Harris County Hospital District and Affiliates, a Component Unit of Harris County, Texas

Transcription

1 Harris County Hospital District and Affiliates, a Component Unit of Harris County, Texas Combined Financial Statements as of and for the Years Ended February 29, 2008 and February 28, 2007, Additional Required Supplementary Information as of January 1, 2007, and Independent Auditors Report

2 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 2 MANAGEMENT S DISCUSSION AND ANALYSIS 3 18 COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007: Page Balance Sheets Statements of Revenues, Expenses, and Changes in Net Assets 21 Statements of Cash Flows Notes to Combined Financial Statements ADDITIONAL REQUIRED SUPPLEMENTARY INFORMATION AS OF JANUARY 1, 2007: 44 Schedule of Funding Progress for Pension Plan 45 Schedule of Actuarial Data for Pension Plan 46

3 INDEPENDENT AUDITORS REPORT To the Board of Managers of Harris County Hospital District: We have audited the accompanying combined balance sheets of the Harris County Hospital District and affiliates (the District ), a component unit of Harris County, Texas, as of February 29, 2008 and February 28, 2007, and the related combined statements of revenues, expenses, and changes in net assets and cash flows for the years then ended. These combined financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the combined financial position of the District as of February 29, 2008 and February 28, 2007, and 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. Management s Discussion and Analysis on pages 3 through 18 and Schedules of Funding Progress and Actuarial Data for Pension Plan on pages 45 through 46 are not a required part of the combined financial statements but are supplementary information required by the Governmental Accounting Standards Board (GASB). This supplementary information is the responsibility of the District s management. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit such information and we do not express an opinion on it.

4 In accordance with Government Auditing Standards, we have also issued our report dated July 31, 2008, on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. As discussed in Note 2 to the combined financial statements, the District has adopted GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. July 31,

5 MANAGEMENT S DISCUSSION AND ANALYSIS Harris County Hospital District Year Ended February 29, 2008 This section of the Harris County Hospital District s (the District ) financial report presents background information and management s analysis of the District s financial results for the fiscal year ended February 29, This section should be read in conjunction with the District s combined financial statements, which begin on page 19. Financial Highlights The District s net assets increased $133 million, or 21.0%, given the income reported for the year. Total assets increased $358 million, or 36.4%, between fiscal 2007 and fiscal Long-term debt increased $189 million, or 157.5%, between fiscal 2007 and fiscal In October of 2007, the District issued $302,610,000 in refunding and revenue bonds. Community Health Choice, Inc. experienced a 33% growth in membership during the year. During the year, the District invested $30 million in critical information technology and space/facility expansion projects. Significant capital acquisitions and resource investments included the following: Coordinated EPIC clinical care systems implementation EPIC patient accounting and business systems implementation Renovation projects including: LBJ radiology triage Existing community health clinics Ben Taub elevator modernization Ben Taub urgent care renovation, and Expansion of community health clinics and outpatient ancillary services including: Land acquisition Architectural and construction services for the replacement of an existing clinic and the addition of a new site in west Harris County, and Architectural services for a new radiation therapy and diagnostic clinic to be located at the administrative campus Combined Financial Statements The District s combined financial statements are prepared on the accrual basis of accounting and present the District s operational activities in a manner similar to that of private sector companies. The financial statements consist of three statements: (1) combined balance sheets, (2) combined statements of revenues, expenses, and changes in net assets, and (3) combined statements of cash flows. The statements provide information about the combined activities of the District, the HCHD Foundation (the Foundation ) and Community Health Choice, Inc. (the HMO ). The combined balance sheets and the combined statements of revenues, expenses, and changes in net assets reflect the District s combined financial position at the end of the fiscal year and report the District s net assets and changes in them as a result of the District s revenues and expenses for the year. The term net assets represents the difference between assets, or the District s investment in resources, and liabilities, or the District s obligation to its creditors. Increases or decreases in - 3 -

6 net assets are an indicator of whether financial health is improving or deteriorating. Other nonfinancial factors should be considered, however, in evaluating financial health, such as changes in the District s patient base, changes in economic conditions, taxable property values and tax rates, and changes in government legislation. The combined statements of cash flows report cash receipts, cash payments, and net changes in cash resulting from operations, investing, and noncapital/capital financing activities. The statement explains where cash came from, how it was used, and the change in cash balance during the year. Net Assets A summary of the District s assets and liabilities as of February 29, 2008 and February 28, 2007, is presented in Table 1 below: TABLE 1 Condensed Summary of Assets and Liabilities (In millions) Dollar Total % Change Change Current and other assets $ 1,138 $ 779 $ % Capital assets (1) (0.1) Total assets $ 1,342 $ 984 $ % Long-term debt outstanding $ 309 $ 120 $ % Other liabilities Total liabilities $ 577 $ 352 $ % Invested in capital assets, net of related debt $ 69 $ 66 $ % Restricted net assets Unrestricted net assets Total net assets $ 765 $ 632 $ % Net assets, the difference between the assets and liabilities reported on the balance sheet, increased $133 million in fiscal The overall increase is the result of the income reported for fiscal The income reported is discussed in detail following Table 2; however, the change in net assets is primarily the result of increased nonoperating revenues including net ad valorem taxes of $59 million, tobacco settlement revenues of $5 million, and investment income of $12 million. Current and other assets increased $359 million or 46.1% from fiscal 2007 to fiscal 2008 as a result of increased cash and investments generated by the year s income and proceeds of the bond issuance. Long-term debt and other liabilities increased $225 million, or 63.9%. As a result of the bond issuance and restructuring of previous debt, current liabilities at February 29, 2008 as compared to February 28, 2007 decreased $24 million and long-term debt outstanding increased $189 million. Other liabilities also increased $24 million with the implementation of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Expenses for the retirement medical plan are now reported on an accrual basis versus a cash basis as claims were paid

7 Summary of Revenues, Expenses, and Changes in Net Assets The following table summarizes the District s revenues and expenses for each of the years ended February 29, 2008 and February 28, 2007, and the changes in net assets during each of those years: TABLE 2 Condensed Statements of Revenues, Expenses, and Changes in Net Assets (In thousands) Operating revenues: Net patient service revenue $ 258,428 $ 261,104 DSH/UPL programs revenue 165, ,902 Premium revenue 345, ,705 Other operating revenues 23,906 21,266 Total operating revenues 792, ,977 Operating expenses: Salaries, wages, and benefits 525, ,453 Purchased services, supplies, and other 324, ,892 Medical claims expense 299, ,844 Depreciation and amortization 32,360 32,930 Total operating expenses 1,181,301 1,025,119 Operating loss (388,526) (361,142) Total nonoperating revenues (expenses) net 521, ,729 Foundation net assets transferred 12,554 Restricted (distributions) contributions net (48) 37 Change in net assets 132, ,178 Total net assets beginning of year 631, ,807 Total net assets end of year $ 764,502 $ 631,985 During the year, the District s total operating revenue increased $129 million while operating expenses increased $156 million over the prior year. Payments to the District for patient services decreased $17.4 million in fiscal 2008: $2.7 million decreased funding from third-party payors and patients and $14.7 million in decreased funding by the Disproportionate Share (DSH) program and the Upper Payment Limit (UPL) program. Other operating revenues increased $2.6 million over the prior year. Although funding for uncompensated trauma care decreased $1.2 million, the deficit was more than offset by increased funding from grants, donations, and medical center parking fees. Premium revenue in fiscal 2008 was 71%, or $143.6 million, greater than the prior year. Current year DSH/UPL revenues include a net refund of approximately $9 million for a period prior to fiscal At February 28, 2007, the District had recorded a $93.7 million receivable related to the DSH/UPL programs. Receipts in fiscal 2008 for the state s fiscal 2007 program exceeded estimates by $10.6 million

8 The District is unable to estimate the continuance or amount of future funding of the UPL program. As of February 29, 2008, the District has received funds totaling $60 million related to the state of Texas September 2007 August 2008 DSH/UPL programs. The District has recorded a $22.5 million receivable at February 29, 2008, related to the DSH and UPL programs. Salaries and wages increased $29 million, or 7.7%, due to merit increases and changes in the compensation plan to reflect market adjustments to enable the District to retain current staff and recruit additional needed staff. Related benefits overall increased $33 million, or 36%. The District has made certain changes in the structure of its retirement and medical plans to provide more effective coverage at a lower cost. However, overall benefits increased with the implementation of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The effect was to change recognition of these expenses from a cash basis as claims are paid to an accrual basis. The approximate effect on the fiscal 2008 operating results was an additional $24.1 million in expenses. Overall, purchased services and supplies decreased $31 million, or 8.8%. As a result of the Harris County collaborative discussed in further detail in Note 12 to the financial statements, the District was able to achieve cost savings in physician service costs of $32 million as compared to fiscal The District reported an overall cost reduction in supplies of $6 million, or 4%. The primary driver of savings was lower pharmaceutical expense including savings from pharmaceutical company patient assisted drug programs, resulting in a net cost reduction of $8.2 million. The District expended $7 million over the prior year in its cost for other purchased services. Increases were experienced in facilities, maintenance and utilities costs of approximately $2 million, $0.9 million in facility insurance costs, $1.9 million in premium taxes incurred by the HMO, $3.4 million in contracted medical services, and $3.2 million in contracted non-clinical costs. The increases year to year were offset by a $6 million reduction in legal fees. Medical claims expense associated with the HMO increased by $126 million due to the growth in membership during the year and a 1% increase in medical expense. Membership increased from 95,250 member months in February 2007 to 126,220 in February 2008, a 33% increase. Overall, the District s operating loss increased $27 million, or 8%. The District receives property tax revenues to subsidize the cost of services provided to qualified uninsured patients. Although the costs incurred to provide these services are reflected above as operating expenses, the property tax revenues are required to be reported as nonoperating revenues. Nonoperating revenues consist of property tax revenue, investment income, tobacco settlement monies, and gains or losses on disposal of assets. Tax revenues increased $59 million, or 14%, as a result of increased property values and a reduction in collection fees. Investment income increased approximately $12 million reflecting increased cash positions achieved through operations and issuance of debt. In fiscal 2008, the District received approximately $20 million in tobacco settlement revenue as compared to $15 million in

9 Capital Assets and Debt Financing During fiscal 2008, the District has invested $30 million in information technology, facility renovation and land acquisition. Table 3 summarizes the changes in the District s capital assets between February 29, 2008 and February 28, 2007: TABLE 3 Capital Assets (In thousands) Dollar Total % Change Change Land and improvements $ 28,030 $ 26,233 $ 1, % Buildings and fixed equipment 291, ,760 6, Major movable equipment 199, ,603 (3,214) (1.6) Subtotal 518, ,596 5, Less accumulated depreciation (323,275) (312,065) (11,210) (3.6) Construction in progress 8,169 3,223 4, Capital assets net $ 203,722 $ 204,754 $ (1,032) (0.5)% The District s capital budget for fiscal year 2009 anticipates an investment of $87 million in capital projects for the expansion of existing diagnostic and treatment facilities and building of new facilities to improve access to health care services. The capital projects include $12 million in information technology primarily dedicated to patient management and patient accounting, $12 million specific to medical capital, and $63 million in facility construction and renovations

10 At February 29, 2008, the District had $317 million in outstanding revenue bonds, net of any discounts, premiums, and deferred refunding losses. The refunding revenue bonds were issued in 1990 for facility expansions and were refinanced in The proceeds of the 2000 bonds were used to defease approximately 54% of the 1990 bonds and to increase the debt service reserve funds. In October 2007 the District issued Series 2007A refunding and revenue bonds to refund $24 million in outstanding commercial paper debt and to provide funding for expansion and renovation projects totaling $158,000,000 and to fund the required debt service reserve fund. In October 2007 the District also refunded and refinanced the Series 2000 revenue bonds with the issuance of Series 2007B bonds in the amount of $103.5 million. The bonds were initially issued as 28 day taxable auction-rate paper converting to tax-exempt in August of Subsequent to the 2008 fiscal year end, the auction rate paper was converted to taxable fixed rate bonds. Moody s and Standard & Poor s have maintained an underlying rating of A1/A on the District s revenue bond obligations. The debt was insured by MBIA Insurance Corporation and, as such, was designed to carry Aaa/AAA ratings by both Moody s and Standard & Poor s. Since that time both Moody s and Standard & Poor s have downgraded MBIA Insurance Corporation to Aa/AA ratings. The debt is scheduled to be repaid in The debt is issued in the name of the Harris County Hospital District. Any issuance of debt requires the approval of the District s Board of Managers and the Harris County Commissioners Court. Table 4 below summarizes the District s debt obligations at February 29, 2008 and February 28, 2007: TABLE 4 Long-Term Debt and Other Long-Term Obligations (In thousands) Series 1990 tax-exempt revenue bonds, net of discount $ 19,329 $ 27,356 Series 2000 tax-exempt revenue bonds, including premium and deferred loss on refunding 99,776 Series 2007 tax-exempt revenue bonds, including premium and deferred loss on refunding 297,737 Other long term obligations 845 1,470 Total long-term debt and other long-term obligations 317, ,602 Less current portion (9,000) (8,837) Noncurrent portion $ 308,911 $ 119,

11 Current Budget Annually, the District prepares an operating and capital budget for approval by the District s Board of Managers and for submission to the Harris County Commissioners Court for approval prior to the beginning of the operating year. Table 5 presents the approved budget as compared to fiscal 2008 actual results: TABLE 5 Budget vs. Actual (In thousands) Favorable Budget Actual (Unfavorable) Variance Revenues: Net patient service revenue $ 303,059 $ 258,428 $ (44,631) DSH/UPL programs revenue 161, ,161 4,061 Premium revenue 328, ,280 16,861 Other operating revenues 22,565 23,906 1,341 Nonoperating revenues 448, ,091 72,887 Total revenues $ 1,263,347 $ 1,313,866 $ 50,519 Operating expenses: Salaries, wages, and benefits $ 515,901 $ 525,385 $ (9,484) Purchased services, supplies, and other 380, ,487 55,982 Medical claims expense 283, ,069 (15,861) Depreciation and amortization 30,779 32,360 (1,581) Total operating expenses $ 1,210,357 $ 1,181,301 $ 29,056 Income before restricted contributions $ 52,990 $ 132,565 $ 79,575 Restricted distributions net (48) (48) Change in net assets $ 52,990 $ 132,517 $ 79,527 In comparing 2008 financial results to budget, the following items are noted. Upon completion of the year, total revenues exceeded budget by $51 million. Revenues recognized related to the DSH and UPL programs exceeded the budget by more than $4 million. Nonoperating revenues exceeded budget by $73 million: $59 million in net ad valorem tax revenues, $12 million in investment income, and $5 million in tobacco settlement funds received. Other operating revenue was approximately $1 million over budget, primarily grant funding. Net patient service revenues fell $45 million short of budget as a result of lower than anticipated patient utilization and reimbursement rates. Premium revenues exceeded budget due to the 33% growth in membership for the year and a shift to higher premium risk groups. Controllable operating costs exceeded budget for all line items except purchased services and supplies expense. Supplies expense reflected $22 million in cost savings as compared to budget, mostly pharmaceutical costs. Medical claims expense exceeded budget $16 million due to the growth in membership and a higher than expected medical loss ratio. Total operating expenses were $29 million less than budget

12 The District was able to achieve income before restricted contributions/distributions $80 million greater than planned. The Board of Managers has designated 75% of the District s fiscal 2008 income for use in the facilities expansion program. Economic Conditions and Plan for Fiscal 2009 In planning for fiscal 2009, of primary concern was the uncertain status of the economy at both the federal and state funding levels. Issues that need to be addressed on an ongoing basis throughout the year include the following: Medicaid cuts Number of uninsured and working poor, and the capacity of the District s system at both a physical plant capacity level and staffing availability level Plant and equipment needs for replacement of aged equipment, and needed repairs, maintenance, and renovation Financial planning for the District s Strategic Capital Initiatives Plan and continued development of the long-range operating, facilities, and financial plan related to these capital initiatives Future funding available under the DSH and UPL programs Monitoring of the expansion and renovations projects under the Strategic Capital Initiatives Plan Future cost savings and efficiencies available under the Harris County collaborative Management of the EPIC clinical and business systems implementation and subsequent process related changes Implementation and monitoring of new payment methodology for physician services

13 MANAGEMENT S DISCUSSION AND ANALYSIS Harris County Hospital District Year Ended February 28, 2007 This section of the Harris County Hospital District s (the District ) financial report presents background information and management s analysis of the District s financial results for the fiscal year ended February 28, This section should be read in conjunction with the District s combined financial statements, which begin on page 19. Financial Highlights The District s net assets increased $100 million, or 18.8%, given the income before other changes in net assets reported for the year. As discussed in Footnote 2 to the combined financial statements, effective fiscal 2007, the Harris County Hospital Foundation net assets of $15 million are included in the combined net assets. During the year, the District s total operating revenue increased $99 million while operating expenses increased $133 million over the prior year. Net patient service revenue provided an additional $5 million in funding and the Disproportionate Share (DSH) program and the Upper Payment Limit (UPL) program provided the District with an additional $11 million in funding for patient services for fiscal Other operating revenues increased $5 million over the prior year, primarily due to increased funding from grants and increased funding for uncompensated trauma care. Premium revenue in fiscal 2007 was $79 million greater than the prior year. Community Health Choice Inc. experienced a 68% growth in membership during the year. Net ad valorem taxes generated an additional $38 million, and the District experienced an increase of $5 million in net tobacco settlement revenue as compared to the prior year. During the year, the District invested $41 million in critical information technology and space/facility expansion projects. Medical equipment expansion and funding was minimal. Significant capital acquisitions and resource investments included the following: Radiology systems Coordinated EPIC clinical care systems implementation Epic business systems implementation PeopleSoft human resources and payroll module software implementation Renovation projects including: LBJ radiology triage Ben Taub parking garage Ben Taub elevator modernization Ben Taub urgent care renovation, and Land acquisition for expansion of community health clinics and pavilion ancillary services Combined Financial Statements The District s combined financial statements are prepared on the accrual basis of accounting and present the District s operational activities in a manner similar to that of private sector companies. The financial statements consist of three statements: (1) combined balance sheets, (2) combined statements of revenues, expenses, and changes in net assets, and (3) combined statements of cash flows. The statements provide

14 information about the combined activities of the District, the HCHD Foundation (the Foundation ) and Community Health Choice, Inc. (the HMO ). The combined balance sheets and the combined statements of revenues, expenses, and changes in net assets reflect the District s combined financial position at the end of the fiscal year and report the District s net assets and changes in them as a result of the District s revenues and expenses for the year. The term net assets represents the difference between assets, or the District s investment in resources, and liabilities, or the District s obligation to its creditors. Increases or decreases in net assets are an indicator of whether financial health is improving or deteriorating. Other nonfinancial factors should be considered, however, in evaluating financial health, such as changes in the District s patient base, changes in economic conditions, taxable property values and tax rates, and changes in government legislation. The combined statements of cash flows report cash receipts, cash payments, and net changes in cash resulting from operations, investing, and noncapital/capital financing activities. The statement explains where cash came from, how it was used, and the change in cash balance during the year. Net Assets A summary of the District s assets and liabilities as of February 28, 2007 and 2006, is presented in Table 6 below: TABLE 6 Condensed Summary of Assets and Liabilities (In millions) Dollar Total % Change Change Current and other assets $ 779 $ 631 $ % Capital assets Total assets $ 984 $ 827 $ % Long-term debt outstanding $ 120 $ 128 $ (8) (6.3)% Other liabilities Total liabilities $ 352 $ 295 $ % Invested in capital assets net of related debt $ 66 $ 50 $ % Restricted net assets Unrestricted net assets Total net assets $ 632 $ 532 $ % As can be seen in Table 6, net assets increased $100 million in fiscal Net patient service revenues increased $4.8 million and premium revenues increased $78.6 million, as compared to fiscal Additionally, the District s revenues from the DSH and UPL programs were approximately $180 million this year compared to $169 million last year. These increases in operating revenues, however, were more than offset by an increase in operating expenses, primarily salaries, wages and benefits. The change in net assets is primarily the result of increased nonoperating revenues including net ad valorem taxes of $38 million, tobacco settlement revenues of $4.5 million and investment income of $11.2 million

15 Summary of Revenues, Expenses, and Changes in Net Assets The following table summarizes the District s revenues and expenses for each of the years ended February 28, 2007 and 2006, and the changes in net assets during each of those years: TABLE 7 Condensed Statements of Revenues, Expenses, and Changes in Net Assets (In thousands) Operating revenues: Net patient service revenue $ 261,104 $ 256,316 DSH/UPL programs revenue 179, ,119 Premium revenue 201, ,147 Other operating revenues 21,266 16,671 Total operating revenues 663, ,253 Operating expenses: Salaries, wages, and benefits 463, ,000 Purchased services, supplies, and other 355, ,081 Medical claims expense 172,844 99,828 Depreciation and amortization 32,930 32,039 Total operating expenses 1,025, ,948 Operating loss (361,142) (326,695) Total nonoperating revenues (expenses) net 448, ,819 Foundation net assets transferred 12,554 - Restricted contributions (distributions) net 37 (132) Change in net assets 100,178 67,992 Total net assets beginning of year 531, ,815 Total net assets end of year $ 631,985 $ 531,807 The District s net patient service revenue increased $4.8 million in 2007 as a result of continuing improvements throughout the revenue cycle, including rate increases. Revenues from the Disproportionate Share III and Upper Payment Limit programs increased $10.8 million. Current year revenues include $23.7 million for a period prior to fiscal At February 28, 2006, the District had recorded a $35.7 million receivable related to the DSH/UPL programs. Receipts exceeded estimates by $2.7 million. In addition, $20.9 million in funds were received related to reconciliations of the state s fiscal 2005 program. The District is unable to estimate the continuance or amount of future funding of the UPL program. As of February 28, 2007, the District has not received any funds related to the state of

16 Texas September 2006 August 2007 UPL program. The District has recorded a $93.7 million receivable at February 28, 2007, related to the DSH and UPL programs. Premium revenues increased $78.6 million, or 64%, with a growth in membership. In addition, other operating revenues increased in fiscal 2007 as the District received $1.9 million increased funding for uncompensated trauma care and $1.8 million in grant funding. Salaries and wages increased $30.5 million, or 10%, due to merit increases and changes in the compensation plan to reflect market adjustments to enable the District to retain current staff and recruit additional needed staff. Related benefits overall increased $3.9 million, or 4.5%. Overall, purchased services and supplies increased $25 million, or less than 8%. Physician service costs of $118 million were $5 million, or 4% greater than in the prior year, primarily due to expanded faculty staffing costs. The District expended $18 million over the prior year in its cost for other purchased services. Increases were experienced in facilities and maintenance and repair costs of approximately $4 million, $3 million in contracted medical services, and $7 million in legal fees. The cost of supplies increased 2%, or $2 million. Cost reductions of $3.4 million in pharmaceuticals were offset by increased expenditures in minor IT equipment purchased related to system implementations and in other medical supplies. Medical claims expense associated with the HMO increased by $73 million due to the growth in membership during the year. Membership increased from 56,655 member months in February 2006 to 95,250 in February 2007, a 68% increase. Overall, the District s operating loss increased $34 million, or 10%. The District receives property tax revenues to subsidize the cost of services provided to qualified uninsured patients. Although the costs incurred to provide these services are reflected above as operating expenses, the property tax revenues are required to be reported as nonoperating revenues. Nonoperating revenues consist of property tax revenue, investment income, tobacco settlement monies, and gains or losses on disposal of assets. Tax revenues increased $38 million, or 10%, as a result of increased property values. Investment income increased approximately $11 million reflecting greater market returns and increased cash positions. In fiscal 2007, the District received approximately $15 million in tobacco settlement revenue as compared to $10 million in

17 Capital Assets and Debt Financing During fiscal 2007, the District has invested $41 million primarily in information technology, medical equipment, and facility renovation and land acquisition. Table 8 summarizes the changes in the District s capital assets between February 28, 2007 and 2006: TABLE 8 Capital Assets (In thousands) Dollar Total % Change Change Land and improvements $ 26,233 $ 20,302 $ 5, % Buildings and fixed equipment 284, ,713 6, Major movable equipment 202, ,125 16, Subtotal 513, ,140 28, Less accumulated depreciation (312,065) (289,991) (22,074) (7.6) Construction in progress 3,223 1,338 1, Capital assets net $ 204,754 $ 196,487 $ 8, % The District s capital budget for fiscal year 2008 anticipates an investment of $30 million for capital projects that include $5 million in information technology primarily dedicated to patient management and patient accounting, $6 million specific to medical capital, $14 million in facility renovations, and $5 million for the other District-wide support services

18 At February 28, 2007, the District had $127 million in outstanding tax-exempt revenue bonds, net of any discounts, premiums, and deferred refunding losses. The refunding revenue bonds were issued in 1990 for facility expansions and were refinanced in The proceeds of the 2000 bonds were used to defease approximately 54% of the 1990 bonds and to increase the debt service reserve funds. Moody s and Standard & Poor s have maintained an underlying rating of Baa2/A on the District s tax-exempt revenue bond obligations. The debt is insured by MBIA Insurance Corporation and as such carries Aaa/AAA ratings by both Moody s and Standard & Poor s. The debt is scheduled to be repaid in Debt is issued in the name of the Harris County Hospital District. Any issuance of debt requires the approval of the District Board of Managers and the Harris County Commissioners Court. Table 9 below summarizes the District debt obligations at February 28, 2007 and 2006: TABLE 9 Long-Term Debt and Other Long-Term Obligations (In thousands) Series 1990 tax-exempt revenue bonds, net of discount $ 27,356 $ 34,802 Series 2000 tax-exempt revenue bonds, including premium and deferred loss on refunding 99,776 99,376 Other long term obligations 1,470 1,600 Total long-term debt and other long term obligations 128, ,778 Less current portion (8,837) (8,120) Noncurrent portion $ 119,765 $ 127,

19 Current Budget Annually, the District prepares an operating and capital budget for approval by the District Board of Managers and for submission to the Harris County Commissioners Court for approval prior to the beginning of the operating year. Table 10 presents the approved budget as compared to fiscal 2007 actual results: TABLE 10 Budget vs. Actual (In thousands) Favorable Budget Actual (Unfavorable) Variance Revenues: Net patient service revenue $ 298,051 $ 261,104 $ (36,947) DSH/UPL programs revenue 161, ,902 18,802 Premium revenue 168, ,705 32,786 Other operating revenues 14,252 21,266 7,014 Nonoperating revenues 412, ,729 35,932 Total revenues $ 1,055,119 $ 1,112,706 $ 57,587 Operating expenses: Salaries, wages, and benefits $ 468,681 $ 463,453 $ 5,228 Purchased services, supplies, and other 365, ,892 9,740 Medical claims expense 143, ,844 (29,754) Depreciation and amortization 37,206 32,930 4,276 Total operating expenses $ 1,014,609 $ 1,025,119 $ (10,510) Income before restricted contributions $ 40,510 $ 87,587 $ 47,077 Foundation net assets transferred - 12,554 12,554 Restricted distributions net Change in net assets $ 40,510 $ 100,178 $ 59,668 In comparing 2007 financial results to budget, the following items are noted. Upon completion of the year, total revenues exceeded budget by $57.6 million. Monies received related to the DSH and UPL programs exceeded the budget by more than $18.8 million. Nonoperating revenues exceeded budget by $35.9 million: $25 million in net ad valorem tax revenues, $7 million in investment income, and $5 million in tobacco settlement funds received. Other operating revenue was approximately $7 million over budget, primarily unbudgeted grant funding of $3.6 million and $1.9 million of trauma funds in excess of budget. Net patient service revenues fell $36.9 million short of budget as a result of lower than anticipated reimbursement rates. Premium revenues exceeded budget due to the 68% growth in membership for the year and a shift to higher premium risk groups. Controllable operating costs were contained below budget for all line items except medical claims expense. Medical claims expense exceeded budget $29.8 million due to the growth in membership and a higher than expected medical loss ratio. Total operating expenses were $10.5 million greater than budget

20 The District was able to achieve income before changes in net assets $47.1 million greater than planned. In addition, with the inclusion of the net assets of the Foundation effective this fiscal year, the Foundation contributed $12.6 million in beginning net assets for a consolidated change in net assets $59.7 million greater than budget. Economic Conditions and Plan for Fiscal 2008 In planning for fiscal 2008, of primary concern was the uncertain status of the economy at both the federal and state funding levels. Issues that need to be addressed on an ongoing basis throughout the year include the following: Medicaid cuts Number of uninsured and working poor, and the capacity of the District s system at both a physical plant capacity level and staffing availability level Plant and equipment needs for replacement of aged equipment, and needed repairs, maintenance, and renovation Financial planning for the District s 2015 Strategic Plan as adopted by the District Board of Managers and approved by the Harris County Commissioners Court Future funding available under the DSH and UPL programs

21 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS COMBINED BALANCE SHEETS AS OF FEBRUARY 29, 2008 AND FEBRUARY 28, 2007 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 135,936 $ 91,063 Short-term investments 403, ,721 Accounts receivable net of allowance for uncollectible accounts of $333,922 and $312,422 in 2008 and 2007, respectively 62,926 51,044 Current portion of ad valorem taxes receivable net of allowance for uncollectible taxes of $4,756 and $4,231 in 2008 and 2007, respectively 34,643 39,080 Inventories 6,008 5,222 Prepaid expenses and other current assets 51, ,941 Estimated third-party payor settlements 1,465 Current portion of assets limited as to use or restricted (Note 5) 85,125 83,279 Total current assets 780, ,350 ASSETS LIMITED AS TO USE OR RESTRICTED Net of current portion (Note 5): Debt service 37,435 36,414 Capital expansion 283,766 32,818 Other 13,449 13,711 Total assets limited as to use or restricted net 334,650 82,943 CAPITAL ASSETS (Note 7): Land and improvements 28,030 26,233 Buildings and fixed equipment 291, ,760 Major movable equipment 199, ,603 Less accumulated depreciation (323,275) (312,065) Total depreciable capital assets net 195, ,531 Construction in progress 8,169 3,223 Capital assets net 203, ,754 OTHER ASSETS: Ad valorem taxes receivable net of current portion and allowance for uncollectible taxes of $46,572 and $48,223 in 2008 and 2007, respectively 5,221 5,442 Net pension asset (Note 9) 2,680 2,879 Long-term investment 8,280 Deferred bond issue costs net of accumulated amortization of $6,532 and $8,055 in 2008 and 2007, respectively 5,786 1,827 Other assets Total other assets 22,699 10,880 TOTAL $ 1,341,991 $ 983,927 (Continued)

22 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS COMBINED BALANCE SHEETS AS OF FEBRUARY 29, 2008 AND FEBRUARY 28, 2007 (In thousands) LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 92,198 $ 105,376 Interest payable Employee compensation and related benefit liabilities 48,029 19,645 Compensated absences 31,402 29,204 Medical claims liability (Note 2) 86,591 43,289 Estimated third-party payor settlements net 541 1,206 Notes payable (Note 8) 24,251 Current portion of long-term debt and capital leases (Note 8) 9,000 8,837 Total current liabilities 268, ,177 LONG-TERM DEBT (Note 8): Series 1990 tax-exempt revenue bonds net of discount of $206 and $234 10,674 19,301 in 2008 and 2007, respectively Series 2000 tax-exempt revenue bonds including premium of $1,687 and deferred loss on refunding of $1,991 99,776 Series 2007 revenue bonds including premium of $8 and deferred loss on refunding of $4, ,737 Other long-term obligations Total liabilities 577, ,942 COMMITMENTS AND CONTINGENCIES (Note 11) NET ASSETS: Invested in capital assets net of related debt 68,978 65,896 Restricted net assets 60,721 47,081 Unrestricted net assets 634, ,008 Total net assets 764, ,985 TOTAL $ 1,341,991 $ 983,927 See notes to combined financial statements. (Concluded)

23 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS COMBINED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007 (In thousands) OPERATING REVENUES: Net patient service revenue (Note 3) $ 258,428 $ 261,104 DSH/UPL programs revenue (Note 4) 165, ,902 Premium revenue 345, ,705 Other operating revenues 23,906 21,266 Total operating revenues 792, ,977 OPERATING EXPENSES: Salaries, wages, and benefits 525, ,453 Pharmaceuticals and supplies 136, ,990 Physician services 85, ,155 Medical claims expense 299, ,844 Other purchased services 102,683 95,747 Depreciation and amortization 32,360 32,930 Total operating expenses 1,181,301 1,025,119 OPERATING LOSS (388,526) (361,142) NONOPERATING REVENUES (EXPENSES): Ad valorem tax revenues net 480, ,655 Tobacco settlement revenues 20,138 14,832 Investment income 33,434 21,813 Interest expense (12,874) (9,185) Other (152) (386) Total nonoperating revenues (expenses) net 521, ,729 INCOME BEFORE OTHER CHANGES IN NET ASSETS 132,565 87,587 FOUNDATION NET ASSETS TRANSFERRED 12,554 RESTRICTED (DISTRIBUTIONS) CONTRIBUTIONS Net (48) 37 CHANGE IN NET ASSETS 132, ,178 TOTAL NET ASSETS Beginning of year 631, ,807 TOTAL NET ASSETS End of year $ 764,502 $ 631,985 See notes to combined financial statements

24 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007 (In thousands) OPERATING ACTIVITIES: Cash received from patients and members $ 615,732 $ 483,460 Cash received from DSH/UPL 236, ,927 Cash payments for medical claims (255,767) (152,277) Cash payments for goods and services (351,479) (326,073) Cash payments to employees (494,604) (452,705) Net cash used in operating activities (249,783) (325,668) NONCAPITAL FINANCING ACTIVITIES: (Use) receipts of restricted contributions net (48) 37 Cash received from foundation net assets transferred 1,274 Ad valorem taxes received net 485, ,188 Tobacco settlement received 20,138 14,832 Net cash provided by noncapital financing activities 505, ,331 CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisitions and construction of capital assets net of deletions (30,598) (40,550) Proceeds from Series 2007 Bonds 291,778 Defeasance of Series 2000 Bonds (98,568) Repayment of notes payable (24,251) Interest paid (12,334) (9,568) Repayment of long-term debt (8,834) (8,352) Net cash provided by (used in) capital and related financing activities 117,193 (58,470) INVESTING ACTIVITIES: Receipts of investment income including realized gains and losses 33,434 21,813 Foundation purchase of investments net 216 (1,583) Increase in cash equivalents included in assets limited as to use or restricted net (21,677) (38,358) Purchases of investment securities (1,085,734) (424,836) Proceeds from sale and maturities of investment securities 745, ,954 Net cash used in investing activities (327,830) (30,010) NET INCREASE IN CASH AND CASH EQUIVALENTS 44,873 22,183 CASH AND CASH EQUIVALENTS Beginning of year 91,063 68,880 CASH AND CASH EQUIVALENTS End of year $ 135,936 $ 91,063 (Continued)

25 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007 (In thousands) RECONCILIATION OF OPERATING LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Operating loss $ (388,536) $ (361,142) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation and amortization expense 32,360 32,930 Changes in operating assets and liabilities: Increase in accounts receivable (11,882) (615) (Increase) decrease in inventories (786) 224 Decrease (increase) in prepaid expenses and other assets 60,276 (61,577) Increase in estimated third-party payor settlements (1,465) Decrease in net pension asset (Decrease) increase in accounts payable and accrued liabilities (13,178) 37,191 Increase in employee compensation and related benefit liabilities 28,384 1,084 Increase in compensated absences 2,198 9,451 Increase in medical claims liability 43,302 20,567 Decrease in estimated third-party payor settlements (665) (3,994) Total adjustments 138,743 35,474 NET CASH USED IN OPERATING ACTIVITIES $ (249,793) $ (325,668) See notes to combined financial statements. (Concluded)

26 HARRIS COUNTY HOSPITAL DISTRICT AND AFFILIATES, A COMPONENT UNIT OF HARRIS COUNTY, TEXAS NOTES TO COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, ORGANIZATION AND MISSION Harris County Hospital District (the District ), a component unit of Harris County, Texas, was created by authorization of the legislature of the state of Texas and subsequent approval by the voters of Harris County, Texas, in November The District provides patient care to the indigent population of Harris County and receives property taxes levied by Harris County for the provision of this care. The District operates two acute care hospitals and a hospital-based skilled nursing and rehabilitation facility and psychiatric unit, with a total of 975 licensed beds. The District also operates 11 health clinics, 2 specialty clinics providing dental and HIV/AIDS treatment services, and 9 school-based or mobile health clinics. The District is exempt from federal income taxes. The District is presented as a discrete component unit of Harris County, Texas (legally separate from Harris County, Texas), since the members of the District s governing board are appointed by the Harris County Commissioners Court. The Harris County Commissioners Court approves the District s tax rate and annual operating and capital budget. Harris County, Texas, does not provide any funding to the District, hold title to any of the District s assets, or have any rights to any surpluses of the District. The District s primary mission is to provide quality preventive, medical, hospital, and emergency care to the indigent and needy of Harris County and to others with the ability to pay. All activities conducted by the District are directly associated with the furtherance of this mission and are, therefore, considered to be operating activities. Harris County Hospital District Foundation (the Foundation ), a blended component unit of the District, is a not-for-profit corporation incorporated on March 2, 1992, and organized under Section 501(c)(3) of the Internal Revenue Code to support the operations and activities of the District. Community Health Choice, Inc. (HMO), a blended component unit of the District, is a Texas not-forprofit corporation incorporated on May 8, 1996, and organized under Section 501(c)(4) of the Internal Revenue Code to operate as a health maintenance organization. The HMO was licensed by the Texas Department of Insurance on February 14, As of February 29, 2008, the HMO had approximately 119,000 enrollees. The HMO offers three insurance products. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying combined financial statements are prepared on the accrual basis of accounting. Method of Accounting The District s accounting policy is to apply all Financial Accounting Standards Board (FASB) statements and interpretations issued after November 30, 1989, except for those that would conflict with or contradict Governmental Accounting Standards Board (GASB) pronouncements. In accordance with GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, the District s combined financial