committee of the Board of Directors of El Camino Hospital (the Hospital ) was called to order by Mr. Dennis Chiu, Chairman, at 5:30 pm on Tuesday, July 30, 2013 in Conference Room A, Ground Floor, El Camino Hospital, Mountain View. OPEN SESSION ROLL CALL was taken. Members in attendance were Mr. Dennis Chiu, Mr. John Zoglin, and Mr. Richard Juelis. Absent members were Mr. Bill Hobbs and Ms. Nandini Tandon. PUBLIC COMMUNICATIONS: As no member of the public was in attendance, there was no public comment. CONFLICT OF INTEREST DISCLOSURES: Mr. Chiu asked if any Committee member may have a conflict of interest on any of the items on the agenda. No conflict was stated. CONSENT CALENDAR: Mr. Chiu asked if anyone had any items they wanted removed from the consent calendar. Mr. Zoglin had requested that the May 28, 2013 minutes be pulled from the consent calendar for a separate vote as he was not in attendance at the May 28, 2013 meeting. A motion was made by Mr. Zoglin, seconded by Mr. Juelis, and approved by three members in favor, none opposed, to approve the following items on the consent calendar: May 2013 Financials; Simplee Agreement and Travel Policy. MAY 28 MINUTES: A motion was made by Mr. Juelis, seconded by Mr. Chiu, approved by two members in favor, one member abstained, and none opposed, to approve the May 28, 2013 minutes. LOS GATOS VOIP PROJECT POST ACTIVATION REVIEW: Mr. Greg Walton, Chief Information Officer, updated the Committee on the Los Gatos Voice Over Internet Protocol (VOIP) implementation, a project initiated in FY2012 to replace an unsupported and isolated phone switch. This has been accomplished, coming in at approximately $100,000 under budget. Information Systems and Los Gatos leadership and staff are satisfied with the outcome. IT CASE FOR CHANGE: Mr. Greg Walton presented a historical summary of the IT Planning, Contracting and Case for Change project. Dr. Michael Podlone, Chair of Medical Standards IT Committee, was in attendance to answer questions. Mr. Walton updated the Committee on the IT Case for Change project and stated that McKesson has announced that our revenue cycle software, STAR, is no longer being developed. Mr. Walton stated that while staff has been examining the Case for Change for many months and has narrowed its scope to considering four options, this development has accelerated our sense of concern. He stated that the two vendors still being considered for EMR and revenue cycle solutions are Epic and Allscripts, and that the four options under consideration are: 1) Epic EMR and revenue cycle, with a Sutter implementation; 2) Epic EMR and revenue cycle with a retail (Epic) implementation; 3) Allscripts EMR and revenue cycle; and 4) Epic revenue cycle with an Allscripts EMR. He noted that the Allscripts revenue cycle solution is a new product which is currently being rolled out, and also noted that Epic just recently came forward with a proposal that would allow ECH to install only the revenue cycle solution, so that option 4 is a relatively new development. Dr. Neal Cohen commented that the Sutter physicians and Palo Alto Medical Clinic physicians use Epic all the time and these physicians would support the use of Epic at El Camino Hospital. The community Page 5/243

5 El Camino Hospital Finance Committee of the Board July 30, 2013 P a g e 2 physicians do not use Epic. Site visits were made with Mills and Stanford Hospital and those who visited were impressed with their in-hospital versions of Epic. Mr. Walton stated that management is nearing the last portion of the fact gathering stage of the process. A team is scheduled to visit the Epic headquarters in Wisconsin and Allscripts headquarters in Georgia. A proposal from Sutter has not been received but is expected this month. After the August site visits, Mr. Walton will be providing updates to the committee. Mr. King commented that the Allscripts revenue cycle product is so new that it is not yet up and running in a hospital, although several installations are underway and are expected to be live in November. He noted that because cash flow depends on the revenue cycle module operating properly, it is imperative that we know not only that the product works, but that it works well. Dr. Neal Cohen commented that although Epic is a great tool, critically important is that it is set up in a way that helps this institution and that it is integrated with the way the physicians practice, both at the hospital and in their offices. All EMRs, including Epic, is difficult to learn and the transition is incredibly difficult. It is critical that clinicians are on site and that we have the support that we need from Epic to handle the transition. He stated that the approach we are taking is the right one, to be sure the right questions are asked about interfaces and also the ability of the vendors to support the clinicians during the implementation. ADJOURN TO CLOSED SESSION: Upon motion duly made by Mr. Zoglin, seconded by Mr. Juelis, and approved by the members of the Finance Committee, the Open Session Finance Committee meeting was adjourned to Closed Session at 6:15pm. pursuant to Gov t Code Section CLOSED SESSION The Committee completed its business of the Closed Session at 7:10 pm. RECONVENE OPEN SESSION: The Committee reconvened Open Session at 7:10 pm. CLOSED SESSION REPORTS: Mr. Chiu reported that no action was taken in Closed Session. Mr. Zoglin encouraged staff to ensure that all physician contracts include measurable goals and that metrics are aligned with strategy before presenting requests to the Board for approval. He also stated that he would like to see a calculation of return and payback period, when possible, on capital projects. Mr. King noted that the policies governing how contracts are approved are currently being re-examined and he expects a proposed revision of those policies to be brought to the committee in the near future. MEDICAL DIRECTOR DIGESTIVE HEALTH: A motion was made by Mr. Juelis, seconded by Mr. Zoglin, and approved by three members in favor, none opposed, that the Board of Directors authorize management to negotiate an agreement for the Medical Director of Digestive Health. SURGICAL ROBOT SYSTEM: A motion was made by Mr. Zoglin, seconded by Mr. Juelis, and approved by three members in favor, none opposed, that the Board of Directors authorize the purchase of a fourth robot system at a cost not to exceed $2 million. MEDICAL DIRECTOR, GERIATRIC PSYCHIATRY: A motion was made by Mr. Juelis, seconded by Mr. Zoglin, and approved by three members in favor, none opposed, that the Board of Directors authorize management to negotiate an agreement for the Medical Director of Geriatric Psychiatry. Page 6/243

6 El Camino Hospital Finance Committee of the Board July 30, 2013 P a g e 3 MEDICAL DIRECTOR, WELLNESS: A motion was made by Mr. Zoglin, seconded by Mr. Juelis, and approved by three members in favor, none opposed, to authorize management to negotiate an agreement for the Medical Director of Wellness. MEDICAL DIRECTOR, INFORMATION TECHNOLOGY: A motion was made by Mr. Zoglin, seconded by Mr. Juelis, and approved by three members in favor, none opposed, to authorize management to negotiate an agreement for the Medical Director of Information Technology. ED ON-CALL PANEL FOR PLASTIC SURGERY: A motion was made by Mr. Juelis, seconded by Mr. Zoglin, and approved by three members in favor, none opposed, to authorize management to negotiate an agreement for the ED On Call Panel for Plastic Surgery. MEDICAL DIRECTOR, TRANSCATHETER AORTIC VALVE REPLACEMENT (TAVR): A motion was made by Mr. Zoglin, seconded by Mr. Juelis, and approved by three members in favor, none opposed, to authorize management to negotiate an agreement for the Medical Director of TAVR. PRELIMINARY SUMMARY OF FINANCIAL OPERATIONS: Mr. Michael King, Chief Financial Officer, presented the preliminary June Financials. He noted that since the statements were printed, additional entries had increased operating expenses by approximately $300 thousand and increased net revenues by approximately $900 thousand, providing a bottom line which is $600 above what is shown in the report. Mr. King reported that management was investigating whether any adjustments might be necessary as a result of how the hospital records paid time off. Mr. King noted that A/R days came in just slightly better than target, volume numbers were above target in most areas, and that obstetrical volumes were significantly greater than budgeted. He also noted that the run rate is just slightly greater than budgeted. He stated that investments showed a loss in period 12, caused by increasing interest rates that reduced the value of our bond holdings, combined with a drop in the stock market. A motion was made by Mr. Juelis, seconded by Mr. Zoglin, and approved by three members in favor, none opposed to approve the June preliminary financials. At this time, Mr. Chiu shared an from committee member Mr. Bill Hobbs who was not available to attend the Finance Committee meeting. In summary, Mr. Hobbs stated we need to ensure that we have control of all our costs and be more productive every year, and that given a commitment to better control employee expenses, he would vote to approve all the proposals presented in the package. Discussion followed, during which Mr. King expressed that the union agreement and the decision to bring the Allscripts employees onto the payroll were two decisions which significantly impacted actual payroll expenses. He also noted that when comparing ECH Medicare margins with other California hospitals Medicare margins, we are in the bottom quartile, which suggests that ECH has room to work on expense management. Mr. Juelis suggested the variance could best be understood by building a bridge between the years, as was done in the budget process. Mr. Chiu suggested that we search for other channels of revenue for Los Gatos to keep it viable with PAMF and Stanford moving that way adding to competition. Mr. Chiu is concerned productivity will decrease with IT Case for Change moving forward and moving to a new system. Dr. Cohen stated that when they implemented Epic, on the ambulatory side they declined to 50% to 75% of normal volume, and that while a couple of practices returned to 100% within 45 days, for others it took three months. Inpatient volume didn t change except to reduce the OR schedule for a couple of weeks. Mr. Jeulis would like to see a quick comment on how the budget is looking for the year and would like to re-review the capital budget at a future meeting. Mr. Zoglin suggested that perhaps the Executive Compensation Committee should consider whether it would be more appropriate to use the run rate margin rather than operating margin, that the dashboard should contain data that is actionable, and that Page 7/243

7 El Camino Hospital Finance Committee of the Board July 30, 2013 P a g e 4 indicators provided to the board should help them quickly understand why margins are at variance from projections. FINANCE COMMITTEE GOALS: Mr. King presented the 2014 Finance Committee goals with recommended changes from the Governance Committee for the Finance Committee to consider. Mr. Chiu stated that the original intent of Goal #2 was changed, he would like the Executive team to branch out and search for revenue enhancement. Mr. Zoglin explained that the Governance Committee thought this was getting into strategic plans and that the Finance Committee is to review strategic initiatives, not drive strategic initiatives. As it is currently stated, it appears the Finance Committee is going beyond the charter of the Committee. The Committee is to evaluate the finances and address what the financial ramifications are. Mr. Chiu would like to continue talking about the change to the goal and bring the discussion to the BOD, he prefers not to leave revenue enhancement off any committee. He would like to have a revenue enhancement discussion with the board and talk about what the Committee s role is. Mr. King provided information on the sequencing of activities necessary to accomplish the committee s goals, which explained why most goals are scheduled for third and fourth quarter. It was suggested that some things be moved up and that Education be ongoing. Mr. King suggested that because the financial statements are reviewed at the Finance Committee, it might be appropriate to reallocate some of the Board agenda time from covering financial performance to education of the board on financial topics. Mr. Juelis suggested that the committee could begin reviewing important pieces of the long range capital plan. Mr. King suggested that we start with the facility master plan and agreed to ask the VP of Administrative Services, Ken King, to provide the committee with an update at the next meeting, if possible. Mr. Chiu stated he will postpone the motion for approving the Finance Committee Goals and requested Mr. King to redraft the goals. After redrafting the FY2014 Goals, Mr. King will send the revised version to committee members and request individual comments (via bcc), and will synthesize those comments for the next scheduled Finance Committee meeting. PACING PLAN: Mr. King presented the FY2014 Pacing Plan for discussion. No changes were made to the Placing Plan. ADDITIONAL COMMENTS: Mr. King suggested reordering the Finance Committee agenda to place all contracts in the consent calendar, and if any member has questions or would like more detail, the item will be pulled for discussion and the presenter will be notified to attend the meeting. Members were asked to notify Mr. King or Lily Wong in advance to pull an item off of the consent calendar. Mr. King will communicate this information to the Finance Committee members who are not in attendance at today s meeting. ADJOURNMENT: There being no further business, the meeting adjourned at 8:10pm. NEXT MEETING: September 24, 2013, Ground Floor Meeting Room A. Dennis Chiu Chair, Finance Committee Patricia A. Einarson, MD, Secretary El Camino Hospital Board of Directors Page 8/243

8 Separator Page #1b MRK_Board and Finance Committee FY14 Period 1 UPDATED Sep pptx Page 9/243

9 Summary of Financial Operations Fiscal Year 2014 Period 1 7/1/2013 to 7/31/2013 Page 10/243

10 EL CAMINO HOSPITAL (Excludes Controlled Affiliates) EXECUTIVE FINANCIAL SUMMARY Period Ending July 31, 2013 YTD STATEMENT OF REVENUE AND EXPENSES ($000s) BALANCE SHEET ($000s) Actual Budget Var F(U) July 31, 2013 Jul 31, 2012 Gross Revenue $201,253 $198,229 $3,024 Cash and Investments 580, ,180 Deductions from Revenue (142,382) (139,585) (2,797) Non Cash Current Assets 144, ,124 Net Patient Revenue 58,871 58, Property, Plant & Equipment (Net) 630, ,719 Other Operating Revenue 1,225 1,372 (146) Other Assets 36,875 37,491 Total Operating Revenue 60,096 60, Total Assets 1,392,406 1,298,514 Salaries & Wages 31,898 31,875 (23) Current Liabilities 95,603 89,878 Supplies 7,933 8, Long-Term Debt 230, ,242 Fees & Purchased Services 6,670 6,419 (251) Fund Balance/Capital Accounts 1,066, ,394 Other Operating Expense 2,685 2, Total Liabilities & Equity 1,392,406 1,298,514 Total Non Capital Operating Expense 49,186 49, KEY ECH STATISTICS - YTD OPERATING EBITDA 10,911 10, Balance Sheet Actual Target (1) Debt Service Coverage Ratio (MADS) Interest, Depreciation & Amortization 4,654 4, Debt to Capitalization 13.7% 37.5% Days of Cash NET OPERATING SURPLUS 6,257 5, Net AR Days Non Operating Income 10,994 1,660 9,333 Other Actual Budget Acute Discharges 1,542 1,541 TOTAL NET SURPLUS 17,251 6,990 10,261 Acute Average Daily Census Deliveries Yield Percent (NPR / Gross Revenue) 29.3% 29.6% -0.3% Emergency Department Visits 4,908 4,469 EBITDA Margin 18.2% 17.1% 1.0% Surgical Cases Operating Margin 10.4% 8.9% 1.5% Full Time Equivalent Employees 2,360 2,369 Total Margin 28.7% 11.6% 17.1% Worked Hrs/CMI Adjusted Discharge (1) For Debt Service Coverage Ratio and Debt to Capitalization, Target represents Bond Convenants For Days Cash and Net AR Days, Target represents S&P A+ Rated Hospital Medians (1) Hospital entity only, excludes controlled affiliates Page 11/243 2

11 Management Commentary (1) 54 Net Days in AR 4,400 Case Mix Index Adjusted Discharges Current & Prior Fiscal Year 12,000 Operating Income ($000S) Current & Prior Fiscal Year ,200 4,000 3,800 3,600 3,400 10,000 8,000 6,000 4, ,200 2, PY A S O N D J F M A M J CY A S O N D J F M A M J 3,000 PY A S O N D J F M A M J CY A S O N D J F M A M J 0 PY A S O N D J F M A M J CY A S O N D J F M A M J Actual Target Actual Budget Actual Budget Budget is represented by solid lines; Bars represent acutal results Net Days in AR Net days in A/R, while still favorable to goal, increased for the second month, coming in at 47.7 days for the first period of the new fiscal year. Net outstanding receivables increased $1.6 million in July. For the most recent 12-month period, A/R days averaged 49.0 or 1 day favorable to the 50-day target. CMI Adjusted Discharges Although Case Mix was 1% below budget in July and discharges were 0.4% short, outpatient activity that was 8% above budget more than offset the shortfall resulting in CMI Adjusted Discharges which were 3% favorable to budget. Operating Margin Although July s gross charges were $3.2 million favorable to budget, an unfavorable payer mix provided a $2.8 million unfavorable variance in revenue deductions. In addition, other operating revenues were $146 thousand unfavorable to budget. Expenses were well-controlled, coming in 1.5% favorable to budget, in spite of the increased gross charges. Consequently, hospital operations were $927 thousand or 17% favorable to budget. Very strong investment performance in July provided a $9.3m favorable budget variance in non-operating income and total income which was $10.3 million favorable to budget. (1) Hospital entity only, excludes controlled affiliates Page 12/243 3

12 Key Hospital Indicators (1) Statistic FYE 2011 FYE 2012 FYE 2013 FYTD 2014 Target (2) +/- Operating Margin 7.9% 10.5% 9.9% 10.4% 8.9% EBITDA Margin 16.6% 19.4% 17.8% 18.2% 17.1% Days of Cash Debt Service Coverage Ratio (MADS) Debt to Capitalization 17.1% 15.8% 14.0% 13.7% 26.8% Net AR Days (1) Hospital Only - Excludes Affiliates (2) Target source: FYTD Budget for Operating Margin and EBITDA Margin Target source: S&P 2012 A+ Rated Hospital Medians for all others *Prior Year numbers represent full year (1) Hospital entity only, excludes controlled affiliates Page 13/243 4

13 El Camino Hospital Financial Metrics Trend (1) P r o f I t _ L o s s 1.1% Favorable to Budget B A L _ S H E E T 8 Days Favorable to Budget Represents cash of $580 million (1) Hospital entity only, excludes controlled affiliates Page 14/243 5

14 ECH Operating Margin (1) Run rate is booked operating income adjusted for material non-recurring transactions (1) Hospital entity only, excludes controlled affiliates Page 15/243 6

15 ECH Volume Statistics (1) MOUNTAIN VIEW Month of Jul, 2013 Year to Date Prior Year Act Bud Var% Act Bud Var% Act Var% Discharges (2) 1,235 1, % 1,235 1, % 1, % ADC (2) % % % Deliveries % % % ED Visits 3,787 3, % 3,787 3, % 3, % Surgical Cases % % % LOS GATOS Month of Jul, 2013 Year to Date Prior Year Act Bud Var Act Bud Var Act Var% Discharges (2) % % % ADC (2) % % % Deliveries % % % ED Visits 1, % 1, % % Surgical Cases % % % ECH Month of Jul, 2013 Year to Date Prior Year Act Bud Var Act Bud Var Act Var% Discharges (2) 1,542 1, % 1,542 1, % 1, % ADC (2) % % % Deliveries % % % ED Visits 4,908 4, % 4,908 4, % 4, % Surgical Cases % % % (1) (2) Hospital entity only, excludes controlled affiliates Excludes normal newborns (MS-DRG 795) Page 16/243 7

16 El Camino Hospital Volume Trends Prior and Current Fiscal Years Discharges, Discharges, Excl Normal Excl Normal Newborns Newborns ADC, Excl Normal Newborns Deliveries 1, ,600 1, ,200 Both 200 Both 400 Both 1, MV LG 150 MV LG 300 MV LG PY A S O N D J F M A M J CY A S O N D J F M A M J 0 PY A S O N D J F M A M J CY A S O N D J F M A M J 0 PY A S O N D J F M A M J CY A S O N D J F M A M J ED Visits Surgical Cases Psych Discharges (MV Rehab Discharges (LG) 6,000 5,000 1,200 1, ,000 3,000 2,000 Both MV LG Both MV LG MV LG 1, PY A S O N D J F M A M J CY A S O N D J F M A M J 0 PY A S O N D J F M A M J CY A S O N D J F M A M J 0 PY A S O N D J F M A M J CY A S O N D J F M A M J Page 17/243 8

17 APPENDIX Page 18/243 9

18 Summary of Financial Results $ in Thousands (1) Period 1 - Month Period 1 - FYTD Actual Budget Variance Actual Budget Variance El Camino Hospital Income (Loss) from Operations Mountain View 4,450 4,482 (33) 4,450 4,482 (33) Los Gatos 1, , Sub Total - El Camino Hospital, excl. Afflilates 6,257 5, ,257 5, Operating Margin % 10.4% 8.9% 10.4% 8.9% El Camino Hospital Non Operating Income Investments ** 10,815 2,012 8,803 10,815 2,012 8,803 Swap Adjustments Community Benefit (180) 0 (180) (180) 0 (180) Other (141) (351) 211 (141) (351) 211 Sub Total - Non Operating Income 10,994 1,660 9,333 10,994 1,660 9,333 El Camino Hospital Net Income (Loss) 17,251 6,990 10,261 17,251 6,990 10,261 ECH Net Margin % 28.7% 11.6% 28.7% 11.6% Net Income Hospital Affiliates Total Net Income Hospital & Affiliates 17,992 7,224 10,769 17,992 7,224 10,769 (1) Hospital entity only, excludes controlled affiliates Page 19/

19 Worked Hours per CMI Adjusted Discharge (1) (1) Hospital entity only, excludes controlled affiliates Page 20/243 11

20 Supply Cost per CMI Adjusted Discharges (1) YTD: 11.5% under budget Mountain View YTD: 8.9% under budget Los Gatos 11 (1) Hospital entity only, excludes controlled affiliates Page 21/243 12

21 Mountain View LOS & CMI Trend (1) Medicare: Due to DRG reimbursement, financial results usually improve with decreased LOS and increased CMI Non-Medicare: Reimbursement varies; financial results usually improve when both LOS & CMI increase (1) Hospital entity only, excludes controlled affiliates Page 22/243 All data excludes normal newborns (MS-DRG=795), Medicare data excludes Medicare HMOs and PPOs 13

22 Los Gatos LOS & CMI Trend (1) Medicare: Due to DRG reimbursement, financial results usually improve with decreased LOS and increased CMI Non-Medicare: Reimbursement varies; financial results usually improve when both LOS & CMI increase (1) Hospital entity only, excludes controlled affiliates Page 23/243 All data excludes normal newborns (MS-DRG=795), Medicare data excludes Medicare HMOs and PPOs 14

23 El Camino Hospital (1) Results from Operations vs. Prior Year 1 month ending 7/31/2013 $000s FY 2014 FY 2013 Variance Fav (Unfav) Var% OPERATING REVENUE: Gross Revenue 201, ,881 2, % Deductions (142,382) (143,288) % Net Patient Revenue 58,871 55,593 3, % Other Operating Revenue 1,225 1,398 (173) -12.4% Total Operating Revenue 60,096 56,991 3, % OPERATING EXPENSE: Salaries & Wages 31,898 28,302 (3,596) -12.7% Supplies 7,933 9,412 1, % Fees & Purchased Services 6,670 7, % Other Operating Expense 7,339 6,356 (983) -15.5% Total Operating Expense 53,839 51,104 (2,736) -5.4% Net Operating Income/(Loss) 6,257 5, % Non Operating Income 10,994 3,430 7, % Net Income(Loss) 17,251 9,318 7, % Collection Rate 29.3% 28.0% 1.3% Operating Margin 10.4% 10.3% 0.1% Net Margin 28.7% 16.3% 12.4% (1) Hospital entity only, excludes controlled affiliates Page 24/243 15

24 El Camino Hospital Mountain View Results from Operations vs. Prior Year 1 month ending 7/31/2013 $000s FY 2014 FY 2013 Variance Fav (Unfav) Var% OPERATING REVENUE: Gross Revenue 159, ,859 4, % Deductions (112,547) (110,865) (1,682) -1.5% Net Patient Revenue 47,246 43,994 3, % Other Operating Revenue 1,189 1,327 (138) -10.4% Total Operating Revenue 48,435 45,320 3, % OPERATING EXPENSE: Salaries & Wages 26,504 23,429 (3,075) -13.1% Supplies 6,289 6, % Fees & Purchased Services 5,404 5, % Other Operating Expense 5,788 4,800 (988) -20.6% Total Operating Expense 43,985 40,884 (3,101) -7.6% Net Operating Income/(Loss) 4,450 4, % Non Operating Income 10,994 3,430 7, % Net Income(Loss) 15,443 7,866 7, % Collection Rate 29.6% 28.4% 1.2% Operating Margin 9.2% 9.8% -0.6% Net Margin 31.9% 17.4% 14.5% (1) (1) Hospital entity only, excludes controlled affiliates Page 25/243 16

25 El Camino Hospital Los Gatos Results from Operations vs. Prior Year 1 months ending 7/31/2013 1(1) $000s FY 2014 FY 2013 Variance Fav (Unfav) Var% OPERATING REVENUE: Gross Revenue 41,460 44,022 (2,563) -5.8% Deductions (29,835) (32,423) 2, % Net Patient Revenue 11,625 11, % Other Operating Revenue (35) -49.1% Total Operating Revenue 11,661 11,671 (10) -0.1% OPERATING EXPENSE: Salaries & Wages 5,394 4,873 (521) -10.7% Supplies 1,644 2,668 1, % Fees & Purchased Services 1,265 1,123 (142) -12.7% Other Operating Expense 1,551 1, % Total Operating Expense 9,854 10, % Net Operating Income/(Loss) 1,808 1, % Non Operating Income % Net Income(Loss) 1,808 1, % Collection Rate 28.0% 26.3% 1.7% Operating Margin 15.5% 12.4% 3.1% Net Margin 15.5% 12.4% 3.1% (1) Hospital entity only, excludes controlled affiliates Page 26/243 17

26 El Camino Hospital Results from Operations vs. Budget 1 month ending 7/31/2013 $000s FY 2014 Budget 2014 Variance Fav (Unfav) Var% OPERATING REVENUE: Gross Revenue 201, ,229 3, % Deductions (142,382) (139,585) (2,797) -2.0% Net Patient Revenue 58,871 58, % Other Operating Revenue 1,225 1,372 (146) -10.7% Total Operating Revenue 60,096 60, % OPERATING EXPENSE: Salaries & Wages 31,898 31,875 (23) -0.1% Supplies 7,933 8, % Fees & Purchased Services 6,670 6,419 (251) -3.9% Other Operating Expense 7,339 7, % Total Operating Expense 53,839 54, % Net Operating Income/(Loss) 6,257 5, % Non Operating Income 10,994 1,660 9, % Net Income(Loss) 17,251 6,990 10, % (1) Collection Rate 29.3% 29.6% -0.3% Operating Margin 10.4% 8.9% 1.5% Net Margin 28.7% 11.6% 17.1% 1 (1) Hospital entity only, excludes controlled affiliates Page 27/243 18

27 El Camino Hospital Mountain View Results from Operations vs. Budget 1 month ending 7/31/2013 $000s FY 2014 Budget 2014 Variance Fav (Unfav) Var% OPERATING REVENUE: Gross Revenue 159, ,617 (1,823) -1.1% Deductions (112,547) (113,368) % Net Patient Revenue 47,246 48,249 (1,002) -2.1% Other Operating Revenue 1,189 1,327 (138) -10.4% Total Operating Revenue 48,435 49,576 (1,141) -2.3% OPERATING EXPENSE: Salaries & Wages 26,504 26, % Supplies 6,289 6, % Fees & Purchased Services 5,404 5,173 (232) -4.5% Other Operating Expense 5,788 6, % Total Operating Expense 43,985 45,093 1, % Net Operating Income/(Loss) 4,450 4,482 (33) -0.7% Non Operating Income 10,994 1,660 9, % Net Income(Loss) 15,443 6,143 9, % Collection Rate 29.6% 29.9% -0.3% Operating Margin 9.2% 9.0% 0.1% Net Margin 31.9% 12.4% 19.5% (1) (1) Hospital entity only, excludes controlled affiliates Page 28/243 19

28 El Camino Hospital Los Gatos Results from Operations vs. Budget 1 month ending 7/31/2013 $000s FY 2014 Budget 2014 Variance Fav (Unfav) Var% OPERATING REVENUE: Gross Revenue 41,460 36,612 4, % Deductions (29,835) (26,217) (3,617) -13.8% Net Patient Revenue 11,625 10,395 1, % Other Operating Revenue (8) -18.4% Total Operating Revenue 11,661 10,440 1, % OPERATING EXPENSE: Salaries & Wages 5,394 5,013 (381) -7.6% Supplies 1,644 1, % Fees & Purchased Services 1,265 1,246 (19) -1.5% Other Operating Expense 1,551 1,547 (4) -0.3% Total Operating Expense 9,854 9,592 (261) -2.7% Net Operating Income/(Loss) 1, % Non Operating Income n/a Net Income(Loss) 1, % Collection Rate 28.0% 28.4% -0.4% Operating Margin 15.5% 8.1% 7.4% Net Margin 15.5% 8.1% 7.4% (1) (1) Hospital entity only, excludes controlled affiliates Page 29/243 20

29 El Camino Hospital Balance Sheet ($ Thousands) (1) ASSETS LIABILITIES AND FUND BALANCE Period Ending Jul 31 Period Ending Jul 31 CURRENT ASSETS FY 2014 FY 2013 CURRENT LIABILITIES FY 2014 FY 2013 Cash 59,687 43,885 Accounts Payable 21,595 16,948 Short Term Investments 134, ,393 Salaries and Related Liabilities 16,461 17,270 Patient Accounts Receivable, NET 87,235 89,267 Accrued PTO 18,609 16,437 Other Accounts and Notes Receivable 3,294 3,344 Worker's Comp Reserve 2,383 2,300 Intercompany Receivables 996 1,281 Third Party Settlements 21,117 19,682 Inventories and Prepaids 53,142 42,231 Intercompany Payables Total Current Assets 338, ,401 Malpractice Reserves 2,002 2,318 Bonds Payable - Current 3,000 2,850 BOARD DESIGNATED ASSETS Bond Interest Payable 4,387 4,501 Plant & Equipment Fund 83,689 59,511 Other Liabilities 5,814 7,337 Operational Reserve Fund 100, ,989 Total Current Liabilities 95,603 89,878 Community Benefit Fund - 4,926 Workers Compensation Reserve Fund 26,221 20,585 Postretirement Health/Life Reserve Fund 15,629 14,927 LONG TERM LIABILITIES PTO Liability Fund 18,609 16,437 Post Retirement Benefits 15,629 14,927 Malpractice Reserve Fund 2,002 2,318 Worker's Comp Reserve 23,838 18,285 Catastrophic Reserves Fund 15,246 12,101 Other L/T Obligation (Asbestos) 3,320 3,216 Total Board Designated Assets 261, ,795 Other L/T Liabilities (IT/Medl Leases) - 2,806 Bond Payable 187, ,008 FUNDS HELD BY TRUSTEE 9,385 9,385 Total Long Term Liabilities 230, ,242 LONG TERM INVESTMENTS 124,737 38,108 FUND BALANCE/CAPITAL ACCOUNTS INVESTMENTS IN AFFILIATES 22,837 23,274 Unrestricted 804, ,595 Board Designated 261, ,795 PROPERTY AND EQUIPMENT Restricted 34 4 Fixed Assets at Cost 1,011,754 1,003,166 Total Fund Bal & Capital Accts 1,066, ,394 Less: Accumulated Depreciation (391,533) (353,520) Construction in Progress 10,611 5,073 TOTAL LIABILITIES AND FUND BALANCE 1,392,406 1,298,514 Property, Plant & Equipment - Net 630, ,719 DEFERRED COSTS/BOND ISSUE COSTS 4,647 4,828 RESTRICTED ASSETS - CASH 7 4 TOTAL ASSETS 1,392,406 1,298,514 1 (1) Hospital entity only, excludes controlled affiliates Page 30/243 21

30 Date: September 10, 2013 To: From: Subject: El Camino Hospital Finance Committee Kathryn Fisk, Interim Chief Human Resource Officer Greg Walton, Chief Information Officer Human Resource Process Improvement Upgrades Recommendation: We request that the Finance Committee recommend to the Board approval of the Human Resources Process Improvement Charter including approval for the expenditure of the expected $1.1 million five-year costs as detailed in the Charter, and authorize staff to execute the necessary documents to proceed. Problem Definition: The volume of position descriptions and the lack of an effective document management system prevent position descriptions from being widely available to employees or managers. The process of reviewing employee performance involves manual completion of forms, duplication of work effort and generation of large amounts of paper which must then be filed and maintained manually. Please see the Charter document for more detailed information. Authority: The request from the senior leadership team exceeds the spending authority of the CEO. The FY Capital account ID is for $750,000. Process Description: A multi-disciplinary team from Human Resources, Information Technology, and Finance developed a Project Charter to address the matters such as process improvement, implementation, cost, benefits, measures, and timing. Alternative Solution Which Includes Cost Benefits/SWOT Analysis: The Human Resources FY14 projects include several individual sub-projects that will greatly improve work flow within the Human Resources Department and will increase efficiencies hospital wide. Maintaining the status quo continues the intensively manual labor processes as they currently have while lowering the ability to provide quality data in a timely manner to the internal customers of the organization. Concurrence for Recommendation: Leaders in Information Technology, Senior Leadership, and Leaders in the Human Resources Division have endorsed this project. Outcome Measures/Deadlines: 1) Enable the alignment of employee goals across the enterprise to support the achievement of overall organization objectives. Page 31/243

31 2) Improve the efficiency and effectiveness of performance reviews with online tracking, routing and electronic signature. 3) Implement a clearly defined organizational structure within a system that provides consistent and maintainable position descriptions, performance reviews, management reports, and system interface. 4) Implement an electronic document management system that replaces cumbersome paperwork processes with indexed and retrievable employee records. Legal Review: N/A Compliance Review: N/A Financial Review: The Charter has been reviewed and approved by the CFO and Controller. The FY2014 Capital Budget includes $750 thousand funding for this project and it has now been determined that much of the project cost will be operational. The estimated Capital Expense for FY 2014 is $116,000, and the estimated Operational Expense in FY 2014 is $408,286, totaling $524,286. The Performance Management system annual subscription and support is $143,186, which totals $573,144 for future years 2 through 5. The combined 5 year total for the project is expected to be $1,097,430, including licensing, implementation and ongoing support. Tomi Ryba, CEO Kathryn Fisk, Interim CHRO Greg Walton, CIO Page 32/243

32 Separator Page #1c HR IT FY14 Project Charter FINAL docx Page 33/243

33 Project Charter General Information Project Title: Human Resources FY 2014 Projects Capital ID: Sponsors: Kathryn Fisk, Greg Walton Prepared by: Tamara Stafford, Dave Zucker, Farzin Mirzaagha Project Stakeholders Position Name/Title Phone Project Sponsor Kathryn Fisk Interim CHRO 7226 Project Coordinator Tamara Stafford Director of Education 7783 IT Sponsor Greg Walton, CIO 7300 Business Applications Lead Dave Zucker, Dir. IS Business Applications 7065 Project Manager Farzin Mirzaagha, Project Manager 8326 Executive Summary The Human Resources FY2014 Projects include several individual sub-projects that will greatly improve work flow within the Human Resources Department and will increase efficiencies hospital wide. The major efforts in this project are the following: Performance and Goals Management: El Camino Hospital currently has manual processes for documenting performance evaluations, individual performance goals and other performance related information. Each Competency-Based Job Description/Performance Evaluation detailing the duties of a specific position is a separate electronic document making wide-scale updates tedious, time-consuming and inefficient. This sub-project will replace the manual system and processes with the Success Factors cloudbased performance and goals management solution that will decrease the manual work of managers and HR staff through automation allowing more time for delivering meaningful reviews, alignment of goals and calibration of performance across the enterprise. Position Management: A clearly defined and well-documented organizational structure is essential in order to support Talent Management, Time and Attendance, Staffing and Scheduling, Payroll, HR Document Management and several other applications. This sub-project will use the PeopleSoft HRMS system to define positions with clear reporting responsibilities. The result of this work will form the basis of the hospital s official organizational structure. Document Management: Currently most Human Resources records are stored on paper in file folders and cabinets. This process is inefficient when it comes to document retrieval, replications or distribution. The Redwood Report2Web system, which is currently used to store and distribute accounting reports, is being considered for the software solution. One other more HR-focuses product is being reviewed, and a final decision has not yet been made. In this sub-project, El Camino will choose and implement a document imaging system that allows employee records to be scanned or electronically fed to the application where they are indexed and stored for distribution and retrieval. Page 34/243

34 Project Charter Project Purpose Problem/Definition: The volume of position descriptions and the lack of an effective document management system prevent position descriptions from being widely available to employees or managers. The process of reviewing employee performance involves manual completion of forms, duplication of work effort and generation of a large amount of paper which must then be filed and maintained manually. Purpose: The purpose of this project is to provide electronic tools that will increase the efficiency, effectiveness and documentation of performance and goals management. In addition, it will enable the enterprise to more easily change work processes related to talent and performance management going forward. Project Goals 1) Enable the alignment of employee goals across the enterprise to support the achievement of overall organization objectives. 2) Improve the efficiency and effectiveness of performance reviews with online tracking, routing and electronic signature. 3) Implement a clearly defined organizational structure with consistent and maintainable position descriptions. 4) Implement an electronic document management system that replaces cumbersome paperwork processes with indexed and retrievable employee records. Project Overview Project Scope: Implementation of the Success Factors Performance and Goals management solutions across the enterprise. Future projects may include the related Compensation Management, Succession Planning and Recruiting modules. Configuration of Position Management and the hospital s organizational structure within the existing PeopleSoft HR System as a foundation for Performance Management work flow. Implementation of an HR Document Management system, using Redwood Report2Web, or other similar software, so that paper records are replaced by document scanning, electronic feeds and online retrieval of employee records. Page 35/243

35 Project Requirements/Deliverables Performance and Goals Management System 1. Role Based Permissions 2. Employee Profile Management 3. Employee Goal Management 4. Performance Management 5. Job Profile Builder Project Charter Position Management System 1. Maximum of one employee assigned to each position. 2. One solid-line reporting relationship per position. 3. Maximum of one dotted-line reporting relationship per position. 4. Organizational structure that can be exported or replicated to other systems. 5. Addition of contracted interim managers to PeopleSoft HR and E-Time systems. Document Management 1. Scanning and indexing of Documents to Employee Folders. 2. Completely paperless employee record for all active employees. 3. Consistent and standardized retrieval of electronic documents. Project Management Milestones and Deliverables Milestones Position Management Dates Position Management Planning and Design Weeks 1 thru 2 Position Cleanup and Test Case Validation Weeks 2 thru 3 Configuration of Solid Line Reporting Structure Weeks 3 thru 7 Publish Organizational Structure Week 8 Activate Position Management in Production Week 8 Milestones Document Management Dates Design Folder Structure Weeks 1 thru 2 Install and Configure Document Scanning Weeks 2 thru 3 Install and Configure Electronic Interfaces Weeks 3 thru 7 Scan Active Employee Folders Weeks 8 thru 16 Activate Document Management in Production Weeks 8 thru 16 Milestones Performance and Goals Management Dates Build and Connect to Success Factors System Weeks 1 thru 4 Design and Plan El Camino Work Flow Weeks 4 thru 8 Configure and Test Role-Based Permissions Weeks 8 thru 10 Configure and Test Employee Profile Management Weeks 10 thru 14 Configure and Test Employee Goals Management Weeks 15 thru 18 Configure and Test Performance Management Weeks 19 thru 22 Configure and Test Job Profile Builder Weeks 23 thru 24 Activate Success Factors in Production Weeks 25 thru 26 Page 36/243

36 Project Charter Costs/Budget One Time Capital Costs (Charged to Capital ID# ) Amount Aasonn Success Factors Implementation Services $66,000 Implement New or Upgrade Existing Document Imaging System $ 50,000 TOTAL CAPITAL EXPENSE (Year One) $ 116,000 Current Fiscal Year Operational Expense Amount Success Factors Performance and Goal Management Solution Subscription $130,260 Success Factors Premium Plus Support $13,026 Aasonn Travel and Living Expenses $ 15,000 Document Imaging Scanning Services (Estimate) $ 250,000 TOTAL OPERATIONAL EXPENSE (Year One) $ 408,286 Future Fiscal Year Operational Expense Amount Success Factors Subscription Costs (Total of Years 2 thru 5) $ 521,040 Success Factors Premium Plus Support (Total of Years 2 thru 5) $52,104 TOTAL FUTURE OPERATIONAL EXPENSE (Years Two thru Five) $573,144 Note: FY 2014 Budget was designated as Capital Expense, however much of this project cost appears to be Operational Expense. Project Organization The Success Factors system implementation will be managed by the Aasonn Project Manager. The other sub-projects will be managed by hospital IS resources. Executive Steering Committee Executive Stakeholders Information Systems Management ECH Project Manager Aason Project Manager Department POC IT Project Member 3 rd Party Vendors Department Resources Vendor Resources Project Team Page 37/243

37 Project Charter Executive Steering Committee (ESC) Members Kathryn Fisk Interim Chief Human Resources Officer Greg Walton Chief Information Officer Tamara Stafford Director of Education Lynn Worsham Director of Workforce Planning and Recruitment Julie Johnston Director of Compensation and Benefits Sandra Speer Director of Employee and Labor Relations Dave Zucker Director of IS Business Applications Farzin Mirzaagha IS Project Manager Personnel & Other Resources Resources HR Project Team IS Business Application Team IS Technical Team ECH Department Heads Description HRIS Analyst, HR Analysts, Education Coordinator, E-Time FSA, Comp Analyst Business Analysts, DBA Network Engineer, Server Engineer, Desktop Support Managers and Directors All Hospital Departments Roles, Responsibilities and Time Commitments Stakeholder Title Name Roles & Responsibilities Estimated Hours CHRO Kathryn Fisk Project sponsor, Ensure 10 Step process is completed and project approved. Ensure that 20 hours per month financial and administrative related prerequisites are planned for and addressed. Work with other hospital executives to ensure that appropriate resources are allocated. CIO Greg Walton Ensure 10 Step process is completed and project approved. Ensure SOWs are signed by ECH. Works with other hospital executives to ensure appropriate resources are allocated. 10 hours per month Director of Education Director of Workforce Planning and Recruitment Tamara Stafford Lynn Worsham Provide HR leadership in the Performance and Goals sub-project. Ensures HR and stakeholders have been identified and that all training and communication requirements are met. Ensures any changes to policies and procedures have been completed. Provide HR leadership in the Position Management sub-project and ensure that appropriate HR resources participate in other sub-projects. Attend monthly steering committee meetings. 16 hours per month 16 hours per month Page 38/243

38 Project Charter Director of Employee and Labor Relations Director of Compensation and Benefits Director IS Business Applications IS Project Manager IS Technical Services Director HR Project Team Members IS Business Applications Team IS Technical Team PeopleSoft Consultant ECH Department Heads Sandra Speer Julie Johnston Dave Zucker Farzin Mirzaagha James Brummett Jenny Devitt, Emelie Perry Comp Analyst (TBD) Rob Bennett, Freddie Alejo, Iling Siano Victor Aranda, Victor Naval Tom Gitto Department Managers and Directors Provide HR leadership in the Document Management sub-project. Work with other directors to ensure that appropriate resources are allocated and performing duties as required. Escalate project issues to the CIO as needed. Provide HR leadership in the Performance and Goals sub-project. Work with other directors to ensure that appropriate resources are allocated and performing duties as required. Escalate project issues to the CIO as needed. Ensure all appropriate stakeholders have been identified. Provide IS Department oversight for overall progress of the project. Work with other directors to ensure that appropriate resources are allocated and performing duties as required. Escalate project issues to the CIO as needed. Hands on management of the project. Create and maintain project plan and ensure plan is up to date. Ensure timeline goals are met. Ensure that HR and vendor resources are engaged as required. Work with IS to ensure resources are available and working to project plan. Assign appropriate desktop and hardware resources to the project. Ensure that projects related to server, network or laptop configuration is complete. Assign appropriate desktop and hardware resources to the project. Ensure that projects related to server, network or laptop configuration is complete. Creates Job descriptions and profiles for dept managers and directors to review and approve. Perform technical work in PeopleSoft HRIS, Healthcare Source Position Management and the Document Management system as needed. Support the implementation of the project. Assign appropriate desktop and hardware resources to the project. Ensure that projects related to server, network or laptop configuration is complete. Advise on Position Management, Organizational Structure and other PeopleSoft configuration as needed to achieve project goals. Standardize employee Job Descriptions and assist with job profile information gathering and entry to Success Factors. 16 hours per month 16 hours per month 8 hours per month 40 hours per month 2 hours per month 20 hours per month, each 12 hours per month, each 8 hours per month, each 16 hours for 2 3 months 8 hours per month, each Page 39/243

39 Project Charter Project User Acceptance Criteria Position Management configuration is complete, covering all hospital positions. The PeopleSoft organizational structure is acceptable for Performance Management. Employee Performance and Goal Management features successfully implemented. The Performance and Goal Management system work flow replaces manual processes. The paper-based Job Descriptions are replaced by the online Job Profile. The Document Management system has been successfully configured as designed. A standardized work flow for scanning and indexing employee records is established and documented. Assumptions 1. Remote access to the Performance and Goals Management system will be available to end users. 2. The Document Management sub-project can be done at any time or pace, depending on the availability of resources. 3. Other hospital projects will compete for resources and may at times take priority. 4. Estimated hours for HR staff and management are an average and may become less as the project implementation matures. Constraints 1. Position Management configuration should be completed before starting the Performance Management sub-project. 2. Performance Management system activation is desired by 6/1/2014, before the start of the new Fiscal Year. Project Risks & Mitigation Tactics Risks Unable to implement Position Management prior to Success Factors kickoff. Existing Redwood Report2Web Document Management technology at El Camino is not sufficient. Success Factors Performance and Goals Management implementation is delayed. Mitigation Increase resources to expedite Position Management, or build Success Factors organizational structure manually, using agreed-upon standard. Work with the vendor to enhance capability, or look for a new product, which may impact the schedule. Work directly with Success Factors if necessary to achieve essential functionality by target date. Page 40/243

40 Project Charter Executive Council Project Charter Acceptance and Approval Date: Approval Signatures Position/Title Signature/Printed Name Date Interim Chief Human Resources Officer Kathryn Fisk Chief Information Officer Greg Walton Appendices Page 41/243

41 Separator Page #1d Intergovernmental Transfer.pdf Page 42/243

42 Administration Date: September 18, 2013 To: El Camino Hospital - Board Finance Committee From: Michael King, Chief Financial Officer Re: Inter-Governmental Transfer ("IGT") Authorization Recommendation: Management requests that the Finance Committee recommend to the full Board authorization for management to transfer funds from the Hospital to the District, as bona fide donations, in amounts adequate to fully offset the amounts the District will need to transfer to the State in order for El Camino Hospital to participate in the Inter-Governmental Transfer program. The IGT program allows the State to receive additional federal funding for Medi-Cal, which is then provided to the hospital. In 2012, two transfers were necessary, and the amount received by the hospital was approximately twice the amount paid by the District. We do not yet know the timing or the amounts which would need to be transferred, or the amounts which would later be received, as the State has not yet provided the information. Problem / Opportunity Definition: In April of 2011, the legislature approved AB 113, which allows the State to receive increased Medicaid (Medi-Cal) dollars for inter-governmental transfers to the State. The program remained operational in 2011 and 2012 but was not utilized in On September 11, I received an communication from the State Department of Health Care Services notifying us that the program was going to be operational in The letter gave the hospital two days to respond as to whether we would participate. We responded affirmatively as although there was not time to gain appropriate authorization from the Board their letter stated, If you do not submit the letter by the date specified, the offer will be considered declined. Their letter also provides notice that the preliminary estimate of the funding we will receive is just under $2.4 million and further states that the amount will be recalculated at a later date. Although the exact amounts necessary are unknown, it seems clear that they will exceed management s approval authorization. In addition, because the State has just required a two-day turnaround on this topic, management believes it is prudent to seek authorization to transfer the amounts necessary (as will be provided by the State at an unspecified future date) so that the hospital does not miss the opportunity to maximize available additional funding as a result of its lacking the authority to transfer the necessary dollars to the District. Authority: The Signature Authority Policy requires that any expenditure in excess of $500 thousand must be approved by the Board. Page 43/243

43 Page 2 of 2 Ten-Step Approval Process September 18, 2013 Process Description: On September 11, the State provided notification that the program was operational along with a preliminary estimate of the amount the hospital would receive and will later provide the final amount to be received and amount necessary to be provided by the District. Based on prior communications with the State, we would expect return payments to the hospital to occur two to three months after the payment is made by the District. Alternative Solutions: We could choose not to participate and to forgo the additional funding. Concurrence for Recommendation: Participation in the IGT program is supported by prior experience, by the CEO and by the CFO. Outcome Measures / Deadlines: While deadlines have not yet been provided by the State, the outcome measure will be the additional Medi-Cal funding received by the hospital. Legal Review: None required; no material change is being made. Compliance Review: None required; no material change is being made. Financial Review: The Chief Financial Officer is initiating this request based on the hospital s prior experience in participating with the IGT program. Page 44/243

44 Separator Page #1d.1FY Eligibility Letter El Camino Hospital.pdf Page 45/243

45 State of California Health and Human Services Agency Department of Health Care Services TOBY DOUGLAS DIRECTOR EDMUND G. BROWN JR. GOVERNOR September 11, 2013 Mr. Michael King EL CAMINO HOSPITAL 2500 Grant Road Mountain View, CA Dear Mr. King: NONDESIGNATED PUBLIC HOSPITAL INTERGOVERNMENTAL TRANSFER (NDPH-IGT) PROGRAM This letter informs EL CAMINO HOSPITAL that it is included on the Program Year (PY) NDPH-IGT Eligibility List. Eligibility for the NDPH-IGT program is based on either of the following: 1. A public hospital that is licensed under subdivision (a) of section 1250 of the Health and Safety Code, is not designated as a specialty hospital in the hospital s latest Annual Financial Disclosure Report (AFDR), submitted to the Office of Statewide Health Planning and Development (OSHPD), and satisfies the definition in paragraph (25) of subdivision (a) of W&I Code section , excluding designated public hospitals, as described in subdivision (d) of section as that section may be amended from time to time. 2. A tax-exempt nonprofit hospital that is licensed under subdivision (a) of section 1250 of the Health and Safety Code, is not designated as a specialty hospital in the hospital s latest AFDR, is a hospital operated, owned, or both by a local health care district, and is affiliated with the health care district hospital owner by means of the district s status as the nonprofit corporation s sole corporate member. If your hospital does not meet the eligibility criteria, or if you do not wish to participate in this voluntary program, please respond by declining participation. If your hospital meets the eligibility criteria and wishes to participate please see the first of two estimates below. Safety Net Financing Division Medi-Cal Supplemental Payment Unit 1501 Capitol Avenue, Suite , MS 4518, P. O. Box , Sacramento, CA Phone: (916) Page /243 Fax: (916) Internet Address:

46 EL CAMINO HOSPITAL September 11, 2013 Page 2 Hospital OSHPD ID: Estimate: $2,374,413 Non-Federal Share of Supplemental Payment: $2,160,716 Administration and Medi-Cal Children s Health Programs:$213,697 Legislation requires DHCS to ask for participants and recalculate IGT amounts twice. This is the least amount your hospital can expect to receive. Once we hear back from all facilities we will recalculate and another letter will be sent with the revised IGT amounts. Please send a formal letter to the address below stating you would like to participate by September 13, If you do not submit the letter by the date specified, the offer will be considered declined. Address: AB113@dhcs.ca.gov If you have questions regarding the program, please contact Ms. Diana Sugihara at (916) or Diana.Sugihara@dhcs.ca.gov. Sincerely, Pamela Tello, Unit Chief Medi-Cal Supplemental Payments Unit Safety Net Financing Division Page 47/243

47 Separator Page 2a-ECHD Hospital Board Presentation - Draft pdf Page 48/243

48 El Camino Healthcare District Report of Independent Auditors Brian Conner National Practice Leader Hospitals Health Care Services Partner Joelle Pulver Health Care Services Senior Manager (415) Page 49/243 0

49 AUDIT OBJECTIVES Opinion on whether the consolidated financial statements of the District, Hospital, Foundation, and CONCERN are fairly and reasonably stated in accordance with generally accepted accounting principals o District-only financial statements are reported in the accompanying supplementary information consolidating schedules. Based on the District s control of the Hospital, Foundation, and CONCERN, consolidated reporting is required. Required under bond and California State requirements Page 50/243 1

50 REPORT OF INDEPENDENT AUDITORS Unmodified Opinion Consolidated financial statements are fairly presented in accordance with generally accepted accounting principles. Page 51/243 2

51 2013 AUDIT TIMELINE April 2013 April 2013 June 2013 August 2013 September 2013 September 2013 October 2013 October 2013 Initial Planning & Scoping on Site Control Design and Implementation Walkthroughs Control Effectiveness Testing and System Documentation Audit Year-End Fieldwork Page 52/243 Present Draft Consolidated Financial Statements to Management Presentations to Audit & Finance Committees Presentations to Hospital & District Boards Consolidated Financial Statements Issuance 3

52 STATEMENTS OF NET POSITION Page 53/243 4

53 ASSET COMPOSITION (IN MILLIONS) 2011 = $1,276 $800 $700 $600 $500 $ = $1, = $1,449 $300 $200 $ $0 Cash / Investment Patient A/R, Net Capital Assets, Net Other Assets Page 54/243 5

54 KEY PROCEDURES ASSETS Cash and Cash Equivalents o Confirmed significant balances with financial institutions o Tested significant account reconciliations o Reviewed disclosures and restrictions of balances Investments o Confirmed significant balances with financial institutions o Verified valuation with third-parties as of year-end o Reviewed disclosures on fair value measurements Page 55/243 6

55 KEY PROCEDURES ASSETS (CONT.) Alternative Investments o Confirmed significant balances with investment managers o Verified valuation through net asset value provided by investment managers o Analyzed net asset values based on benchmark performance of relevant stock market indexes o Reviewed disclosures on fair value measurements Page 56/243 7

56 KEY PROCEDURES ASSETS (CONT.) Capital Assets, Net o Performed roll forward of capital asset balances o Tested significant additions and retirements o Reviewed new or revised capital and operating leases related to capital assets o Analyzed depreciation expense based on useful lives by capital asset categories Page 57/243 8

57 KEY PROCEDURES ASSETS (CONT.) Other Assets o Performed roll forward of investments in affiliates; and tested significant additions, distributions, and fair value adjustments o Tested accounting for transactions with Surgery Center during the current year o Reviewed actuarial assumptions by management and analysis performed by Buck Consultants for pension plan Page 58/243 9

58 LIABILITIES AND NET POSITION (IN MILLIONS) $1,000 $ $600 $ $200 $ Current Liabilities Long-Term Liabilities Net Position Page 59/243 10

59 KEY PROCEDURES LIABILITIES Accounts Payable and Accrued Liabilities o Performed search for unrecorded liabilities o Reviewed accruals for payroll, PTO, and incentive bonuses o Reviewed third-party settlement roll forward, and tested significant settlements and additional accruals o Evaluated Recovery Audit Contractor (RAC) accrual methodology o Evaluated insurance refund liability accrual methodology Page 60/243 11

60 KEY PROCEDURES LIABILITIES (CONT.) Long-term Liabilities o Confirmed outstanding balances with financial institutions o Reviewed debt disclosures and debt covenant computations o Reviewed actuarial assumptions by management and analysis performed by Buck Consultants for post-retirement medical benefit liabilities o Reviewed actuarial assumptions by management and analysis performed by Garland Actuarial for workers compensation and professional liabilities Page 61/243 12

61 KEY PROCEDURES NET POSITION Net Position o Reviewed disclosures and restrictions of balances Page 62/243 13

62 PATIENT SERVICE ACCOUNTS RECEIVABLE Dollars (in millions) % Net Revenues $100 $90 $80 $70 $60 $82 $88 $ % 14.0% 13.0% 13.5% 13.7% 12.8% $ % $40 $30 $ % 10.0% Page 63/243 14

63 KEY PROCEDURES Patient Accounts Receivable, Net o Analyzed balance at year-end, as compared to cash receipts subsequent to year-end o Analyzed accounts receivable (A/R) turnover, financial class, and aging period; compared to prior years and current year developments o Performed cut-off testing over A/R and revenue o Evaluated appropriateness of contractual and bad debt allowance methodologies o Performed look back review of prior year s allowances to determine historical reliability of allowances methodologies o Review credit balances in A/R at year-end Page 64/243 15

64 KEY PROCEDURES (CONT.) Allowances for Contractual and Bad Debt o Evaluated appropriateness of contractual and bad debt allowance methodologies o Performed look back review of prior year s allowances to determine historical reliability of allowances methodologies Page 65/243 16

65 OPERATIONS Page 66/243 17

66 INCOME STATEMENTS (IN THOUSANDS) YEAR-TO-YEAR COMPARISON Total Operating Revenues June 30, 2013 $713,110 June 30, 2012 $658,411 15% Salaries, Wages, and Benefits 14% Supplies 52% 7% 13% Professional Fees and Purchased Services Depreciation and Amortization Other Expenses 50% 14% 8% 4% Operating Income 5% 9% 9% Page 67/243 18

67 THE AUDITOR S COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE Significant accounting policies Accounting estimates are reasonable No material weaknesses identified No audit adjustments No issues discussed prior to our retention as auditors No disagreement with management Internal control related matters - AU-C Sec 265 Page 68/243 19

68 NEW ACCOUNTING PRONOUNCEMENTS GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, effective for financial statements for periods beginning after December 15, GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, effective for financial statements for periods beginning after June 15, GASB Statement No. 69, Government Combinations and Disposals of Government Operations, effective for financial statements for periods beginning after December 15, Page 69/243 20

69 QUESTIONS? Page 70/243 21

70 Separator Page 2b-ECHD District FS - Draft pdf Page 71/243

71 DRAFT Report of Independent Auditors and Consolidated Financial Statements with Supplementary Information El Camino Healthcare District June 30, 2013 and 2012 Page 72/243

72 CONTENTS PAGE MANAGEMENT S DISCUSSION AND ANALYSIS... 1 REPORT OF INDEPENDENT AUDITORS CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2013 AND 2012 Statements of net position Statements of revenues, expenses, and changes in net position Statements of cash flows Notes to financial statements SUPPLEMENTARY INFORMATION AS OF AND FOR THE YEAR ENDED JUNE 30, 2013 Consolidating statement of net position Consolidating statement of revenues, expenses, and changes in net position Supplemental pension and postretirement benefit information Supplemental schedule of community benefit (unaudited) Page 73/243

73 MANAGEMENT S DISCUSSION AND ANALYSIS Page 74/243

74 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 During fiscal year 2013 El Camino Hospital District changed its name to become more transparent in the public eye, to El Camino Healthcare District (the District ), to make a sharper distinction between the taxpayer funded District and the operations of El Camino Hospital (the Hospital ) and its subsidiaries. The District is comprised of six (6) entities: the District, the Hospital, El Camino Hospital Foundation (the Foundation ), CONCERN: Employee Assistance Program ( CONCERN ), El Camino Surgery Center ( ECSC ), and Silicon Valley Medical Development, LLC ( SVMD ). Effective May 2013, the Surgery Center, operated by ECSC, was sold to a third party, the El Camino Ambulatory Surgery Center ( ECASC ). ECSC contributed certain medical equipment, furnishings, fixtures, inventories, and other tangible personal property in exchange for a seven and one half (7.5%) interest in ECASC. ECSC has also provided a working capital line of credit in a principal amount of $750,000 represented by a Promissory Note with a term of 39 months. The Hospital acquired the real estate and certain other assets of the 143 bed Community Hospital of Los Gatos ( Los Gatos ) in April 2009, closed it for 90 days, and re opened it on July 12, The Los Gatos sister hospital campus operates under the tax identification number, state healthcare license number, and the various provider numbers of the Hospital. Overview of the Consolidated Financial Statements This annual report consists of the consolidated financial statements and notes to those statements. These statements are organized to present the District as a whole, including all the entities it controls. Financial information for each separate entity is shown in the supplemental schedules on the last pages of the report. In accordance with the Governmental Accounting Standards Board ( GASB ) Codification Section 2200, Comprehensive Annual Financial Report, the District presents comparative financial highlights for the fiscal years ended June 30, 2013, 2012, and This discussion and analysis should be read in conjunction with the consolidated financial statements in this report. The consolidated statements of net position, the consolidated statements of revenues, expenses, and changes in net position, and consolidated statements of cash flows provide an indication of the District s financial health. The consolidated statements of net position include all the District s assets and liabilities, using the accrual basis of accounting. The consolidated statements of revenues, expenses, and changes in net position report all of the revenues and expenses during the time periods indicated. The consolidated statements of cash flows report the cash provided by the operating activities, as well as other cash sources such as investment income and cash payments for capital additions and improvements. Consolidated Financial Highlights Year Ended June 30, 2013 The increase in net position for 2013 was $102.6 million over fiscal year Net operating income contributed $64.8 million. Non operating added another $37.9 million, primarily driven by realized investment income and an unrealized gain this year on an interest rate swap. Total assets increased by $92.6 million over fiscal year 2012, which was mostly in the increase of total surplus cash and investments. Year Ended June 30, 2012 The increase in net position for 2012 was $72.1 million over fiscal year Net operating income contributed $59.7 million. Non operating income contributed another $12.4 million, primarily driven by net investment income, including realized and unrealized gains on investments. Page 1 Page 75/243

75 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 The increase in operating income between fiscal years 2011 and 2012 was $14.1 million. This was primarily due to growth in patient volumes at the Los Gatos campus and growth at both campuses in procedural volumes. Continued staff efficiencies and a reduction in operating costs due to the one time significant consulting project Accelerated Continuous Excellence ( ACE ) started at the end of fiscal year Total assets increased by $79.8 million over fiscal year Total surplus cash and investments increased by $91.8 million over fiscal year 2011, primarily driven by significant net income, and continued reduction in capital expenditures. Current liabilities decreased by $41.6 million in the current fiscal year over Primarily, this was due to the outstanding $50 million 2009 Series Revenue Bond that, during the current fiscal year, had its Letter of Credit extended to April 2017, causing the debt to again be classified as a long term liability. Summary of Assets, Liabilities and Net Position As of June 30, 2013, 2012 and 2011 (In Thousands) Assets: Current assets $ 379,513 $ 379,838 $ 306,128 Board designated and restricted funds, net of current portion 343, , ,669 Funds held by trustee, net of current portion 14,866 13,495 13,090 Capital assets, net 647, , ,178 Other assets 63,573 55,230 53,196 Total assets $ 1,448,620 $ 1,356,037 $ 1,276,261 Liabilities: Current liabilities $ 97,619 $ 100,252 $ 141,821 Bonds payable, net of current portion 321, , ,728 Other long term liabilities 48,955 51,768 48,361 Total liabilities $ 468,560 $ 478,598 $ 470,910 Net position: Unrestricted and invested in capital assets, net $ 972,978 $ 870,562 $ 795,539 Restricted by donors charity and other 5,297 4,820 5,250 Restricted endowments 1,785 2,057 4,562 Total net position $ 980,060 $ 877,439 $ 805,351 Total liabilities and net position $ 1,448,620 $ 1,356,037 $ 1,276,261 Operating cash equivalents & short term investments $ 256,841 $ 263,762 $ 196,034 Board designated & restricted funds 355, , ,812 Total available cash & investments $ 611,876 $ 504,557 $ 414,846 Page 76/243 Page 2

76 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Investments The consolidated District maintains sufficient cash balances to pay daily operational expenses and all short term liabilities. In late fiscal year 2012, the Hospital (exclusive of the District) went through a RFP process to select an Investment Consultant to assist the Hospital and its subsidiaries in managing it Surplus Cash (and Cash Balance Plan) assets. At the end of 2012 the Investment Consultant was retained and both the investment policies for Surplus Cash and Cash Balance Plan were updated and approved by the Hospital Board of Directors. The policies allow for greater diversification in the investment portfolios balance the need for liquidity with a long term investment focus in order to improve investment returns and the organization s financial strength. Beginning early in fiscal year 2013, an Investment Subcommittee of the Finance Committee was formed to perform the following responsibilities, among others: monitor performance of investment managers, monitor allocations across investment styles and investment managers, review compliance with the policies, and make recommendations for revisions to the policies. Throughout fiscal year 2013, the number of money managers expanded from two money managers for Surplus Cash to appropriately seventeen managers. Also, in an effort to reduce costs, the Custodian Bank was consolidated to Wells Fargo Bank, which had been the custodian for the Cash Balance Plan. Capital Assets In fiscal year 2013, the Los Gatos campus had three major construction projects approved, including $6.7 million to perform seismic upgrades, $7 million for infrastructure, such as replacement of boilers/chillers, HVAC controls, conference room upgrades, finishes, fixtures and furnishings upgrades in the CCU, Mother Baby unit, and Medical/Surgical units; and $3.1 million for phase 2 of an Imaging Equipment replacement. At the Mountain View campus, a $19 million project was approved to build out a 16,000 square foot area of the new hospital that will allow for the relocation of the Data Center, the Morgue and Autopsy functions and the Clean and Soiled Linen functions that currently exist in the old main hospital. Still in progress is the $4.5 million Women s Hospital Labor and Delivery expansion and upgrade. At fiscal yearend, the initial design and development costs for a renovation of the Behavioral Health building were written off, as a total replacement building project was brought forward for an authorized $3 million for design and scope costs in June During 2013, an infant security system was installed at the Mountain View campus. A number of sophisticated information technology software systems were added in fiscal 2013: a Knowledge Enterprise System, a business intelligence system to be used by the newly formed Performance Improvement department; a project that utilizes a technology called Virtual Desktop Infrastructure or VDI which takes applications and user data and centralizes the users desktops in the data center where it can be easily managed, modified, and refreshed; all through software; and a system that integrates medical systems and information systems in to the clinical and electronic medical record system to increase timeliness of data entry, accuracy and efficiency to assist with the new IDC 9 requirements set forth by the Federal Government. Page 3 Page 77/243

77 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Revenues and Expenses The following table displays revenues and expenses for 2013, 2012, and 2011: Revenues & Expenses Years Ended June 30, 2013, 2012 and 2011 (In Thousands) Operating revenues: Net patient service revenue $ 691,545 $ 636,820 $ 603,625 Other revenue 21,565 21,591 19,015 Total operating revenues $ 713,110 $ 658,411 $ 622,640 Operating expenses: Salaries, wages & benefits $ 373,480 $ 330,472 $ 307,707 Professional fees and purchased services 90,649 93, ,386 Supplies 103,603 94,196 88,761 Depreciation and amortization 48,357 49,593 49,942 Rent and utilities 13,937 13,925 13,029 Interest 7,757 7,374 7,374 Other 10,571 9,870 8,903 Total operating expenses $ 648,354 $ 598,754 $ 577,102 Operating income $ 64,756 $ 59,657 $ 45,538 Nonoperating revenue (expense) items: General Obligation bond interest expense (4,787) (4,828) (4,897) Intergovernmental transfer expense (3,349) Investment income, net 26,943 18,346 23,544 Property tax revenues 18,264 16,420 15,793 Restricted gifts, grants and other 4,432 3,432 8,003 Unrealized gain (loss) on interest rate swap 4,061 (5,781) 1,364 Other, net (11,048) (11,423) (5,686) Minority interest in subsidiary earnings (386) (386) Total nonoperating revenues and expenses $ 37,865 $ 12,431 $ 37,735 Increase in net position $ 102,621 $ 72,088 $ 83,273 Total net position, beginning of year $ 877,439 $ 805,351 $ 722,078 Total net position, end of year $ 980,060 $ 877,439 $ 805,351 Page 78/243 Page 4

78 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Fiscal Year 2013 Consolidated Financial Analysis Net Patient Services Revenues Net patient services revenue in fiscal year 2013 increased by $54.7 million or 8.6% over fiscal year This increase was due to changes in payor reimbursement arrangements, increases in surgical volumes, and increased patient activity in Maternity and Intensive Care Nursery at both campuses. Also during fiscal year 2013, the Hospital experienced an increase in cost report settlements. Specialty 2013 Days 2012 Days % Change Medical/Surgical 57,274 55, % Maternity 13,600 11, % Pediatrics % NICU 5,936 4, % Psychiatry 7,789 7, % Normal newborn 11,850 10, % Total 96,521 90, % Specialty 2013 LOS 2012 LOS % Change Medical/Surgical % Maternity % Pediatrics % NICU % Psychiatry % Normal newborn % Total % The overall case mix index, which is an indicator of patient acuity, was 1.43 in fiscal year 2013, compared to 1.44 in fiscal year Operating Expenses Other $80,622 12% Professional & Purchased Services $90,649 14% Supplies $103,603 16% 2013 Salaries & Benefits $373,480 58% Professional & Purchased Services $93,324 16% Supplies $94,196 16% Other $80,762 13% 2012 Salaries & Benefits $330,472 55% Page 5 Page 79/243

79 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Los Gatos As discussed in prior year MD&A s, the Los Gatos campus of El Camino Hospital occurred in fiscal year 2010, with the July 2009 opening of the newly acquired hospital in the Los Gatos/Campbell area. For the fiscal year 2013 it had an operating income of $13.8 million, which included a charge for overhead from the Mountain View campus of $10.5 million. Salaries and Wages It is to be noted that the District as a stand alone entity has no employees. All employees are at the Hospital and its related corporations. Total salaries and wages (including employee benefits) increased by $43 million in fiscal year 2013 over 2012, which is 57.6% of total operating expenses compared to 55.2% in fiscal year Salaries and wages (exclusive of employee benefits) increased by $25.4 million over fiscal year RN payroll salaries increased by $15.2 million in fiscal year 2013 compared to Approximately $5.5M of this increase was due to the average wage increase of 6.8% granted PRN (Professional Resource of Nurses the RN s bargaining unit) implemented in April and June 2012 that carried forward for the entire fiscal year On March 31, 2013, PRN was granted another 2% increase, and will receive 2% increases every six months over the next 18 months. With a RN turnover rate of 6.2%, the Hospital is below the Northern California rate holding at 8.8%, as published by the California Hospital Association ( CHA ). In 2013, the Hospital added 126 FTE s ( Full Time Equivalents ), of which 96 FTE s were in nursing and clinical departments. Effective beginning the fourth quarter of fiscal year 2013, the employees of the Hospital s previously outsourced IT and Health Information Management services departments became employees of the Hospital, which caused a salaries and benefits expense of $2.9 million over the prior fiscal year. Employees represented by SEIU United Healthcare Workers ( SEIU UHW ) negotiated a new contract with the Hospital, after reaching an impasse in labor negotiations, the Hospital Board approved implementation of the Last, Best and Final Offer to the SEIU UHW on October 11, The new contract was ratified and approved by the Hospital Board on October 10, 2012 and extends through June Employees of SEIU UHW received a 3% increase at the July 2012 contract start date. The Hospital s Stationary Engineers Local 39 per their current contract were provided a 4% increase effective November 11, Hospital represented, non management staff were granted a 3% salary and wage increase effective July 5, Within the management staff, certain managers received market based salary adjustments effective August 5, Senior executive staff received market based adjustments effective August 5, 2012 that averaged 2.7% in the aggregate. Employee Benefits Aggregate employee benefits, including accrued Paid Time Off ( PTO ) and Extended Sick Leave increased by $17.6 million. Page 80/243 Page 6

80 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Significant increases were as follows: Healthcare expense increased by $5.2 million this fiscal year over This was attributable to the Hospital reverting back to covering 100% of the premium for the healthcare and dental coverage that became effective January Employees had previously contributed 10% of these costs. Also adding to the increase were the overall monthly premium increases and the increase in the number of covered employees. Accrued Paid Time Off increased by $3.9 million driven by salary and wage increases, flat dollar differentials being paid for RN s on evening and night shifts and while on extended sick leave, and the overall FTE increase. Effective January 2013 the maximum accrual bank was increased from 350 hours to 400 hours for PRN, SEIU UHW, and hospital represented staff. Workers Compensation costs increased by $3.5 million primarily due to the need to increase actuarial reserves and that the on going claim payments grew over the prior year. Employer Social Security and Medicare taxes increased by $1.7 million in fiscal year 2013 driven by the increase in the Social Security wage threshold, salary and wage increases, and additional FTE s. 403B Employer Match expense increased this year over prior year by $1.2 million due to increased participation and the return to an enhancement match of 5% and 6% for employees with longevity of 15 years and 20 years respectively. Professional and Purchased Services Total professional fees and purchased services decreased by $2.7 million over the prior fiscal year. Effective beginning the fourth quarter of fiscal year 2013, the employees of our previously outsourced IT and Health Information Management Services became employees of the Hospital, which caused a decrease of $4.3 million in purchased services during the last quarter of fiscal Offsetting most of this $4.3 million were increases for physician medical and directorship fees, management fees for the Inpatient Rehab at Los Gatos due to increased activity, maintenance services for the facilities, and outside agency services for managers in the critical care, sterile processing and dialysis departments. Supplies Total supplies increased by $9.4 million in fiscal year 2013 over Significant areas of increase were in the surgeries at both campuses, especially the Orthopedic Spine program at Los Gatos, interventional radiology procedures, pharmaceutical supplies, and facility building maintenance supplies. Continued increases for minor equipment (primarily medical) due to changes made to the threshold for capitalization of equipment from the previous $1,000 to $2,500 at the end of fiscal year Depreciation and Amortization Depreciation expense this fiscal year decreased over the prior year by $1.2 million, primarily attributable due to medical equipment in the Surgery and Imaging departments and certain major software becoming fully depreciated during the current fiscal year. Rent and Utilities The.1% increase experienced in the current fiscal year is immaterial. Page 7 Page 81/243

81 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Interest Expense Interest expense is primarily a result of the 2007 and 2009 bond debt, with minor amounts on the current capitalized equipment that are entering their final year. Other Expense The increase of $0.7 million over the prior fiscal year was principally in the areas of community sponsorships and forgiveness on loans granted certain recruited physicians that are needed within the communities of the Hospital and remained in their practices. Change in Net Unrealized Gains and Losses on Investments For fiscal year 2013, the Hospital had seventeen money managers with different investment objectives for the Hospital s surplus cash investments. Total net unrealized gains/losses are reported in the consolidated financial statements during this fiscal year. The change in net unrealized gains and losses for fiscal year 2013 was a Year over Year (YOY) positive change of $0.1 million. The net unrealized gain in 2013 was a result of strong equity market returns as the S&P 500 Index was up 20.6% for the twelve months ended June 30, The combination of equities and mutual funds unrealized gains was the main driver of the increase. Mutual fund investments are primarily comprised of equity securities. Fixed income securities experienced a net unrealized loss of $0.9 million in 2013, whereas, equities contributed $0.3 million in net unrealized gains in The Barclays Capital Aggregate Index returned 7.5% for the twelve months ended June 30, Economic Factors and Next Year s Budget The Board approved the fiscal year 2014 budget at their June 2013 meeting. The District is budgeting net income of $83.2 million in fiscal year Volumes are expected to increase by 1% due to expansion of the Orthopedic & Spine service lines, as well as a new neuro interventional program. Increases in reimbursement are budgeted to be below the rate of expense inflation. Additionally, the organization continues to improve patient satisfaction levels and quality and expects to incur increased costs as it invests in strategic initiatives continuum of care initiatives. Fiscal Year 2012 Consolidated Financial Analysis Net Patient Services Revenues Net patient services revenue in fiscal year 2012 increased by $33.2 million or 5.5% over fiscal year This increase was due to changes in payor reimbursement arrangements, increases in surgical volume and emergency department visits at the Mountain View campus, increases in admissions at the Los Gatos campus, and Intergovernmental Transfer ( IGT ) payments from the state Medi Cal program for uncompensated care. Page 82/243 Page 8

82 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Inpatient Business Activity Specialty 2012 Days 2011 Days % Change Medical/Surgical 55,992 57, % Maternity 11,632 12, % Pediatrics % NICU 4,946 4, % Psychiatry 7,429 7, % Normal newborn 10,469 10, % Total 90,802 92, % Specialty 2012 LOS 2011 LOS % Change Medical/Surgical % Maternity % Pediatrics % NICU % Psychiatry % Normal newborn % Total % The overall case mix index, which is an indicator of patient acuity, was 1.44 in fiscal year 2012, compared to 1.17 in fiscal year Operating Expenses Other $80,762 13% 2012 Ot her $79,248 14% 2011 Professional & Purchased Services $93,324 16% Salaries & Benefits $330,472 55% Professional & Purchased Services $101,386 18% Salaries & Benefits $307,707 53% Supplies $94,196 16% Supplies $88,761 15% Los Gatos As discussed in the fiscal year 2011 Management Discussion and Analysis, there was the addition of the Los Gatos campus of El Camino Hospital, which opened in July For fiscal year 2012, the Los Gatos campus generated an operating income of $17.3 million over the fiscal year 2011 operating income of $12.3 million for a $5.0 million increase. The Los Gatos campus is charged costs of overhead from the Mountain View campus in the amount of $8.5 million and $9.0 million in the respective years. Page 9 Page 83/243

83 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Salaries and Wages It is to be noted that the District as a stand alone entity has no employees. All employees are at the Hospital and its related corporations. Total salaries and wages (including employee benefits) increased by $22.8 million in fiscal year 2012 over 2011, which is 55.2% of total operating expenses compared to 53.3% in fiscal year Salaries and wages (exclusive of employee benefits) increased by $9.6 million over fiscal year Effective the end of April and the beginning of June 2012, the bargaining unit for nurses (PRN Professional Resources of Nurses) received salary increases and market adjustments for certain clinical positions that increased the average wage rate by 6.8%. This increase restored competitive wages allowing the District to hire experienced RN s. With a RN turnover rate of 7.3%, the District is below the Northern California turnover rate of 8.8% as published by the California Hospital Association ( CHA ). In 2012, the District added approximately 60 FTE s ( Full Time Equivalents ), mostly in the patient services areas. Employees represented by SEIU United Healthcare Workers had their 4 year contract expire in July Contract negotiations continued throughout the summer into early fall with no agreement being reached. Thus, in October 2011, the Hospital implemented its Last, Best, Final offer approved by the Board, which granted no wage increase in the fiscal year, with the exception of 123 employees in 13 job classifications receiving increases of 4 16% effective in December 2011 for market adjustments. An additional 22 employees received increases of 1.6 5% with implementation of a career ladder for Respiratory Therapy employees in April Other changes in implementing the Hospital s Last, Best, Final offer was a change to healthcare benefits, which has employees contribute 10% of the healthcare premiums for the basic coverage that was previously covered at 100% by the Hospital. The Hospital s Stationary Engineers Local 39 per their current contract were provided a 4% increases effective November 13, Hospital represented, non management staff were granted a 3% salary and wage increase effective June 23, Management staff had sixteen (16) managers that received market based salary adjustments effective August 7, Senior executive staff received market based adjustments effective August 7, 2011, that averaged 3.4% in the aggregate. Employee Benefits Aggregate employee benefits, including accrued Paid Time Off ( PTO ) increased by $13.3 million in fiscal year 2012 over Significant increases were as follows: Pension retirement (Cash Balance Plan) expense increased this year over prior year by $4.5 million, due to second year in a row of lowering the discount rate (from 8% in fiscal year 2010 to 7% in fiscal year 2011) to 6% for the current fiscal year. Management also reduced the amortization period of the NPO (Net Pension Obligation) to seven (7) years from ten (10) years in the 2011 fiscal year, which was down from thirty (30) years in fiscal year Workers compensation actuarial reserves stabilized to a normal expensing amount in fiscal year 2012, after a couple of years of credits to expense in the overall needed reserves that occurred in fiscal years 2011 and Thus, given the swing between these two (2) fiscal years, this actuarial amount increased $4.1 million in 2012 over Page 84/243 Page 10

84 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 In recognition of the Hospital s strong financial performance in fiscal year 2012, as well as improvements in patient satisfaction and quality care the Board approved an overall Employee Recognition Award to nearly all employees. This expected cost, along with the anticipated increase for incentive pay provided senior management, directors, and managers given their individual performance evaluations and goals, contributed to an approximate $2.3 million increase over fiscal year Accrued PTO expense increased by $1.8 million over fiscal year While some of this increase would be attributable to wage and salary increases during 2012, a significant portion was due to returning to an accrual method based on an employee s status, and not straight productive hours worked, that excluded PTO being taken for PRN and the Hospital represented employee base, that was in effect the last six months of fiscal year Professional and Purchased Services Total professional fees and services decreased by $8 million in fiscal year 2012 over The significant item that caused the decrease in the amount of $17 million was that in the prior fiscal year 2011 there were payments made to a consulting firm that had assisted the Hospital in implementing its Accelerated Continuous Excellence ( ACE ) initiative that started in fiscal year 2010 and continued into 2011 with final payments made to the consulting firm in the fiscal year. This initiative made significant and measurable operational improvements in the revenue cycle and cost reductions. The Hospital subsequently incorporated these multiple improvements into its operations to lead to significant income from operations in fiscal years 2011 and again in Significant increases to professional and purchased services occurred in the following areas: An increase of $2.3 million occurred in repair and maintenance to the facilities at both the Mountain View and Los Gatos campuses. At the Mountain View campus, these included the Behavioral Health Services in the old tower, window treatments, and added wall protection in the New Main Hospital where significant wear and tear had already occurred. Additionally, there were maintenance projects, such as parking resurfacing and building joint sealant upgrades, which are done every four to five years. At the Los Gatos campus, the Hospital had to address several elements of deferred maintenance of the buildings causing additional upgrades and major repairs to occur. An increase of $2.3 million over fiscal year 2011 was in the areas strategic planning development for the recently Board approved Hospital Strategic Plan for the next three to five years, legal expense for general corporate issues and for union contract negotiations, and recruitment consulting for top executive positions during the year. An increase of $1 million over fiscal year 2012 occurred at the Los Gatos campus for the outside purchased services to operate its inpatient physical rehabilitation services that were fully operational in the current fiscal year. Supplies Total supplies increased by $5.4 million in fiscal year 2012 over Two (2) major areas of the increase were: The threshold for capitalization of equipment was changed from the previous $1,000 to $2,500 at the end of the year. Thus, management expensed previously capitalized equipment that had a cost of less than $2,500 and still had a remaining book value, which caused a one time expense of approximately $2.4 million. Significant growth in the Ortho Spine program at the Los Gatos campus caused a $2.1 million increase in surgery supplies for the program. Page 11 Page 85/243

85 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Depreciation and Amortization The expense for depreciation and amortization decreased by $0.3 million, principally attributable to assets becoming fully depreciated during the current fiscal year. Interest Interest expense that is primarily for the 2007 and 2009 bond debt for the Replacement Hospital at the Mountain View campus was essentially unchanged. Rent and Utilities The increase in fiscal year 2012 over 2011 was $0.9 million, primarily driven by the opening of the Senior Health Center, providing convenient outpatient services for seniors, at a location near the Mountain View campus, and increases in electric costs at both campuses. Other Expenses This expense increased by $0.9 million in fiscal year 2012 over the prior Property insurance expense increased in the current year due to increases in rates and property values. Employee relocation expense increased in the current fiscal year as a few vacant senior management positions were filled. The District increased its participation in community sponsorships of local events. Change in Net Unrealized Gains and Losses on Investments For fiscal year 2012, the Hospital had two money managers with different investment objectives for the Hospital s surplus cash investments. Total net unrealized gains/losses in stocks and bonds are reported in the District s consolidated financial statements during this fiscal year. Barrow, Hanley, Mewhinney & Strauss (BHMS) Stock investments change to net unrealized gains during fiscal 2012 resulted in a Year over Year (YOY) negative change of $1.4 million. Significant gains were realized from sales during the fiscal year resulting in a lower amount of unrealized gains at the end of the fiscal year despite the S&P 500 being up 3.2% on a price basis for the twelve months ended June 30, Intermediate bond investments change to net unrealized gains during fiscal 2012 resulted in a YOY positive change of $1.9 million. Rates declined moving prices and therefore unrealized gains were higher. For example, the rate on the Treasury five year note was 1.76% at June 30, 2011, compared to 0.72% at June 30, Short maturity bond investments change to net unrealized losses during fiscal 2012 resulted in a YOY negative change of $0.7 million. The bond investment change primarily represents bonds purchased at premiums that must decline to par value as they approach maturity. Page 86/243 Page 12

86 EL CAMINO HEALTHCARE DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS For the Years Ended June 30, 2013, 2012 and 2011 Wells Capital Management ( WCM ) Bond investments managed by WCM reflected an increase in the amount of unrealized gains during the period. The change from the prior year was a net gain of $4.4 million. The bond investment change represents a 5.8% increase in market value. During the period, there were no contributions or withdrawals made to the portfolio. Intermediate U.S. Treasury yields declined significantly during the period falling 100 to 165 basis points across the curve. This decline in rates drove bond prices higher and resulted in the portfolio having an increase in unrealized capital gains. As of the end of the fiscal year, the cost of the Hospital s investments in the WCM Fund were $78.8 million, including reinvestment of income, with the market value of $89.3 million, which represents an unrealized gain of 13.3% of the market value. Page 13 Page 87/243

87 REPORT OF INDEPENDENT AUDITORS To the Board of Directors El Camino Healthcare District Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of El Camino Healthcare District, (the District ) which comprise the consolidated statements of net position as of June 30, 2013 and 2012, and the related statements of revenues, expenses, and changes in net position, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 88/243 Page 14

88 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of El Camino Healthcare District as of June 30, 2013 and 2012, and the consolidated changes in financial position and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information The accompanying Management s Discussion and Analysis on pages 1 through 13, and the accompanying supplemental pension and postretirement benefit information on page 44, are not required parts of the consolidated financial statements but are supplementary information required by the Governmental Accounting Standards Board who considers them to be an essential part of financial reporting for placing the consolidated financial statements in an appropriate operational economic, or historical context. This supplementary information is the responsibility of El Camino Healthcare District s management. We have applied certain limited procedures in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the consolidated financial statements, and other knowledge we obtained during our audit of the consolidated 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. Other Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements that collectively comprise the El Camino Healthcare District's consolidated financial statements. The accompanying consolidating statement of net position and consolidating statement of revenues, expenses, and changes in net position, on pages 41 to 43, are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of El Camino Healthcare District's management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit 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 of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Page 15 Page 89/243

89 Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements that collectively comprise the El Camino Healthcare District s consolidated financial statements. The accompanying supplemental schedule of community benefit on page 45 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. This supplementary information is the responsibility of El Camino Healthcare District s management. Such information has not been subjected to the auditing procedures applied in the audit of the consolidated financial statements, and accordingly, we do not express an opinion or provide any assurance on it. San Francisco, California October, 2013 Page 90/243 Page 16

90 CONSOLIDATED FINANCIAL STATEMENTS Page 91/243

91 EL CAMINO HEALTHCARE DISTRICT CONSOLIDATED STATEMENTS OF NET POSITION June 30, 2013 and 2012 (In Thousands) ASSETS Current assets Cash and cash equivalents $ 51,259 $ 42,334 Short term investments 205, ,428 Current portion of board designated, restricted funds and trusteed assets 14,136 9,653 Patient accounts receivable, net of allowances for doubtful accounts of $9,313 and $9,473 in 2013 and 2012, respectively 88,362 87,528 Prepaid expenses and other current assets 20,101 18,787 Notes receivable, current Total current assets 379, ,838 Non current cash and investments Board designated funds 343, ,707 Restricted funds Funds held by trustee 14,866 13, , ,258 Capital assets, net 647, ,711 Pledges receivable, net 1,651 2,747 Prepaid pension asset 32,868 27,527 Investments in health care affiliates 22,999 18,660 Other assets 6,055 6,296 Total assets $ 1,448,620 $ 1,356,037 LIABILITIES AND NET POSITION Current liabilities Current portion capital lease obligations $ 4,961 $ 5,100 Accounts payable and accrued expenses 17,403 19,442 Salaries, wages, and related liabilities 38,439 39,484 Other current liabilities 11,107 13,609 Estimated third party payor settlements 21,117 18,467 Current portion of bonds payable 4,592 4,150 Total current liabilities 97, ,252 Capital lease obligations, net of current portion 4,952 Bonds payable, net of current portion 321, ,578 Other long term obligations 10,005 13,953 Workers' compensation, net of current portion 23,409 18,031 Postretirement medical benefits, net of current portion 15,541 14,832 Total liabilities 468, ,598 Net position Invested in capital assets, net of related debt 335, ,694 Restricted expendable 5,297 4,820 Restricted nonexpendable 1,785 2,057 Unrestricted 637, ,868 Total net position 980, ,439 Total liabilities and net position $ 1,448,620 $ 1,356,037 Page 17 Page 92/243 See accompanying notes.

92 EL CAMINO HEALTHCARE DISTRICT CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Years Ended June 30, 2013 and 2012 (In Thousands) OPERATING REVENUES Net patient service revenue (net of provision for $ 691,545 $ 636,820 bad debts of $14,623 and $14,747 in 2013 and 2012, respectively) Other revenue 21,565 21,591 Total operating revenues 713, ,411 OPERATING EXPENSES Salaries, wages, and benefits 373, ,472 Professional fees and purchased services 90,649 93,324 Supplies 103,603 94,196 Depreciation and amortization 48,357 49,593 Rent and utilities 13,937 13,925 Other 18,328 17,244 Total operating expenses 648, ,754 Income from operations 64,756 59,657 NONOPERATING REVENUES (EXPENSES) Investment income, net 26,943 18,346 Property tax revenue Designated to support community benefit programs 6,514 5,902 Designated to support capital expenditures 4,483 3,610 Levied for debt service 7,267 6,908 General Obligation bond interest expense (4,787) (4,828) Intergovernmental transfer expense (3,349) Restricted gifts, grants and bequests, and other 4,432 3,432 Unrealized gain (loss) on interest rate swaps 4,061 (5,781) Other, net (11,048) (11,809) Total nonoperating revenues (expenses) 37,865 12,431 Increase in net position 102,621 72,088 TOTAL NET POSITION, beginning of year 877, ,351 TOTAL NET POSITION, end of year $ 980,060 $ 877,439 See accompanying notes. Page 93/243 Page 18

93 EL CAMINO HEALTHCARE DISTRICT CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2013 and 2012 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Cash received from and on behalf of patients $ 693,361 $ 635,449 Other cash receipts 21,565 21,591 Cash payments to employees (368,438) (328,100) Cash payments to suppliers (241,698) (220,872) Net cash from operating activities 104, ,068 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Property taxes 10,997 9,512 Restricted contributions and investment income 5,528 4,441 Transfers from restricted funds and other (2) (2) Net cash from noncapital financing activities 16,523 13,951 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Purchases of property, plant, and equipment (24,682) (29,126) Payments on capital leases obligations (5,091) (5,801) Payments on bonds payable (4,150) (4,610) Interest paid on General Obligation bond debt (4,787) (4,828) Tax revenue related to general obligation bonds 7,267 6,908 Net cash used for capital and related financing activities (31,443) (37,457) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (1,339,447) (458,743) Sales of investments 1,243, ,490 Investment income 15,895 6,537 Decrease in notes receivable 35 1,905 Change in funds held by trustee, net (1,371) (405) Net cash used for investing activities (80,945) (84,216) Net increase in cash and cash equivalents 8, CASH AND CASH EQUIVALENTS at beginning of year 42,334 41,988 CASH AND CASH EQUIVALENTS at end of year $ 51,259 $ 42,334 RECONCILIATION OF INCOME FROM OPERATIONS TO NET CASH FROM OPERATING ACTIVITIES Income from operations $ 64,756 $ 59,657 Adjustments to reconcile operating income to net cash from operating activities Depreciation and amortization 48,357 49,593 Provision for bad debts 14,623 14,747 Changes in assets and liabilities Patient accounts receivable, net (12,807) (16,118) Prepaid expenses and other current assets (10,753) (4,138) Current liabilities, excluding current portion capital lease obligations (5,586) 1,463 Other long term obligations 5,491 2,567 Postretirement medical benefits Net cash from operating activities $ 104,790 $ 108,068 Page 19 Page 94/243 See accompanying notes.

94 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization During fiscal year 2013 El Camino Hospital District changed its name to El Camino Healthcare District (the District ), to make a sharper distinction between the taxpayer funded District and the operations of El Camino Hospital (the Hospital ) and its related corporations. The District includes the following component units which are included as blended component units of the District s consolidated financial statements: the Hospital, El Camino Hospital Foundation (the Foundation ), CONCERN: Employee Assistance Program ( CONCERN ), El Camino Surgery Center, LLC ( ECSC ), and Silicon Valley Medical Development, LLC ( SVMD ). The District is organized as a political subdivision of the State of California and was created for the purpose of operating an acute care hospital and providing management services to certain related corporations. The District is the sole member of the Hospital, and the Hospital is the sole corporate member of the Foundation and CONCERN. As sole member, the District (with respect to the Hospital) and the Hospital (with respect to the Foundation and CONCERN) have certain powers, such as the appointment and removal of the boards of directors and approval of changes to the articles of incorporation and bylaws. As of June 30, 2012, the Hospital owned 99.9% of ECSC and a physician owned the remaining 0.1%. In May 2013, the Hospital purchased the remaining 0.1% from the physician. As of June 30, 2013, the Hospital owns 100% of ECSC. The purpose of CONCERN is to provide and operate a specialized healthcare service plan for various business organizations nationwide; CONCERN has a limited Knox Keene license from the Department of Corporations of the State of California. SVMD was formed in September 2008 as a Limited Liability Corporation ( LLC ), a wholly owned subsidiary of the Hospital focused on the expansion of the clinical enterprise outside of the Hospital through various business ventures and physician alignment initiatives that improve access for the Hospital s current patients and new, underserved members of the community, extend healthcare into people s homes through the applications of electronic connectivity and assist independent physicians in clinical integration with the Hospital, among other initiatives. All significant inter entity accounts and transactions have been eliminated in the consolidated financial statements. Accounting standards Pursuant to Government Accounting Standard Board ( GASB ) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre November 30, 1989 Financial Accounting Standards Board ( FASB ) and American Institute of Certified Public Accountants ( AICPA ) Pronouncements, the District s proprietary fund accounting and financial reporting practices are based on all applicable GASB pronouncements as well as codified pronouncements issued on or before November 30, The District utilizes the proprietary fund method of accounting whereby revenues and expenses are recognized on the accrual basis and consolidated financial statements are prepared using the economic resources measurement focus. Use of estimates The preparation of the consolidated 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 consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents include deposits with financial institutions, and investments in highly liquid debt instruments with an original maturity of three months or less. In addition, in 2013 and 2012, cash and cash equivalents include repurchase agreements, which consist of highly liquid obligations of U.S. governmental agencies. Cash and cash equivalents exclude amounts whose use is limited by board designation or by legal restriction. Page 95/243 Page 20

95 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investments Investments consist primarily of highly liquid debt instruments and other short term interest bearing certificates of deposit, U.S. Treasury bills, U.S. government obligations, hedge funds, hedge fund of funds, and corporate debt, excluding amounts whose use is limited by board designation or other arrangements under trust agreements. Board designated and restricted funds include assets set aside by the board for future capital improvements and other operational reserves, over which the board retains control and may at its discretion use for other purposes; assets set aside for qualified capital outlay projects in compliance with state law; and assets restricted by donors or grantors. Investment income, realized gains and losses, and unrealized gains and losses on investments are reflected as nonoperating revenue or expense. Deferred financing costs Financing costs incurred with the issuance of bonds are amortized over the term of the bonds using a method that approximates the effective interest rate method, included in prepaid expenses and other current assets. Amortization of these costs is included in interest expense. Bond assets held in trust According to the terms of both indenture agreements (General Obligation and Revenue Bonds), these amounts are held by the bond trustee and paying agent and are maintained and managed by the trustee and are invested in short term cash equivalents. These assets are available for the settlement of future current bond obligations. Capital assets Capital asset acquisitions are recorded at cost. Donated property is recorded at its fair market value on the date of donation. All purchases over $2,500 are capitalized. Equipment under capital lease is amortized on the straight line basis over the shorter of the lease term or the estimated useful life of the equipment. Leasehold improvements are amortized using the straight line method over the shorter of the lease term or the estimated useful life of the related assets. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Land improvements Buildings and fixtures Equipment 16 years years 3 16 years The District evaluates prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. Impairment losses on capital assets are measured using the method that best reflects the diminished service utility of the capital asset. Costs of borrowing Except for capital assets acquired through gifts, contributions or capital grants, interest cost on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Investments in health care related affiliates The Hospital holds an interest in Pathways Home Health & Hospice and Pathways Private Duty (formerly Pathways Continuous Care), which are reported on the equity method of accounting. Risk management The Hospital is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; and employee health, dental, and accident benefits. 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. Page 21 Page 96/243

96 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Self insurance plans The Hospital maintains professional liability insurance on a claims made basis, with liability limits of $30,000,000 in aggregate, and which is subject to a $50,000 deductible. Additionally, the Hospital is selfinsured for workers compensation benefits. The Hospital purchases a Workers Compensation Excess Policy that insures claims greater than $1,000,000 with a limit of $10,000,000 and a $1,000,000 deductible. Actuarial estimates of uninsured losses for professional liability and workers compensation have been accrued as liabilities in the accompanying consolidated financial statements. The following is a summary of changes in workers compensation liabilities for the years ended June 30 (in thousands): Beginning Balance Increases Decreases Ending Balance 2013 $ 20,331 $ 9,198 $ 3,820 $ 25,709 Beginning Balance Increases Decreases Ending Balance 2012 $ 17,872 $ 5,343 $ 2,884 $ 20,331 Interest rate swap agreements During the fiscal year ended June 30, 2007, the Hospital entered into derivative instruments in the form of three swap agreements to hedge variable interest rate exposure. During the fiscal year ended June 30, 2008, the underlying variable rate debt was refunded for fixed rate debt, leaving the Hospital with speculative derivative instruments that largely offset the variable rate debt issued in Two of these swaps were terminated in the fiscal year ended June 30, Refer to Note 9 for a full description of the interest rate swap agreements. Net position Net position of the District are classified as invested in capital assets, restricted expendable, restricted nonexpendable, and unrestricted net position. Invested in capital assets, net of related debt Invested in capital assets of $335,114,000 and $343,694,000 at June 30, 2013 and 2012, respectively, represent investments in all capital assets (building and building improvements, furniture and fixtures, and information and technology equipment), net of depreciation less any debt issued to finance those capital assets. Restricted expendable The restricted expendable net position is restricted through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, laws or regulations of other governments, or constraints imposed by law through constitutional provisions or enabling legislation and includes assets in self insurance trust funds, revenue bond reserve fund assets, and net position restricted to use by donors. Restricted nonexpendable The restricted non expendable net position is equal to the principal portion of permanent endowments. Unrestricted net position Unrestricted net position consists of net position that does not meet the definition of invested in capital assets, net of related debt, or restricted. Statements of revenues, expenses, and changes in net position For purposes of display, transactions deemed by management to be ongoing, major, or central to the provisions of healthcare services are reported as revenues and expenses. Peripheral or incidental transactions are reported as gains and losses. These peripheral activities include investment income, property tax revenue, gifts, grants and bequests, change in net unrealized gains and losses on investments in marketable securities, unrealized losses on interest rate swaps and are reported as nonoperating. Investments in the Pathways Home Health & Hospice and Pathways Private Duty are accounted for under the equity method. The Hospital s share of the operating income of these entities is included as other, net in the consolidated financial statements. Page 97/243 Page 22

97 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net patient service revenue and patient accounts receivable 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 the related services are rendered, and adjusted in future periods as final settlements are determined. At June 30, 2013 and 2012, the Hospital provided allowances for losses on amounts receivable directly from patients totaling $13,204,000 and $12,542,000, respectively. The distribution of net patient accounts receivable by payor at June 30, 2013 and 2012, is as follows: June 30, Medicare 21% 19% Medi Cal 3% 4% Commercial and other 74% 76% Self pay 2% 1% 100% 100% Uncollectible accounts The Hospital provides care to patients without requiring collateral or other security. Patient charges not covered by a third party payor are billed directly to the patient if it is determined that the patient has the ability to pay. A provision for uncollectible accounts is recognized based on management s estimate of amounts that ultimately may be uncollectible. Charity care The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. The amount of estimated costs for services and supplies furnished under the Hospital s charity care policy aggregated approximately $2,417,000 and $3,154,000 in 2013 and 2012, respectively. Property tax revenue The District received approximately 18% in 2013 and 23% in 2012 of its total increase in net position from property taxes. These funds were designated as follows: June 30, Designated to support community benefit programs $ 6,514,000 $ 5,902,000 Designated to support Hospital Replacement Project $ 4,483,000 $ 3,610,000 Levied for debt service $ 7,267,000 $ 6,908,000 Property taxes are levied by the County on the District s behalf on January 1 and are intended to finance the District s activities of the same calendar year. Amounts levied are based on assessed property values as of the preceding July 1. Property taxes are considered delinquent on the day following each payment due date. Property taxes are recorded as nonoperating revenue by the District when they are earned. Grants and contributions From time to time, the District receives grants as well as contributions from individuals and private organizations. Revenues from grants and contributions are recognized when all eligibility requirements, including time requirements are met. Grants and contributions may be restricted for either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are restricted to a specific operating purpose are reported as nonoperating revenues. Page 23 Page 98/243

98 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income taxes The District operates under the purview of the Internal Revenue Code, Section 115, and corresponding California Revenue and Taxation Code provisions. As such, it is not subject to state or federal taxes on income. CONCERN has also been granted tax exempt status. However, income from the unrelated business activities of the Hospital and the Foundation is subject to income taxes. ECSC and SVMD are limited liability companies and are treated as pass through entities for federal income tax purposes. Accordingly, no recognition has been given to federal income taxes in the accompanying consolidated financial statements. Reclassifications Certain amounts in the 2012 notes to the consolidated financial statements have been reclassified to conform to the 2013 presentation. New accounting pronouncements The GASB issued GASB Statement No. 61, The Financial Reporting Entity: Omnibus ( GASB No. 61 ), which is effective for financial statements for periods beginning after June 15, GASB No. 61 modifies certain requirements for inclusion of component units in the financial reporting entity and amends the criteria for reporting component units as if they were part of the primary government (that is, blending) in certain circumstances. It also clarifies the reporting of equity interests in legally separate organizations. It requires a primary government to report its equity interest in a component unit as an asset. The District has adopted this statement for the fiscal year ended June 30, 2013, and it did not have a significant effect on the consolidated financial statements. The GASB issued GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position ( GASB No. 63 ), which is effective for financial statements for periods beginning after December 15, The requirements of GASB No. 63 will improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government s net position. It alleviates uncertainty about reporting those financial statement elements by providing guidance where none previously existed. Amounts that are required to be reported as deferred outflows of resources should be reported in a statement of financial position in a separate section following assets. Similarly, amounts that are required to be reported as deferred inflows of resources should be reported in a separate section following liabilities. The statement of net position should report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. Net position represents the difference between all other elements in a statement of financial position and should be displayed in three components net investment in capital assets; restricted (distinguishing between major categories of restrictions); and unrestricted. The District has adopted this statement for the fiscal year ended June 30, 2013, and it did not have a significant effect on the consolidated financial statements. The GASB also issued GASB Statement No. 65, Items Previously Reported as Assets and Liabilities ( GASB No. 65 ), which is effective for financial statements for periods beginning after December 15, GASB No. 65 establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. It also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations. The District is currently evaluating the impact of the adoption of GASB No. 65 for the fiscal year ending June 30, Page 99/243 Page 24

99 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The GASB also issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 ( GASB No. 68 ), which is effective for financial statements for periods beginning after June 15, GASB No. 68 replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 27 and 50 remain applicable for pensions that are not covered by the scope of this Statement. It establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. The District is currently evaluating the impact of the adoption of GASB No. 68 for the fiscal year ending June 30, The GASB also issued GASB Statement No. 69, Government Combinations and Disposals of Government Operations ( GASB No. 69 ), which is effective for financial statements for periods beginning after December 15, GASB No. 69 requires the use of carrying values to measure the assets and liabilities in a government merger. Conversely, government acquisitions are transactions in which a government acquires another entity, or its operations, in exchange for significant consideration. This Statement requires measurements of assets acquired and liabilities assumed generally to be based upon their acquisition values. It also provides guidance for transfers of operations that do not constitute entire legally separate entities and in which no significant consideration is exchanged. It defines the term operations for purposes of determining the applicability of this Statement and requires the use of carrying values to measure the assets and liabilities in a transfer of operations, and provides accounting and financial reporting guidance for disposals of government operations that have been transferred or sold. The District is currently evaluating the impact of the adoption of GASB No. 69 for the fiscal year ending June 30, NOTE 2 OPERATING REVENUES The following table reflects the percentage of net patient revenues by major payor group for the years ended June 30: Medicare 25% 24% Commercial and other 73% 74% Medi cal 2% 2% 100% 100% The Hospital has agreements with third party payors that provide for payments to the Hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, fee schedules, prepaid payments per member, and per diem payments or a combination of these methods. Net patient service revenue is reported at the estimated net realizable amounts from patients, thirdparty payors, and others for services rendered, including estimated settlements under reimbursement agreements with third party payors. Page 25 Page 100/243

100 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system based on clinical, diagnostic, and other factors. Inpatient services are paid at prospectively determined rates per discharge. Payments for outpatient services are based on a stipulated amount per procedure. The District is reimbursed for cost reimbursable items at a tentative rate, with final settlements determined after submission of annual cost reports by the District and audits thereof by the Medicare fiscal intermediary. The effect of updating prior year estimates for Medicare and other liabilities was to increase 2013 and 2012 net operating income by $2,650,000 and $7,992,000, respectively. The Hospital s cost reports have been audited by the Medicare fiscal intermediary through June 30, Medi Cal and contracted rate payors are paid on a percentage of charges, per diem, per discharge, fee schedule, or a combination of these methods. Laws and regulations governing the Medicare and Medi Cal programs are complex and are subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change in the near term. Included in other revenue are amounts from investments in health related activities, rental income, cafeteria, and other nonpatient care revenue. NOTE 3 CASH DEPOSITS At June 30, 2013 and 2012, District cash deposits had carrying amounts of $51,259,000 and $42,334,000, respectively, and bank balances of $55,780,000 and $47,116,000, respectively. All of these funds were held in cash deposits, which are collateralized with the California Government Code ( CGC ), except for $250,000 per account that is federally insured by the Federal Deposit Insurance Corporation ( FDIC ). The District participates in a cash management program provided by its primary depository institution that allows cash in District concentration accounts to be swept daily and invested overnight in reverse repurchase agreements that are not exposed to custodial credit risk because the underlying securities are held by the buyer lender. At June 30, 2013 and 2012, balances in repurchase agreements had bank balances of $54,474,000 and $44,958,000, respectively, and are included in the carrying amounts above. Page 101/243 Page 26

101 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 BOARD DESIGNATED, RESTRICTED FUNDS AND INVESTMENTS Board designated funds, restricted funds, and short term investments, collectively, as of June 30, 2013 and 2012, comprised the following (in thousands): Amortized Gross Unrealized Carrying Costs Gains Losses Value 2013 Cash and cash equivalents $ 19,008 $ $ $ 19,008 Mutual funds 174,400 9, ,768 Equities 31,373 8,113 (1,430) 38,056 Fixed income securities 320,706 4,469 (5,390) 319,785 $ 545,487 $ 21,950 $ (6,820) $ 560, Cash and cash equivalents $ 9,534 $ $ $ 9,534 Mutual funds Equities 54,118 7,420 (7,066) 54,472 Fixed income securities 383,536 15,854 (1,173) 398,217 $ 447,513 $ 23,274 $ (8,239) $ 462,548 At June 30, 2013, investment balances and average maturities were as follows: Fair Value Investment Maturities (in years) Investment Type (in thousands) Less than 1 1 to 5 6 to 10 More than 10 Short term money market $ 19,008 $ 19,008 $ $ $ Mutual funds 183, ,768 Government and agencies 89,036 19,045 64,881 4, Corporate bonds 120,584 7,091 82,296 20,959 10,238 Domestic fixed income 100,351 17,074 9,914 73,363 Foreign fixed income 9,814 5,789 2,686 1, ,561 $ 228,912 $ 170,040 $ 37,798 $ 85,811 Equities 38,056 Total fair value $ 560,617 At June 30, 2012, investment balances and average maturities were as follows: Fair Value Investment Maturities (in years) Investment Type (in thousands) Less than 1 1 to 5 6 to 10 More than 10 Short term money market $ 9,534 $ 9,534 $ $ $ Mutual funds Government and agencies 109,871 3,382 82,964 23,525 Corporate bonds 189,229 13, ,696 15,007 Domestic fixed income 89,511 89,511 Foreign fixed income 9,606 5,332 4, ,076 $ 26,767 $ 338,503 $ 42,806 $ Equities 54,472 Total fair value $ 462,548 Page 27 Page 102/243

102 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest rate risk Through its investment policies, the District manages its exposure to fair value losses arising from increasing interest rates by limiting duration of fixed income securities in its portfolio to no more than 30% of designated benchmark. Credit risk District investment policies require fixed income investments to have a minimum of 85% of a money manager s assets in investment grade assets. The investment policy requires investment managers maintain an average of A or higher ratings as issued by a nationally recognized rating organization. Additionally, the investment policy requires no more than 5% of a money manager s portfolio at the time of purchase shall be invested in the securities of any one issuer, with the exception of a United States government agency, agency MBS or other Sovereign issues rated AAA or Aaa. Foreign currency risk The District s investment policy permits it to invest up to 30% of total investment in foreign currency denominated investments. Alternative investments risk The District s alternative investments include ownership interest in a wide variety of partnership and fund structures that may be domestic or offshore. Generally, there is little or no regulation of these investments by the Securities and Exchange Commission or U.S. state attorneys general. These investments employ a wide variety of strategies including absolute return, hedge, venture capital, private equity and other strategies. Investments in this category may employ leverage to enhance the investment return. The District s holdings can include financial assets such as marketable securities, non marketable securities, derivatives, and synthetic and structured instruments; real assets; tangible and intangible assets; and other funds and partnerships. Generally these investments do not have a ready market. Interest in these investments may not be traded without approval of the general partner or fund management. Alternative investments are subject to all of the risks described previously relating to equities and fixed income instruments. In addition, alternative strategies and their underlying assets and rights are subject to a broad array of economic and market vagaries that can limit or erode value. The underlying assets may not be held by a custodian either because they cannot be, or because the entity has chosen not to hold them in this form. Valuation determined by the investment manager, who has a conflict of interest in that he or she is compensated for performance are considered and reviewed by the District s Investment Committee and the Board of Directors. Real assets may be subject to physical damage from a variety of means, loss from natural causes, theft of assets, lawsuits involving rights and other loss and damage including mortgage foreclosure risk. These risks may not be insured or insurable. Tangible assets are subject to loss from theft and other criminal actions and from naturals. Intangible assets are subject to legal challenge and other possible impairment. The carrying amount of deposits and investments are included in the District s consolidated statements of net position as follows (in thousands): Included in the following consolidated statement of net position captions: Short term investments $ 205,582 $ 221,428 Current portion board designated, restricted funds and trusteed assets 11,403 4,032 Board designated, less current portion 343, ,032 Restricted funds, less current portion $ 560,617 $ 462,548 Page 103/243 Page 28

103 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 CAPITAL ASSETS Capital assets activity for the year ended June 30, 2013, is as follows (in thousands): Balance Balance June 30, 2012 Increases Decreases June 30, 2013 Capital assets not being depreciated Land $ 39,627 $ $ $ 39,627 Construction in progress 6,074 9,261 4,109 11,226 45,701 9,261 4,109 50,853 Capital assets being depreciated Land improvement 11,283 11,283 Buildings 710,601 3, ,538 Property under capital leases 26,122 26,122 Capital equipment 235,066 37,283 33, , ,072 40,587 34, ,532 Less accumulated depreciation for Land improvement 4, ,694 Buildings 180,346 19, ,308 Property under capital leases 16,398 6,161 22,559 Capital equipment 156,410 21,505 13, , ,062 48,414 13, ,349 Total capital assets being depreciated, net 625,010 (7,827) 21, ,183 Total capital assets, net $ 670,711 $ 1,434 $ 25,109 $ 647,036 Page 29 Page 104/243

104 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital assets activity for the year ended June 30, 2012, is as follows (in thousands): Balance Balance June 30, 2011 Increases Decreases June 30, 2012 Capital assets not being depreciated Land $ 33,937 $ 5,690 $ $ 39,627 Construction in progress 4,520 8,690 7,136 6,074 38,457 14,380 7,136 45,701 Capital assets being depreciated Land improvement 11, ,283 Buildings 703,329 7, ,601 Property under capital leases 26,122 26,122 Capital equipment 227,218 20,688 12, , ,946 28,269 13, ,072 Less accumulated depreciation for Land improvement 4, ,908 Buildings 160,486 19, ,346 Property under capital leases 10,237 6,161 16,398 Capital equipment 140,386 22,839 6, , ,225 49,655 6, ,062 Total capital assets being depreciated, net 652,721 (21,386) 6, ,010 Total capital assets, net $ 691,178 $ (7,006) $ 13,461 $ 670,711 Construction contracts of approximately $58,487,000 exist for the construction of various projects including upgrading the Los Gatos campus, Los Gatos seismic upgrades, and the Women s Hospital at the Mountain View campus. At June 30, 2013, the remaining commitment on these contracts approximated $42,175,000. NOTE 6 EMPLOYEE BENEFIT PLANS The Hospital sponsors a cash balance pension plan (the Plan ), which has been in effect since January 1, The Plan covers employees who are 21 years of age and have completed one year of credited service. Participants are entitled to a lump sum distribution or monthly benefits at age 65 based on a predetermined formula that considers years of service and compensation. Effective July 1, 1999, employer Plan benefits are calculated as 5% of a participant s annual plan compensation, and the annual interest is an indexed rate based on the return on ten year U.S. treasury securities. Participants are fully vested in their account balances after five pension years. Certain retired and terminated employees and certain participants covered by a collective bargaining agreement continue to participate under provisions of a defined benefit retirement plan in effect prior to January 1, Any costs and liabilities related to this plan are included below. Page 105/243 Page 30

105 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the net pension obligation ( NPO ) or prepaid pension asset for the Hospital s cashbalance pension plan (in thousands): End of Fiscal Year Beginning of Year NPO/(Prepaid Pension Asset) (a) Annual Pension Cost (b) Actual Contribution (c) Increase (Decrease) in NPO (b c) Year NPO/ (Prepaid Pension Asset) ((a)+c b)) 2011 $ (27,310) $ 7,871 $ 4,800 $ 3,071 $ (24,239) 2012 $ (24,239) $ 12,367 $ 15,654 $ (3,287) $ (27,526) 2013 $ (27,526) $ 12,665 $ 18,005 $ (5,340) $ (32,866) The following table summarizes the actuarial assumptions used to determine the Hospital s cash balance pension plan liabilities as of June 30: Expected long term return on assets 6.0% 6.0% 7.0% Rate of compensation increases 4.0% 4.0% 4.0% Date of actuarial valuation January 2012 January 2011 January 2010 Amortization period of NPO 7 years 7 years 10 years Components of pension activity for the years ended June 30, 2013 and 2012, consist of the following (in thousands): Pension expense $ 12,665 $ 8,114 Employer contributions $ 18,005 $ 15,654 Benefits paid $ 8,024 $ 7,118 Eligible employees of the Hospital may also elect to participate in a separate deferred compensation plan (the 403(b) plan) pursuant to Section 403(b) of the Code. The Hospital acts as the administrator and sponsor, and the 403(b) plan s assets are held by trustees designated by the Hospital s management. Employees are eligible to participate upon employment, and participants are immediately vested in their elective contributions plus actual earnings thereon. The Hospital will match employee contributions to the 403(b) plan, subject to a maximum of 4% of each participant s annual plan compensation. Participants are eligible for employer match in the second plan year in which they work at least 1,000 hours, and they must be on the payroll at the end of the plan year (December 31). Employer matching contributions under the 403(b) plan are made to the cash balance pension plan and earn interest as defined by that plan. Employer matching contributions to the 403(b) plan of $6,797,000 and $6,531,000 in 2013 and 2012, respectively, are included in benefits expense. Participants are immediately vested in the employer contributions included in the cash balance pension plan. Page 31 Page 106/243

106 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 POSTRETIREMENT MEDICAL BENEFITS The Hospital provides healthcare benefits and life insurance for retired employees who meet eligibility requirements as outlined in the plan document, as approved by the board of directors of the Hospital. All employees who attain age 55 with a minimum of 20 years of enrollment in the Hospital s healthcare program and are enrolled in one of the plans upon retirement, and who were hired prior to July 1, 1994 are eligible. Under the plan, employees are credited with employment history accumulated under a prior Hospital plan. Benefits are funded by the Hospital on a pay as you go basis. If a participant terminates from the Hospital after 20 years of enrollment but before reaching age 62, he or she can choose to contribute to the plan between ages 55 and 61 to retain the plan s benefits. At age 62, eligible retirees are given an annual credit based on years of service to pay for health benefits. As of June 30, 2013 and 2012, approximately 655 employees and former employees were eligible to participate in the plan. For the fiscal years ended June 30, 2013 and 2012, the Hospital contributed $468,000 and $727,000, respectively, to fund benefits paid in those years. The Hospital s annual postretirement benefit cost is calculated based on the annual required contribution of the employer ( ARC ), an amount actuarially determined in accordance with parameters of GASB Codification Section P50, Postemployment Benefits Other Than Pension Benefits Employer Reporting. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The following table shows the components of the Hospital s annual postretirement benefit cost, the amount actually contributed to the plan, and the changes in the Hospital s postretirement benefit obligation (in thousands): Annual required contribution $ 896 $ 890 Interest on postretirement benefit obligation Adjustment to annual required contribution (349) (485) Annual postretirement benefit expense 1,177 1,024 Employer contributions (468) (727) Increase in accumulated benefit obligation $ 709 $ 297 Postretirement benefit obligation, beginning of the year $ 14,832 $ 14,535 Postretirement benefit obligation, end of the year $ 15,541 $ 14,832 The Hospital s annual postretirement benefit cost, the percentage of annual postretirement benefit cost contributed to the plan, and the postretirement benefit obligation for 2013 and the two preceding years were as follows (in thousands): Annual Annual Postretirement Postretirement Postretirement Benefit Expense Benefit Benefit Expense Contributed Obligation Fiscal Year Ended June 30, 2011 $ 1, % $ 14,535 June 30, 2012 $ 1, % $ 14,832 June 30, 2013 $ 1, % $ 15,541 Page 107/243 Page 32

107 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of July 1, 2011, the most recent actuarial valuation date, the plan was not funded. The actuarial accrued liability for benefits was $21,400,000, resulting in an unfunded actuarial accrued liability (UAAL) of $21,400,000. The covered payroll (annual payroll of active employees covered by the plan) was $42,931,000, and the ratio of the UAAL to the covered payroll was 49.8%. For measurement purposes, annual rates of increase in the per capita cost of covered healthcare benefits of 9% and 10% were assumed for fiscal years 2013 and 2012, respectively. The rate was assumed to decrease gradually to 5.5% over the next four years and remain at that level thereafter. The dental benefit trend rate was assumed to be 5% in all future years. The discount rates used was 4.25% for both 2013 and The UAAL is being amortized as a level percentage over 30 years on an open basis. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the consolidated financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long term perspective of the calculations. NOTE 8 INSURANCE PLANS The Hospital purchases professional, general, automobile, and directors and officers liability insurance from BETA Healthcare Group ( BHG ), and also purchases all risk property insurance (including limited flood), fiduciary, crime, and excess workers compensation coverage needs from Alliant insurance Services ( Alliant ). The Hospital s coverage is under a claims made policy with limits of $30 million per occurrence, $30 million in the annual aggregate, and with a self insured retention level of $50,000 per claim. There are known claims and incidents that may result in the assertion of additional claims, as well as claims from unknown incidents that may be asserted from services provided to patients. The Hospital has actuarial estimates performed annually on its self insurance plans of professional liability and workers compensation benefits. Estimated liabilities (which have not been discounted) have been actuarially determined at an expected 75% confidence level and include an estimate of incurred, but not reported, claims. The balances are included in salaries and wages payable, workers compensation and other long term liabilities in the accompanying consolidated statements of net position. Page 33 Page 108/243

108 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 BONDS PAYABLE Bonds payable consists of the following obligations (in thousands): June 30, El Camino Hospital District 2006 General Obligation Bonds Principal $ 141,310 $ 142,280 Unamortized premium El Camino Hospital Revenue Bonds Series 2008 Principal 134, ,950 Unamortized premium Series 2009 Principal 50,000 50,000 Total long term debt 326, ,728 Less current maturities 4,592 4,150 Maturities due after one year $ 321,986 $ 326, Balance at Balance at June 30, 2012 Payments June 30, 2013 General obligation bonds $ 143,169 $ 1,154 $ 142,015 Revenue bonds 187,559 2, ,564 $ 330,728 $ 4,149 $ 326, Balance at Balance at June 30, 2011 Payments June 30, 2012 General obligation bonds $ 144,876 $ 1,707 $ 143,169 Revenue bonds 190,462 2, ,559 $ 335,338 $ 4,610 $ 330,728 General obligation bonds Upon voter approval, in November 2003, the District issued in 2006, $148,000,000 principal amount of General Obligation Bonds, which consists of $115,665,000 of Current Interest Bonds, and $32,335,000 of Capital Appreciation Bonds. Interest on the Current Interest Bonds is payable semiannually at rates ranging from 4% to 5% and principal maturities ranging from $845,000 in 2010 to $18,050,000 in 2036 are due annually on August 1. Interest at rates ranging from 4.38% to 4.48% and principal of the Capital Appreciation Bonds are payable only at maturity. The Current Interest Bonds maturing on or before August 1, 2016, are not subject to redemption. The Current Interest Bonds maturing on or after August 1, 2017, may be redeemed prior to their respective stated maturity dates, at the option of the District, from any source of available funds, as a whole or in part on any date on or after February 1, 2017, at a redemption price equal to the principal amount of the Current Interest Bonds called for redemption, together with interest accrued thereon to the date of redemption, without premium. Page 109/243 Page 34

109 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Bonds are general obligations of the District payable from ad valorem taxes. Payment of principal, interest and maturity value of the Bonds, when due, is insured by a municipal bond insurance policy. Revenue Bonds, Series 2007 Each Series of Bonds initially bore interest at Auction Rates for successive seven day Auction Periods. Interest on the Bonds was payable on the Business Day immediately following the applicable Auction Period. In May 2008, the Hospital issued $147,525,000 of Santa Clara County Financing Authority Insured Revenue Bonds, Series 2007A, B, and C, at rates of 5.125% to 5.750%, to advance refund $147,525,000 of the outstanding original Series 2007A, B, and C. Principal maturities on the serial bonds range from $950,000 in 2013 to $4,725,000 in 2041, and are due annually on February 1. Revenue Bonds, Series 2009 In April 2009, the Hospital issued $50,000,000 of Santa Clara County Financing Authority Insured Revenue Bonds, Series 2009A to fund completion of the Hospital Replacement construction project. Interest on the Bonds is payable on the Business Day immediately following the applicable Remarketing Period. Principal maturities on the bonds range from $100,000 in 2025 to $10,920,000 in 2044, and are due annually on February 1. The 2009 Series Revenue bond agreement contains various restrictive covenants which include, among other things, minimum debt service coverage, maintenance of minimum liquidity, and requirement to maintain certain financial ratios. The bonds are secured by a pledge of gross revenues to an Indenture of Trust (Indenture) dated March 16, The Indenture contains certain covenants that, among other things, require the District to deposit all Gross Revenues of the Hospital as soon as practicable upon receipt. The Indenture also requires the Hospital to maintain a long term debt service coverage ratio of 1.15 to 1. Failure to comply with the restrictive covenants of the Indenture could result in all of the unpaid principal and accrued interest of the bonds becoming due immediately, at the option of the trustee. Letter of credit In March 2009, in connection with the issuance of the 2009 Series Revenue bonds, the Hospital obtained an irrevocable Letter of Credit issued by a bank for $50,000,000. This Letter of Credit expires April 2017 and requires the Hospital to maintain a long term debt services coverage ratio of 1.20 to 1. Interest costs Interest costs incurred for the years ended June 30, 2013 and 2012, are (in thousands): June 30, Operating expense $ 7,486 $ 7,603 Nonoperating expense 4,787 4,828 $ 12,273 $ 12,431 Page 35 Page 110/243

110 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Debt service requirements for bonds payable are as follows (in thousands): Year Ending General Obligation Bonds Revenue Bonds June 30, Principal Interest Principal Interest 2014 $ 1,300 $ 4,906 $ 3,000 $ 8, ,665 4,848 3,075 8, ,065 4,773 3,200 8, ,485 4,690 53,275 8, ,950 4,578 3,350 8, ,021 27,687 18,700 38, ,977 43,159 22,050 33, ,447 31,123 25,975 26, ,400 7,308 30,550 17, ,925 7, $ 141,310 $ 133,072 $ 184,100 $ 167,298 Interest rate swaps On March 7, 2007, the Hospital entered into three interest rate swap agreements in connection with the issuance of the Series 2007 Revenue Bonds. The intention of the swap is to create debt with a synthetic, fixed interest rate on the variable rate Revenue Bonds. The swaps were effective March 23, 2007, with a termination date of February 1, 2041, and notional amounts of $50 million each, these terms match the terms of the underlying Series 2007 Revenue Bonds. Under each swap transaction, the Hospital pays a fixed rate of interest of 3.204% and the counterparty pays a variable rate of interest equal to the sum of (i) 56% of USD LIBOR BBA plus (ii).23%. In March 2008, the Hospital Board directed management to terminate the floating to fixed interest rate swaps when economically prudent in connection with the refunding of their Series 2007 Revenue Bonds. In December 2009, two of the three swaps were terminated. The fair value of the remaining swap is a liability of $6,675,000 at June 30, 2013, and $10,737,000 at June 30, 2012, included in other long term obligations in the consolidated statements of net position. Risks associated with the swap agreements From the Hospital s perspective, the following risks are generally associated with swap agreements: Credit risk The counterparty becomes insolvent or is otherwise not able to perform its financial obligations. In the event the counterparty become insolvent or their credit rating falls below BBB /Baa2 the Hospital has the right to terminate the swap. Upon exercise of early termination the amounts due from or to the counterparty will be determined by the market pricing of the swaps at the time of termination. Termination risk The Hospital or counterparty may terminate the swap if the other party fails to perform under the terms of the contract. If, at the time of the termination, the swap has a negative fair value, the Hospital would be liable to the counterparty for that payment. Page 111/243 Page 36

111 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 CAPITAL LEASE OBLIGATIONS Capital lease obligations outstanding as of June 30, 2013, are as follows (in thousands): Description Maturity Interest Rates Original Issue June 30, 2013 Capital leases equipment September % to 7.75% net of interest May 2014 $ 25,711 $ 4,961 Less current portion $ 4,961 Description June 30, 2012 Increases Decreases Outstanding June 30, 2013 Capital leases equipment $ 10,052 $ $ 5,091 $ 4,961 Description June 30, 2011 Increases Decreases Outstanding June 30, 2012 Capital leases equipment $ 15,853 $ $ 5,801 $ 10,052 Debt service requirements for capital lease obligations are as follows (in thousands): Period Ending June 30, 2014 $ 4,961 Less current portion 4,961 $ NOTE 11 RESTRICTED NET POSITION Restricted net position consists of donor restricted contributions and grants and cash restricted for regulatory requirements, which are to be used as follows (in thousands): Charity and other $ 5,297 $ 4,820 Endowments 1,735 2,007 Restricted by donor for specific uses 7,032 6,827 Restricted by Department of Managed Health Care Total restricted net position $ 7,082 $ 6,877 Permanently restricted contributions (endowments) remain intact, with the earnings on such funds providing an ongoing source of revenue to be used primarily for education. The Foundation is the beneficiary of gifts through testamentary and other trusts in which the gift assets are held by the trustees and administered for the benefit of the Foundation and Hospital. Pooled income trust assets are donated to the Foundation under life annuity agreements. The donors maintain the right to income earned on the assets during their lifetime and, in some cases, during the lifetime of their survivors. Page 37 Page 112/243

112 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Although these gifts are irrevocable, applicable GASB pronouncements permit financial statement recognition only upon satisfaction of all eligibility requirements. Since the Foundation is not eligible to receive the assets held in the trusts until maturity of the trusts (generally the donor s death), long term receivables from charitable remainder trusts and pooled income funds are not recognized in the consolidated financial statements. The total of these contributions, measured at the fair value of assets to be received, discounted to their estimated net present value, is $1,990,000 and $1,761,000, respectively, at June 30, 2013 and The applicable federal discount rate for June 2013 and 2012, of 3.14% and 3.71%, respectively, per annum and the Standard Ordinary Mortality Rate Table were used to arrive at the present value. NOTE 12 RELATED PARTY TRANSACTIONS The Hospital pays vendor related expenses on behalf of the Foundation and is reimbursed for these costs incurred. The Hospital also pays employee related expenses, which are reimbursed by the Foundation. The Foundation s employees also participate in the cash balance pension plan, sponsored by the Hospital. Full footnote disclosures relating to the cash balance pension plan is included in the consolidated financial statements. The Hospital performs certain administrative functions on behalf of the Foundation for which no amounts are charged to the Foundation. As of June 30, 2013 and 2012, the Foundation has a payable to the Hospital in the amount of $347,373 and $528,847, respectively. During the fiscal years 2013 and 2012, the Foundation paid the Hospital $5,984,638 and $4,565,594 for such expenses, respectively, which included amounts for operations, but also disbursements from Donor Restricted Funds in support of Hospital operations and capital acquisitions. In June 2012, the Hospital board approved the funding of the Foundation s salaries, wages, and benefits for fiscal year 2013, thus along with 2012 fiscal year approved funding of their rent provided a maximum funding of $1,783,197 for both items on an ongoing basis. Effective May 6, 2013, ECSC sold certain medical equipment, furnishings, fixtures, inventories, and other tangible personal property in exchange for a seven and one half (7.5%) interest in El Camino Ambulatory Surgery Center, ( ECASC ). ECSC has provided a working capital line of credit to ECASC in a principal amount of $750,000 represented by a Promissory Note and has a term of 39 months with an interest rate of 5% per annum. At June 30, 2013, there were no draws against the line of credit. The Hospital leases the space to ECASC and provides certain services, such as utilities and building/equipment maintenance. There was no rental income recorded as of June 30, 2013, related to the lease. NOTE 13 COMMITMENTS AND CONTINGENCIES Litigation The District is a defendant in various legal proceedings arising out of the normal conduct of its business. In the opinion of management and its legal representatives, the District has valid and substantial defenses, and settlements or awards arising from legal proceedings, if any, will not exceed existing insurance coverage, nor will they have a material adverse effect on the financial position, results of operations, or liquidity of the District. Page 113/243 Page 38

113 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease commitments The District is obligated for land and office rental under the terms of various operating lease agreements. Following is a schedule by year of future minimum lease payments under operating leases as of June 30, 2013 (in thousands): Operating Lease Lease Net Lease Commitments Income Benefit 2014 $ 2,243 $ 7,643 $ 5, ,105 7,377 5, ,481 6,821 5, ,153 6,034 4, ,139 4,985 3,846 Thereafter 26,507 6,329 (20,178) $ 34,628 $ 39,189 $ 4,561 Total rental expense in 2013 and 2012 for all operating leases was approximately $2,376,000 and $2,345,000, respectively. Regulatory environment The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medi Cal fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. The District is subject to routine surveys and reviews by federal, state and local regulatory authorities. The District has also received inquiries from healthcare regulatory authorities regarding its compliance with laws and regulations. Although the District management is not aware of any violations of laws and regulations, it has received corrective action requests as a result of completed and on going surveys from applicable regulatory authorities. Management continually works in a timely manner to implement operational changes and procedures to address all corrective action requests from regulatory authorities. Breaches of these laws and regulations and non compliance with survey corrective action requests could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. Hospital Seismic Safety Act In the 2010 fiscal year, the Mountain View campus completed its three year construction of the Hospital Replacement Project with the opening of its new five story, 450,000 square foot, state ofthe art hospital facility on November 15, This completion made the Mountain View hospital campus in compliance with the State of California s SB 1953 in meeting all requirements of the Hospital Seismic Safety Act of The Hospital Replacement Project at the Mountain View campus financing included the proceeds from a combination of: (1) General Obligation bonds, totaling $148 million that were issued by the County of Santa Clara approved by the November 2003 Measure D; (2) $150 million in revenue bonds issued by the Hospital in 2007; (3) an additional $50 million revenue bond issue in 2009, and (4) cash reserves. At the Los Gatos campus, where most of the buildings were constructed in the 1960 s, the campus has been going through a seismic compliance review. Over the past two years since its acquisition structural engineers have been performing seismic assessments that have rated 12 of the 14 buildings to be seismic compliant through The two remaining buildings that require seismic upgrades at an estimated cost of $7 million, under current regulations, the work in phases must be completed between 2013 and Senate Bill 90 recently signed into law, after other details being approved would provide a seven year extension on these 2013 and 2015 seismic deadlines. Page 39 Page 114/243

114 EL CAMINO HEALTHCARE DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 HEALTH CARE REFORM In March 2010, President Obama signed the Health Care Reform Legislation into Law. The new law will result in sweeping changes across the health care industry. The primary goal of this comprehensive legislation is to extend health care coverage to approximately 32 million uninsured legal U.S. residents through a combination of public program expansion and private sector health insurance reforms. To fund the expansion of insurance coverage, the legislation contains measures designated to promote quality and cost efficiency in health care delivery and to generate budgetary savings in the Medicare and Medicaid programs. The District is unable to predict the full impact of the Health Care Reform Legislation at this time due to the law s complexity and current lack of implementing regulations and or interpretive guidance. However, the District expects that several provisions of the Health Care Reform Legislation will have a material effect on its business. NOTE 15 SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the consolidated statement of net position date but before consolidated financial statements are available to be issued. The District recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the consolidated statement of net position date, including the estimates inherent in the process of preparing the consolidated financial statements. The District s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the consolidated statement of net position date but arose after the consolidated statement of net position date and before consolidated financial statements are available to be issued. The Center for Medicare and Medicaid Services ( CMS ) determined that the Hospital was out of compliance with a number of conditions of participation during a CMS validation survey in May 2013 leading to the potential removal of the Hospital s deemed status as a Medicare provider, which could cause the Hospital to lose its ability to be reimbursed for Medicare services. The Hospital has submitted a plan of correction to CMS, and management is confident that the Hospital will resolve the CMS issues favorably so as to maintain the Hospital s deemed status. Page 115/243 Page 40

115 SUPPLEMENTARY INFORMATION Page 116/243

116 EL CAMINO HEALTHCARE DISTRICT CONSOLIDATING SCHEDULE STATEMENT OF NET POSITION June 30, 2013 (In Thousands) ASSETS El Camino Healthcare District El Camino Hospital El Camino Hospital Foundation CONCERN Surgery Center Silicon Valley Medical Development Eliminations Increase (Decrease) El Camino Healthcare District and Affiliates Current assets Cash and cash equivalents $ 339 $ 49,691 $ 95 $ 476 $ 494 $ 164 $ $ 51,259 Short term investments 4, ,818 1,501 11, ,582 Current portion of board designated, restricted funds and trusteed assets 11,461 2,675 14,136 Patient accounts receivable, net of allowances for doubtful accounts of $9,313 87, ,362 Prepaid expenses and other current assets 21, (1,426) 20,101 Notes receivable, current 80 (7) 73 Total current assets 16, ,314 1,596 12, (1,433) 379,513 Non current cash and investments Board designated funds 3, ,293 16, ,574 Restricted funds Funds held by trustee 8,156 6,710 14,866 11, ,011 16, ,498 Capital assets, net 12, , (323) 647,036 Pledges receivable, net 1,651 1,651 Prepaid pension 32,868 32,868 Investment in health care affiliates 22,435 1,856 (1,292) 22,999 Other assets 1,393 4,662 6,055 Total assets $ 42,141 $ 1,373,240 $ 20,050 $ 13,512 $ 2,528 $ 197 $ (3,048) $ 1,448,620 Page 117/243 Page 41

117 EL CAMINO HEALTHCARE DISTRICT CONSOLIDATING SCHEDULE STATEMENT OF NET POSITION (CONTINUED) June 30, 2013 (In Thousands) LIABILITIES AND NET POSITION El Camino Healthcare District El Camino Hospital El Camino Hospital Foundation CONCERN Surgery Center Silicon Valley Medical Development Eliminations Increase (Decrease) El Camino Heathcare District and Affiliates Current liabilities Current portion capital lease obligations $ $ 4,961 $ $ $ $ $ $ 4,961 Accounts payable and accrued expenses 16, (263) 17,403 Salaries, wages, and related liabilities 37, ,439 Other current liabilities 2,530 7, (1,170) 11,107 Estimated third party payor settlements 21,117 21,117 Current portion of bonds payable 1,480 3,112 4,592 Total current liabilities 4,010 91, , (1,433) 97,619 Capital lease obligations, net of current portion Bonds payable, net of current portion 140, , ,986 Other long term obligations 10,005 10,005 Workers' compensation, net of current portion 23,409 23,409 Postretirement medical benefits, net of current portion 15,541 15,541 Total liabilities 144, , , (1,433) 468,560 Net position Invested in capital assets, net of related debt (110,271) 445, (323) 335,114 Restricted expendable 5,297 5,297 Restricted nonexpendable 1, ,785 Unrestricted 7, ,754 11,985 11,438 2,144 (32) (1,292) 637,864 Total net position (102,404) 1,051,180 19,125 11,662 2,144 (32) (1,615) 980,060 Total liabilities and net position $ 42,141 $ 1,373,240 $ 20,050 $ 13,512 $ 2,528 $ 197 $ (3,048) $ 1,448,620 Page 118/243 Page 42

118 EL CAMINO HEALTHCARE DISTRICT CONSOLIDATING SCHEDULE STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Year Ended June 30, 2013 (In Thousands) El Camino Healthcare District El Camino Hospital El Camino Hospital Foundation CONCERN Surgery Center Silicon Valley Medical Development Eliminations Increase (Decrease) El Camino Healthcare District and Affiliates Operating revenues Net patient service revenue (net of provision for $ $ 686,327 $ 54 $ $ 5,164 $ $ $ 691,545 bad debts of $14,623) Other revenue 84 14,620 10, (3,456) 21,565 Total operating revenues , ,298 5,183 (3,456) 713,110 Operating expenses Salaries, wages and benefits 366,006 1,438 3,036 2, (256) 373,480 Professional fees and purchased services ,679 1,513 4, (2,073) 90,649 Supplies 102, , ,603 Depreciation and amortization , ,357 Rent and utilities 13, (604) 13,937 Other 17, ,328 Total operating expenses 1, ,313 3,267 7,998 5, (2,933) 648,354 (Loss) income from operations (1,139) 68,634 (3,213) 2,300 (317) (986) (523) 64,756 Nonoperating revenues (expenses): Investment income, net 70 25,338 1, ,943 Property tax revenue Designated for community benefit programs 6,514 6,514 Designated for capital expenditures 4,483 4,483 Levied for debt service 7,267 7,267 General Obligation bond interest expense (4,787) (4,787) Restricted gifts, grants and bequests, and other 3,298 1,134 4,432 Unrealized gain on interest rate swap 4,061 4,061 Other, net 11 (9,174) 121 (1,989) 872 (889) (11,048) Total nonoperating revenues and (expenses) 13,558 20,225 4,895 (1,930) ,865 Excess (deficit) of revenues over expenses before capital grants, contributions, and additions to permanent endowments 12,419 88,859 1, (317) (114) (278) 102,621 Capital transfers (5,132) 4,787 (123) 468 Increase (decrease) in net assets 7,287 93,646 1, (114) (278) 102,621 Total net position, beginning of year (109,691) 957,534 17,566 11,292 1, (1,337) 877,439 Total net position, end of year $ (102,404) $ 1,051,180 $ 19,125 $ 11,662 $ 2,144 $ (32) $ (1,615) $ 980,060 Page 119/243 Page 43

119 EL CAMINO HEALTHCARE DISTRICT SUPPLEMENTAL PENSION AND POSTRETIREMENT BENEFIT INFORMATION June 30, 2013 Supplemental pension information The following table summarizes the funding status of the Hospital s cashbalance pension plan (in thousands): Assets in Excess/ Fiscal Year Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) Projected Unit Credit (b) Assets in Excess of AAL (a b) Funded Ratio (a/b) Covered Payroll (c) (Shortfall) of AAL as a Percentage of Covered Payroll ((a b)/c) 2009 $ 103,654 $ 94,352 $ 9, % $ 133, % 2010 $ 90,565 $ 109,373 $ (18,808) 82.8% $ 149, % 2011 $ 118,424 $ 128,154 $ (9,730) 92.4% $ 178, % 2012 $ 133,257 $ 150,895 $ (17,638) 88.3% $ 205, % 2013 $ 138,356 $ 156,175 $ (17,819) 88.6% $ 209, % Supplemental postretirement benefit information The following table summarizes the funding status of the Hospital s postretirement medical benefit plan (in thousands): Assets in Excess/ Fiscal Year Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) Projected Unit Credit (b) Unfunded Actuarial Accrued Liability UAAL (a b) Funded Ratio (a/b) Annual Covered Payroll (c) (Shortfall) of UAAL as a Percentage of Covered Payroll ((a b)/c) 2011 $ $ 21,373 $ (21,373) 0.0% $ 42, % 2012 $ $ 20,820 $ (20,820) 0.0% $ 45, % 2013 $ $ 21,118 $ (21,118) 0.0% $ 32, % The following table summarizes the calculation of the net benefit obligation for the Hospital s postretirement medical benefit plan (in thousands): Fiscal Year Beginning of Year Net Benefit Obligation (a) Annual Required Contribution (b) Actual Contribution (c) Annual Postretirement Benefit Cost (d) Increase in Net Benefit Obligation (d c) End of Year Net Benefit Obligation ((a)+(d c)) 2011 $ 14,197 $ 982 $ 774 $ 1,112 $ 338 $ 14, $ 14,535 $ 890 $ 727 $ 1,024 $ 297 $ 14, $ 14,832 $ 896 $ 468 $ 1,177 $ 709 $ 15,541 Page 44 Page 120/243

120 EL CAMINO HEALTHCARE DISTRICT SUPPLEMENTAL SCHEDULE OF COMMUNITY BENEFIT (UNAUDITED) Year Ended June 30, 2013 The Hospital maintains records to identify and monitor the level of direct community benefit it provides. These records include the charges foregone for providing the patient care furnished under its charity care policy. For the years ended June 30, 2013 and 2012, the estimated costs of providing community benefit in excess of reimbursement from governmental programs were as follows (in thousands): Unpaid costs of Medi Cal programs $ 22,515 $ 13,175 Indigent charity care 2,417 3,154 Other community based programs 19,009 13,539 Total community benefits $ 43,941 $ 29,868 In furtherance of its purpose to benefit the community, the Hospital provides numerous other services to the community for which charges are not generated and revenues have not been accounted for in the accompanying consolidated financial statements. These services include providing access to healthcare through interpreters, referral and transport services, healthcare screening, community support groups and health educational programs, and certain home care and hospice programs. The estimated costs of Medicare programs in excess of reimbursement from Medicare were $66,852,000 and $56,810,000 for the years ended June 30, 2013 and 2012, respectively. The Hospital also provides services to the community through the operations of the El Camino Hospital Auxiliary, Inc. (the Auxiliary ). Services provided by volunteers of the Auxiliary, free of charge to the community, include assistance and counseling to patients and visitors, provision of scholarship awards to qualifying paramedical students, and daily personal contact with members of the community who are living alone. In 2013 and 2012, these volunteers contributed approximately 122,000 and 126,000 hours, respectively in providing these services, the value of which is not recorded in the accompanying consolidated financial statements. Page 121/243 Page 45

121 Separator Page 2c-ECHD District AU-C Draft pdf Page 122/243

122 DRAFT 09/13/13 Communication with Those Charged with Governance El Camino Healthcare District June 30, 2013 Page 123/243

123 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE To the Board of Directors El Camino Healthcare District We have audited the consolidated financial statements of El Camino Healthcare District (the District ) as of and for the year ended June 30, 2013, and have issued our report thereon dated October, Professional standards require that we provide you with the following information related to our audit. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA As stated in our engagement letter dated December 10, 2010, and addendum letter dated June 20, 2012, our responsibility, as described by professional standards, is to form and express an opinion about whether the consolidated financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. We will also report on whether the consolidating statement of net position, consolidating statement of revenues, expenses, and changes in net position, and supplemental pension and postretirement benefit information, presented as supplementary information, are fairly stated, in all material respects, in relation to the consolidated financial statements, as a whole. Our audit of the consolidated financial statements does not relieve you or management of your responsibilities. Our responsibility is to plan and perform the audit in accordance with auditing standards generally accepted in the United States of America and to design the audit to obtain reasonable, rather than absolute, assurance about whether the consolidated financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we considered the District s internal control solely for the purposes of determining our audit procedures and not to provide assurance concerning such internal control. We are also responsible for communicating significant matters related to the consolidated financial statement audit that, in our professional judgment, are relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously communicated to you in our engagement letter dated December 10, 2010, and addendum letter dated June 20, Page 124/243 Page 1

124 SIGNIFICANT AUDIT FINDINGS AND ISSUES Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the District are described in Note 1 to the consolidated financial statements. During the year, the District adopted Governmental Accounting Standards Board ( GASB ) Statement No. 61, The Financial Reporting Entity: Omnibus an amendment of GASB Statements No. 14 and No. 34; and GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. There have been no other new accounting policies adopted and there were no changes in the application of existing policies during We noted no transactions entered into by the District during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the consolidated financial statements in a different period than when the transaction occurred. Significant Accounting Estimates Accounting estimates are an integral part of the consolidated financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the District s consolidated financial statements were: Management s estimate of 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 the related services are rendered and adjusted in future periods as final settlements are determined. We evaluated the key factors and assumptions used to develop the estimated net realizable amounts. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Management s estimate of the provision for uncollectible accounts is recognized based on management s estimate of amounts that ultimately may be uncollectible. El Camino Hospital provides care to patients without requiring collateral or other security. Patient charges not covered by a third party payor are billed directly to the patient if it is determined that the patient has the ability to pay. We evaluated the key factors and assumptions used to develop the provision for uncollectible accounts. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Management s estimate of the fair market values of investments in the absence of readily determinable fair values are based on information provided by the fund managers. We have gained an understanding of management s estimate methodology and examined the documentation supporting this methodology. We evaluated the key factors and assumptions used to develop the fair market value of investments. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Management s estimate of uninsured losses for professional liability is recognized based on management s estimate of historical claims experience. We evaluated the key factors and assumptions used to develop the actuarial estimates of uninsured losses for professional liabilities and workers compensation. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Page 125/243 Page 2

125 Management s estimate of the minimum pension liability is actuarially determined using assumptions on the long term rate of return on pension plan assets, the discount rate used to determine the present value of benefit obligations and the rate of compensation increase. These assumptions are provided by management. We have evaluated the key factors and assumptions used to develop the estimate. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Management s estimated liability for workers compensation claims is recognized based on management s estimate of historical claims experience and known activity subsequent to yearend. We evaluated the key factors and assumptions used to develop the actuarial estimates of uninsured losses for professional liabilities and workers compensation. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Management s estimated liability for postretirement medical benefits is recognized based on management s estimate of historical claims experience and known activity subsequent to yearend. We have evaluated the key factors and assumptions used to develop the liability for postretirement medical benefits. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Management s estimates of useful lives of capital assets are based on the intended use and are within accounting principles generally accepted in the United States of America. We found management s basis to be reasonable in relation to the consolidated financial statements taken as a whole. Actual results could differ from these estimates. In accordance with accounting principles generally accepted in the United States of America, any change in these estimates is reflected in the consolidated financial statements in the year of change. Consolidated Financial Statement Disclosures The disclosures in the consolidated financial statements are consistent, clear, and understandable. Certain consolidated financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the District s consolidated financial statements was the disclosure surrounding related party transactions, significant concentration of net patient accounts receivable, investments, capital assets, employee benefit plans, postretirement medical benefits, insurance plans, long term debt, and commitment and contingencies. Significant Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all factual and judgmental misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. There were no corrected and uncorrected financial statement misstatements whose effects, as determined by management, are material, both individually and in the aggregate, to the consolidated financial statements taken as a whole. Page 126/243 Page 3

126 Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, which could be significant to the District s consolidated financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Representations Requested from Management We have requested certain representations from management that are included in the attached management representation letter dated October, Management s Consultation with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the District s consolidated financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Independence We are required to disclose to those charged with governance, in writing, all relationships between the auditors and the District, that in the auditor s professional judgment, may reasonably be thought to bear on our independence. We know of no such relationships and confirm that, in our professional judgment, we are independent of the District within the meaning of professional standards. Other Significant Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the District s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of the Board of Directors and management of El Camino Healthcare District and is not intended to be, and should not be, used by anyone other than these specified parties. San Francisco, California October, 2013 Page 127/243 Page 4

127 Separator Page 2d-ECHD District AU-C Draft pdf Page 128/243

128 DRAFT Communication of Internal Control Related Matters El Camino Healthcare District June 30, 2013 Page 129/243

129 COMMUNICATION OF INTERNAL CONTROL RELATED MATTERS To the Board of Directors and Management El Camino Healthcare District In planning and performing our audit of the consolidated financial statements of El Camino Healthcare District (the District ) as of and for the year ended June 30, 2013, in accordance with auditing standards generally accepted in the United States of America, we considered the District s internal control over financial reporting ( internal control ) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we do not express an opinion on the effectiveness of the District s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations, we did not identify any deficiencies in internal controls that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Our audit was also not designed to identify deficiencies in internal control that might be significant deficiencies. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the following deficiency in the District s internal control to be a significant deficiency: Observation: We noted a deficiency in user access within the McKesson STAR systems related to user profiles that have access to these applications that would conflict or prevent strong segregation of duties. These areas of conflict include but are not limited to charge master pricing updates, patient charge entry and crediting, as well as general journal entry creation and editing. This deficiency was also noted as a result of prior year FY2010, FY2011, and FY2012 audit procedures. Recommendation: Management should review user access controls within the McKesson STAR systems on at least an annual basis to ensure user access rights preserve strong segregation of duties. Management Response: Although prolonged reliance on interim management contributed to the lack of attention to this issue, permanent management is now in place and will assure that corrective action is taken. We have very strong procedures related to the termination of or separation with an employee and the IT Security department is constantly reviewing and performing internal audits around user access, which feeds into our employee on boarding and off boarding process. Additionally, management will evaluate current work flows and user access controls within the McKesson STAR systems to create clear segregation of duties and will review access rights annually. Page 130/243 Page 1

130 We also identified certain deficiencies in internal control that we consider to be control deficiencies: Observation: In our review of credit balances in net patient accounts receivable, we noted a credit balance in the amount of approximately $1.3 million as of June 30, 2013, that was a result of insurance payments recorded twice in error on June 28, 2013, the last business day of FY2013. While these payments were subsequently reversed out of the cash balance on July 2, 2013, there was no adjusting entry made to correct this error in the net patient accounts receivable balance as of June 30, We further noted the credit balances were over $5 million at June 30, 2013, and had not been regularly worked or reconciled on a timely basis. Recommendation: Management should perform monthly reconciliations of credit balances in net patient accounts receivable, including investigation and resolution of unusual credit balances items. Management Response: Management agrees that credit balances should be investigated and resolved in a timely fashion and has re initiated processes which normally occur throughout the year. Management noted that credit balance accounts are generally worked routinely by an individual who was temporarily reassigned to cover an unexpected leave which created a staffing shortage in the Business Office. The double counted insurance payments were corrected the following business day, which happened to cross fiscal years, but was not reported to Accounting so that an adjusting entry could be made to correct yearend balances. Patient Accounting management is now aware of the need to communicate any similar issues to Accounting management. Observation: In our review of the insurance refund liability, the detail of the accrual provided did not agree to the general ledger by approximately $600,000. We further noted that the accrual account did not appear to be reconciled regularly. Recommendation: Management should perform a monthly reconciliation of the accrual for insurance refund liability. Management Response: Management agrees that insurance refund liability should be regularly reconciled and with the implementation of the new contracting system (JDA), the system will be able to provide certain monthly reports to be used in performing a monthly reconciliation. In addition, we noted other matters involving internal control and its operation that we believe may be of potential benefit to the District: Observation: In our review of compliance with the charity care policy, we noted the policy was not consistently followed. Of the 18 selections made, we noted that the charity care applications were missing from the files for seven of the selections. Recommendation: Management should implement procedures to ensure that charity care applications are consistently completed for patients who are seeking charity care and all charity care write offs comply with the charity care policy. Page 131/243 Page 2

131 Management Response: Management agrees that practice was not consistent with the written policy. In fiscal year 2012, El Camino Hospital (the Hospital ) initiated a program of presumptive eligibility, using an outside service company to identify, from credit data and other databases, patients who were of limited financial means. Under this program, patients who met predefined criteria were granted charity care. The seven patients noted above were all granted charity care under this program, and documentation of their eligibility was maintained by the Hospital. In fiscal year 2013, management proposed an amended charity care policy, which the board approved. The amended policy, which became effective at the start of fiscal year 2014, includes languages that bring the policy into alignment with the previously instituted program of presumptive eligibility. Observation: In our review of the patient accounts receivable details, we observed issues with the financial class categories that in turn, affected the contractual allowances and revenue classifications. We noted that certain patients who should have been classified as self pay were mapped to Medi Cal or Indemnity, resulting in negative net revenue for some financial classes. Recommendation: Management should implement procedures to ensure that financial class categories are mapped appropriately and consistently throughout the year. Management Response: Through routine review of accounting data, management was previously aware of this error and made adjustments to closing entries to account for the misclassification. Management has developed and implemented an additional review procedure to minimize the possibility that an error of this type could recur. Observation: In our review of the results of the Uniform Commercial Code ( UCC ) search for the District, there were several liens against the District and the Hospital that were unknown to management. Recommendation: Management should investigate those liens that are not related to any current agreements and to contact the related vendors to remove these liens against the District and the Hospital effectively. Management Response: Management agrees. Management will contact those vendors where the liens should have been cancelled by the vendors as equipment leases have terminated or were fully paid off. For those few vendors that were not readily known, management will determine why a UCC was filed to assess if the lien was warranted. Management will perform annual UCC search for liens against the District and Hospital and validate the liens are current and warranted. The District s written responses to the significant deficiency, control deficiencies and other recommendations identified in our audit were not subjected to the auditing procedures applied in the audit of the consolidated financial statements and accordingly we express no opinion on them. This communication is intended solely for the information and use of the Board of Directors and management of El Camino Healthcare District, and is not intended to be, and should not be, used by anyone other than these specified parties. San Francisco, California October, 2013 Page 132/243 Page 3

132 Separator Page 2e-6-El Camino 2013 slides.pptx Page 133/243

133 El Camino Hospital District Report of Independent Auditors 2011 Benefit Plan Audits September 2013 Bertha Minnihan Employee Benefit Plan Services Partner (415) Page 134/243 MOSS ADAMS LLP 1

134 EL CAMINO HOSPITAL CASH BALANCE PLAN Limited Scope Opinion o Investments and activity certified by plan custodian Wells Fargo Significant Accounting Estimates o Actuarial assumptions o Fair value of investments significant changes in 2012 o Net appreciation in the fair value of investment Page 135/243 MOSS ADAMS LLP 2

135 EL CAMINO HOSPITAL 403(B) TAX DEFERRED ANNUITY PLAN Limited Scope Opinion o Investments and activity certified by plan custodians Fidelity VALIC Lincoln Significant Accounting Estimates o Fair value of investments o Net appreciation in the fair value of investment Page 136/243 MOSS ADAMS LLP 3

136 COMMUNICATIONS WITH THOSE CHARGED WITH GOVERNANCE No known or likely misstatements identified No significant difficulties encountered in performing the audit No disagreements with management regarding accounting, reporting, or auditing matters Management and staff were cooperative and helpful throughout the engagement Page 137/243 MOSS ADAMS LLP 4

137 Questions? Page 138/243 MOSS ADAMS LLP 5

138 Separator Page 2f-draft cash balance financial statements.pdf Page 139/243

139 Report of Independent Auditors and Financial Statements with Supplementary Information El Camino Hospital Cash Balance Plan December 31, 2012 and 2011 Page 140/243

140 Page 141/243

141 CONTENTS PAGE REPORT OF INDEPENDENT AUDITORS... 1 FINANCIAL STATEMENTS Statements of net assets available for benefits... 2 Statements of changes in net assets available for benefits... 3 Notes to financial statements... 4 SUPPLEMENTARY INFORMATION REQUIRED BY THE DEPARTMENT OF LABOR Schedule H, line 4(i) - schedule of assets (held at end of year) Schedule H, line 4(j) - schedule of reportable transactions Page 142/243

142 Page 143/243

143 REPORT OF INDEPENDENT AUDITORS To the Trustees El Camino Hospital Cash Balance Plan Report on the Financial Statements We were engaged to audit the accompanying financial statements of El Camino Hospital Cash Balance Plan (the Plan), which comprise the statements of net assets available for benefits as of December 31, 2012 and 2011, and the related statements of changes in net assets available for benefits for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion As permitted by 29 CFR of the Department of Labor's (DOL s) Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (ERISA), the plan administrator instructed us not to perform, and we did not perform, any auditing procedures with respect to the information summarized in Note 7, which was certified by Wells Fargo Bank, NA (Wells Fargo), the custodian of the Plan, except for comparing such information with the related information included in the financial statements. We have been informed by the plan administrator that the custodian holds the Plan's investment assets and executes investment transactions. The plan administrator has obtained a certification from the custodian as of December 31, 2012 and 2011, and for the year ended December 31, 2012, that the information provided to the plan administrator by the custodian is complete and accurate. Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements. Other Matter Page 144/243 Page 1

144 The schedule H, line 4(i) schedule of assets (held at year end) and schedule H, line 4(j) schedule of reportable transactions as of and for the year ended December 31, 2012, are required by the DOL's Rules and Regulations for Reporting and Disclosure under ERISA and are presented for the purpose of additional analysis and are not a required part of the financial statements. Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we do not express an opinion on this supplementary information. Report on Form and Content in Compliance with DOL Rules and Regulations The form and content of the information included in the financial statements and supplementary information, other than that derived from the information certified by the custodian, have been audited by us in accordance with auditing standards generally accepted in the United States of America and, in our opinion, are presented in compliance with the DOL s Rules and Regulations for Reporting and Disclosure under ERISA. Santa Rosa, California September, 2013 Page 145/243

145 FINANCIAL STATEMENTS Page 146/243

146 EL CAMINO HOSPITAL CASH BALANCE PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS December 31, 2012 and ASSETS Investments Wells Fargo Short-Term Investment Fund $ 3,674,601 $ 5,676,746 U.S. government securities 11,090,752 2,992,292 Mortgage/asset-backed securities - 17,599,253 Municipal bond - 2,503,080 Other fixed income securities 171, ,239 Pooled, common & collective trusts 21,295,219 - Mutual funds 109,478,538 - Corporate bonds 7,743,233 17,092,122 Common stock 15,324,468 85,371, ,777, ,788,650 Employer contributions receivable 5,666,486 14,410,929 Net pending trades (88,376) (1,515,811) Interest and dividends receivable 79, ,799 NET ASSETS AVAILABLE FOR BENEFITS $ 174,435,269 $ 145,355,567 Page 2 Page 147/243 See accompanying notes.

147 EL CAMINO HOSPITAL CASH BALANCE PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS Years Ended December 31, 2012 and CHANGES IN NET ASSETS ATTRIBUTED TO Employer contributions $ 14,005,102 $ 19,810,929 Interest 1,308,307 2,255,017 Dividends 2,944,240 1,771,085 Other income 295,741 3,522 Net appreciation (depreciation) in fair value of investments 18,552,515 (4,621,771) Benefits paid to participants (8,024,086) (7,117,736) Administrative expenses (2,117) (2,073) CHANGE IN NET ASSETS 29,079,702 12,098,973 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 145,355, ,256,594 NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 174,435,269 $ 145,355,567 See accompanying notes. Page 148/243 Page 3

148 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF PLAN The following description of the El Camino Hospital Cash Balance Plan (the Plan) provides only general information. Participants should refer to the plan agreement, as amended, for a more complete description of plan provisions. General The Plan was originally adopted as a defined benefit plan and was amended and restated in its entirety to a cash-balance formula effective January 1, Effective January 1, 2009, the Plan was restated and amended. The Plan is administered by the sponsor, El Camino Hospital (the Hospital), and plan assets are held by the custodian of the Plan, Wells Fargo Bank, N.A. (Wells Fargo). The Plan is a noncontributory defined benefit plan intended to qualify under Section 401(a) of the Internal Revenue Code (IRC). The Plan maintains participant account balances equal to a participant s account balance established as of January 1, 1995, upon the conversion to the cash-balance formula, plus subsequent contribution credits and interest credits related to the participant s accumulated cash balance, participant match contribution credits, and participant match interest credits. Contribution credits of 5% of eligible compensation for the year are credited to a participant s account as of the last day of the plan year. Each year, interest credits related to a participant s cash balance are credited to the participant s account in an amount that is equal to a percentage of a participant s account balance at the beginning of the plan year. The percentage rate used is the annual rate of return on 10-year Treasury Securities in effect for the third month (October) immediately preceding the first day of the applicable plan year. The rates credited were 2.15% and 2.54% for the years beginning January 1, 2012 and Eligibility Hospital employees are eligible to participate on the first day of the month succeeding the later of the date on which they complete one year of service, defined as working 12 months for a minimum of 1,000 hours, and they reach age 21. Funding policy The amount of employer contributions is determined based on actuarial valuations and recommendations as to the amounts required to fund benefits. Contributions are made by the Hospital based on the results of the actuarial recommendations. The Hospital intends to make contributions in amounts not less than the minimum required by the funding standards of the Employee Retirement Income Security Act of 1974 (ERISA), and are required to keep the Plan qualified under Section 401(a) of the IRC. Participants are not permitted to contribute to the Plan. Vesting Participants are fully vested with their third year of service. Payment of benefits Monthly benefit payments, based upon a formula described in the plan document, commence within 30 days of the normal retirement date, early retirement date, or deferred retirement date. A participant may elect to defer retirement past the normal retirement age, which will result in benefits greater than 100%, based on a published scale. The eligibility requirement for early retirement is age 55. Early retirement benefits are calculated by multiplying the accrued benefit as of the early retirement date by a percentage defined in the plan document. On termination of service, a participant may elect to receive either a lump-sum amount equal to the value of the participant s account balance or annuity payments based upon formulas described in the plan document. Death benefits The Plan provides death benefits in the form of a qualified pre-retirement survivor annuity for life equal to the annuity that would have been payable to the spouse if the participant had retired on the day preceding the participant s death. At the option of the beneficiary, the benefit may be paid in a lump sum. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The financial statements of the Plan are prepared under the accrual method of accounting. 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, liabilities, and changes therein; disclosure of contingent assets and liabilities; and the actuarial present value of accumulated plan benefits, at the date of the financial statements. Actual results could differ from those estimates. Page 4 Page 149/243

149 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS Recent accounting pronouncements In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No requires disclosure of valuation techniques for Level 2 and Level 3 measurements and for Level 3 measurements requires disclosure of valuation processes used by the reporting entity and quantitative information about significant unobservable inputs. ASU No removes the requirement for nonpublic companies to disclose information about transfers between Level 1 and Level 2 of the fair value hierarchy. The plan adopted the new disclosure requirements effective January 1, Investment valuation and income recognition The Plan s investments are stated at fair value, as certified by the Plan s custodian, based generally on quoted market prices. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. The net appreciation or depreciation in fair value of investments consists of both the realized gains or losses and unrealized appreciation (depreciation) of those investments. Payment of benefits Benefits are recorded when paid. Expenses Administrative fees, such as custodian, actuarial, and certain other administrative expenses, may be paid by the Plan or the Hospital. Subsequent events The Plan has evaluated subsequent events through September, 2013, which is the date the financial statements were available to be issued. NOTE 3 - ACTUARIAL PRESENT VALUE OF ACCUMULATED PLAN BENEFITS Actuarial present value of accumulated plan benefits is those estimated future periodic payments, including lump-sum distributions that are attributable under the Plan s provisions for services rendered by employees to the valuation date. Accumulated plan benefits include benefits expected to be paid to: (a) retired or terminated employees or their beneficiaries; and (b) present employees or their beneficiaries. Buck Consultants, consulting actuaries, estimates the actuarial present value of accumulated plan benefits. This is the amount that results from applying actuarial assumptions to adjust the accumulated plan benefits earned by the participants to reflect the time value of money through discounts for interest, and the probability of payment by means of decrements, such as for death, withdrawal, or retirement, between the valuation date and the expected date of payment. The actuarial present value of accumulated plan benefits as of January 1, the beginning of each plan year, was as follows: Vested benefits Participants currently receiving payments $ 28,145,331 $ 25,687,941 Other participants 119,527, ,242,674 Total vested benefits 147,672, ,930,615 Nonvested benefits 3,564,364 4,184,331 $ 151,237,078 $ 132,114,946 Page 150/243 Page 5

150 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS The change in actuarial present value of accumulated plan benefits from the prior year was as follows: Actuarial present value of accumulated plan benefits at January 1, 2011 $ 132,114,946 Increase (decrease) during the year attributable to Benefits accumulated 5,852,221 Assumption changes 11,384,508 Interest 9,003,139 Benefits paid (7,117,736) Actuarial present value of accumulated plan benefits at January 1, 2012 $ 151,237,078 The significant actuarial assumptions underlying the actuarial valuation as of January 1, 2012 and 2011: Discount rates 6% (2012) and 7% (2011) Mortality basis The IRS applicable 2012 Mortality Table is the RP-2000 mortality table for annuitants and non-annuitants with projections from the valuation date Retirement Normal retirement age is 65 NOTE 4 - FAIR VALUE MEASUREMENTS The Plan classified its investments based upon an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1: Level 2: Level 3: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Quoted prices in markets that are not considered to be active or financial instruments without quoted market prices, but for which all significant inputs are observable, either directly or indirectly; and Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets measured at fair value: Shares of registered investment company funds are valued using the net asset value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in an active market and is classified within Level 1 of the valuation hierarchy. U.S. Government securities, other fixed income securities, corporate bonds and common and preferred stocks are valued at the closing price reported on the major market on which the individual securities are traded. Common and preferred stock are generally classified within Level 1 of the valuation hierarchy. Units held in pooled, common/collective trusts are valued using the NAV of the fund. The NAV of a collective investment fund is calculated based on a compilation of primarily observable market information. The number of units of the fund that are outstanding on the calculation date is derived from observable purchase and redemption activity in the fund. Accordingly, the unit value for a collective investment fund is classified within Level 2 of the valuation hierarchy. As of December 31, 2012 and 2011, the contracts carrying value approximated fair value. Page 6 Page 151/243

151 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS The following sets forth, by level within the fair value hierarchy, the Plan s assets at fair value at December 31, 2012: 2012 Level 1 Level 2 Level 3 Total Wells Fargo Short-Term Investment Fund $ 3,674,601 $ - $ - $ 3,674,601 U.S. government securities - 11,090,752-11,090,752 Other fixed income securities - 171, ,138 Pooled, common & collective trusts - 21,295,219-21,295,219 Mutual funds Bond 21,132,256 21,132,256 International 32,148,597 32,148,597 Growth 11,896,579 11,896,579 Fixed Income 21,260,991 21,260,991 Stock 23,040,115 23,040,115 Corporate bonds Financial institutions 3,826, ,826,136 Healthcare 502, ,784 Industrials/materials 526, ,564 Information technology 929, ,638 Manufacturing/retail 1,514, ,514,733 Telecommunications 443, ,378 Common stock Common stock 1,452,831 1,452,831 Consumer discretionary 940, ,872 Consumer staples 555, ,693 Energy 1,504, ,504,717 Financial institutions 3,057, ,057,766 Healthcare 3,110, ,110,835 Industrials/materials 1,779, ,779,941 Information technology 2,082, ,082,421 Other 88, ,987 Telecommunications 610, ,155 Utilities 140, ,250 $ 136,220,840 $ 32,557,109 $ - $ 168,777,949 Page 152/243 Page 7

152 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS The following sets forth, by level within the fair value hierarchy, the Plan s assets at fair value at December 31, 2012: 2011 Level 1 Level 2 Level 3 Total Wells Fargo Short-Term Investment Fund $ 5,676,746 $ - $ - $ 5,676,746 U.S. government securities - 2,992,292-2,992,292 Mortgage/asset-backed securities - 17,599,254-17,599,254 Municipal bonds - 2,503,080-2,503,080 Other fixed income securities - 245, ,731 Corporate bonds - Automotive/industrial - 1,314,082-1,314,082 Financial institutions - 6,137,925-6,137,925 Healthcare - 2,189,672-2,189,672 Information technology - 316, ,875 Manufacturing/retail - 2,187,938-2,187,938 Telecommunications - 3,834,547-3,834,547 Unknown (GMAC LLC) - 1,111,083-1,111,083 Preferred/convertible securities 307, ,508 Common stock Energy 4,936, ,936,745 Financial institutions 17,078, ,078,639 Healthcare 17,881, ,881,310 Industrials/materials 7,763, ,763,589 Information technology 15,029, ,029,085 Manufacturing/retail 20,098, ,098,273 Telecommunications 2,584, ,584,276 $ 91,356,171 $ 40,432,479 $ - $ 131,788,650 NOTE 5 - INVESTMENT Investments representing 5% or more of net assets available for benefits consisted of the following at December 31, Vanguard Institutional Index Fund $ 23,040,115 Dodge & Cox Income Fund 21,260,991 Metropolitan West Total Return Bond Fund Class I 21,132,256 Harbor International Fund Class Institutional 16,194,338 Dreyfus Premier International Stock Fund Class I 15,954,260 Touchstone Sands Capital Institutional Growth Fund 11,896,579 There were no investments that individually represented 5% of more of the Plan s net assets available for benefits as of December 31, Page 8 Page 153/243

153 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011, the Plan s investments, including investments purchased, sold, and held during the year, appreciated (depreciated) in fair value, as follows: U.S. government securities $ 923 $ 4,665 Mortgage/asset-backed securities (799,319) (37,936) Municipal bond (348,281) 289,971 Other fixed income securities (14,958) (33,697) Corporate bonds (411,694) (157,910) Preferred/convertible securities 26,550 (7,897) Common stock 17,738,413 (4,678,967) Mutual funds 2,093,112 - Pooled common/collective trusts 267,769 - Net appreciation (depreciation) in fair value of investments $ 18,552,515 $ (4,621,771) NOTE 6 - TAX STATUS The Internal Revenue Service (IRS) issued a determination letter dated August 19, 2011, that stated that the Plan and related trust were designed in accordance with applicable sections of the IRC. Although the Plan has been amended and restated since receiving the determination letter, the plan administrator believes the Plan is designed, and is currently being operated, in compliance with the applicable requirements of the IRC. Accounting principles generally accepted in the United States of America require plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. NOTE 7 - INFORMATION CERTIFIED BY THE CUSTODIAN The plan administrator has elected the method of compliance permitted by 29 CFR of the Department of Labor s Rules and Regulations for Reporting and Disclosure under ERISA. Accordingly, Wells Fargo, the custodian of the Plan, has certified to the completeness and accuracy of: investments, interest, and dividends receivable, and net pending trades reflected on the accompanying statements of net assets available for benefits as of December 31, 2012 and 2011; net appreciation (depreciation) in fair value of investments, dividends, other income, and interest reflected on the accompanying statements of changes in net assets available for benefits for the years ended December 31, 2012 and 2011; investments reflected on the supplemental schedule of assets (held at end of year); and investments reflected on the supplemental schedule of reportable transactions. Page 154/243 Page 9

154 EL CAMINO HOSPITAL CASH BALANCE PLAN NOTES TO FINANCIAL STATEMENTS NOTE 8 - RISKS AND UNCERTAINTIES The Plan provides for investment in various investment securities that are exposed to various risks, such as interest rate, market volatility, and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term, and such changes could materially affect the amounts reported in the statements of net assets available for benefits. Plan contributions are made, and the actuarial present value of accumulated plan benefits is reported, based on certain assumptions pertaining to interest rates, inflation rates, and employee demographics, all of which are subject to change. Due to uncertainties inherent in the estimations and assumptions process, it is at least reasonably possible that changes in these estimates and assumptions in the near term would be material to the financial statements. NOTE 9 - PARTY-IN-INTEREST TRANSACTIONS Plan investments include shares of registered investment company funds, corporate bonds, and common stock managed by Wells Fargo. As Wells Fargo is the custodian of the Plan, transactions with this entity qualifies as exempt party-in-interest transactions. NOTE 10 - PLAN TERMINATION Although it has not expressed any intention to do so, the Hospital has the right to discontinue its contributions at any time and to terminate the Plan, subject to the provisions set forth in ERISA. In the event the Plan is terminated, the net assets will be allocated for payment of plan benefits to the participants in order of priority determined in accordance with ERISA, applicable regulations thereunder, and the plan document. Certain benefits are insured by the Pension Benefit Guaranty Corporation (PBGC), if the Plan terminates. Generally, the PBGC guarantees most vested normal age retirement benefits, early retirement benefits, and certain disability and survivor s pensions. However, the PBGC does not guarantee all types of benefits, and the amount of benefit protection is subject to certain limitations. Vested benefits are guaranteed at the level in effect on the date of the Plan s termination, subject to a statutory ceiling on the amount of an individual s monthly benefit. Whether all participants receive their benefits, should the Plan be terminated at some future time, will depend on the sufficiency, at the time, of the net assets to provide those benefits, the priority of those benefits to be paid, and the level and type of benefits guaranteed by the PBGC at that time. Some benefits may be fully or partially provided for by the then-existing assets and the PBGC guaranty, while other benefits may not be provided at all. Page 10 Page 155/243

155 SUPPLEMENTAL SCHEDULES REQUIRED BY THE DEPARTMENT OF LABOR Page 156/243

156 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 Employer identification number: Plan number: 001 Schedule H, Line 4(i) (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value * WELLS FARGO SHORT-TERM INVESTMENT FUND N Cash Equivalent $ 3,674,601 $ 3,674,601 EXTERNAL COMMINGLED FUND-PENDING Pooled, common & collective trust investments; 8,400,000share 8,400,000 8,400,000 LIGHTHOUSE DIVERSIFIED FUND LIMITED CLASS A Pooled, common & collective trust investments; 4,877 shares 8,400,000 8,490,050 WELLINGTON CIF SMALL CAP VALUE Pooled, common & collective trust investments; 98,154 shares 4,227,449 4,405,169 US TREASURY NOTE US Government; Maturity Date: 02/15/2015; 0.250%; Shares: 1,185,000 1,184,239 1,184,443 US TREASURY NOTE US Government; Maturity Date: 03/31/2014; 0.250%; Shares: 895, , ,421 US TREASURY NOTE US Government; Maturity Date: 06/30/2014; 0.250%; Shares: 5,345,000 5,344,089 5,347,085 US TREASURY NOTE US Government; Maturity Date: 10/15/2013; 1.250%; Shares: 1,030, , ,877 US TREASURY NOTE US Government; Maturity Date: 08/31/2013; 2.125%; Shares: 1,240,000 1,056,634 1,055,029 US TREASURY NOTE US Government; Maturity Date: 11/30/2013; 0.500%; Shares: 340,000 1,285,157 1,283,983 US TREASURY NOTE US Government; Maturity Date: 06/30/2013; 2.625%; Shares: 950, , ,915 AIR PRODUCTS & CHEMICALS Corporate Bond; Maturity Date: 08/02/2016; 2.000%; Shares: 100, , ,881 AMERICAN EXPRESS CREDIT Corporate Bond; Maturity Date: 06/15/2015; 1.750%; Shares: 225, , ,711 AMERICAN INTL GROUP Corporate Bond; Maturity Date: 09/15/2014; 4.250%; Shares: 100,000 99, ,340 ANHEUSER-BUSCH INBEV WOR Corporate Bond; Maturity Date: 07/15/2015; 0.800%; Shares: 200, , ,524 AT&T CORP Corporate Bond; Maturity Date: 12/1/2015; 8.000%; Shares: 225, , ,992 BANK OF AMERICA CORP Corporate Bond; Maturity Date: 07/01/2020; 5.625%; Shares: 60,000 59,785 71,138 BANK OF NOVA SCOTIA Corporate Bond; Maturity Date: 10/09/2015; 0.750%; Shares: 200, , ,904 BOSTON PROPERTIES LIMITED Corporate Bond; Maturity Date: 04/15/2015; 5.265%; Shares: 175, , ,174 CAPITAL ONE FINANCIAL CORP Corporate Bond; Maturity Date: 03/23/2015; 2.150%; Shares: 150, , ,111 CATERPILLAR INC Corporate Bond; Maturity Date: 06/26/2015; 0.950%; Shares: 200, , ,670 CITIGROUP INC Corporate Bond; Maturity Date: 05/19/2015; 4.750%; Shares: 175, , ,657 COMCAST CORP Corporate Bond; Maturity Date: 02/15/2018; 5.875%; Shares: 75,000 78,919 90,379 COSTCO WHOLESALE CORP Corporate Bond; Maturity Date: 12/07/2015; 0.650%; Shares: 255, , ,140 COX COMMUNICATIONS INC NEW Corporate Bond; Maturity Date: 12/15/2014; 5.450%; Shares: 21,000 20,954 22,902 COX COMMUNICATIONS INC Corporate Bond; Maturity Date: 10/01/2015; 5.500%; Shares: 400, , ,168 EXPORT-IMPORT BK KOREA Corporate Bond; Maturity Date: 01/11/2017; 4.000%; Shares: 250, , ,085 FEDEX CORP Corporate Bond; Maturity Date: 01/15/2014; 7.375%; Shares: 50,000 50,000 53,429 FREEPORT-MCMORAN C&G Corporate Bond; Maturity Date: 02/13/2012; 1.400%; Shares: 95,000 95,856 94,800 Page 10 Page 157/243

157 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value GENERAL ELEC CAP CORP Corporate Bond; Maturity Date: 07/02/2015; 1.625%; Shares: 385, , ,387 GILEAD SCIENCES INC Corporate Bond; Maturity Date: 12/01/2014; 2.400%; Shares: 185, , ,777 GOLDMAN SACHS GROUP INC Corporate Bond; Maturity Date: 05/03/2015; 3.300%; Shares: 150, , ,339 HSBC USA INC Corporate Bond; Maturity Date: 02/13/2015; 2.375%; Shares: 150, , ,294 IBM CORP Corporate Bond; Maturity Date: 02/06/2015; 0.550%; Shares: 215, , ,041 JOHN DEERE CAPITAL CORP Corporate Bond; Maturity Date: 04/17/2015; 0.875%; Shares: 175, , ,770 JPMPRGAN CHASE & CO Corporate Bond; Maturity Date: 03/01/2016; 3.450%; Shares: 185, , ,472 NBCUNIVERSAL MEDIA LLC Corporate Bond; Maturity Date: 04/01/2014; 2.100%; Shares: 185, , ,385 NORDSTROM INC Corporate Bond; Maturity Date: 06/01/2014; 6.750%; Shares: 75,000 74,726 81,359 PETROBRAS INTL FIN CO Corporate Bond; Maturity Date: 02/06/2015; 2.875%; Shares: 75,000 77,054 76,957 PROVIDENT COMPANIES INC Corporate Bond; Maturity Date: 07/15/2018; 7.000%; Shares: 50,000 52,190 59,381 RABOBANK NEDERLAND Corporate Bond; Maturity Date: 10/13/2015; 2.125%; Shares: 275, , ,828 ROYAL BK OF CANADA Corporate Bond; Maturity Date: 03/13/2015; 1.150%; Shares: 185, , ,007 ROYAL BK OF SCOTLAND PLC Corporate Bond; Maturity Date: 03/16/2016; 4.375%; Shares: 100,000 99, ,201 SOUTHERN CO Corporate Bond; Maturity Date: 09/15/2015; 2.375%; Shares: 185, , ,661 ST PAUL TRAVELERS Corporate Bond; Maturity Date: 12/01/2015; 5.500%; Shares: 75,000 70,837 84,888 TARGET CORP Corporate Bond; Maturity Date: 07/18/2014; 1.125%; Shares: 150, , ,460 TELEFONICA EMISIONES SAU Corporate Bond; Maturity Date: 04/26/2013; 2.582%; Shares: 200, , ,700 TEVA PHARMA FIN IV LLC Corporate Bond; Maturity Date: 11/10/2014; 1.700%; Shares: 200, , ,604 TEXAS GAS TRANSMISSION Corporate Bond; Maturity Date: 06/01/2015; 4.600%; Shares: 125, , ,221 TOYOTA MOTOR CREDIT CORP Corporate Bond; Maturity Date: 02/17/2015; 1.000%; Shares: 175, , ,174 UNITED TECHNOLOGIES CORP Corporate Bond; Maturity Date: 06/01/2015; 1.200%; Shares: 150, , ,148 WELLPOINT INC Corporate Bond; Maturity Date: 01/15/2016; 5.250%; Shares: 375, , ,896 * WELLS FARGO & COMPANY Corporate Bond; Maturity Date: 02/13/2015; 1.250%; Shares: 185, , ,735 * WELLS FARGO COMPANY Corporate Bond; Maturity Date: 12/11/2017; 5.625%; Shares: 200, , ,540 ABBVIE INC Private Placement; Shares: 170,000; 1.200%; 11/06/ , ,136 KAUPTHING BK TRANCHE Private Placement; Shares: 275,000; 7.125%; 05/19/ ,000 3 ALLOT COMMUNICATIONS LTD. Common Stock; Shares: 1,340 31,330 23,879 BP PLC - ADR Common Stock; Shares: 4, , ,560 CARNIVAL CORP Common Stock; Shares: 6, , ,036 DIAGEO PLC - ADR Common Stock; Shares: 3, , ,714 INTERXION HOLDING NV Common Stock; Shares: 1,457 32,479 34,618 NOVADAQ TECHNOLOGIES Common Stock; Shares: 3,733 41,441 33,149 RADWARE LTD Common Stock; Shares: 1,080 34,863 35,640 SANOFI-AVENTIS Common Stock; Shares: 5, , ,328 Page 158/243 Page 11

158 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value VODAFONE GROPU PLC NEW Common Stock; Shares: 8, , ,115 WESTPORT INNOVATIONS INC Common Stock; Shares: 1,677 49,179 44,793 NANOSPHERE INC Common Stock; Shares: 15,313 47,005 44,101 ASTRONICS CORP COM Common Stock; Shares: 1,161 26,412 26,564 CHART INDUSTRIES INC Common Stock; Shares: ,134 39,213 ECHO GLOBAL LOGISTICS, INC Common Stock; Shares: 2,911 47,729 52,311 EMERSON ELECTRIC CO Common Stock; Shares: 5, , ,392 FLOW INTL CORP Common Stock; Shares: 12,558 42,663 43,953 HERITAGE-CRYSTAL CLEAN INC Common Stock; Shares: 2,166 37,696 32,512 HONEYWELL INTERNATIONAL INC Common Stock; Shares: 4, , ,309 ILLINOIS TOOL WORKS INC Common Stock; Shares: 5, , ,455 L-3 COMMUNICATIONS CORP COM Common Stock; Shares: 1, , ,578 MANITEX INTERNATIONAL INC Common Stock; Shares: 3,597 24,314 25,683 RAYTHEON CO Common Stock; Shares: 6, , ,360 RUSH ENTERPRISES INC Common Stock; Shares: 1,697 30,978 35,077 TEAM, INC. COMMON STOCK Common Stock; Shares: ,356 30,774 TITAN MACHINERY INC Common Stock; Shares: 2,051 44,602 50,660 BLACK DIAMOND INC Common Stock; Shares: 4,155 39,542 34,071 FUEL SYSTEMS SOLUTIONS INC Common Stock; Shares: 1,850 30,921 27,215 GANNETT INC Common Stock; Shares: 3,900 65,676 70,239 GENTHERM INC. Common Stock; Shares: 3,256 37,837 43,305 GENUINE PARTS CO Common Stock; Shares: 3, , ,740 KOHLS CORP Common Stock; Shares: 3, , ,238 MORGANS HOTEL GROUP CO Common Stock; Shares: 5,197 33,626 28,791 RESTORATION HARDWARE HOLDINGS Common Stock; Shares: ,600 31,807 SHUTTERFLY INC Common Stock; Shares: 1,887 54,953 56,365 STAMPS COM INC Common Stock; Shares: 1,089 27,886 27,443 STANLEY BLACK & DECKER,INC. Common Stock; Shares: 3, , ,307 STEVEN MADDEN LTD Common Stock; Shares: 1,617 69,242 68,351 FRESH MARKET INC/THE Common Stock; Shares: ,586 40,925 WAL MART STORES INC Common Stock; Shares: 2, , ,575 WALGREEN CO Common Stock; Shares: 9, , ,193 CARRIZO OIL & GAS INC Common Stock; Shares: 1,483 39,839 31,024 CHEVRON CORP Common Stock; Shares: 1, , ,466 Page 159/243 Page 12

159 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value CONOCOPHILLIPS Common Stock; Shares: 4, , ,754 ION GEOPHYSICAL CORP Common Stock; Shares: 6,953 46,951 45,264 MARATHON OIL CORP Common Stock; Shares: 9, , ,534 NORTHERN OIL AND GAS INC Common Stock; Shares: 2,914 44,727 49,013 OCCIDENTAL PETE CORP Common Stock; Shares: 3, , ,135 PHILLIPS 66 Common Stock; Shares: 2, , ,130 REX ENERGY CORP Common Stock; Shares: 3,700 47,929 48,174 SANCHEZ ENERGY CORP Common Stock; Shares: 2,654 48,112 47,772 SYNERGY RESOURCES CORP Common Stock; Shares: 9,468 38,910 51,033 TRIANGLE PETROLEUM CORP Common Stock; Shares: 11,088 71,072 66,417 AMERICAN EXPRESS CO Common Stock; Shares: 6, , ,124 BANK OF AMERICA CORP Common Stock; Shares: 17, , ,819 BOFI HOLDING INC Common Stock; Shares: 1,667 45,602 46,361 CAPITAL ONE FINANCIAL CORP Common Stock; Shares: 4, , ,306 CITIGROUP, INC. Common Stock; Shares: 4, , ,844 EVERBANK FINANCIAL CORP Common Stock; Shares: 1,377 20,311 20,531 GREENHILL & CO INC Common Stock; Shares: ,718 40,604 JPMORGAN CHASE & CO Common Stock; Shares: 7, , ,181 PINNACLE FINL PARTNERS INC Common Stock; Shares: 2,466 48,667 46,459 PNC FINANCIAL SERVICES GROUP Common Stock; Shares: 3, , ,578 PRIMORIS SERVIES CORPORATION Common Stock; Shares: 3,552 48,089 53,420 SLM CORP Common Stock; Shares: 13, , ,542 STATE STREET CORP Common Stock; Shares: 6, , ,668 TEXAS CAP BANCSHARES INC Common Stock; Shares: ,161 36,887 TRAVELERS COMPANIES, INC Common Stock; Shares: 4, , ,372 WELLS FARGO & CO Common Stock; Shares: 11, , ,070 BRIGHTCOVE INC Common Stock; Shares: 3,487 41,662 31,522 COMMVAULT SYSTEMS INC Common Stock; Shares: ,541 63,114 COMPUTER TASK GROUP INC Common Stock; Shares: 2,528 46,244 46,085 ENVESTNET INC Common Stock; Shares: 3,445 47,457 48,058 EXACTTARGET INC Common Stock; Shares: 2,083 47,667 41,660 E2OPEN INC Common Stock; Shares: 2,654 43,319 37,581 FARO TECHNOLOGIES INC Common Stock; Shares: ,261 33,967 FLUIDIGM CORP Common Stock; Shares:3,323 51,088 47,552 Page 160/243 Page 13

160 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value GUIDEWIRE SOFTWARE INC Common Stock; Shares: 1,833 54,681 54,477 HEWLETT PACKARD CO Common Stock; Shares: 6, ,790 98,325 ICG GROUP INC Common Stock; Shares: 3,420 37,131 39,091 IMPERVA INC Common Stock; Shares: 1,493 46,152 47,074 INCONTACT INC Common Stock; Shares: 10,619 62,344 55,006 INFOBLOX INC Common Stock; Shares: 1,634 28,607 29,363 INPHI CORP Common Stock; Shares: 4,479 38,833 42,909 INTEL CORP Common Stock; Shares: 10, , ,510 INTERACTIVE INTELLIGENCE GROUP INC Common Stock; Shares: 1,407 44,742 47,191 INTERNATIONAL BUSINESS MACHS CORP Common Stock; Shares: ,800 95,775 LIVEPERSON INC Common Stock; Shares: 2,569 39,649 33,757 LOGMEIN INC Common Stock; Shares: 1,550 37,780 34,736 MAXLINEAR INC Common Stock; Shares: 6,297 37,836 31,611 MICROSOFT CORP Common Stock; Shares: 10, , ,439 MONOLITHIC PWR SYS INC Common Stock; Shares: 2,070 39,161 46,120 PROCERA NETWORKS, INC. Common Stock; Shares: 2,396 55,428 44,446 PROOFPOINT INC Common Stock; Shares: 3,874 51,122 47,689 QLIK TECHNOLOGIES INC Common Stock; Shares: 1,329 26,294 28,866 QUALYS INC Common Stock; Shares: 1,689 24,045 24,980 SAPIENT CORP COM Common Stock; Shares: 3,811 39,039 40,244 SEMTECH CORP COM Common Stock; Shares: 1,526 37,986 44,178 SHORETEL INC Common Stock; Shares: 9,121 41,603 38,673 SPS COMMERCE INC Common Stock; Shares: ,644 24,337 SYNCHRONOSS TECHNOLOGIES INC Common Stock; Shares: 2,169 44,470 45,744 TANGOE INC Common Stock; Shares: 3,310 41,701 39,290 TEXAS INSTRUMENTS INC Common Stock; Shares: 6, , ,052 ENTERGY CORP NEW COM Common Stock; Shares: 2, , ,250 ACCURAY INC Common Stock; Shares: 8,518 57,431 54,771 ALIGN TECHNOLOGY INC Common Stock; Shares: 1,908 50,346 52,947 BAXTER INTL INC Common Stock; Shares: 6, , ,960 CEPHEID Common Stock; Shares: 1,362 42,195 46,117 CERUS CORP COM Common Stock; Shares: 13,024 41,213 41,156 CONCEPTUS INC Common Stock; Shares: 2,622 49,220 55,062 DEXCOM INC Common Stock; Shares: 3,757 50,460 51,058 Page 161/243 Page 14

161 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value ENDOLOGIX INC Common Stock; Shares: 3,982 54,877 56,704 GREENWAY MEDICAL TECHNOLOGIES Common Stock; Shares: 2,666 44,125 40,950 HEALTHSTREAM INC Common Stock; Shares: 2,091 51,445 50,832 INSULET CORP Common Stock; Shares: 2,129 45,118 45,177 JOHNSON & JOHNSON Common Stock; Shares: 3, , ,390 MEDIDATA SOLUTIONS INC Common Stock; Shares: 2,262 86,332 88,625 MEDTRONIC INC Common Stock; Shares: 8, , ,670 MYRIAD GENETICS INC COM Common Stock; Shares: 1,768 46,390 48,178 NEOGEN CORP Common Stock; Shares: 1,160 48,989 52,571 NEOGENOMICS INC Common Stock; Shares: 7,104 20,891 17,618 ORASURE TECHNOLOGIES INC Common Stock; Shares: 6,582 56,400 47,259 PFIZER INC Common Stock; Shares: 15, , ,729 PHOTOMEDEX INC Common Stock; Shares: 3,266 43,582 47,454 QUIDEL CORP Common Stock; Shares: 3,615 63,831 67,492 SOLTA MEDICAL INC Common Stock; Shares: 17,967 52,985 47,972 SPECTRANETICS CORP Common Stock; Shares: 2,138 30,872 31,578 STAAR SURGICAL CO COM NEW PAR Common Stock; Shares: 7,225 45,669 44,073 SYNERGETICS USA INC Common Stock; Shares: 8,069 34,766 38,731 TEARLAB CORP Common Stock; Shares: 8,191 35,894 33,583 UNITEDHEALTH GROUP INC Common Stock; Shares: 7, , ,528 UROPLASTY INC Common Stock; Shares: 8,420 29,420 27,365 VOCERA COMMUNICATIONS INC Common Stock; Shares:1,332 36,157 33,433 WELLPOINT INC Common Stock; Shares: 3, , ,852 ARUBA NETWORKS INC Common Stock; Shares: 1,845 33,572 38,265 AT & T INC Common Stock; Shares: 7, , ,567 COGENT COMMUNICATIONS GROUP INC Common Stock; Shares: 1,332 27,637 30,156 VERIZON COMMUNICATIONS Common Stock; Shares: 5, , ,639 8X8 INC Common Stock; Shares: 4,814 32,945 35,527 CHUY S HOLDINGS INC Common Stock; Shares: 1,319 30,462 29,466 FRANCESCA S HOLDINGS CORP Common Stock; Shares: 1,212 35,784 31,427 IGNITE RESTAURANT GROUP INC Common Stock; Shares: 2,161 29,186 28,093 DODGE & COX INCOME FD COM Mutual Fund; Shares: 1,533, ,382,335 21,260,991 DREYFUS PREMIER INTERNATIONAL STOCK FUND CLASS I Mutual Fund; Shares: 1,100, ,358,919 15,954,260 HARBOR INTERNATIONAL FUND CLASS INSTITUTIONAL Mutual Fund; Shares: 260, ,420,962 16,194,338 Page 162/243 Page 15

162 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(i) SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Identity of issue, borrower, Description of investment including maturity date, Current lessor, or similar party rate of interest, collateral, par, or maturity value Cost value METROPOLITAN WEST TOTAL RETURN BOND FUND CLASS I Mutual Fund; Shares: 1,940, ,475,238 21,132,256 TOUCHSTONE SANDS CAPITAL INST GROWTH Mutual Fund; Shares: 694, ,734,347 11,896,579 VANGUARD INSTITUTIONAL INDEX FUND Mutual Fund; Shares: 176, ,860,565 23,040,115 * Indicates party-in-interest $ 166,580,203 $ 168,777,949 Page 163/243 Page 16

163 EL CAMINO HOSPITAL CASH BALANCE PLAN SCHEDULE H, LINE 4(j) - SCHEDULE OF REPORTABLE TRANSACTIONS December 31, 2012 Employer identification number: Plan number: 001 Schedule H, Line 4(j) (a) (b) (c) (d) (e) (h) (i) Current value Identity of Purchase Selling Cost of of asset on Net gain party involved Description of assets price price asset transaction date or (loss) Category (iii) - series of transactions in excess of 5% of plan assets * Wells Fargo Bank Short-Term Investment Fund Series of cash sweep purchases $ 152,750,783 $ - $ 152,750,783 $ 152,750,783 $ - Series of cash sweep sales - 154,752, ,752, ,752,929 - U.S. Treasury Note Series of cash sweep purchases 10,523,209-10,523,209 10,523,209 - * Indicates party-in-interest Page 164/243 Page 17

164 Separator Page 2g-draft 403(b) financial statements.pdf Page 165/243

165 Report of Independent Auditors and Financial Statements with Supplementary Information El Camino Hospital 403(b) Retirement Plan December 31, 2012 and 2011 Page 166/243

166 Page 167/243

167 CONTENTS PAGE REPORT OF INDEPENDENT AUDITORS... 1 FINANCIAL STATEMENTS Statements of net assets available for benefits... 2 Statement of changes in net assets available for benefits... 3 Notes to financial statements... 4 SUPPLEMENTARY INFORMATION REQUIRED BY THE DEPARTMENT OF LABOR Schedule H, line 4(i) - schedule of assets (held at end of year) Page 168/243

168 Page 169/243

169 REPORT OF INDEPENDENT AUDITORS To the Trustees El Camino Hospital 403(b) Retirement Plan We were engaged to audit the accompanying financial statements of El Camino Hospital 403(b) Retirement Plan (the Plan), which comprise the statements of net assets available for benefits as of December 31, 2012 and 2011, and the related statement of changes in net assets available for benefits for the year ended December 31, 2012, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion As permitted by 29 CFR of the Department of Labor's (DOL s) Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (ERISA), the plan administrator instructed us not to perform, and we did not perform, any auditing procedures with respect to the information summarized in Note 8, which was certified by Fidelity Management Trust Company, Lincoln National Life Insurance Company, and The Variable Annuity Life Insurance Company, custodians of the Plan, except for comparing such information with the related information included in the financial statements. We have been informed by the plan administrator that the custodians hold the Plan's investment assets and execute investment transactions. The plan administrator has obtained a certification from the custodians as of December 31, 2012 and 2011, and for the year ended December 31, 2012, that the information provided to the plan administrator by the custodians is complete and accurate. Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements. Other Matter The supplemental schedule of schedule H, line 4(i) schedule of assets (held at end of year) as of or for the year ended December 31, 2012, is required by the DOL's Rules and Regulations for Reporting and Disclosure under ERISA and is presented for the purpose of additional analysis and is not a required part of the financial statements. Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we do not express an opinion on this supplementary information. Page 170/243 Page 1

170 Report on Form and Content in Compliance with DOL Rules and Regulations The form and content of the information included in the financial statements and supplementary information, other than that derived from the information certified by the custodians, have been audited by us in accordance with auditing standards generally accepted in the United States of America and, in our opinion, are presented in compliance with the DOL s Rules and Regulations for Reporting and Disclosure under ERISA. Santa Rosa, California Date Page 171/243

171 FINANCIAL STATEMENTS Page 172/243

172 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS December 31, 2012 and ASSETS Participant-directed investments $ 210,148,777 $ 171,029,559 Employer match receivable 6,797,208 6,530,892 Notes receivable from participants 3,459,096 2,572,585 NET ASSETS AVAILABLE FOR BENEFITS $ 220,405,081 $ 180,133,036 Page 2 Page 173/243 See accompanying notes.

173 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS Year Ended December 31, 2012 ADDITIONS TO NET ASSETS ATTRIBUTED TO Investment income Net appreciation in fair value of participant-directed investments $ 14,576,591 Dividends and interest 5,534,338 20,110,929 Contributions Participant deferrals 19,724,469 Employer match contributions 6,797,208 Rollover contributions 3,018,451 29,540,128 Total additions 49,651,057 DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO Benefits paid to participants 9,329,582 Deemed distributions 14,882 Corrective distributions 3,415 Administrative and investment expenses 31,133 Total deductions 9,379,012 CHANGE IN NET ASSETS 40,272,045 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 180,133,036 NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 220,405,081 See accompanying notes. Page 174/243 Page 3

174 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF PLAN The following description of the El Camino Hospital 403(b) Retirement Plan (the Plan) provides only general information. Participants should refer to the plan agreement, as amended, for a more complete description of plan provisions. General The Plan is a 403(b) defined contribution retirement plan covering all employees of El Camino Hospital (the Hospital) and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Hospital is the Plan s sponsor and serves as plan administrator. Eligibility All full-time, part-time, and per-diem employees of the Hospital are eligible to participate in the Plan upon date of hire. Contributions Participants may elect to contribute up to the legal limit on a before-tax basis. Employer matching contributions are made for eligible employees based on a percentage of a participant s eligible compensation. Employer matching contributions range from 4% to 6% and are determined based on years of service. Contributions are subject to regulatory limitations. Participant accounts Each participant s account is credited with the participant s and employer s contributions and allocations of plan earnings, and charged with an allocation of administrative expenses. Allocations are based on participant earnings or account balances, as defined. Participants may direct the investment of their account balances into various investment options offered by the Plan. The benefit to which a participant is entitled is the benefit that can be provided from the participant s vested account. Vesting Participants are fully vested in their salary deferrals and employer matching contributions, plus actual earnings thereon. Notes receivable from participants Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. The maximum loan term is five years unless the loan term qualifies as a home loan, in which case the term of the loan is not to exceed fifteen years. Loans are secured by the balance of the participant s account and bear fixed, reasonable rates of interest, as determined by the custodians. Principal and interest are paid ratably through payroll deductions or paid directly by the participant to the custodians through monthly ACH transactions. As of December 31, 2012, the rates of interest on outstanding loans with Fidelity Management Trust Company (Fidelity) ranged from 4.25% to 7.5%, with various maturities through October The loans with Fidelity are considered assets of the Plan and totaled $3,459,096 and $2,572,586 as of December 31, 2012 and 2011, respectively. The Plan also allows plan loans which are loans made directly between the participant and Lincoln National Life Insurance Company (Lincoln) and are collateralized by the participant s account. When taking a plan loan, the collateralized plan assets are moved to the Fixed Account until the loan is paid down. Participants are charged an interest rate of 7%, of which 4.5% is credited to participant accounts and 2.5% is paid to Lincoln as a loan administration fee. The total collateral included in the Plan assets was approximately $221,000 and $354,000 as of December 31, and 2011, respectively. As of December 31, 2012, the rates of interest on outstanding loans with The Variable Annuity Life Insurance Company (VALIC) ranged from 3% to 4.50%, with various maturities through November Participant balances in the amount of loans outstanding are used as collateral on the loans. These funds are restricted with respect to withdrawals and transfers while the loan is outstanding. The loans themselves are not reported assets of the Plan. The total collateral included in plan assets was approximately $45,000 and $262,000 as of December 31, 2012 and 2011, respectively. Payment of benefits On termination of service due to death, disability, or retirement, a participant may elect to receive either a lump-sum amount equal to the value of the participant s account balance, or annual installments over a period of time. For termination of service for other reasons, a participant may receive the value of the vested interest in their account as a lump-sum distribution. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The financial statements of the Plan are prepared under the accrual method of accounting. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of net assets available for benefits and changes therein. Actual results could differ from those estimates. Page 4 Page 175/243

175 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS Recent accounting pronouncements - In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No requires disclosure of valuation techniques for Level 2 and Level 3 measurements and for Level 3 measurements requires disclosure of valuation processes used by the reporting entity and quantitative information about significant unobservable inputs. ASU No removes the requirement for nonpublic companies to disclose information about transfers between Level 1 and Level 2 of the fair value hierarchy. The Plan adopted the new disclosure requirements effective January 1, Investment valuation and income recognition Investments are stated at fair value as certified by Fidelity, Lincoln, and VALIC. If available, quoted market prices are used to value investments. Management determines the Plan s valuation policies utilizing information provided by the investment advisors, custodians, and insurance company. Fair value is the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price ) in an orderly transaction between market participants at the measurement date. See Note 4 for discussion of fair value measurements. Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. The net appreciation in fair value of participant-directed investments consists of both the realized gains or losses and unrealized appreciation or depreciation of those investments. Payment of benefits Benefits are recorded when paid. Expenses Administrative expenses related to operating and maintaining the Plan are paid by the Hospital. Certain investment and transaction fees are paid by participants in the Plan. Subsequent events The administrator of the Plan evaluated subsequent events for recognition and disclosure through, the date the financial statements were available to be issued. Management concluded that no material subsequent events occurred since December 31, 2012, that required recognition or disclosure in the financial statements. Reclassification Certain amounts from the prior year statement of net assets available for benefits have been reclassified, in order to conform to the current year presentation. NOTE 3 - INVESTMENT Investments representing 5% or more of net assets available for benefits consisted of the following as of December 31: Principal Financial 403(b) Fixed Account $ 23,734,395 $ 20,772,140 Fidelity Freedom ,943,743 12,999,384 Spartan 500 Index 12,362,649 less than 5% Fidelity Freedom ,310,355 less than 5% Fidelity Freedom ,107,062 less than 5% During 2012, the Plan s investments (including gains and losses on investments purchased and sold, as well as held during the year) appreciated in fair value as follows: Registered investment companies $ 13,472,388 Pooled separate accounts 960,231 Guaranteed investment contracts 143,972 Net appreciation in fair value of investments $ 14,576,591 NOTE 4 - FAIR VALUE MEASUREMENTS Fair value is the 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. The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Page 176/243 Page 5

176 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS The three levels of inputs used to establish fair value are as follows: Level 1: Level 2: Level 3: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability. Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Following are descriptions of the valuation methodologies used for assets measured at fair value: Shares of registered investment company funds are valued using the net asset value (NAV) of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in an active market or is calculated based on a compilation of primarily observable market information and is classified within level 1 of the valuation hierarchy. Pooled separate accounts are valued using the NAV of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The NAV of a pooled separate account is calculated based on a compilation of primarily observable market information. The number of units of the fund that are outstanding on the calculation date is derived from observable purchase and redemption activity in the fund. Accordingly, the unit value for a collective investment fund is classified within level 2 of the valuation hierarchy. The Plan invests in the Principal Financial 403(b) Fixed Account, which is a stable value fund annuity contract issued by Principal Life Insurance Company. The investment s objective is to provide a high quality investment option, earnings stability and liquidity, while offering a guarantee of principal and interest. The Principal Financial 403(b) Fixed Account is backed by the general account of Principal Life Insurance Company, which consists of a diversified general account portfolio of public and private securities, commercial and residential mortgages, and U.S. agency securities. Guarantees are subject to the claims-paying ability of the issuing insurance company. Accordingly, the Principal Financial 403(b) Fixed Account is classified within level 2 of the valuation hierarchy. The Plan invests in the Lincoln Financial Fixed Account, which is a guaranteed investment annuity contract. The Lincoln Financial Fixed Account is valued at fair value by using discounted cash-flow calculations based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. Funds under the guaranteed investment contract that have been allocated and applied to purchase annuities (that is, Lincoln is obligated to pay the related benefits) are excluded from the Plan s assets. As of December 31, 2012 and 2011, the remaining guaranteed interest and similar contracts carrying value approximated fair value. The Plan invests in the VALIC Fixed Account Plus, which is a guaranteed investment annuity contract and generally invests in longterm investments. The current interest rate is established on a portfolio basis with the same rate applicable to all amounts on deposit for the period such current rate is in effect. Funds under the guaranteed investment contract that have been allocated and applied to purchase annuities (that is, VALIC is obligated to pay the related benefits) are excluded from the Plan s assets. As of December 31, 2012 and 2011, the remaining guaranteed interest and similar contracts carrying value approximated fair value. Page 6 Page 177/243

177 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS The following sets forth, by level within the fair value hierarchy, the Plan s assets at fair value at December 31: 2012 Level 1 Level 2 Level 3 Total Registered investment companies Balanced funds $ 10,241,889 $ - $ - $ 10,241,889 Blended funds 105,812, ,812,153 Bonds 13,405, ,405,682 Equity funds 700, ,845 Growth and income funds 20,128, ,128,359 International funds 2,413, ,413,686 Money market funds 10,339, ,339,037 Other 11,563,045 45,318-11,608, ,604,696 45, ,650,014 Pooled separate accounts Balanced funds - 1,504,652-1,504,652 Blended funds - 3,876,359-3,876,359 Bonds - 836, ,090 Growth and income funds - 1,751,334-1,751,334 Money market funds - 20,135-20,135 Other - 114, ,845-8,103,415-8,103,415 Guaranteed investment contracts - 23,735,427 3,659,921 27,395,348 $ 174,604,696 $ 31,884,160 $ 3,659,921 $ 210,148, Level 1 Level 2 Level 3 Total Registered investment companies Balanced funds $ 8,685,077 $ - $ - $ 8,685,077 Blended funds 78,508, ,508,126 Bonds 11,566, ,566,758 Equity funds 719, ,243 Growth and income funds 16,852, ,852,529 International funds 2,265, ,265,718 Money market funds 8,709, ,709,144 Other 9,046, ,887-9,308, ,352, , ,614,616 Pooled separate accounts Balanced funds - 1,585,504-1,585,504 Blended funds - 3,790,783-3,790,783 Bonds - 855, ,811 Growth and income funds - 1,695,764-1,695,764 Money market funds - 20,349-20,349 Other - 122, ,820-8,071,031-8,071,031 Guaranteed investment contracts - 22,215,849 4,128,063 26,343,912 $ 136,352,729 $ 30,548,767 $ 4,128,063 $ 171,029,559 Page 178/243 Page 7

178 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS The following table discloses the summary of changes in the fair value of the Plan s level 3 investment assets at December 31, 2012: Guaranteed Investment Contracts Balance, beginning of year $ 4,128,063 Interest credited 143,972 Purchases 12,115 Settlements (602,806) Other (21,423) Balance, end of year $ 3,659,921 NOTE 5 - GUARANTEED INVESTMENT CONTRACTS The Plan s guaranteed annuity contracts are fully benefit-responsive and presented at estimated fair value on the statements of net assets available for benefits. The accounts are credited with earnings on the underlying investments and charged for participant withdrawals. The guaranteed annuity contract issuer is contractually obligated to repay the principal and a specified interest that is guaranteed to the Plan. Contract value as reported to the Plan by Fidelity, Lincoln, and VALIC represents contributions made under the contract, plus earnings, less participant withdrawals. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value. Management has determined that the estimated fair value of the Plan s investment contracts as of December 31, 2012 and 2011, materially approximates contract value. Accordingly, the statements of net assets available for benefits reflect no adjustment for the difference between net assets at fair value and net assets available for benefits. There are no reserves against contract value for credit risk or the contract issuer or otherwise. Crediting rates on the investment contracts are based on a formula agreed upon with the issuer. Interest rates are reviewed on an annual basis for resetting. Certain events, such as the premature termination of the contract by the Plan or the termination of the Plan, may limit the Plan s ability to transact at contract value with the issuer. The plan administrator does not believe that the occurrence of such events, which would also limit the Plan s ability to transact at contract value with participants, is probable. Average yields and crediting interest rates estimated for each of the custodians for the years ended December 31, 2012 and 2011, were as follows: Fidelity Guaranteed Investment Contracts Average yield 2.41% 2.97% Crediting interest rate 2.38% 2.94% Lincoln Guaranteed Investment Contracts Average yield 3.70% 3.62% Crediting interest rate 3.62% 3.54% VALIC Guaranteed Investment Contracts Average yield 4.16% 2.60% Crediting interest rate 4.16% 2.60% NOTE 6 - TAX STATUS The plan administrator believes the Plan meets the qualification requirements under Section 403(b), is tax exempt under provisions of the Internal Revenue Code (the Code), and is designed and currently being operated in compliance with the applicable requirements of the Code. Accounting principles generally accepted in the United States of America require plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The plan administrator has analyzed the tax positions taken by the Plan and has concluded that as of December 31, 2012, there were no uncertain positions taken or expected to be taken that would require recognition of a Page 8 Page 179/243

179 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. NOTE 7 - RISKS AND UNCERTAINTIES The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market volatility, and credit risks. It is reasonably possible, given the level of risk associated with investment securities, that changes in the near term could materially affect a participant s account balance and the amounts reported in the financial statements. NOTE 8 - INFORMATION CERTIFIED BY THE CUSTODIANS The plan administrator has elected the method of compliance permitted by 29 CFR of the Department of Labor s Rules and Regulations for Reporting and Disclosure under ERISA. Accordingly, Fidelity, Lincoln, and VALIC, custodians of the Plan, have certified to the completeness and accuracy of: participant-directed investments and loans to participants reflected in the accompanying statement of net assets available for benefits as of December 31, 2012 and 2011; net appreciation in fair value of participant-directed investments and dividends and interest reflected in the accompanying statement of changes in net assets available for benefits for the year ended December 31, 2012; and investments reflected on the supplemental schedule of assets (held at end of year) NOTE 9 - PARTY-IN-INTEREST TRANSACTIONS Plan investments include shares of registered investment company funds managed by Fidelity, Lincoln, and VALIC. As these are custodians of the Plan, transactions with these entities qualify as exempt party-in-interest transactions. NOTE 10 - PLAN TERMINATION Although it has not expressed any intention to do so, the Hospital has the right to terminate the Plan and discontinue its contributions at any time. Page 180/243 Page 9

180 Page 181/243

181 SUPPLEMENTAL SCHEDULE REQUIRED BY THE DEPARTMENT OF LABOR Page 182/243

182 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN SCHEDULE H, LINE 4(i) - SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 Plan sponsor: El Camino Hospital Employer identification number: Plan number: 002 Schedule H, Line 4(i) (a) (b) (c) (d) (e) Description of investment including Identity of issue, borrower, maturity date, rate of interest, Current lessor, or similar party collateral, par, or maturity value Cost value * Principal Fixed Account Principal Financial 403(b) Guaranteed investment contract ** $ 23,734,395 * Fidelity Freedom 2020 Registered investment company ** 16,943,743 Spartan 500 Index Registered investment company ** 12,362,649 * Fidelity Freedom 2030 Registered investment company ** 11,310,355 * Fidelity Freedom 2015 Registered investment company ** 11,107,062 J.P. Morgan Core Bond Select Registered investment company ** 10,217,092 Fidelity Freedom 2025 Registered investment company ** 9,721,035 * AF Growth Fund of America R4 Registered investment company ** 8,597,362 * Fidelity Retire Money Market Registered investment company ** 8,553,141 * Fidelity Freedom 2040 Registered investment company ** 7,244,871 * Fidelity Freedom 2035 Registered investment company ** 7,180,702 * AF Europac Growth R4 Registered investment company ** 5,783,489 Fidelity Freedom 2010 Registered investment company ** 5,654,473 Large Cap Value I Registered investment company ** 3,668,633 * Fidelity Contrafund Registered investment company ** 3,660,973 * Fixed Account Guaranteed investment contract ** 3,659,921 * Fidelity Freedom 2045 Registered investment company ** 3,614,286 * Spartan Extended Market Index Registered investment company ** 3,518,603 Artisan Mid Cap Val Registered investment company ** 3,492,077 Allianz NFJ Sm Cap Val I Registered investment company ** 2,488,724 * C&S Investment Reality Shares Registered investment company ** 2,292,121 * Fidelity Freedom 2050 Registered investment company ** 2,257,245 * Vanguard Small Cap index Registered investment company ** 1,925,755 Fidelity Freedom Income Registered investment company ** 1,856,193 * Fidelity Blue Chip Growth Registered investment company ** 1,563,571 * Baron Asset fund Registered investment company ** 1,421,379 * Fidelity VIP Contrafund Pooled separate account ** 1,389,355 * Fidelity Magellan Fund Registered investment company ** 1,282,069 * Fidelity Growth Company Registered investment company ** 1,191,042 * Brokerage Link Fidelity Fund Registered investment company ** 1,048,101 * Delaware VIP SMID Cap Growth Pooled separate account ** 1,010,749 * Fidelity Asset Manager 0.5 Registered investment company ** 991,121 * American Funds Growth Registered investment company ** 966,532 Fidelity OTC Portfolio Registered investment company ** 963,471 Fidelity Asset Manager 0.7 Registered investment company ** 926,322 Fidelity Low Price Stock Fund Registered investment company ** 921,944 LVIP Delaware Growth & Income Pooled separate account ** 905,492 * Fidelity Cash Reserve Registered investment company ** 858,784 * American Funds International Registered investment company ** 853,863 Fidelity Balanced Registered investment company ** 826,518 Page 10 Page 183/243

183 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN SCHEDULE H, LINE 4(i) - SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Description of investment including Identity of issue, borrower, maturity date, rate of interest, Current lessor, or similar party collateral, par, or maturity value Cost value * Brokerage Link Cash Registered investment company ** 786,270 * Hartford Small Co HLS Fund IA Registered investment company ** 749,558 * Fidelity Ginnie Mae Registered investment company ** 666,001 * LVIP Delaware Special Opportunities Pooled separate account ** 637,488 * Fidelity Money Market Registered investment company ** 635,281 * Brokerage Link External Fund Registered investment company ** 570,858 * Fidelity Growth & Income Registered investment company ** 568,824 * LVIP Del Foundation Conservative Alloc. Pooled separate account ** 551,208 * Fidelity Retire Govt Money Market Registered investment company ** 524,466 * Fidelity Investment Grade Bond Registered investment company ** 520,105 * LVIP Wells Fargo Intrinsic Value Pooled separate account ** 475,217 * Fidelity Puritan Registered investment company ** 463,219 * LVIP Delaware Bond Pooled separate account ** 454,563 * Fidelity Diversified International Registered investment company ** 421,346 * Fidelity Equity Income Registered investment company ** 413,565 Fidelity Money Market Registered investment company ** 388,182 Delaware VIP Diversified Income Pooled separate account ** 356,122 * Fidelity Select Biotechnology Fund Registered investment company ** 353,378 * American Funds Growth-Income Registered investment company ** 331,078 LVIP Delaware Social Awareness Pooled separate account ** 319,301 * Fidelity Freedom 2005 Registered investment company ** 309,156 * Fidelity Freedom 2000 Registered investment company ** 303,793 * Spartan Total Market Index Registered investment company ** 296,755 * Delaware VIP Small Cap Value Pooled separate account ** 291,850 * Fidelity U.S. Bond Index Registered investment company ** 277,200 * Fidelity Leveraged Company Stock Fund Registered investment company ** 276,332 * Fidelity International Discovery Registered investment company ** 263,636 * Fidelity Overseas Registered investment company ** 249,522 * LVIP SSGA Emerging Markets 100 Pooled separate account ** 230,401 * Fidelity Capital & Income Registered investment company ** 222,736 * Fidelity Mid Cap Stock Registered investment company ** 209,162 Fidelity Select Software Registered investment company ** 207,887 * PIMCO Vit Total Return Portfolio Registered investment company ** 207,509 * Fidelity Asset Manager 0.2 Registered investment company ** 204,185 * Fidelity Value Registered investment company ** 197,077 * Fidelity Asset Manager 0.85 Registered investment company ** 195,633 Fidelity Disciplined Equity Registered investment company ** 194,845 * Fidelity U.S. Government Money Market Registered investment company ** 189,497 * Fidelity Canada Registered investment company ** 188,658 * Fidelity Emerging Asia Registered investment company ** 187,824 * Delaware VIP REIT Pooled separate account ** 185,829 * LVIP Baron Growth Opportunities Pooled separate account ** 185,618 * Delaware VIP Value Pooled separate account ** 181,500 Page 184/243 Page 11

184 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN SCHEDULE H, LINE 4(i) - SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Description of investment including Identity of issue, borrower, maturity date, rate of interest, Current lessor, or similar party collateral, par, or maturity value Cost value * Fidelity Export & Multinational Registered investment company ** 178,357 * Fidelity EQ Div Income Registered investment company ** 172,921 * Fidelity Strategic Income Registered investment company ** 171,743 Fidelity Telecom & Utilities Registered investment company ** 171,050 Spartan International Index Registered investment company ** 163,690 * Fidelity Independence Registered investment company ** 151,923 * Fidelity Small Cap Stock Registered investment company ** 146,285 * Fidelity New Markets Income Registered investment company ** 145,270 Fidelity Four-in-One Index Registered investment company ** 142,200 * Fidelity Inflation Protected Bond Registered investment company ** 140,252 * Fidelity Latin America Registered investment company ** 135,732 * Fidelity Total Bond Registered investment company ** 132,825 * Fidelity Fifty Registered investment company ** 132,577 * LVIP Wilshire Moderate Profile Pooled separate account ** 132,202 * Fidelity Worldwide Registered investment company ** 129,143 * Fidelity Government Income Registered investment company ** 121,505 * Fidelity Real Estate Investment Registered investment company ** 119,552 * LVIP Mondrain International Value Pooled separate account ** 116,821 * Fidelity Select Energy Registered investment company ** 116,462 * LVIP Wilshire Moderately Aggressive Profile Pooled separate account ** 114,845 * LVIP T.Rowe Price Structured Mid-Cap Growth Pooled separate account ** 112,717 MFS Utilities Registered investment company ** 108,667 DWS Equity 500 Index VIP Pooled separate account ** 107,800 * Fidelity U.S. Government Reserves Registered investment company ** 107,505 * Fidelity Europe Capital Appreciation Registered investment company ** 103,643 * Fidelity Select Natural Resources Registered investment company ** 101,199 * LVIP Del Foundation Aggressive Alloc. Pooled separate account ** 100,933 * Fidelity Mid Cap Growth Registered investment company ** 92,081 * Fidelity Large Cap Value Registered investment company ** 90,016 * Fidelity Select Healthcare Registered investment company ** 89,356 Fidelity International Small Cap Registered investment company ** 86,399 * Fidelity Small Cap Value Registered investment company ** 84,682 * Fidelity China Region Registered investment company ** 84,468 * Fidelity Cap Appreciation Registered investment company ** 82,263 * Fidelity Small Cap Growth Registered investment company ** 80,876 * Fidelity Short Term Bond Registered investment company ** 80,044 * Fidelity Registered investment company ** 71,497 * Fidelity Emerging Markets Registered investment company ** 70,875 * Fidelity Small Cap Independence Registered investment company ** 70,268 * Fidelity Select Gold Registered investment company ** 70,083 * Fidelity Growth Discovery Registered investment company ** 69,774 * Fidelity Nordic Registered investment company ** 69,728 * Fidelity Select Med Eq & Sys Registered investment company ** 69,365 * Fidelity New Millennium Registered investment company ** 69,173 Page 12 Page 185/243

185 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN SCHEDULE H, LINE 4(i) - SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 (a) (b) (c) (d) (e) Description of investment including Identity of issue, borrower, maturity date, rate of interest, Current lessor, or similar party collateral, par, or maturity value Cost value * Fidelity Strategic Real Return Registered investment company ** 67,223 * Fidelity Select Technology Registered investment company ** 63,569 * Fidelity International Capital Appreciation Registered investment company ** 61,705 * LVIP Janus Capital Appreciation Pooled separate account ** 61,533 * Fidelity Intermediate Bond Registered investment company ** 61,300 * Neuberger Berman Mid Cap Growth Registered investment company ** 60,321 * Fidelity Trend Registered investment company ** 59,997 Fidelity U.S. Treasury Money Market Registered investment company ** 57,648 * Fidelity Intermediate Government Income Registered investment company ** 56,561 * Fidelity Select Computers Registered investment company ** 54,992 * Fidelity Pacific Basin Registered investment company ** 52,740 * Fidelity Dividend Growth Registered investment company ** 52,393 * Fidelity Select Electronics Registered investment company ** 51,923 * Fidelity High Income Registered investment company ** 51,338 * LVIP Cohen & Steers Global REIT Pooled separate account ** 46,592 * Fidelity Select Defense Registered investment company ** 44,796 * Loan Collateral Fund Registered investment company ** 41,583 * Alliance Bernstein Growth & Income Registered investment company ** 41,396 * Fidelity Select Energy Services Registered investment company ** 39,918 * Fidelity Growth Strategies Registered investment company ** 38,404 * Fidelity Europe Registered investment company ** 37,982 * LVIP Vanguard International Equity ETF Pooled separate account ** 36,122 * Fidelity Select Communication Equipment Registered investment company ** 35,156 American Funds Global Growth Registered investment company ** 34,441 Spartan Long-Term TR Index Investment Registered investment company ** 31,805 * Fidelity Select Consumer Staples Registered investment company ** 30,757 * Fidelity Select Telecommunications Registered investment company ** 28,776 * Fidelity Convertible Securities Registered investment company ** 25,664 Fidelity Select Natural Gas Registered investment company ** 23,576 * Fidelity NASDAQ Composite Index Registered investment company ** 22,729 * Fidelity Select Chemicals Registered investment company ** 22,109 * LVIP SSGA Global Tactical Allocation Pooled separate account ** 21,048 * Fidelity Mid Cap Value Registered investment company ** 20,381 * LVIP Money Market Pooled separate account ** 20,135 * Fidelity Select Wireless Registered investment company ** 19,887 * Fidelity Select Environmental Registered investment company ** 18,891 * LVIP Global Income Pooled separate account ** 18,705 * Fidelity Value Discovery Registered investment company ** 16,644 * American Century Inflation Protection Registered investment company ** 16,308 * Fidelity Ultra-Short Bond Fund Registered investment company ** 15,096 * Fidelity Blue Chip Value Registered investment company ** 14,710 * Fidelity International Small Cap Opportunities Registered investment company ** 14,596 * Fidelity Stock Sell All Cap Registered investment company ** 14,255 * Fidelity Select Leisure Registered investment company ** 14,243 Page 186/243 Page 13

186 EL CAMINO HOSPITAL 403(b) RETIREMENT PLAN SCHEDULE H, LINE 4(i) - SCHEDULE OF ASSETS (HELD AT END OF YEAR) December 31, 2012 * Fidelity Strategic Dividend & Income Registered investment company ** 13,662 * Blackrock Global Allocation Registered investment company ** 13,484 Spartan International TR Index Investment Registered investment company ** 11,302 * LVIP SSGA S&P 500 Index Pooled separate account ** 11,238 LVIP SSGA Small-cap Index Pooled separate account ** 10,222 * Fidelity Select Pharmaceuticals Registered investment company ** 10,128 * Fidelity Large Cap Value Enhanced Index Registered investment company ** 9,633 Fidelity Global Balanced Registered investment company ** 9,333 * Fidelity Small Cap Enhanced Index Registered investment company ** 8,835 * Fidelity Select Medical Deliver Registered investment company ** 8,296 * Fidelity Select Brokerage Registered investment company ** 8,001 * Fidelity Value Strategies Registered investment company ** 7,913 * Fidelity Real Estate Income Registered investment company ** 7,504 * Fidelity International Value Registered investment company ** 7,430 * DWS Small Cap Index VIP Pooled separate account ** 6,863 * Fidelity Mega Cap Stock Registered investment company ** 6,838 * Delaware VIP High Yield Pooled separate account ** 6,700 * Fidelity Large Cap Growth Registered investment company ** 6,559 * Fidelity Select Utilities Registered investment company ** 4,977 Spartan Short-Term TR Index Investment Registered investment company ** 4,811 * Fidelity Intl Real Estate Registered investment company ** 4,691 * Fidelity VIP Growth Pooled separate account ** 4,246 * Loan Escrow Fund Registered investment company ** 3,735 * Fidelity Japan Smaller Companies Registered investment company ** 3,589 * Fidelity Select Insurance Registered investment company ** 3,118 * Fidelity Asset Manager.60 Registered investment company ** 3,004 * Fidelity Select Financial Registered investment company ** 2,645 * Fidelity Large Cap Stock Registered investment company ** 2,394 * Fidelity Floating Rate High Income Registered investment company ** 2,222 * Fidelity Focused Stock Registered investment company ** 2,127 * Fidelity Japan Registered investment company ** 1,894 * Alliance Bernstein Global Thematic Growth Registered investment company ** 1,774 * Fidelity Mortgage Securities Registered investment company ** 1,738 * Principal Fixed Account Other Receivables Guaranteed investment contract ** 1,008 * Fidelity Select Banking Registered investment company ** 125 * Fidelity Small Cap Discovery Registered investment company ** 96 * Fidelity Institutional Shares International Govt Registered investment company ** 56 * Principal Fixed Account Accrued Income Guaranteed investment contract ** ,148,777 * Participant loans Interest rates range from 4.25% - 7.5% maturing through October ,459,096 $ 213,607,873 * Indicates party-in-interest. ** Information is not required as investments are participant directed. Page 14 Page 187/243

187 Separator Page 2h-El Camino Hospital 403 (b) Retirment Plan SAS letter draft.pdf Page 188/243

188 Communication to Those Charged with Governance El Camino Hospital 403(b) Retirement Plan December 31, 2012 Page 189/243

189 Communications with Those Charged with Governance in accordance with AU C 260 (AU 380) To the Retirement Plan Administrative Committee El Camino Hospital 403(b) Retirement Plan We have completed a Department of Labor (DOL) limited scope audit of the financial statements and supplementary information of El Camino Hospital 403(b) Retirement Plan (the Plan) as of and for the year ended December 31, As permitted by 29 CFR of the DOL s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (ERISA), the plan administrator instructed us not to perform, and we did not perform, any auditing procedures with respect to the information summarized in Note 8 to those financial statements. Because of the significance of the information that we did not audit, we are unable to, and have not, expressed an opinion on those financial statements and supplementary information taken as a whole. Professional standards require that we provide you with the following information related to our audit. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA As part of our audit, we considered the internal control of the Plan except that we did not, as part of the scope limitation discussed in the first paragraph, include a consideration of internal control relating to the information summarized in Note 8 to those financial statements. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. Our responsibility is to plan and perform the audit in accordance with auditing standards generally accepted in the United States of America and to design the audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan s internal control over financial reporting. Accordingly, we considered the Plan s internal control solely for the purposes of determining our audit procedures and not to provide assurance concerning such internal control. We are also responsible for communicating significant matters related to the financial statement audit that, in our professional judgment, are relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. You should understand that our audit is not specifically designed for and should not be relied upon to disclose matters affecting plan qualifications or compliance with the ERISA and Internal Revenue Code requirements. If during the audit we become aware of any instances of any such 1 Page 190/243

190 matters or ways in which management practices can be improved, we will communicate them to you. OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS The AICPA s Audit and Accounting Guide for Employee Benefit Plans requires that, before an auditor s report on the Plan s financial statements can be included with a filed Form 5500 (including any related schedules), the auditor must review the Form 5500 and consider whether there are any material inconsistencies between the other information in the form and the audited financial statements (including the required supplementary information) or any material misstatement of fact. Our responsibility for other information in the Form 5500 does not extend beyond the financial information identified in our report. We do not have an obligation to perform any procedures to corroborate other information contained in the form, except as described above. However, we have read the information contained in the Form 5500 and nothing came to our attention that caused us to believe that such information or its manner of presentation is materially inconsistent with the information as it is presented in the financial statements. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously communicated to you in in the engagement letter dated January 3, 2013, and subsequent planning discussions. SIGNIFICANT AUDIT FINDINGS AND ISSUES Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Plan are described in Note 2 to the financial statements. The Plan has adopted ASU No , Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance requires disclosure of valuation techniques for Level 2 and Level 3 measurements and for Level 3 measurements requires disclosure of valuation processes used by the reporting entity and quantitative information about significant unobservable inputs. ASU No removes the requirement for nonpublic companies to disclose information about transfers between Level 1 and Level 2 of the fair value hierarchy. This was adopted effective January 1, There were no changes in the application of existing accounting policies during the year. We noted no transactions entered into by the Plan during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. 2 Page 191/243

191 Significant Accounting Estimates Accounting estimates may be an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates may be particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. We did not note any significant accounting estimates in the financial statements. Significant accounting estimates are not commonly inherent in a defined contribution plan with investments that are readily marketable. Financial Statement Disclosures The disclosures in the financial statements are consistent, clear and understandable. Certain financial statement disclosures may be particularly sensitive because of their significance to financial statement users. We did not note any disclosures in the financial statements which we consider sensitive to potential users. Significant Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all factual and judgmental misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. We did not note any factual or judgmental misstatements in the course of the engagement. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated [Date of Management Representation Letter]. Management Consultation with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the Plan s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our 3 Page 192/243

192 professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Significant Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Plan s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of the Retirement Plan Administrative Committee and management of the Plan and is not intended to be and should not be used by anyone other than these specified parties. Santa Rosa, California Date 4 Page 193/243

193 Separator Page 2i-El Camino Cash Balance SAS letter Draft.pdf Page 194/243

194 Communication to Those Charged with Governance El Camino Hospital Cash Balance Plan December 31, 2012 Page 195/243

195 Communications with Those Charged with Governance in accordance with AU C 260 (AU 380) To the Retirement Plan Administrative Committee El Camino Hospital Cash Balance Plan We have completed a Department of Labor (DOL) limited scope audit of the financial statements and supplementary information of El Camino Hospital Cash Balance Plan (the Plan) as of and for the year ended December 31, As permitted by 29 CFR of the DOL s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (ERISA), the plan administrator instructed us not to perform, and we did not perform, any auditing procedures with respect to the information summarized in Note 7 to those financial statements. Because of the significance of the information that we did not audit, we are unable to, and have not, expressed an opinion on those financial statements and supplementary information taken as a whole. Professional standards require that we provide you with the following information related to our audit. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA As part of our audit, we considered the internal control of the Plan except that we did not, as part of the scope limitation discussed in the first paragraph, include a consideration of internal control relating to the information summarized in Note 7 to those financial statements. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. Our responsibility is to plan and perform the audit in accordance with auditing standards generally accepted in the United States of America and to design the audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan s internal control over financial reporting. Accordingly, we considered the Plan s internal control solely for the purposes of determining our audit procedures and not to provide assurance concerning such internal control. We are also responsible for communicating significant matters related to the financial statement audit that, in our professional judgment, are relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. You should understand that our audit is not specifically designed for and should not be relied upon to disclose matters affecting plan qualifications or compliance with the ERISA and Internal Revenue Code requirements. If during the audit we become aware of any instances of any such 1 Page 196/243

196 matters or ways in which management practices can be improved, we will communicate them to you. OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS The AICPA s Audit and Accounting Guide for Employee Benefit Plans requires that, before an auditor s report on the Plan s financial statements can be included with a filed Form 5500 (including any related schedules), the auditor must review the Form 5500 and consider whether there are any material inconsistencies between the other information in the form and the audited financial statements (including the required supplementary information) or any material misstatement of fact. Our responsibility for other information in the Form 5500 does not extend beyond the financial information identified in our report. We do not have an obligation to perform any procedures to corroborate other information contained in the form, except as described above. However, we have read the information contained in the Form 5500 and nothing came to our attention that caused us to believe that such information or its manner of presentation is materially inconsistent with the information as it is presented in the financial statements. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously communicated to you in in the engagement letter dated January 3, 2013, and subsequent planning discussions. SIGNIFICANT AUDIT FINDINGS AND ISSUES Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Plan are described in Note 2 to the financial statements. The Plan has adopted ASU No , Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance requires disclosure of valuation techniques for Level 2 and Level 3 measurements and for Level 3 measurements requires disclosure of valuation processes used by the reporting entity and quantitative information about significant unobservable inputs. ASU No removes the requirement for nonpublic companies to disclose information about transfers between Level 1 and Level 2 of the fair value hierarchy. This was adopted effective January 1, There were no changes in the application of existing accounting policies during the year. We noted no transactions entered into by the Plan during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. 2 Page 197/243

197 Significant Accounting Estimates Accounting estimates may be an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates may be particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. We did not note any significant accounting estimates in the financial statements. Significant accounting estimates are not commonly inherent in a defined contribution plan with investments that are readily marketable. Financial Statement Disclosures The disclosures in the financial statements are consistent, clear and understandable. Certain financial statement disclosures may be particularly sensitive because of their significance to financial statement users. We did not note any disclosures in the financial statements which we consider sensitive to potential users. Significant Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all factual and judgmental misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. We did not note any factual or judgmental misstatements in the course of the engagement. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated [Date of Management Representation Letter]. Management Consultation with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the Plan s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our 3 Page 198/243

198 professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Significant Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Plan s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. This information is intended solely for the use of the Retirement Plan Administrative Committee and management of the Plan and is not intended to be and should not be used by anyone other than these specified parties. Santa Rosa, California Date 4 Page 199/243

199 Separator Page #5 MRK_Board and Finance Committee FY14 Period 2 REVISED Final.pptx Page 200/243

200 Summary of Financial Operations Fiscal Year 2014 Period 2 7/1/2013 to 8/31/2013 Page 201/243

201 (1) Hospital entity only, excludes controlled affiliates Page 202/243 2

202 Management Commentary (1) 54 Net Days in AR 4,400 Case Mix Index Adjusted Discharges Current & Prior Fiscal Year 12,000 Operating Income ($000S) Current & Prior Fiscal Year ,200 4,000 3,800 3,600 3,400 10,000 8,000 6,000 4, ,200 2, PY A S O N D J F M A M J CY A S O N D J F M A M J 3,000 PY A S O N D J F M A M J CY A S O N D J F M A M J 0 PY A S O N D J F M A M J CY A S O N D J F M A M J Actual Target Actual Budget Actual Budget Budget is represented by solid lines; Bars represent acutal results Net Days in AR Net outstanding receivables decreased by $620 thousand between July and August, but this was more than offset by net revenues which were $2.1 million lower in August. Consequently, net days in A/R are still favorable to goal, but increased to 48.8 days. For the most recent 12-month period, A/R days averaged 48.9 days or 1.1 day favorable to the 50-day target. CMI Adjusted Discharges Although Case Mix in August was 4% below budget and discharges were 5% short, these unfavorable variances were largely offset by outpatient revenues which exceeded budget by 9.5%, resulting in CMI Adjusted Discharges which were just slightly (0.9%) unfavorable to budget. Fiscal year to date CMI Adjusted Discharges are 1.4% favorable to budget. Operating Margin July s gross charges were $6.7 million unfavorable to budget, all but $1.1 million of which was offset at the total revenue line by favorable payer mix, by a favorable shift towards outpatient utilization, and by $1.5 million higher than expected recoveries on accounts previously reserved as uncollectible. Expenses were $950 thousand favorable to budget, resulting in hospital operations which were $150 thousand unfavorable to budget. After investment performance in July s that was $9.3m favorable to budget, August results were $6.2 million unfavorable. YTD results are 93% favorable to budget. (1) Hospital entity only, excludes controlled affiliates Page 203/243 3

203 (1) Hospital entity only, excludes controlled affiliates Page 204/243 4

204 El Camino Hospital Financial Metrics Trend (1) P r o f I t _ L o s s 0.2% Favorable to Budget B A L _ S H E E T 2 Days Favorable to Budget Represents cash of $577 million (1) Hospital entity only, excludes controlled affiliates Page 205/243 5

205 ECH Operating Margin (1) Run rate is booked operating income adjusted for material non-recurring transactions (1) Hospital entity only, excludes controlled affiliates Page 206/243 6

206 ECH Volume Statistics (1) (1) (2) Hospital entity only, excludes controlled affiliates Excludes normal newborns (MS-DRG 795) Page 207/243 7

207 El Camino Hospital Volume Trends Prior and Current Fiscal Years Page 208/243 8

208 APPENDIX Page 209/243 9

209 Summary of Financial Results $ in Thousands Period 2 - Month Period 2 - FYTD Actual Budget Variance Actual Budget Variance El Camino Hospital Income (Loss) from Operations Mountain View 3,507 3, ,957 7, Los Gatos 543 1,137 (594) 2,351 1, Sub Total - El Camino Hospital, excl. Afflilates 4,051 4,205 (154) 10,308 9, Operating Margin % 7.0% 7.1% 8.7% 8.0% El Camino Hospital Non Operating Income Investments ** (4,667) 2,016 (6,683) 6,148 4,028 2,120 Swap Adjustments Community Benefit (330) 0 (330) (510) 0 (510) Other 2 (352) 354 (139) (703) 564 Sub Total - Non Operating Income (4,591) 1,664 (6,255) 6,403 3,325 3,078 El Camino Hospital Net Income (Loss) (540) 5,869 (6,409) 16,711 12,859 3,852 ECH Net Margin % -0.9% 9.9% 14.1% 10.8% Net Income Hospital Affiliates (189) 198 (386) Total Net Income Hospital & Affiliates (729) 6,067 (6,796) 17,264 13,291 3,973 Page 210/243 10

210 FY13 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 FY14 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 Worked Hours per CMI Adjusted Discharge (1) 110 Actual Budget (1) Hospital entity only, excludes controlled affiliates Page 211/243 11

211 Supply Cost per CMI Adjusted Discharges (1) YTD: -6.0% under budget Mountain View YTD: -4.4% under budget Los Gatos 11 (1) Hospital entity only, excludes controlled affiliates Page 212/243 12

212 Mountain View LOS & CMI Trend (1) Medicare: Due to DRG reimbursement, financial results usually improve with decreased LOS and increased CMI Non-Medicare: Reimbursement varies; financial results usually improve when both LOS & CMI increase (1) Hospital entity only, excludes controlled affiliates Page 213/243 All data excludes normal newborns (MS-DRG=795), Medicare data excludes Medicare HMOs and PPOs 13

213 Los Gatos LOS & CMI Trend (1) Medicare: Due to DRG reimbursement, financial results usually improve with decreased LOS and increased CMI Non-Medicare: Reimbursement varies; financial results usually improve when both LOS & CMI increase (1) Hospital entity only, excludes controlled affiliates Page 214/243 All data excludes normal newborns (MS-DRG=795), Medicare data excludes Medicare HMOs and PPOs 14

214 El Camino Hospital (1) Results from Operations vs. Prior Year 2 months ending 8/31/2013 (1) Hospital entity only, excludes controlled affiliates Page 215/243 15

215 El Camino Hospital Mountain View Results from Operations vs. Prior Year 2 months ending 8/31/2013 (1) (1) Hospital entity only, excludes controlled affiliates Page 216/243 16

216 El Camino Hospital Los Gatos Results from Operations vs. Prior Year 2 months ending 8/31/2013 1(1) (1) Hospital entity only, excludes controlled affiliates Page 217/243 17

217 El Camino Hospital Results from Operations vs. Budget 2 months ending 8/31/2013 (1) 1 (1) Hospital entity only, excludes controlled affiliates Page 218/243 18

218 El Camino Hospital Mountain View Results from Operations vs. Budget 2 months ending 8/31/2013 (1) (1) Hospital entity only, excludes controlled affiliates Page 219/243 19

219 El Camino Hospital Los Gatos Results from Operations vs. Budget 2 months ending 8/31/2013 (1) (1) Hospital entity only, excludes controlled affiliates Page 220/243 20

220 El Camino Hospital Balance Sheet ($ Thousands) (1) 1 (1) Hospital entity only, excludes controlled affiliates Page 221/243 21

221 Page 222/243 22

222 Page 223/243 23