SKAGIT COUNTY PUBLIC HOSPITAL DISTRICT NO. 2 DBA ISLAND HOSPITAL FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2015 AND 2014

Transcription

1 SKAGIT COUNTY PUBLIC HOSPITAL DISTRICT NO. 2 DBA ISLAND HOSPITAL FINANCIAL STATEMENTS YEARS ENDED

2 TABLE OF CONTENTS YEARS ENDED INDEPENDENT AUDITORS REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS 3 FINANCIAL STATEMENTS STATEMENTS OF NET POSITION 10 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION 12 STATEMENTS OF CASH FLOWS 13 NOTES TO FINANCIAL STATEMENTS 15

3 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT Board of Commissioners Skagit County Public Hospital District No. 2 dba Island Hospital Anacortes, Washington Report on the Financial Statements We have audited the accompanying financial statements of Skagit County Public Hospital District No. 2 dba Island Hospital (the Hospital), which comprise the statements of net position as of December 31, 2015 and 2014, 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 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. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. An independent member of Nexia International (1)

4 Board of Commissioners Skagit County Public Hospital District No. 2 dba Island Hospital Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Skagit County Public Hospital District No. 2 dba Island Hospital as of December 31, 2015 and 2014, and the changes in its 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 Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis information on pages 3 through 9 be presented to supplement the basic financial statements. Such information, although not a part of the financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the 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. CliftonLarsonAllen LLP Bellevue, Washington April 28, 2016 (2)

5 MANAGEMENT S DISCUSSION AND ANALYSIS Using this Annual Report The Hospital s consolidated financial statements consist of three statements statements of net position; statements of revenues, expenses, and changes in net position; and statements of cash flows. These financial statements and related notes provide information about the activities of the Skagit County Public Hospital District No. 2 doing business as Island Hospital (the Hospital) including resources held by the Hospital but restricted for specific purposes by contributors, grantors, or enabling legislation. Statements of Net Position and Statements of Revenues, Expenses, and Changes in Net Position Our analysis of the Hospital s finances begins on page 4. One of the most important questions asked about the Hospital s finances is, Is the Hospital as a whole better or worse off as a result of the year s activities? The statements of net position and the statements of revenues, expenses, and changes in net position report information about the Hospital s resources and its activities in a way that helps answer this question. These statements include all restricted and unrestricted assets and all liabilities using the accrual basis of accounting. All of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. Those two statements report the Hospital s net position and changes in net position. You can think of the Hospital s net position the difference between assets and liabilities as one way to measure the Hospital s financial health or financial position. Over time the increases or decreases in the Hospital s net position are one indicator of whether the financial health is improving or deteriorating. You will need to consider other nonfinancial factors, however, such as changes in the Hospital s patient base and measures of the quality of service it provides to the community, as well as local economic factors to assess the overall health of the Hospital. Statements of Cash Flows The final required statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing, and financing activities. It also describes the sources and uses of cash during the reporting period. Introduction The discussion and analysis of the Hospital financial performance provides an overview of the financial activities for the years ended December 31, 2015 and The financial statements and notes are to be read in conjunction with this section. The following narrative utilizes approximate amounts unless otherwise specified. (3)

6 MANAGEMENT S DISCUSSION AND ANALYSIS Financial Highlights For the fiscal year ended December 31, 2015, the Hospital reported net operating gain of $1,029,405 and excess of revenues over expenses before capital contributions of $2,791,440, a margin of 3 percent. This compares to respective amounts in 2014 of a net operating gain of $1,472,371, excess of revenues over expenses of $2,784,617 and a margin of 3.3 percent. The following significant events had an impact on the operating results for the Hospital: In November 2008, the Hospital entered into an agreement with Skagit Valley Hospital and United General Hospital to form Medical Information Network-North Sound to develop, implement, and maintain an electronic health record system for health care providers in Skagit County. Initial funding for this corporation came from a $50,000 grant received from the Health Care Authority and subsequent funding will be shared by the three hospitals equally. United General Hospital withdrew from the agreement in In 2010 the Hospital received an additional grant of $85,000 for this project. In 2014 the Hospital received another grant in the amount of $900,000 of which will be paid over 3 years. In 2015 and 2014, $338,673 and $190,742, respectively, was requested to reimburse MIN-NS. In addition the Hospital contributed $360,950 in 2015, $383,298 in 2014, $379,655 in 2013, $281,557 in 2012, $133,088 in 2011, and $230,333 in 2010 for its share of the operating costs. In 2008 the Hospital acquired the Zap Tune property and in January 2009 acquired the old KLKI radio station property. In December 2010 the Hospital entered into a construction contract with Lydig Construction to build the Medical Arts Pavilion on these parcels as well as other land already owned by the Hospital. In June 2011 a new entity, Island Hospital Medical Properties, was created by the Hospital to hold and own the building. In August 2011, Island Hospital Medical Properties completed financing arrangements for the Medical Arts Pavilion utilizing the federal New Market Tax Credit program. The Hospital has entered into an agreement to lease the land to Island Hospital Medical Properties. The Hospital has also entered into a lease agreement with Island Hospital Medical Properties to lease the building for an annual lease amount of $545,000. Services housed in this new building include an expanded Cancer Care Center, Physical Therapy, and Wound Care. Construction was completed in December 2011 and the building opened for business January In August 2011, the Hospital entered into a Lease and Services Agreement with Orcas Medical Foundation. The Hospital agreed to lease the 6,000 square foot facility and Orcas Medical Foundation contracted with Island Hospital to operate and manage the primary care medical facility with federal rural health clinic status. The Orcas Medical Foundation has committed to provide grant funding to support the operation of the clinic up to annual maximum amounts of $200,000 for 2012 and 2011, with decreasing annual caps starting in In 2015 and 2014, Orcas Medical Foundation provided support in the amount of $70,000 and $120,000, respectively. In June 2012, the medical center received federal rural health clinic status and in December received notification of the encounter rate based upon the 2011 cost report. (4)

7 MANAGEMENT S DISCUSSION AND ANALYSIS Financial Highlights (Continued) In October 2011, the Hospital entered into a refundable grant agreement in support of professional urology services in Skagit County with Skagit Valley Hospital. The grant calls for an initial grant of $107,000 which was paid in 2011, and an additional $227,000 for the first year of the agreement defined as November 1, 2011 to October 31, Additional grant funding is determined by a set formula in the agreement based upon the financial performance of the clinic. Additional grant funding was requested in 2015 and 2014 of $280,721. The Hospital submitted an application to the Office of Management and Budget (OMB) of the United States of America requesting a reclassification from the Mount Vernon-Anacortes MSA to the Seattle-Tacoma-Olympia CSA for purposes of increasing reimbursement from the Medicare program. The application was approved by OMB in December 2006 and approved by the Medicare Geographic Review Board in February The Hospital received extensions in subsequent periods that are effective thru September 30, The Hospital received $500,000 in 2010 and $100,000 from 2011 through 2015 from the Island Hospital Foundation for the purpose of funding the Medical Arts Pavilion with a commitment to receive $100,000 per year through The Hospital also received $2,500 in 2015, $115,000 in 2014, $113,472 in 2013, $148,910 in 2012, $144,200 in 2011, and $135,655 in 2010 from the Foundation for other capital equipment, as well as $260,917 in 2015, $202,028 in 2014, $175,853 in 2013, $241,851 in 2012, $86,700 in 2011, and $90,900 in 2010 for other programs in the Hospital. In November 2014 $9,190,000 refunding bonds were issued for the advance refunding of the District s outstanding Limited Tax General Obligation Bonds, 2005 plus $2,900,000 in additional bonds. Moody s gave the 2014 Refunding bonds a rating of A2. Over the term of the refunded bonds, the District will save taxpayers an estimated $800,000. In 2014, 2013, and 2012, the Hospital applied for and received federal Medicare Meaningful Use under the Health Information Technology for Economic and Clinical Health Act in the amount of $639,648, $1,052,007, and $1,176,766, respectively. The Hospital also applied for and received in 2014 and 2012 state Medicaid Meaningful use funds in the amount of $380,216 and $336,345, respectively. In September 2013, the Hospital purchased the property at 2520 Commercial Avenue for future expansion plans. The Hospital leased the property back to the former owner under a 3-year lease term. In April 2014, the Hospital entered into an Accountable Care Network (ACN) with UW Medicine. The ACN is currently an option for Boeing beneficiaries and UW is hoping to offer their product on a broader scale. (5)

8 MANAGEMENT S DISCUSSION AND ANALYSIS Statements of Revenues, Expenses, and Changes in Net Position The following table summarizes the operating results of the Hospital for the years ended December 31, 2015, 2014, and 2013: (Dollars in Thousands) Net Patient Service Revenue $ 92,440 $ 82,360 $ 79,279 Other Operating Revenue 971 1,878 1,838 Total Operating Revenues 93,411 84,238 81,117 Salaries, Wages, and Benefits 49,160 46,396 45,747 Professional Fees 6,173 6,319 6,485 Supplies 21,219 15,206 14,505 Purchased Services 8,682 7,927 7,697 Depreciation 3,916 4,105 4,203 Other Expenses 3,232 2,812 3,002 Operating Expenses 92,382 82,765 81,639 Operating Gain (Loss) 1,029 1,472 (522) Nonoperating Revenue and Expenses 1,762 1,312 1,449 Excess of Revenues over Expenses 2,791 2, Contributions for Capital Change in Net Position 2,895 3,107 1,140 Total Net Position, Beginning of Year 49,171 46,064 44,924 Total Net Position, End of Year $ 52,066 $ 49,171 $ 46,064 Sources of Revenue Net patient service revenue for 2015 increased $10.1 million or 12.2 percent from This was a result of increases in surgery and outpatient volumes and a decrease in bad debt. Net patient service revenue for 2014 increased $3.0 million or 3.9 percent from Patient service revenues are reported net of contractual adjustments with Medicare, Medicaid, and other third-party payers. The collection percentage for the Hospital decreased from 43 percent in 2014 to 42 percent in 2015 due to a decrease in commercial insurance payments, increase in Medicaid, lower inpatient volumes and higher outpatient volumes. (6)

9 MANAGEMENT S DISCUSSION AND ANALYSIS Sources of Revenue (Continued) The following table shows the percentage of revenue by payer class based upon total patient revenue for the years ended December 31, 2015 and Description Change 2013 Medicare (Including MGH) 52.8 % 50.3 % 2.5 % 50.5 % Medicaid (1.9) 9.8 Other Government Commercial Insurances (1.3) 29.5 Self-Pay (0.6) % % % In 2015, Medicare, including Medicare managed care dollars, increased 2.5 percent; Medicaid, including Healthy Options, decreased 1.9 percent; Government payers increased 1.3 percent, commercial payers decreased 1.3 percent and self-pay decreased 0.6 percent. In 2014, Medicare, including Medicare managed care dollars, decreased 0.2 percent; Medicaid, including Healthy Options, increased 3.9 percent; Government payers decreased 0.8 percent, Commercial payers decreased 2.5 percent and self-pay decreased 2 percent. In 2015, bad debt expense decreased 33 percent and charity write-offs decreased 61 percent over the 2014 amounts. In 2014, bad debt expense decreased 36 percent and charity write-offs decreased 50 percent over the 2013 amounts. Operating Expenses Total operating expenses in 2015 increased $9.6 million (11.6 percent) over 2014 compared to an increase in 2014 of $1.1 million (1.4 percent) over The increase for 2015 was in all categories except professional fees and depreciation. Salaries, Wages, and Benefits increased by 6 percent compared to 2014 as a result of collective bargaining agreements, annual wage adjustments and increases in benefit costs. Total FTE s increased by 22 to a total of 540 in Professional fees expense decreased 2.3 percent in 2015 compared to Professional fees expense decreased 2.6 percent in 2014 due to fewer consulting fees. Purchased Services increased 9.5 percent compared to 2014 due to increased volumes at the wound center, increased computer maintenance service costs and increased use of contract labor. Supplies increased 40% due to increased orthopedic surgery volumes and increased drug costs related to the oncology clinic. (7)

10 MANAGEMENT S DISCUSSION AND ANALYSIS Operating Expenses (Continued) Depreciation decreased 4.6 percent in 2015 and decreased 2.3 percent 2014 compared to Other expenses increased 14.9 percent in 2015 compared to 2014 due to increase in business and occupation taxes. Statements of Net Position The following table shows the statements of net position as of December 31, 2015, 2014, and 2013: (Dollars in Thousands) Current Assets: Cash and Cash Equivalents $ 26,194 $ 22,470 $ 16,139 Patient Accounts Receivable, Net 10,305 8,039 10,168 Other Current Assets 3,068 3,447 3,203 Total Current Assets 39,567 33,956 29,510 Capital Assets, Net 63,779 65,277 67,022 Other Assets 7,093 9,341 6,716 Deferred Outflows of Resources 1,775 1,903 1,614 Total Assets and Deferred Outflows of Resources $ 112,214 $ 110,477 $ 104,862 Current Liabilities $ 11,105 $ 10,603 $ 9,446 Long-Term Debt, Net 48,192 49,930 48,542 Other Liabilities Total Liabilities 60,147 61,306 58,798 Net Position 52,066 49,171 46,064 Total Liabilities and Net Position $ 112,214 $ 110,477 $ 104,862 Total assets and deferred outflows of resources increased $1.7 million from 2014 and increased $5.6 million from Current liabilities increased $0.5 million from 2015 and increased $1.2 million from Long-term debt decreased as a result of debt payments in 2015 and increased as a result of the Limited Tax General Obligation bond refunding in (8)

11 MANAGEMENT S DISCUSSION AND ANALYSIS Currently Known Facts, Decisions, or Conditions The State of Washington Auditor s Office performed a financial and compliance audit for the year ended December 31, The Hospital was issued a report with no findings. In 2010, the Hospital contracted with DNV Healthcare, Inc. to conduct the accreditation survey and was issued an accreditation certificate on March 19, 2013, which is good through March In March 2014 the Hospital also received ISO Certification through DNV which is good through March The DNV accreditation process requires annual surveys and DNV was on site January 5 through 8, 2016 conducting the annual unannounced survey. The Hospital received their final report of findings and have responded with a corrective action plans to address those findings. The Medicare cost report for 2014 has been filed and is awaiting final review. The cost report for 2015 will be filed in May Contacting the Hospital s Financial Management This financial report is designed to provide our patients, suppliers, taxpayers, and creditors with a general overview of the Hospital s finances and to show the Hospital s accountability for the money it receives. If you have questions about this report or need additional financial information, contact Administration, Skagit County Public Hospital District No. 2, th Street, Anacortes, Washington (9)

12 STATEMENTS OF NET POSITION ASSETS AND DEFERRED OUTFLOWS OF RESOURCES CURRENT ASSETS Cash and Cash Equivalents $ 26,193,877 $ 22,469,578 Patient Accounts Receivable, Net 10,304,827 8,038,849 Other Receivables 462, ,091 Inventories 1,488,725 1,475,354 Prepaid Expenses 928,739 1,090,233 Noncurrent Cash and Investments Required for Current Liabilities 187, ,243 Total Current Assets 39,566,930 33,955,348 NONCURRENT CASH AND INVESTMENTS, Less Current Portion 6,017,788 8,283,934 CAPITAL ASSETS Art 306, ,715 Land 4,708,577 4,708,577 Depreciable Capital Assets, Net 58,344,143 59,706,488 Construction in Progress 419, ,914 Total Capital Assets, Net 63,778,667 65,276,694 OTHER ASSETS Intangible Assets, Net 598, ,703 Purchase Option 476, ,449 Total Other Assets 1,075,152 1,057,152 Total Assets 110,438, ,573,128 DEFERRED OUTFLOWS OF RESOURCES Loss on Refunding of Long-Term Debt 1,775,160 1,903,416 Total Assets and Deferred Outflows of Resources $ 112,213,697 $ 110,476,544 See accompanying Notes to Financial Statements. (10)

13 LIABILITIES AND NET POSITION CURRENT LIABILITIES Current Portion of Long-Term Debt $ 1,641,875 $ 1,841,443 Accounts Payable 4,424,768 4,661,965 Accrued Payroll and Related Liabilities 3,615,548 3,421,569 Accrued Interest 133,957 96,594 Estimated Third-Party Payer Settlements 1,077, ,855 Other Current Liabilities 211, ,142 Total Current Liabilities 11,105,437 10,602,568 LONG-TERM LIABILITIES Long-Term Debt, Less Current Portion 48,191,693 49,929,572 Deferred Compensation Payable 319, ,475 Professional Liability Claims Payable 530, ,202 Total Long-Term Liabilities 49,042,053 50,703,249 Total Liabilities 60,147,490 61,305,817 NET POSITION Net Investment in Capital Assets 13,945,099 13,505,679 Unrestricted 38,121,108 35,665,048 Total Net Position 52,066,207 49,170,727 Total Liabilities and Net Position $ 112,213,697 $ 110,476,544 (11)

14 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION YEARS ENDED OPERATING REVENUES Net Patient Service Revenue $ 92,440,027 $ 82,359,648 Other Operating Revenue 971,316 1,877,795 Total Operating Revenues 93,411,343 84,237,443 OPERATING EXPENSES Salaries and Wages 39,615,669 37,318,884 Employee Benefits 9,544,093 9,077,004 Professional and Physician Fees 6,172,924 6,318,836 Supplies 21,218,912 15,205,949 Purchased Services 8,682,127 7,926,714 Rents and Leases 785, ,998 Depreciation and Amortization 3,916,303 4,105,015 Other Expenses 2,445,947 2,034,672 Total Operating Expenses 92,381,938 82,765,072 OPERATING GAIN 1,029,405 1,472,371 NONOPERATING REVENUE AND EXPENSES Investment Income 69,447 60,517 Interest Expense (1,924,861) (2,048,021) Revenue from Tax Levy 3,236,039 3,141,464 Loss from Investment in Joint Venture (435,900) (626,145) Other Nonoperating Revenues 817, ,431 Total Nonoperating Revenue and Expenses 1,762,035 1,312,246 EXCESS OF REVENUES OVER EXPENSES 2,791,440 2,784,617 Contributions for Capital 104, ,393 Net Position - Beginning of Year 49,170,727 46,063,717 NET POSITION - END OF YEAR $ 52,066,207 $ 49,170,727 See accompanying Notes to Financial Statements. (12)

15 STATEMENTS OF CASH FLOWS YEARS ENDED CASH FLOWS FROM OPERATING ACTIVITIES Receipts from and on Behalf of Patients $ 90,989,463 $ 84,242,470 Payments to Suppliers and Contractors (48,731,466) (40,750,532) Payments to Employees (39,311,563) (36,867,429) Other Receipts and Payments, Net 970,625 1,871,795 Net Cash Provided by Operating Activities 3,917,059 8,496,304 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Other Nonoperating Receipts - Including Contributions 859, ,428 Receipts from Tax Levy - Operations 137, ,666 Net Cash Provided by Noncapital Financing Activities 997, ,094 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital Expenditures (2,168,700) (2,363,878) Receipts from Issuance of Debt - 12,842,738 Cash Paid for Financing Costs - (327,146) Advanced Refunding of 2005 LTGO Bonds - (9,583,417) Principal Payments on Long-Term Debt (1,840,370) (1,802,906) Interest Paid (2,239,097) (2,176,420) Receipts from Tax Levy - Debt Service 3,107,936 3,012,279 Contributions for Capital 104, ,393 Net Cash Used by Capital and Related Financing Activities (3,036,191) (76,357) CASH FLOWS FROM INVESTING ACTIVITIES Interest and Dividends on Investments 51,447 42,517 Capital Contributions for Investment in Joint Venture (435,900) (626,145) Changes in Noncurrent Cash and Investments 2,230,564 (2,503,742) Net Cash Provided (Used) by Investing Activities 1,846,111 (3,087,370) INCREASE IN CASH AND CASH EQUIVALENTS 3,724,299 6,329,671 Cash and Cash Equivalents - Beginning of Year 22,469,578 16,139,907 CASH AND CASH EQUIVALENTS - END OF YEAR $ 26,193,877 $ 22,469,578 See accompanying Notes to Financial Statements. (13)

16 RECONCILIATION OF OPERATING GAIN TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating Gain $ 1,029,405 $ 1,472,371 Adjustments to Reconcile Operating Gain to Net Cash Provided by Operating Activities: Amortization 149,652 59,038 Depreciation 3,921,249 4,096,169 Provision for Bad Debts 1,689,908 2,503,807 (Increase) Decrease in Assets: Patient Accounts Receivable (3,955,886) (374,485) Other Receivables 192,851 (261,355) Inventories (13,371) 12,439 Prepaid Expenses 161,494 (203,648) Increase (Decrease) in Liabilities: Accounts Payable (237,197) 790,314 Accrued Payroll and Payroll Related Expenses 193, ,719 Estimated Third-Party Payer Settlements 622,563 14,855 Deferred Compensation Payable 110, ,735 Professional Liability Claims Payable 52,285 (64,655) Net Cash Provided by Operating Activities $ 3,917,059 $ 8,496,304 NONCASH INVESTING AND FINANCING ACTIVITIES Equipment Obtained under Capital Leases $ 257,008 $ - Obligations Assumed under Capital Leases $ 257,008 $ - Equipment Purchases Remaining in Accounts Payable $ 53,868 $ 55,649 (14)

17 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The financial statements include the accounts of Skagit County Public Hospital District No. 2 dba Island Hospital (the Hospital), located in Anacortes, Washington, and Island Hospital Medical Properties. The Hospital is organized as a municipal corporation pursuant to the laws of the state of Washington. As organized, the Hospital is exempt from federal income tax. The Hospital Board of Commissioners is comprised of five community members elected by local voters to six-year terms. The Hospital is not considered to be a component unit of the County. The Hospital is an acute-care community hospital with 43 licensed beds that provides services for Anacortes and surrounding communities. Island Hospital Medical Properties is a Washington nonprofit corporation organized and operated for the exclusive purpose within the meaning of Internal Revenue Code 501(c)(2) to hold title to property in support of its sole member, Skagit County Public Hospital District No. 2. The application for acquiring the 501(c)(2) status was accepted by the Internal Revenue Service (IRS) in June Island Hospital Medical Properties is a blended component unit of the Hospital, and activity related to Island Hospital Medical Properties is reflected in the financial statements. The Hospital operates four primary care clinics: Anacortes Family Medicine, Lopez Island Medical Center, Fidalgo Medical Associates at Island Hospital, and Orcas Medical Clinic. The Hospital leases the clinic facilities for Lopez Island Medical Center through a management contract with the Catherine Washburn Memorial Association, the facilities for Fidalgo Medical Associates from Challenge Developments, and the facilities for Orcas Medical Clinic from the Orcas Medical Foundation. Total clinic revenue represented approximately 12% and 14% of the Hospital s net patient service revenues in 2015 and 2014, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Presentation The accompanying financial statements have been presented in conformity with accounting principles generally accepted in the United States of America ( generally accepted accounting principles ) in accordance with the American Institute of Certified Public Accountants audit and accounting guide, Health Care Entities, and other pronouncements applicable to health care organizations and guidance from the Governmental Accounting Standards Board (GASB), where applicable. The basic financial statements include all of the accounts of Skagit County Public Hospital District No. 2 and Island Hospital Medical Properties. Intercompany accounts and transactions have been eliminated in consolidation. (15)

18 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Presentation (Continued) The Hospital s statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenue is recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenue in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Cash and Cash Equivalents For purposes of the statements of cash flows, cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less. Patient Accounts Receivable, Net The Hospital provides an allowance for uncollectible self-pay and miscellaneous commercial insurance accounts. Patients are not required to provide collateral for services rendered. Payment for services is required upon receipt of an invoice, after payment by insurance, if any. Self-pay accounts are analyzed for collectability based on the months past due and payment history. An allowance is estimated for these accounts based on the historical experience of the Hospital. Accounts that are determined to be uncollectible are sent to a collection agency and written off at that time. Inventories Inventories consist of medical, surgical, and pharmaceutical supplies, and are stated at the lower of cost (last-in, first-out) or market. Investments Investments in debt and equity securities are reported at fair value except for short-term highly liquid investments that have a remaining maturity at the time they are purchased of one year or less. These investments are carried at amortized cost. Interest, dividends, and gains and losses, both realized and unrealized, on investments in debt and equity securities are included in nonoperating revenues when earned. Noncurrent Cash and Investments Noncurrent cash and investments include assets set aside for future capital improvements or other designated uses over which the Board of Commissioners retains control, and assets restricted by donors or by bond agreements for capital improvements or debt service. (16)

19 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capital Assets The Hospital s capital assets are stated at cost. Donated capital assets are recorded as capital contributions at fair value at the date of donation. Expenditures for maintenance and repairs are charged to operations as incurred; betterments and major renewals are capitalized. When assets are disposed, the related costs and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss is classified in nonoperating revenues or expenses. All capital assets, other than land and art, are being depreciated or amortized (in the case of capital leases), by the straight-line method of depreciation using these asset lives: Land Improvements Buildings and Leasehold Improvements Equipment 15 to 20 Years 13 to 60 Years 3 to 20 Years Intangible Assets Intangible assets include goodwill and restrictive covenants related to the purchase of the Island Radiology practice in January 2004, the purchase of Fidalgo Medical Associates in 2008, and the purchase of Island Surgeons in Goodwill is reviewed annually for impairment. Goodwill is $598,703 as of December 31, 2015 and The value of the restrictive covenants had been fully amortized in prior fiscal years. Investment in Joint Venture The Hospital has an investment in Medical Information Network-North Sound (MIN-NS) to develop, implement, and maintain an electronic health record system for health care providers in Skagit County. The Hospital has a one-half interest in this joint venture. The interest is accounted for using the equity method of accounting. Payments to MIN-NS for future services are recorded as prepaid assets and as of December 31, 2015 and 2014, there were no such balances. The operations of MIN-NS have resulted in a loss in joint venture of $435,900 and $626,145 for the years ended December 31, 2015 and 2014, respectively, and an investment of $-0-. Deferred Outflows of Resources In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and so will not be recognized as an outflow of resources (expense) until then. The Hospital only has one item that qualifies for reporting in this category. It is the loss on refunding of long-term debt in the statement of net position. A loss on refunding of longterm debt results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. Compensated Absences The Hospital s employees earn paid time off for vacation, holidays, and short-term illnesses, at varying rates depending on years of service. The related liability is accrued during the period in which it is earned. (17)

20 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Tax Levy The Hospital received approximately 3.4% and 3.7% of its financial support from property taxes in 2015 and 2014, respectively. These funds were available for the following: Operations $ 137,939 $ 151,666 Debt Service 3,098,100 2,989,798 Total $ 3,236,039 $ 3,141,464 Property taxes are levied by the County on the Hospital s behalf on January 1 and are intended to finance the Hospital s activities of the same calendar year. Amounts levied are based on assessed property values as of the preceding May 31. The state assessed value base of the taxing district of approximately $4.8 billion with a maximum levy rate of and per $1,000 assessed value for the years ended December 31, 2015 and 2014, respectively. The property tax calendar includes these dates: Levy Date January 1 Lien Date January 1 Tax Bill Mailed February 14 First Installment Payment Due April 30 Second Installment Payment Due October 31 Property taxes are considered delinquent on the day following each payment due date and interest must be paid on delinquent taxes. No allowance for uncollectible taxes receivable was considered necessary at the statement of net position dates. Property Taxes The Hospital is permitted to levy an annual expense fund levy upon the taxable property within the district without a vote of the taxpayers. In addition, taxes are levied annually upon the taxable property within the district to service bond principal and interest payments on the 2012, 2004 and 1996 Unlimited Tax General Obligation (UTGO) Bonds. Taxes to finance debt service on these bonds may be levied without limit as to rate and amount. The Hospital records property taxes on the accrual method. Grants and Contributions From time to time, the Hospital receives grants from Skagit County and the state of Washington, as well as contributions from individuals and private organizations. Revenues from grants and contributions may be restricted for either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are restricted for a specific operating purpose are reported as nonoperating revenues. Amounts restricted for capital acquisitions are reported after nonoperating revenues and expenses. (18)

21 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Position The net position of the Hospital is classified in three components. Net position invested in capital assets net of related debt consists of capital assets net of accumulated depreciation and amortization and reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. Restricted net position (expendable and nonexpendable) consists of noncapital assets that must be used for a particular purpose as specified by creditors, grantors, or contributors external to the Hospital. Unrestricted net position is the remaining net position that does not meet the definition of invested in capital assets net of related debt or restricted. When both restricted and unrestricted resources are available for use, it is the Hospital s policy to use restricted resources first, and then unrestricted resources as they are needed. Operating Revenues and Expenses The Hospital s statements of revenues, expenses, and changes in net position distinguish between operating and nonoperating revenues and expenses. Operating revenues result from exchange transactions associated with providing health care services the Hospital s principal activity. Exchange transactions are those in which each party to the transaction receives and gives essentially equal values. Nonexchange revenues, including taxes, grants, and contributions received for purposes other than capital asset acquisition, are reported as nonoperating revenues. Operating expenses are all expenses incurred to provide health care services, other than financing costs. Net Patient Service Revenue Such revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policies 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 net patient service revenue. Foregone revenue for charity care provided during fiscal years 2015 and 2014, measured by the Hospital s standard charges, was $311,603 and $802,119, respectively. (19)

22 NOTES TO FINANCIAL STATEMENTS NOTE 2 DEPOSITS AND INVESTMENTS The Revised Code of Washington (RCW), Chapter 39, authorizes municipal governments to invest their funds in a variety of investments including federal, state, and local government certificates, notes, or bonds; the State of Washington Local Government Investment Pool; savings accounts in qualified public depositories; and certain other investments. State law requires collateralization of all deposits with federal depository insurance or other acceptable collateral. The Hospital s cash on deposit with banks is insured through the Federal Deposit Insurance Corporation up to $250,000 per financial institution. Cash on deposit with the Washington State Local Government Investment Pool and with qualified public depositaries is protected against loss by the state of Washington Public Deposit Protection Commission, as provided for by RCW 39.58, subject to certain limitations. The Skagit County Treasurer acts as the treasurer for certain deposits and investments of the Hospital. Deposits that are not covered by depository insurance are collateralized in the name of the County, and uninsured investments are registered in the name of the County. Cash and cash equivalents consisted of the following at December 31: Cash on Hand $ 4,200 $ 3,800 Bank of America, Payroll Account 4,117 3,157 Washington Federal Bank, Depository Accounts 609, ,632 Skagit County Treasurer's Office 1,238,711 1,375,221 Washington State Local Government Investment Pool 24,337,025 20,538,342 Bank Balances 26,193,877 22,450,152 Reconciling Items - 19,426 Total Cash and Cash Equivalents per Statements of Net Position $ 26,193,877 $ 22,469,578 Noncurrent cash and investments consisted of the following at December 31: Internally Designated by the Board for Future Capital Improvements: Cash and Cash Equivalents $ 161,010 $ 168,646 Accrued Interest 6,164 2,404 Washington State Local Government Investment Pool 151,488 2,708,860 Total 318,662 2,879,910 Restricted, Proceeds of 2004/2012 Unlimited Tax General Obligation and 2005/2014 Limited Tax General Obligation Issues to be Used for Capital Improvements: Cash and Cash Equivalents 139,519 36,178 Washington State Local Government Investment Pool 143, ,379 Total 282, ,557 (20)

23 NOTES TO FINANCIAL STATEMENTS NOTE 2 DEPOSITS AND INVESTMENTS (CONTINUED) Restricted, for the Repayment of 2005 Limited Tax General Obligation Refunding Bonds: Cash and Cash Equivalents $ 58,527 $ 14,260 Washington State Local Government Investment Pool 726, ,411 Total 785, ,671 Restricted, Proceeds of 2014 Limited Tax General Obligation Issues to be Used for Capital Improvements: Washington State Local Government Investment Pool 2,458,852 2,623,140 Restricted for the Repayment of New Market Tax Credit Loans: Cash and Cash Equivalents 2,045,319 1,708,934 Restricted, under Deferred Compensation Arrangements: Investments in Mutual Funds 315, ,966 Total Noncurrent Cash and Investments 6,205,613 8,436,178 Less: Current Portion 187, ,244 Noncurrent Cash and Investments, Less Current Portion $ 6,017,788 $ 8,283,934 Cash and cash equivalents included in noncurrent cash and investments are not considered cash and cash equivalents for purposes of presenting cash flows. NOTE 3 ACCOUNTS RECEIVABLE The Hospital has a concentration of credit risk with respect to unsecured patient accounts receivable. The majority of the Hospital s patients are local residents and are insured under third-party payer agreements. Patient accounts receivable at December 31 consisted of the following: Receivable from Patients and Their Insurance Carriers $ 5,965,394 $ 4,767,196 Receivable from Medicare 4,033,049 2,834,506 Receivable from Medicaid 1,033,986 1,020,597 Total Patient Accounts Receivable 11,032,429 8,622,299 Less: Allowance for Doubtful Accounts 727, ,450 Patient Accounts Receivable, Net $ 10,304,827 $ 8,038,849 (21)

24 NOTES TO FINANCIAL STATEMENTS NOTE 4 CAPITAL ASSETS Capital asset additions, retirements, and balances for the years ended December 31, 2015 and 2014 were as follows: Balance Balance December 31, December 31, 2014 Additions Transfers Retirements 2015 Land $ 4,708,577 $ - $ - $ - $ 4,708,577 Art 300,715 5, ,204 Land Improvements 2,121,761 11, ,132,886 Buildings and Leasehold Improvements 69,428,301 3, ,951-69,610,903 Fixed Equipment 8,216, ,294 (18,933) 8,733,411 Major Moveable Equipment 26,805,209 1,808,269 23,100 (493,813) 28,142,765 Construction in Progress 560, ,174 (738,345) - 419,743 Total Historical Cost 112,141,527 2,425,708 - (512,746) 114,054,489 Less: Accumulated Depreciation: Land Improvements (1,302,719) (101,440) - - (1,404,159) Buildings and Leasehold Improvements (18,931,563) (1,502,644) - - (20,434,207) Fixed Equipment (5,544,387) (456,238) - 11,684 (5,988,941) Major Moveable Equipment (21,086,164) (1,834,632) - 472,281 (22,448,515) Total Accumulated Depreciation (46,864,833) (3,894,954) - 483,965 (50,275,822) Total Capital Assets, Net $ 65,276,694 $ (1,469,246) $ - $ (28,781) $ 63,778,667 Balance Balance December 31, December 31, 2013 Additions Transfers Retirements 2014 Land $ 4,708,577 $ - $ - $ - $ 4,708,577 Art 293,781 6, ,715 Land Improvements 2,121, ,121,761 Buildings and Leasehold Improvements 68,769, ,693-69,428,301 Fixed Equipment 8,234, (18,782) 8,216,050 Major Moveable Equipment 25,922,904 1,267, ,286 (577,702) 26,805,209 Construction in Progress 329,170 1,082,723 (850,979) - 560,914 Total Historical Cost 110,380,133 2,357,878 - (596,484) 112,141,527 Less: Accumulated Depreciation: Land Improvements (1,204,551) (98,168) - - (1,302,719) Buildings and Leasehold Improvements (17,414,996) (1,516,567) - - (18,931,563) Fixed Equipment (5,148,923) (414,246) - 18,782 (5,544,387) Major Moveable Equipment (19,589,845) (2,052,437) - 556,118 (21,086,164) Total Accumulated Depreciation (43,358,315) (4,081,418) - 574,900 (46,864,833) Total Capital Assets, Net $ 67,021,818 $ (1,723,540) $ - $ (21,584) $ 65,276,694 Construction in progress consists of various small improvement projects within the Hospital. (22)

25 NOTES TO FINANCIAL STATEMENTS NOTE 5 LONG-TERM DEBT AND OTHER NONCURRENT LIABILITIES Changes in the Hospital s noncurrent liabilities for the years ended December 31, 2015 and 2014 are as follows: Balance Balance December 31, December 31, Amounts Due 2014 Additions Reductions 2015 Within 1 Year Long-Term Debt: 2011 Revenue Bond $ 177,996 $ - $ (177,996) $ - $ Refunding UTGO Bonds 25,980,000 - (1,130,000) 24,850,000 1,180, Refunding LTGO Bonds 11,770,000 (375,000) 11,395, ,000 NDC CDE Loan A 5,373, ,373,200 - NDC CDE Loan B 1,770, ,770,800 - Kitsap CDE Loan C 2,121, ,121,000 - Kitsap CDE Loan D 729, ,000 - Capital Leases 179, ,008 (157,374) 278,645 61,875 Subtotal 48,101, ,008 (1,840,370) 46,517,645 1,641,875 Unamortized Premiums 3,670,008 - (354,085) 3,315,923 - Total Long-Term Debt 51,771, ,008 (2,194,455) 49,833,568 1,641,875 Other Noncurrent Payables: Deferred Compensation 295,475 46,329 (21,931) 319,873 - Professional Liability Claims 478,202 52, ,487 - Total Other Noncurrent Payables 773,677 98,614 (21,931) 850,360 - Total Noncurrent Liabilities $ 52,544,692 $ 355,622 $ (2,216,386) $ 50,683,928 $ 1,641,875 Balance Balance December 31, December 31, Amounts Due 2013 Additions Reductions 2014 Within 1 Year Long-Term Debt: 2004 UTGO Bonds $ 975,000 $ - $ (975,000) $ - $ LTGO Bonds 9,190,000 - (9,190,000) Revenue Bond 436,728 - (258,732) 177, , Refunding UTGO Bonds 26,045,000 - (65,000) 25,980,000 1,130, Refunding LTGO Bonds - 12,090,000 (320,000) 11,770, ,000 NDC CDE Loan A 5,373, ,373,200 - NDC CDE Loan B 1,770, ,770,800 - Kitsap CDE Loan C 2,121, ,121,000 - Kitsap CDE Loan D 729, ,000 - Capital Leases 434,297 - (255,286) 179, ,447 Subtotal 47,075,025 12,090,000 (11,064,018) 48,101,007 1,841,443 Unamortized Premiums 3,341, ,738 (423,941) 3,670,008 - Total Long-Term Debt 50,416,236 12,842,738 (11,487,959) 51,771,015 1,841,443 Other Noncurrent Payables: Deferred Compensation 267,480 54,885 (26,890) 295,475 - Professional Liability Claims 542,857 - (64,655) 478,202 - Total Other Noncurrent Payables 810,337 54,885 (91,545) 773,677 - Total Noncurrent Liabilities $ 51,226,573 $ 12,897,623 $ (11,579,504) $ 52,544,692 $ 1,841,443 (23)

26 NOTES TO FINANCIAL STATEMENTS NOTE 5 LONG-TERM DEBT AND OTHER NONCURRENT LIABILITIES (CONTINUED) Long-Term Debt The terms and due dates of the Hospital s long-term debt at December 31, 2015 and 2014 follows: Unlimited tax general obligation bonds of $30,500,000, dated October 15, 2004, were issued to pay for a portion of the costs of a $40,000,000 project to remodel and expand the Hospital s emergency room; construct, furnish, and equip new flexible-use inpatient rooms; relocate and expand the Hospital s ancillary services such as radiology and laboratory; and make other related capital improvements. The unlimited tax general obligation bonds dated September 26, 2012 were issued to advance refund $26,730,000 of the 2004 unlimited tax general obligation bonds. As of September 26, 2012, $2,680,000 of the 2004 unlimited tax general obligation bonds remained. The remaining bonds were paid off in As part of the advance refunding issued on September 26, 2012, a loss on refunding was incurred, considering the refunding of the 2004 bonds, actual cash received as part of the issuance, and unamortized premiums and issuance costs related to the 2004 and 2012 bonds. The loss on refunding of $2,070,898 is amortized using the effective interest rate method through Limited tax general obligation bonds of $10,995,000, dated November 15, 2005, were issued to pay for a portion of the costs of expanding the Hospital s facilities and to advance refund the 1996 limited tax general obligation bonds. A portion of the bond proceeds ($3,322,736) was transferred to Bank of New York to be held in escrow to pay the remaining principal balance and accrued interest related to the 1996 limited tax general obligation bonds on January 2, The limited tax general obligation bonds dated November 11, 2014 were issued to advance refund all of the 2005 limited tax general obligation bonds. As part of the advance refunding issued on November 11, 2014, a loss on refunding was incurred, considering the refunding of the 2005 bonds, actual cash received as part of the issuance, and unamortized premiums and issuance costs related to the 2005 and 2014 bonds. The loss on refunding of $393,417 is amortized using the effective interest rate method through The Hospital issued a revenue bond dated August 22, 2011, for the purpose of financing the payoff of the Whidbey Island revenue bond. The bond is payable over a four-year period, in monthly payments of $22,691 commencing September 1, 2011, including interest at 4.2%, to Washington Federal bank, the bondholder. (24)