Southwestern Illinois Health Facilities, Inc. d/b/a Anderson Hospital

Transcription

1 Accountants Report and Consolidated Financial Statements

2 Contents Independent Accountants Report... 1 Consolidated Financial Statements Balance Sheets... 2 Statements of Operations... 3 Statements of Changes in Net Assets... 4 Statements of Cash Flows... 5 Notes to Financial Statements... 6 Independent Accountants Report on Supplementary Information Supplementary Information 2011 Consolidated Balance Sheet With Consolidating Information Consolidated Statement of Operations With Consolidating Information... 31

3 K CPAs & Advisors LLP One Metropolitan Square 211 N. Broadway, Suite 600 St. Louis, MO Fax Independent Accountants Report Board of Trustees Southwestern Illinois Health Facilities, Inc. Maryville, Illinois We have audited the accompanying consolidated balance sheets of Southwestern Illinois Health Facilities, Inc. (the Hospital ) as of, and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Hospital s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwestern Illinois Health Facilities, Inc. as of, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, in 2011, the Hospital changed its method of presentation and disclosure of patient service revenue, provision for uncollectible accounts and the allowance for doubtful accounts in accordance with Accounting Standards Update March 28, 2012 experience BKD Prsxitx: MEMBER GLOBAL ALLIANCE OF INDEPENDENT FIRMS

4 Consolidated Balance Sheets Assets Current Assets Cash $ 1,712,610 $ 4,521,006 Shortterm investments 3,763, ,780 Assets limited as to use current 4,175,113 4,445,761 Patient accounts receivable, net of allowance; 2011 $8,059,000, 2010 $7,826,000 18,844,610 12,560,830 Supplies 2,077,016 2,137,769 Prepaid expenses and other 4,725,818 3,590,650 Total current assets 35,298,511 28,086,796 Assets Limited As To Use Internally designated for capital improvements 6,184,448 6,165,305 Selfinsurance trust 13,760,340 14,572,633 Restricted under bond indenture 1,364,795 4,298,858 21,309,583 25,036,796 Less amount required to meet current obligations 4,175,113 4,445,761 17,134,470 20,591,035 Longterm Investments 17,759,880 25,100,555 Property and Equipment, At Cost Land 673, ,013 Land improvements 2,569,752 2,408,594 Buildings 89,044,043 79,819,486 Equipment 37,129,423 37,121,372 Construction in progress 4,016,745 1,379, ,432, ,401,915 Less accumulated depreciation 61,250,702 60,257,735 72,182,274 61,144,180 Other Assets 7,199, ,690 Total assets $ 149,574,432 $ 135,840,256 See

5 Liabilities and Net Assets Current Liabilities Current maturities of longterm debt $ 1,506,861 $ 1,028,861 Accounts payable 3,743,003 2,315,597 Accrued expenses 8,237,285 7,285,401 Estimated amounts due to thirdparty payers 3,702,410 3,882,586 Estimated selfinsurance costs current 3,470,000 2,856,000 Other 1,063,004 1,432,268 Total current liabilities 21,722,563 18,800,713 Estimated Selfinsurance Costs 17,415,000 13,435,000 Longterm Debt 40,469,740 33,857,285 Total liabilities 79,607,303 66,092,998 Net Assets Unrestricted 69,627,468 69,248,236 Temporarily restricted 339, ,022 Total net assets 69,967,129 69,747,258 Total liabilities and net assets $ 149,574,432 $ 135,840,256 2

6 Consolidated Statements of Operations Years Ended (As Restated) Unrestricted Revenues, Gains and Other Support Patient service revenue (net of contractual discounts and allowances) $ 132,440,674 $ 130,917,763 Provision for uncollectible accounts (8,371,860) (9,769,535) Net patient service revenue less provision for uncollectible accounts 124,068, ,148,228 Other 2,291,686 2,162,196 Total unrestricted revenues, gains and other support 126,360, ,310,424 Expenses Salaries and wages 45,492,101 43,410,025 Employee benefits 11,181,024 11,611,787 Purchased services and professional fees 20,874,561 20,452,355 Supplies and other 39,793,197 38,519,843 Depreciation and amortization 6,700,855 5,840,366 Interest 2,100,256 1,910,504 Total expenses 126,141, ,744,880 Operating Income 218,506 1,565,544 Other Income (Expense) Contributions received 505,438 2,507,174 Investment return 101,699 4,444,495 Loss on extinguishment of debt (446,411) Total other income 160,726 6,951,669 Increase in Unrestricted Net Assets $ 379,232 $ 8,517,213 See 3

7 Consolidated Statements of Changes in Net Assets Years Ended Increase in Unrestricted Net Assets $ 379,232 $ 8,517,213 Temporarily Restricted Net Assets Contributions received 38, ,832 Net assets released from restriction (198,305) (340,427) Decrease in temporarily restricted net assets (159,361) (101,595) Change in Net Assets 219,871 8,415,618 Net Assets, Beginning of Year 69,747,258 61,331,640 Net Assets, End of Year $ 69,967,129 $ 69,747,258 See 4

8 Consolidated Statements of Cash Flows Operating Activities Change in net assets $ 219,871 $ 8,415,618 Items not requiring (providing) cash Depreciation and amortization 6,700,855 5,840,366 Net (gains) losses on investments 1,391,667 (3,126,573) Loss on extinguishment of debt 446,411 Loss on disposal of property and equipment 204, ,327 Change in accrued selfinsurance costs 2,380,000 2,997,000 Changes in Patient accounts receivable, net (6,283,780) 351,858 Estimated amounts due from and to thirdparty payers (180,176) 342,586 Supplies and prepaid expenses (511,727) (2,067,897) Accounts payable and accrued expenses 2,767,858 2,625,444 Other current assets and liabilities (529,264) 21,077 Net cash provided by operating activities 6,605,783 15,581,806 Investing Activities Purchase of investments (48,432,349) (18,672,203) Proceeds from disposition of investments 55,176,006 13,945,833 Purchase of property and equipment (18,300,424) (7,799,669) Proceeds from disposal of property and equipment 150,016 22,000 Purchase of other assets (5,000,000) Net cash used in investing activities (16,406,751) (12,504,039) Financing Activities Proceeds from issuance of longterm debt 28,438,920 Principal payments on longterm debt (21,446,348) (971,466) Net cash provided by (used in) financing activities 6,992,572 (971,466) Increase (Decrease) in Cash (2,808,396) 2,106,301 Cash, Beginning of Year 4,521,006 2,414,705 Cash, End of Year $ 1,712,610 $ 4,521,006 Supplemental Cash Flows Information Interest paid $ 2,588,844 $ 1,912,586 Property and equipment included in accounts payable $ 44,731 $ 454,301 See 5

9 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Southwestern Illinois Health Facilities, Inc. (the Hospital ) is an Illinois notforprofit corporation that primarily earns revenues by providing inpatient, outpatient and emergency care services to patients in Maryville, Illinois and surrounding areas. In addition, the Hospital is the sole member of Maryville Medical Services, LLC ( MMS ), an Illinois limited liability corporation established to employ and provide billing for anesthesia services provided by nurse anesthetists. Effective March 1, 2010, MMS terminated all contracts for nurse anesthetists and subsequently ended all billing for anesthesia services. The Hospital was also the sole shareholder of Maryville Physician Services, Inc. ( MPS, Inc. ), an Illinois forprofit corporation that contracts for various physician services and provides the related billing for these services. On October 21, 2010, the Hospital created Maryville Physician Services, LLC ( MPS ). Effective December 31, 2010, MPS, Inc. was merged into MPS with MPS being the surviving entity. In January 2011, the Hospital established the Anderson Hospital Foundation (the Foundation ), an Illinois notforprofit corporation, with a generous gift from the late Hermilda Listeman, a Collinsville resident. The Foundation offers such donor opportunities as endowments, planned giving, charitable gift annuities, grants, memorials, bequests, naming rights, annual campaigns and future capital campaigns. In March 2011, the Hospital incorporated Anderson Real Estate, LLC ( Anderson Real Estate ), an Illinois notforprofit corporation. The Hospital is the sole member of Anderson Real Estate which was established for future real estate transactions and holdings. In July 2011, the Hospital entered into an asset purchase agreement to purchase a freestanding outpatient diagnostic imaging center located in Maryville, Illinois, formerly known as the Imaging Center of Southern Illinois. Upon acquisition of the assets, the Hospital incorporated, and is the sole member of, Maryville Imaging, LLC ( Maryville Imaging ), an Illinois notforprofit corporation, which began operating in October Principles of Consolidation The consolidated financial statements include the accounts of the Hospital, MMS, MPS, Maryville Imaging, Anderson Real Estate and the Foundation. All significant intercompany accounts and transactions have been eliminated in consolidation. 6

10 Change in Accounting Principle In 2011, the Hospital changed its method of presentation and disclosure of patient service revenue, provision for uncollectible accounts and the allowance for doubtful accounts in accordance with Accounting Standards Update (ASU) , Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities. The major changes associated with ASU are to reclassify the provision for uncollectible accounts related to patient service revenue to a deduction from patient service revenue and to provide enhanced disclosures around the Hospital s policies related to uncollectible accounts. The change had no effect on prior year change in net assets. The following financial statement line items for fiscal years 2011 and 2010 were affected by the change in accounting principle: As Computed Under Previous Guidance 2011 Statement of Operations As Computed Under ASU Effect of Change Net patient service revenue $ 132,440,674 $ 124,068,814 $ (8,371,860) Total net revenues $ 134,732,360 $ 126,360,500 $ (8,371,860) Total operating expenses $ 134,513,854 $ 126,141,994 $ (8,371,860) 2010 Statement of Operations As Previously Reported As Restated Effect of Change Net patient service revenue $ 130,917,763 $ 121,148,228 $ (9,769,535) Total net revenues $ 133,079,959 $ 123,310,424 $ (9,769,535) Total operating expenses $ 131,514,415 $ 121,744,880 $ (9,769,535) Use of Estimates The preparation of 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7

11 Cash Effective July 21, 2010, the FDIC s insurance limits were permanently increased to $250,000. At December 31, 2011, the Hospital s interestbearing cash accounts exceeded federally insured limits by approximately $2,970,000. Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterestbearing transaction accounts beginning December 31, 2010 through December 31, 2012, as all FDICinsured institutions. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are valued at the lower of cost or fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the consolidated statements of operations and changes in net assets as unrestricted. Assets Limited as to Use Assets limited as to use include assets set aside by the board of trustees for future capital improvements over which the board retains control and may at its discretion subsequently use for other purposes, assets held by trustee under bond indenture agreements and a selfinsurance trust arrangement. Amounts required to meet current liabilities of the Hospital are included in current assets. Patient Accounts Receivable Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Hospital analyzes its past history and identifies trends for each of its major payer sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have thirdparty coverage, the Hospital analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the thirdparty payer has not yet paid, or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely). 8

12 For receivables associated with selfpay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which thirdparty coverage exists for part of the bill), the Hospital records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated or provided by policy) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Hospital s allowance for doubtful accounts for selfpay patients decreased from 93% of selfpay accounts receivable at December 31, 2010, to 88% of selfpay accounts receivable at December 31, In addition, the Hospital s writeoffs decreased approximately $1,800,000 from approximately $12,000,000 for the year ended December 31, 2010, to approximately $10,200,000 for the year ended December 31, Both decreases were the result of positive trends experienced in the collection of amounts from selfpay patients in fiscal year Supplies The Hospital states supply inventories at the lower of cost, determined using the firstin, firstout method or market. Property and Equipment Property and equipment are depreciated on a straightline basis over the estimated useful life of each asset. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets. Construction in Progress Construction in progress at December 31, 2011, relates to the buildout of the physicians office building, purchase of and renovations to a clinic building and electronic health records hardware and software. The projects are being partially financed through the 2011 Bonds, with the remainder financed through current operations and are anticipated to be complete in Construction in progress at December 31, 2010, related to the renovation of physicians office suites and the addition of anesthesiology equipment awaiting installation. The projects were being financed through current operations and were completed in Contributions Receivable Contributions receivable which are temporarily restricted for future capital improvements amounted to approximately $340,000 and $500,000 at, respectively. Of the total amount receivable at December 31, 2011, approximately $215,000 is due within one year, and the remaining amounts are due within three years. 9

13 Other Assets Other assets consist of longterm receivables, deferred financing related to the incurrence of longterm debt, goodwill and other intangible assets. Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. At December 31, 2011, there was approximately $1,692,000 in goodwill. There was no goodwill at December 31, The carrying basis and accumulated amortization of recognized intangible assets at December 31, 2011, were $3,307,100 and $165,355. There were no intangible assets at December 31, The recognized intangible assets have estimated useful lives of five years. Amortization expense for the year ended December 31, 2011, was approximately $165,000. There was no amortization expense for intangible assets for the year ended December 31, Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Foundation has been limited by donors to a specific time period or purpose. Temporarily restricted net assets are related to contributions receivable at December 31, Net Patient Service Revenue The Hospital has agreements with thirdparty payers that provide for payments to the Hospital at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, thirdparty payers and others for services rendered and include estimated retroactive revenue adjustments. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known. Charity Care The Hospital provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. Employee Health Claims Substantially all of the Hospital s employees are eligible to participate in the Hospital s health insurance plan. The Hospital is selfinsured for health claims of participating employees and dependents up to limits provided for in an agreement with its insurance Plan Administrator. A provision is accrued for selfinsured employee health claims including both claims reported and 10

14 claims incurred but not yet reported. The accrual is estimated based on consideration of prior claims experience, recently settled claims, frequency of claims, and other economic and social factors. It is reasonably possible that the Hospital s estimate will change by a material amount in the near term. Contributions Unconditional promises to give cash and other assets are accrued at estimated fair value at the date each promise is received. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donorrestricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Estimated Malpractice Costs An annual estimated provision is accrued for the selfinsured portion of medical malpractice claims and includes an estimate of the ultimate costs for both reported claims and claims incurred but not reported. Income Taxes The Hospital has been recognized as exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law. However, the Hospital is subject to federal income tax on any unrelated business taxable income and taxable income of MPS, Inc. The Hospital files tax returns in the U.S. federal jurisdiction. With a few exceptions, the Hospital is no longer subject to U.S. federal examinations by tax authorities for years before Guarantee The Hospital guarantees an annual, renewable line of credit for Millenium Consultants, LLC. The initial guarantee term is for a period of three years which began March 1, The Hospital will guarantee up to a maximum amount of $1,500,000; $750,000 for the first year of the initial term, $500,000 for the second year and $250,000 for the third year of the initial term. Should the Hospital be obligated to perform under the guarantee agreement, the Hospital may seek reimbursement from the related organization of amounts expended under the guarantee. There were no outstanding borrowings on the line of credit as of. 11

15 Reclassifications Certain reclassifications have been made to the 2010 consolidated financial statements to conform to the 2011 consolidated financial statement presentation. These reclassifications had no effect on the change in net assets. Note 2: Uncompensated Care and Community Benefit In support of its mission, the Hospital voluntarily provides care to patients at less than its established charges for patients that meet the Hospital s charity care criteria. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported in net patient service revenue. Charges excluded from revenue under the Hospital s charity care policy were $5,329,826 and $4,900,602 for 2011 and 2010, respectively. In addition, the Hospital provides services to other medically indigent patients under certain governmentreimbursed public aid programs. Such programs pay providers amounts which are less than established charges for the services provided to the recipients and many times the payments are less than the cost of rendering the services provided. The Hospital s total cost of uncompensated care relating to these services and other services are as follows: State Medicaid and other public aid programs $ 8,591,174 $ 6,771,196 Less Hospital Medicaid assessment program payments, net of taxes assessed 917, ,000 Uncompensated cost of public aid programs, net 7,674,174 5,821,196 Charity care 1,671,461 1,569,262 Uncollectible accounts 2,534,892 2,974,158 Total costs of uncompensated care $ 11,880,527 $ 10,364,616 The cost of charity care provided is determined by computing a ratio of cost (total operating expense) to gross charges and then multiplying that ratio by the gross uncompensated charges associated with providing care to charity patients. The uncompensated care cost of state Medicaid and other public aid programs is determined by computing the cost of providing that care less amounts paid by the programs. 12

16 In addition to the above cost of uncompensated care, the Hospital also commits significant time and resources to endeavors and critical services which meet otherwise unfilled community needs. Many of these activities are sponsored with the knowledge that they will not be selfsupporting or financially viable. Note 3: Net Patient Service Revenue The Hospital recognizes patient service revenue associated with services provided to patients who have thirdparty payer coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the Hospital recognizes revenue on the basis of its standard rates for services provided. On the basis of historical experience, a significant portion of the Hospital s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Hospital records a significant provision for bad debts related to uninsured patients in the period the services are provided. This provision for bad debts is presented on the statement of operations as a component of net patient service revenue. The Hospital has agreements with thirdparty payers that provide for payments to the Hospital at amounts different from its established rates. These payment arrangements include: Medicare. Inpatient acute care services and substantially all outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. The Hospital is reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by the Hospital and audits thereof by the Medicare Administrative Contractor. Medicaid. Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed at prospectively determined rates. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. The Hospital has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Hospital under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. 13

17 Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the year ended December 31, 2011, was approximately: Medicare $ 34,526,000 Medicaid 10,155,000 Other thirdparty payers 81,750,000 Selfpay 6,010,000 Total $132,441,000 Illinois Hospital Medicaid Assessment Program The state of Illinois enacted legislation that provides for a hospital assessment program intended to qualify for federal matching funds under the Illinois Medicaid program. Under the hospital assessment program, each hospital is assessed tax based on that hospital s adjusted gross hospital revenue. The legislation provides that none of the assessment funds are to be collected and no additional Medicaid payments are to be paid until the program receives the required federal government approval through the federal Centers for Medicare and Medicaid Services. The effects of this program in the statements of operations and changes in net assets for the years ended, are as follows: Additional Medicaid payments included in net patient service revenue $ 4,667,000 $ 4,700,000 Taxes assessed and included in supplies and other $ 3,750,000 $ 3,750,000 The hospital assessment program contains a sunset provision effective June 30, 2013, and there is no assurance the program will not be discontinued or materially modified. 14

18 Note 4: Concentration of Credit Risk The Hospital grants credit without collateral to its patients, most of whom are area residents and are insured under thirdparty payer agreements. The mix of receivables from patients and thirdparty payers at, is: Medicare 15% 23% Medicaid 18% 7% Other thirdparty payers 61% 65% Patients 6% 5% 100% 100% Note 5: Investments and Investment Return Assets Limited as to Use Assets limited as to use include: Internally designated for capital improvements Cash $ 149,348 $ 137,622 Fixed income U.S. governmentsponsored enterprises 1,604,498 1,392,177 U.S. Treasury notes 414, ,555 Corporate bonds 1,341,276 1,315,051 Equity securities Small cap funds 325, ,101 Mid cap funds 387, ,340 Large cap funds 1,343,288 1,342,938 International funds 594, ,702 Interest receivable 24,330 27,819 $ 6,184,448 $ 6,165,305 15

19 Held by trustee under selfinsurance trust Cash $ 593,738 $ 721,149 Fixed income securities Certificates of deposit 893, ,034 Corporate bonds 652,832 1,213,201 Municipal bonds 4,918,105 4,413,534 Preferred stock 2,368 2,362 U.S. governmentsponsored enterprises 98,302 Fixed income mutual funds 269, ,932 Equity Mutual funds Small cap 4,339 Large cap 31,713 International 9,896 Common stock Industrials 538, ,225 Materials 404, ,240 Consumer discretionary 1,357,332 1,181,349 Consumer staples 628, ,937 Energy 327, ,844 Financials 1,232,689 1,297,074 Health care 548, ,197 Information technology 1,044,503 1,086,077 Utilities 157, ,416 Telecommunication services 80,873 55,394 Interest receivable 66,510 68,366 $ 13,760,340 $ 14,572,633 Held by trustee under bond indenture Cash $ 452,017 $ 1,834,880 Fixed income securities U.S. government agency bonds 912, ,944 U.S. Treasury notes 1,830,816 Interest receivable 30 11,218 $ 1,364,795 $ 4,298,858 16

20 Other Investments Other investments include: Cash $ 3,665,153 $ 716,535 Fixed income securities Certificates of deposit 825,826 1,042,707 Corporate bonds 1,470,137 3,222,675 Municipal bonds 5,130,770 5,533,379 Preferred stock 6,275 9,094 U.S. government agency bonds 915, ,046 Fixed income mutual funds 479,242 1,068,444 Equity securities Mutual funds Small cap 71,807 Large cap 518,222 International 158,520 Common stock Industrials 637,490 1,233,814 Materials 542, ,342 Consumer discretionary 1,678,341 2,395,385 Consumer staples 751,926 1,476,943 Energy 425, ,914 Financials 1,810,594 3,102,535 Health care 697,449 1,164,792 Information technology 1,316,436 2,259,932 Utilities 215, ,897 Telecommunication services 108, ,656 Interest receivable 98, ,245 21,523,224 25,931,335 Less longterm investments 17,759,880 25,100,555 Shortterm investments $ 3,763,344 $ 830,780 17

21 Total investment return is comprised of the following: Interest and dividend income $ 1,487,352 $ 1,315,799 Realized gains on sales of securities 1,314, ,571 Realized investment return 2,802,342 1,841,370 Net change in unrealized gains (losses) (2,700,643) 2,603,125 Total investment return $ 101,699 $ 4,444,495 Note 6: Medical Malpractice Claims The Hospital is selfinsured for the first $3,000,000 to $5,000,000 per occurrence and $12,000,000 in aggregate of medical malpractice risks per claim year. The Hospital purchases commercial insurance coverage above the selfinsurance limits. Losses from asserted and unasserted claims identified under the Hospital s incident reporting system are accrued based on estimates that incorporate the Hospital s past experience, as well as other considerations, including the nature of each claim or incident and relevant trend factors. Accrued malpractice losses have been discounted at a rate of 5%. In 2011, the Hospital adopted the provisions of Accounting Standards Update (ASU) , Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, which eliminates the practice of netting claim liabilities with expected insurance recoveries for balance sheet presentation. Claim liabilities are to be determined without consideration of insurance recoveries. Expected recoveries are presented separately. Prior to the adoption of ASU , accounting principles generally accepted in the United States of America required a health care provider to accrue only an estimate of the malpractice claims costs for both reported claims and claims incurred but not reported where the risk of loss had not been transferred to a financially viable insurer. There was no material impact of the ASU adoption to the Hospital s financial statements. Based upon the Hospital s claims experience, an accrual had been made for the Hospital s portion of medical malpractice costs related to its deductible under its malpractice insurance policy, amounting to approximately $2,374,000 as of December 31, It is reasonably possible that this estimate could change materially in the near term. 18

22 Activity in the Hospital s estimated selfinsurance liability is summarized as follows: Balance, beginning of year $ 16,291,000 $ 13,244,000 Current year claims incurred and changes in estimates for claims incurred in prior years 5,919,000 3,342,000 Claims and expenses paid (1,325,000) (295,000) Balance, end of year $ 20,885,000 $ 16,291,000 The provision for medical malpractice claims was based on actuarial estimates of asserted and unasserted claims arising from reported and unreported incidents. It is estimated that $3,470,000 and $2,856,000 of the total estimated claims at, respectively, are expected to be paid in 2012 and 2011, and therefore, classified as a current liability. Note 7: Longterm Debt Note payable, bank (A) $ 464,828 $ 588,972 Revenue Bonds 1999 (B) 20,945,000 Revenue Bonds 2006 (B) 12,685,000 12,935,000 Revenue Bonds 2011 (C) 9,872,796 Revenue Refunding Bonds 2011, Series A (D) 9,219,460 Revenue Refunding Bonds 2011, Series B (D) 9,219,460 41,461,544 34,468,972 Less current maturities 1,506,861 1,028,861 Less original issue discount 1999 Bonds 118,885 Plus original issue premium 2006 Bonds 515, ,059 $ 40,469,740 $ 33,857,285 (A) Note payable, dated November 4, Amount outstanding is due on demand after January 2013, but if demand is not made, monthly payments of $13,137, representing principal and interest at 6.35% are payable monthly through November 4, 2014, with a final payment of all unpaid principal and interest; secured by certain equipment. 19

23 (B) The 1999 Revenue Bonds (the 1999 Bonds ) consist of Southwestern Illinois Development Authority Revenue Bonds in the original amount of $26,320,000 dated April 1, 1999, which bear interest at 5.375% to 5.625%. The 1999 Bonds are payable in annual installments through August 15, The 1999 Bonds were effectively redeemed in December The 2006 Revenue Bonds (the 2006 Bonds ) consist of Southwestern Illinois Development Authority Revenue Bonds in the original amount of $13,750,000 dated December 1, 2006, which bear interest at 5.125%. The 2006 Bonds are payable in annual installments through August 15, All of the 2006 Bonds still outstanding may be redeemed at the Hospital s option on or after February 15, 2017, at par. The Southwestern Illinois Development Authority (the Authority ) issued the 1999 Bonds and 2006 Bonds on behalf of the Hospital. The Bonds are secured by the accounts receivable of the Hospital and the assets restricted under the bond indenture agreement. The 1999 Bonds and 2006 Bonds have not been guaranteed by the Authority. The indenture agreement requires that certain funds be established with the Trustee. Accordingly, these funds are included as assets limited as to use restricted under bond indenture in the consolidated balance sheet. The indenture agreement also requires the Hospital to comply with certain restrictive covenants including minimum insurance coverage, maintaining a historical debtservice coverage ratio of at least 1.15 to 1.00 and restrictions on the incurrence of additional debt. (C) The 2011 Revenue Bonds (the 2011 Bonds ) consist of the Village of Maryville Revenue Bonds in the original amount of $10,000,000 dated August 1, 2011, which bear interest at 4.875%. The 2011 Bonds are payable in annual installments through August 1, All of the 2011 Bonds still outstanding may be redeemed at the Hospital s option at any time. The redemption price is 100%. As of December 31, 2011, no redemptions had been made on these bonds. The Village of Maryville (the Village ) issued the 2011 Bonds on behalf of the Hospital. The Bonds are secured by the accounts receivable of the Hospital and the assets restricted under the bond indenture agreement. The 2011 Bonds have not been guaranteed by the Village. The indenture agreement requires the Hospital to comply with certain restrictive covenants including minimum insurance coverage, maintaining a historical debtservice coverage ratio of at least 1.25 to 1.00 and restrictions on the incurrence of additional debt. (D) The 2011 Revenue Refunding Bonds consist of two series of bonds in the aggregate principle amount of $18,438,920 designated as Revenue Refunding Bond, Series 2011 A ( Series 2011A Bonds ) and Revenue Refunding Bond, Series 2011 B ( Series 2011B Bonds ). 20

24 Series 2011A Bonds consist of Southwestern Illinois Development Authority Revenue Bonds in the original amount of $9,219,460 dated December 1, 2011, which bear interest at 4.64% commencing February 1, The bonds are payable in annual installments through August 15, All of the Series 2011A Bonds still outstanding may be redeemed at the Hospital s option on or after December 29, The redemption price is 104% decreasing to 100% on or after December 29, As of December 31, 2011, no redemptions had been made on these bonds. Series 2011B Bonds consist of Southwestern Illinois Development Authority Revenue Bonds in the original amount of $9,219,460 dated December 1, 2011, which bear interest at 4.20% commencing February 1, The bonds are payable in annual installments through August 15, All of the Series 2011A Bonds still outstanding may be redeemed at the Hospital s option on or after December 29, The redemption price is 102% decreasing to 100% on or after December 29, As of December 31, 2011, no redemptions had been made on these bonds. The Authority issued the Series 2011A Bonds and Series 2011B Bonds on behalf of the Hospital. The Bonds are secured by the accounts receivable of the Hospital and the assets restricted under the bond indenture agreement. The Series 2011A Bonds and Series 2011B Bonds have not been guaranteed by the Authority. The indenture agreement requires that certain funds be established with the Trustee. Accordingly, these funds are included as assets limited as to use restricted under bond indenture in the consolidated balance sheet. The indenture agreement also requires the Hospital to comply with certain restrictive covenants including minimum insurance coverage, maintaining a historical debtservice coverage ratio of at least 1.20 to 1.00 and restrictions on the incurrence of additional debt. Upon issuance and delivery of the Series 2011A and Series 2011B Bonds, the Hospital defeased its outstanding 1999 Bonds in the total principal amount of $20,290,000. Proceeds from the Series 2011A and Series 2011B Bonds were used to purchase securities that were deposited in trust under an escrow agreement sufficient in amount to pay future principal, interest on the defeased Bonds. This advance refunding transaction resulted in an extinguishment of debt since the Hospital was legally released from its obligation on all of the 1999 Bonds at the time of defeasance. Accordingly, the 1999 Bonds, aggregating $20,290,000 at December 31, 2011, remain outstanding, but are excluded from the Hospital s consolidated balance sheet. 21

25 Aggregate annual maturities of longterm debt at December 31, 2011, are: 2012 $ 1,506, ,854, ,594, ,669, ,748,142 Thereafter 33,087,547 $ 41,461,544 Note 8: Functional Expenses The Hospital provides health care services primarily to residents within its geographic area. Expenses related to providing these services are as follows: Health care services $ 91,955,630 $ 89,272,445 General and administrative 34,186,364 32,472,435 $ 126,141,994 $ 121,744,880 Note 9: Pension Plan The Hospital has a defined contribution pension plan covering substantially all employees. The board of trustees annually determines the amount, if any, of the Hospital s contributions to the plan. Pension expense was $1,409,296 and $1,258,127 for 2011 and 2010, respectively. Note 10: Related Party Transactions The Hospital maintains banking and investing relationships with The Bank of Edwardsville. The Chairman of the Bank holding company is a member of the Hospital s Board of Trustees. 22

26 Note 11: Significant Estimates Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates. Those matters include the following: Allowance for Net Patient Service Revenue Adjustments Estimates of allowances for adjustments included in net patient service revenue are described in Notes 1 and 3. Malpractice Claims Estimates related to the accrual for medical malpractice claims are described in Notes 1 and 6. Litigation In the normal course of business, the Hospital is, from time to time, subject to allegations that may or do result in litigation. Some of these allegations are in areas not covered by the Hospital s malpractice insurance; for example, allegations regarding employment practices or performance of contracts. The Hospital evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. Current Economic Conditions The current protracted economic decline continues to present hospitals with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of investments and other assets, large declines in contributions, constraints on liquidity and difficulty obtaining financing. The consolidated financial statements have been prepared using values and information currently available to the Hospital. Current economic conditions, including the rising unemployment rate, have made it difficult for certain of our patients to pay for services rendered. As employers make adjustments to health insurance plans or more patients become unemployed, services provided to selfpay and other payers may significantly impact net patient service revenue, which could have an adverse impact on the Hospital s future operating results. Further, the effect of economic conditions on the state may have an adverse effect on cash flows related to the Medicaid program. Given the volatility of current economic conditions, the values of assets and liabilities recorded in the consolidated financial statements could change rapidly, resulting in material future adjustments in investment values and allowances for accounts and contributions receivable that could negatively impact the Hospital s ability to meet debt covenants or maintain sufficient liquidity. 23

27 Note 12: Disclosures About Fair Value of Assets and Liabilities Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements, defines fair value as 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. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Investments Where quoted market prices are available in an active market, investments are classified within Level 1 of the valuation hierarchy. Level 1 investments include equity securities and cash equivalents. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of investments with similar characteristics or discounted cash flows. Level 2 investments include government agency obligations, corporate and municipal debt investments, certificates of deposits, preferred stock and fixed income mutual funds. 24

28 The following tables present the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at : 2011 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Identical Observable Assets Inputs Fair Value (Level 1) (Level 2) Significant Unobservable Inputs (Level 3) Investments Cash equivalents $ 4,860,256 $ 4,860,256 $ $ Equities Common stock Industrials $ 1,175,735 $ 1,175,735 $ $ Materials $ 946,403 $ 946,403 $ $ Consumer discretionary $ 3,035,673 $ 3,035,673 $ $ Consumer staples $ 1,380,137 $ 1,380,137 $ $ Energy $ 752,328 $ 752,328 $ $ Financials $ 3,043,283 $ 3,043,283 $ $ Health care $ 1,245,813 $ 1,245,813 $ $ Information technology $ 2,360,939 $ 2,360,939 $ $ Utilities $ 372,905 $ 372,905 $ $ Telecommunication services $ 188,990 $ 188,990 $ $ Mutual funds Small cap funds $ 401,613 $ 401,613 $ $ Mid cap funds $ 387,826 $ 387,826 $ $ Large cap funds $ 1,893,223 $ 1,893,223 $ $ International funds $ 762,456 $ 762,456 $ $ Fixed income U.S. governmentsponsored enterprises $ 3,432,781 $ $ 3,432,781 $ U.S. Treasury notes $ 414,375 $ $ 414,375 $ Corporate bonds $ 3,464,245 $ $ 3,464,245 $ Municipal bonds $ 10,048,875 $ $ 10,048,875 $ Certificates of deposit $ 1,718,943 $ $ 1,718,943 $ Preferred stock $ 8,643 $ $ 8,643 $ Fixed income mutual funds $ 748,304 $ $ 748,304 $ 25

29 2010 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Identical Observable Assets Inputs Fair Value (Level 1) (Level 2) Significant Unobservable Inputs (Level 3) Investments Cash equivalents $ 3,410,186 $ 3,410,186 $ $ Equities Common stock Industrials $ 1,827,039 $ 1,827,039 $ $ Materials $ 1,390,582 $ 1,390,582 $ $ Consumer discretionary $ 3,576,734 $ 3,576,734 $ $ Consumer staples $ 2,191,880 $ 2,191,880 $ $ Energy $ 1,044,758 $ 1,044,758 $ $ Financials $ 4,399,609 $ 4,399,609 $ $ Health care $ 1,705,989 $ 1,705,989 $ $ Information technology $ 3,346,009 $ 3,346,009 $ $ Utilities $ 389,313 $ 389,313 $ $ Telecommunication services $ 175,050 $ 175,050 $ $ Mutual funds Small cap funds $ 339,101 $ 339,101 $ $ Mid cap funds $ 407,340 $ 407,340 $ $ Large cap funds $ 1,342,938 $ 1,342,938 $ $ International funds $ 687,702 $ 687,702 $ $ Fixed income U.S. governmentsponsored enterprises $ 2,670,469 $ $ 2,670,469 $ U.S. Treasury notes $ 2,346,371 $ $ 2,346,371 $ Corporate bonds $ 5,750,927 $ $ 5,750,927 $ Municipal bonds $ 9,946,913 $ $ 9,946,913 $ Certificates of deposit $ 1,972,741 $ $ 1,972,741 $ Preferred stock $ 11,456 $ $ 11,456 $ Fixed income mutual funds $ 1,813,376 $ $ 1,813,376 $ 26

30 The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value. Notes Payable and Longterm Debt The fair value of the Hospital s longterm debt is estimated using discounted cash flow analysis, based on the Hospital s current incremental borrowing rates for similar types of borrowing arrangements. Contributions Receivable Fair value is estimated at the present value of the future payments expected to be received. The following table presents estimated fair values of the Hospital s financial instruments at : Carrying Carrying Amount Fair Value Amount Fair Value Financial Assets Investments $ 42,832,807 $ 42,832,807 $ 50,968,131 $ 50,968,131 Contributions receivable $ 339,661 $ 339,661 $ 499,022 $ 499,022 Financial Liabilities Longterm debt $ 41,976,601 $ 39,541,000 $ 34,886,146 $ 34,541,000 Note 13: Subsequent Events In February 2012, the Hospital issued 2012 Revenue Bonds (the 2012 Bonds ) which consist of the Village of Maryville Revenue Bonds in the original amount of $6,000,000 dated February 1, 2011, which bear interest at 4.875%. The 2012 Bonds are payable in annual installments through February 1, All of the 2012 Bonds still outstanding may be redeemed at the Hospital s option at any time. The redemption price is 100%. Subsequent events have been evaluated through March 28, 2012, which is the date the consolidated financial statements were issued. 27

31 Supplementary Information

32 K CPAs & Advisors LLP One Metropolitan Square 211 N. Broadway. Suite 600 St. Louis, MO Fax Independent Accountants Report on Supplementary Information Board of Trustees Southwestern Illinois Health Facilities, Inc. Maryville, Illinois Our 2011 audit was performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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. St. Louis, Missouri March 28, 2012 experience BKD 28 Prexitx: MEMBER' GLOBAL ALLIANCE OF INDEPENDENT FIRMS