Report of Independent Auditors and Consolidated Financial Statements. Kaweah Delta Health Care District

Transcription

1 Report of Independent Auditors and Consolidated Financial Statements Kaweah Delta Health Care District June 30, 2013 and 2012

2 CONTENTS PAGE MANAGEMENT S DISCUSSION AND ANALYSIS 1 16 REPORT OF INDEPENDENT AUDITORS CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets Consolidated statements of revenues, expenses, and changes in net position 22 Consolidated statements of cash flows Notes to consolidated financial statements Supplemental pension information 51

3 MANAGEMENT S DISCUSSION AND ANALYSIS Kaweah Delta Health Care District s (the District ) discussion and analysis is designed to assist the reader in focusing on significant financial issues, provide an overview of the District s financial activity, identify changes in the District s financial position, and identify any material deviations from the financial plan (the approved budget). Unless otherwise noted, all discussion and analysis pertains to the District s financial condition, results of operations, and cash flows as of and for the year ended June 30, Please read it in conjunction with the financial statements in this report. FINANCIAL HIGHLIGHTS The District s net position increased by $27.2 million, or 8.2%, primarily attributable to the year s positive net income (income before contributions). Total assets increased by $25.9 million, or 4.3%. Cash and investments increased by $23.4 million, or 11.7%, primarily in board designated assets resulting from positive cash flow generated by operations. Capital assets decreased $4.7 million to $270.2 million with $14.5 million in net additions to buildings, equipment, and construction in progress outpaced by a $19.1 million net increase in accumulated depreciation. For the year, the District s total operating revenues increased to $458.2 million, a 4.0% increase from the prior year, while total operating expenses increased to $428.8 million, an increase of 3.2%. The current year increase in total operating revenues is primarily due to a 3.5% increase in net patient service revenue. This increase in net patient service revenue is attributable to the District s continuous efforts to improve clinical documentation, the result of which better reflects the acuity of patients and appropriately higher reimbursement rates, as well as the receipt of various supplemental Medicare and Medi Cal payments more fully described herein. Capital contributions to the Foundation were $756,000, a decrease from last year s contributions of $5.9 million. The decrease was due to the receipt of a large bequest in the prior year. During the fiscal year, the District made the following significant capital expenditures: electrical infrastructure for the original wing of the Medical Center design and construction of a helipad nuclear medicine scanners construction of graduate medical education classrooms and administrative areas nursing unit remodels The source of funding for these projects was derived from operations, capital contributions, bond and lease project funds, and funds reserved for capital acquisition. 1

4 MANAGEMENT S DISCUSSION AND ANALYSIS REQUIRED CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements of the District include: (a) a balance sheet, (b) a statement of revenues, expenses, and changes in net position, and (c) a statement of cash flows. The consolidated balance sheet includes information about the nature of the District s assets and liabilities and classifies them as current or non current. It also provides the basis for evaluation of the capital structure of the District and for assessing the liquidity and financial flexibility of the District. The District s revenues and expenses are accounted for in the consolidated statement of revenues, expenses, and changes in net position. This statement measures the District s operations and can be used to determine whether the District has been able to recover all of its operating costs from patient services and other operating revenue sources. The primary purpose of the consolidated statement of cash flows is to provide information about the District s cash from operating, non capital financing, capital and related financing, and investing activities. It provides answers to such questions as what were the District s sources of cash, what was cash used for, and what was the change in cash balances during the reporting period. 2

5 MANAGEMENT S DISCUSSION AND ANALYSIS TABLE 1 Financial Analysis of the District Condensed Consolidated Balance Sheets (in Thousands) A summary of the District s consolidated balance sheets is presented in Table 1 below: June 30, June 30, Dollar Total % Change Change Current and other assets $ 354,541 $ 323,995 $ 30, % Capital assets 270, ,915 (4,675) 1.7% Total assets $ 624,781 $ 598,910 $ 25, % Current and other liabilities $ 65,558 $ 70,942 $ (5,384) 7.6% Long term debt outstanding 198, ,480 4, % Total liabilities 264, ,422 (1,372) 0.5% Net investment in capital assets 80,298 81,901 (1,603) 2.0% Restricted 26,471 28,772 (2,301) 8.0% Unrestricted 253, ,815 31, % Total net position 360, ,488 27, % Total liabilities and net position $ 624,781 $ 598,910 $ 25, % As reflected in Table 1, net position increased $27.2 million to $360.7 million for the year ended June 30, 2013, primarily attributable to the District s $26.5 million income before contributions. 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS TABLE 2 Financial Analysis of the District (continued) Condensed Consolidated Balance Sheets (in Thousands) A summary of the District s consolidated balance sheets is presented in Table 2 below: June 30, June 30, Dollar Total % Change Change Current and other assets $ 323,995 $ 285,549 $ 38, % Capital assets 274, ,485 (15,570) 5.4% Total assets $ 598,910 $ 576,034 $ 22, % Current and other liabilities $ 70,942 $ 69,897 $ 1, % Long term debt outstanding 194, ,288 (5,808) 2.9% Total liabilities 265, ,185 (4,763) 1.8% Net investment in capital assets 81,901 92,099 (10,198) 11.1% Restricted 28,772 23,767 5, % Unrestricted 222, ,983 32, % Total net position 333, ,849 27, % Total liabilities and net position $ 598,910 $ 576,034 $ 22, % As reflected in Table 2, net position increased $27.6 million to $333.5 million for the year ended June 30, 2012, primarily attributable to the District s $21.7 million income before contributions. 4

7 MANAGEMENT S DISCUSSION AND ANALYSIS TABLE 3 Financial Analysis of the District (continued) Condensed Consolidated Statements of Revenues, Expenses, and Changes in Net Position (in Thousands) The following table presents a summary of the District s revenues, expenses, and changes in net position: Years Ended June 30, June 30, Dollar Total % Change Change Net patient services revenue $ 423,017 $ 408,618 $ 14, % Management services revenue 20,852 19,391 1, % Other operating revenue 14,379 12,790 1, % Total operating revenues 458, ,799 17, % Salaries and benefits 227, ,197 3, % Medical and other supplies 97,002 93,160 3, % Medical and other fees and services 50,102 46,716 3, % Maintenance, utilities, and rent 21,401 20,369 1, % Depreciation and amortization 22,110 22,795 (685) 3.0% Other 10,571 8,389 2, % Total operating expenses 428, ,626 13, % Operating income 29,460 25,173 4, % Non operating revenues net of non operating expenses (2,973) (3,466) % Income before contributions 26,487 21,707 4, % Capital contributions 756 5,932 (5,176) 87.3% Change in net position 27,243 27,639 (396) 1.4% Net position beginning of year 333, ,849 27, % Net position end of year $ 360,731 $ 333,488 $ 27, % 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS TABLE 4 Financial Analysis of the District (continued) Condensed Consolidated Statements of Revenues, Expenses, and Changes in Net Position (in Thousands) The following table presents a summary of the District s revenues, expenses, and changes in net position: Years Ended June 30, June 30, Dollar Total % Change Change Net patient services revenue $ 408,618 $ 409,106 $ (488) 0.1% Management services revenue 19,391 20,267 (876) 4.3% Other operating revenue 12,790 12, % Total operating revenues 440, ,822 (1,023) 0.2% Salaries and benefits 224, ,299 (8,102) 3.5% Medical and other supplies 93,160 99,863 (6,703) 6.7% Medical and other fees and services 46,716 42,912 3, % Maintenance, utilities, and rent 20,369 20, % Depreciation and amortization 22,795 23,003 (208) 0.9% Other 8,389 10,321 (1,932) 18.7% Total operating expenses 415, ,473 (12,847) 3.0% Operating income 25,173 13,349 11, % Non operating revenues net of non operating expenses (3,466) (2,913) (553) 19.0% Income before contributions 21,707 10,436 11, % Capital contributions 5, , % Change in net position 27,639 11,310 16, % Net position beginning of year 305, ,539 11, % Net position end of year $ 333,488 $ 305,849 $ 27, % 6

9 MANAGEMENT S DISCUSSION AND ANALYSIS SOURCES OF REVENUE Operating revenues For fiscal year 2013, the District derived 98.8% of its total revenues from operations. Operating revenues include, among other items, patient care revenue from Medicare, Medi Cal, and other federal, state, and local government programs, and commercial insurance payers and patients; management services revenue associated with the District s forty five percent (45%) ownership in SRCC Medical Oncology, LLC, a management services organization providing staff, facilities, and administrative services to a medical oncology physician group; cafeteria sales; membership sales and dues from a District owned health and fitness center; and minority ownership interests in a free standing ambulatory surgery center and an assisted living center. Non operating revenues For fiscal year 2013, the District derived 1.2% of its total revenues from investment income and property tax revenue including that associated with the 2004 general obligation bonds as well as an allocation of general property taxes assessed by the County of Tulare on properties residing within the District s geographical boundaries. OPERATING AND FINANCIAL PERFORMANCE The following summarizes the District s consolidated statements of revenues, expenses, and changes in net position between 2013 and 2012: Acute admissions decreased by 493, or 2.2%, to 21,954, while acute patient days decreased by 4,885, or 4.4%, to 107,453. Skilled nursing and long term subacute patient days increased to 20,478 in 2013 from 19,480 in 2012 primarily due to increased admissions to the subacute unit. Outpatient procedures and emergency room visits were 61,426, or 4.8%, above 2012 levels. Significant increases in emergency department visits, urgent care and prompt care center visits, diagnostic laboratory tests, radiology procedures, CT scan procedures, and rural health clinic visits contributed to the overall increase in outpatient activity for Net patient services revenue increased $14.4 million, or 3.5%, in The increase in net patient services revenue can mainly be attributed to the District s continuous efforts to improve clinical documentation, the result of which better reflects the acuity of patients and appropriately higher reimbursement rates, as well as the receipt of various supplemental Medicare and Medi Cal payments more fully described herein. The California Hospital Fee Program (the Program ) was signed into law by the Governor of California and became effective on January 1, Amending legislation to conform to changes requested by the Centers for Medicare & Medicaid Services ( CMS ) during the approval process was signed into law on September 8, 2010 by the Governor of California. The Program requires a hospital fee or Quality Assurance Fee ( QA Fee ) to be paid by certain hospitals to a State fund established to accumulate the assessed QA Fees and receive matching federal funds. QA Fees and corresponding matching federal funds are then paid to participating hospitals in two supplemental payment methodologies: a fee for service methodology and a managed care plan methodology. 7

10 MANAGEMENT S DISCUSSION AND ANALYSIS OPERATING AND FINANCIAL PERFORMANCE (CONTINUED) The District, as a non designated public hospital in California, is not subject to the QA Fee according to the legislation but does participate in the receipt of supplemental funding. The period covered by the Program included a substantial retroactive federal matching component, including all or a portion of the and federal fiscal years, but because final CMS approval required to enact the legislation was not received until fiscal year 2011, the revenue was recognized for retroactive periods in the period that final CMS approval of the Program was received. Legislation in March 2011 ( SB 90 ) extended the Program for the period from January 1, 2011 through June 30, 2011; however, the extension under SB 90 included only private hospitals and thus excluded the District. As an alternative, the Non designated Public Intergovernmental Transfer Program was established under AB 113 in 2011 to allow non designated public hospitals to access additional federal funds. Due to this legislation, in fiscal year 2012 the District recognized net patient services revenue of $7.3 million including intergovernmental transfer funding of $4.3 million related to the year ended June 30, 2012 and $3.0 million related to the year ended June 30, In fiscal year 2013, the District recognized net patient services revenue of $6.8 million including intergovernmental transfer funding of $6.5 million related to the year ended June 30, 2013 and $343,000 related to the year ended June 30, Additional legislation ( SB335 ) extended the Program for the period from July 1, 2011 through December 31, Again, the Program extension included only private hospitals but did allow for direct grants to non designated public hospitals. The District recognized net patient services revenue of $4.2 million and $1.6 million related to this grant program in fiscal years 2013 and 2012, respectively. Without considering the direct grant revenue and the Intergovernmental Transfer revenue discussed above, the District s net patient services revenue increased $12.2 million, or 3.1%, in At the same time, net patient services revenue per adjusted patient day (the amount of net patient services revenue actually collected per equivalent patient encounter) increased from $1,763 to $1,789, or 1.5%, from 2012 to Management services revenue increased $1.5 million, or 7.5%, from The increase in revenue is primarily associated with the increase in revenue generated by the SRCC Medical Oncology joint venture. Other operating revenue consists primarily of cafeteria sales, equity ownership in an ambulatory surgery center and assisted living center, contributions, and health and fitness center membership sales and dues. Other operating revenue increased by $1.6 million, or 12.4%. Other operating income was positively impacted by the recognition of $3.8 million of Health Information Technology for Economic and Clinical Health ( HITECH ) Act funding earned during 2013, as compared to the $2.0 million of HITECH funding earned and recognized during Salaries and benefits expense increased $3.4 million, or 1.5%. Salaries and wages increased $3.0 million, or 1.6%, and employee benefits expense increased $435,000, or 1.1%, from The increase in salaries and wages was mainly attributable to an increase in the average hourly wage rate while the increase in employee benefits was driven by an increase in pension expense due to an increased 401(k) match. Medical and other supplies increased $3.8 million, or 4.1%, from 2012 due mainly to an increase in pharmaceutical cost associated with SRCC Medical Oncology volume, as well as an increase in the District s inpatient and employee pharmacy costs. 8

11 MANAGEMENT S DISCUSSION AND ANALYSIS OPERATING AND FINANCIAL PERFORMANCE (CONTINUED) Medical and other fees and services increased $3.4 million, or 7.2%, due to increases in rural health clinic physician fees, graduate medical education physician fees, contract labor, and staff recruitment fees. Maintenance, utilities, and rent increased by $1.0 million, or 5.1%, during 2013 primarily due to an increase in the cost of repairs and maintenance expense related to information systems. Depreciation and amortization expense decreased $685,000, or 3.0%. Other expenses increased by $2.2 million, or 26.0%, resulting mainly from an increase in professional liability expense. Total operating expenses increased by $13.2 million, or 3.2%. Non operating revenues of $5.7 million for fiscal year 2013 are comprised of $3.9 million of tax revenue received from the County of Tulare and $1.8 million in investment income on cash and investments. Tax revenue decreased by $126,000, or 3.1%, in Investment income represents interest income and realized and unrealized gains and losses on District and Foundation investments. District investments by law may only be invested in high grade, governmental and commercial fixed income securities, and money market funds. Investment income for 2013 decreased $138,000, or 7.0%, from 2012 due to a $690,000 decrease in unrealized gains associated with governmental and commercial bonds and the Foundation s equity investments offset by an increase in investment yields. Non operating expenses represent interest expense recognized during 2013 on the District s short and long term debt consisting of a line of credit, revenue bonds, a note payable, and capital leases. Total interest expense of $8.7 million decreased by $756,000, or 8.0%, from For fiscal year 2013, capital contributions of $756,000 represent amounts received from Foundation donors to support specific capital purposes. The Foundation exists to support the needs of the District and to help build support for the District and our community. The following summarizes the District s consolidated statements of revenues, expenses, and changes in net position between 2012 and 2011: Acute admissions decreased by 930, or 4.0%, to 22,447, while acute patient days decreased by 8,887, or 7.3%, to 112,338. Skilled nursing and long term subacute patient days decreased to 19,480 in 2012 from 20,785 in 2011 primarily due to decreased admissions to the skilled nursing orthopedic unit. Outpatient procedures and emergency room visits were 127,245, or 11.2%, above 2011 levels. Significant increases in emergency department visits, urgent care center visits, diagnostic laboratory tests, radiology procedures, cardiac catheterization lab procedures, and rural health clinic visits contributed to the overall increase in outpatient activity for

12 MANAGEMENT S DISCUSSION AND ANALYSIS OPERATING AND FINANCIAL PERFORMANCE (CONTINUED) Net patient services revenue decreased $488,000, or 0.1%, in The decrease in net patient services revenue can be attributed to $14.2 million of quality assurance fee revenue received in While no quality assurance fee revenue was received in 2012, the District recognized $7.3 of Intergovernmental Transfer ( IGT ) revenue and $1.6 million of direct grant revenue in The California Hospital Fee Program (the Program ) was signed into law by the Governor of California and became effective on January 1, Amending legislation to conform to changes requested by the Centers for Medicare & Medicaid Services ( CMS ) during the approval process was signed into law on September 8, 2010 by the Governor of California. The Program requires a hospital fee or Quality Assurance Fee ( QA Fee ) to be paid by certain hospitals to a State fund established to accumulate the assessed QA Fees and receive matching federal funds. QA Fees and corresponding matching federal funds are then paid to participating hospitals in two supplemental payment methodologies: a fee for service methodology and a managed care plan methodology. The District, as a non designated public hospital in California, is not subject to the QA Fee according to the legislation. During fiscal year 2011, the District received approximately $8.2 million in fee for service supplemental payments and $6.0 million in additional managed care plan supplemental payments. The period covered by the Program included a substantial retroactive federal matching component, including all or a portion of the and federal fiscal years, but because final CMS approval required to enact the legislation was not received until fiscal year 2011, the revenue was recognized for retroactive periods in the period that final CMS approval of the Program was received. Legislation in March 2011 ( SB 90 ) extended the Program for the period from January 1, 2011 through June 30, 2011; however, the extension under SB 90 included only private hospitals and thus excluded the District. As an alternative, the Non designated Public Intergovernmental Transfer Program was established under AB 113 in 2011 to allow non designated public hospitals to access additional federal funds. Due to this legislation, in fiscal year 2012 the District recognized net patient services revenue of $7.3 million including intergovernmental transfer funding of $4.3 million related to the year ended June 30, 2012 and $3.0 million related to the year ended June 30, Additional legislation ( SB335 ) extended the Program for the period from July 1, 2011 through December 31, Again, the Program extension included only private hospitals but did allow for direct grants to non designated public hospitals. The District recognized net patient services revenue of $1.6 million related to this grant program in fiscal year Without considering the $14.2 million of quality assurance fee, the $1.6 million of direct grant revenue and the $7.3 million of Intergovernmental Transfer revenue discussed above, the District s net patient services revenue increased $4.9 million, or 1.2%, in At the same time, net patient services revenue per adjusted patient day (the amount of net patient services revenue actually collected per equivalent patient encounter) decreased from $1,812 to $1,763, or 2.7%, from 2011 to 2012, primarily due to a disproportionate increase in outpatient volumes compared to the decrease in inpatient volumes. Management services revenue decreased $876,000, or 4.3%, from The decrease in revenue is primarily associated with the decrease in revenue generated by the SRCC Medical Oncology joint venture. 10

13 MANAGEMENT S DISCUSSION AND ANALYSIS OPERATING AND FINANCIAL PERFORMANCE (CONTINUED) Other operating revenue consists primarily of cafeteria sales, equity ownership in an ambulatory surgery center and assisted living center, contributions, and health and fitness center membership sales and dues. Other operating revenue increased by $341,000, or 2.7%. Other operating income was positively impacted by the recognition of $2.0 million of Health Information Technology for Economic and Clinical Health ( HITECH ) Act funding earned during The increase in other operating revenue associated with HITECH funding was offset by decreases in income from health related investments, grant revenue and health and fitness membership revenue. Salaries and benefits expense decreased $8.1 million, or 3.5%. While salaries and wages remained consistent with 2011, employee benefits expense decreased $8.5 million, or 17.4%, from This decrease in employee benefits was attributable to a decrease in pension expense due to the freeze of the defined benefit pension plan effective June 30, 2011, and a decrease in workers compensation claims experience. Medical and other supplies decreased $6.7 million, or 6.7%, from 2011 due to the aforementioned decrease in patient volumes, and the related cost of medical surgical supplies and pharmaceuticals. Medical and other fees and services increased $3.8 million, or 8.9%, due to increases in prompt care physician fees, rural health clinic physician fees, radiology physician fees, anesthesiology physician fees, graduate medical education, and physician hospitalist fees. Maintenance, utilities, and rent increased by $294,000, or 1.5%, during 2012 primarily due to an increase in the cost of repairs and maintenance expense related to information systems. Depreciation and amortization expense decreased $208,000, or 0.9%. Other expenses decreased by $1.9 million, or 18.7%, resulting mainly from a decrease in professional liability expense. Total operating expenses decreased by $12.8 million, or 3.0%, primarily due to salaries and benefits, and medical and other supplies. Non operating revenues of $6.0 million for fiscal year 2012 are comprised of $4.0 million of tax revenue received from the County of Tulare and $2.0 million in investment income on cash and investments. Tax revenue decreased by $94,000 in Investment income represents interest income and realized and unrealized gains and losses on District and Foundation investments. District investments by law may only be invested in high grade, governmental and commercial fixed income securities, and money market funds. Investment income for 2012 decreased by $1.0 million from 2011 due to a $486,000 decrease in unrealized gains associated with governmental and commercial bonds and the Foundation s equity investments and a decrease in investment yields. Non operating expenses represent interest expense paid during 2012 on the District s short and long term debt consisting of a line of credit, revenue bonds, a note payable, and capital leases. Total interest expense of $9.5 million decreased by $564,000, or 5.6%, from For fiscal year 2012, capital contributions of $5.9 million represent amounts received from Foundation donors to support specific capital purposes. The Foundation exists to support the needs of the District and to help build support for the District and our community. 11

14 MANAGEMENT S DISCUSSION AND ANALYSIS BUDGET RESULTS The Board of Directors approves the annual operating budget of the District. The budget remains in effect the entire year but is updated as needed for internal management use to reflect changes in activity and approved variances. A fiscal year 2013 budget comparison and analysis is presented below. TABLE 5 Actual vs. Budget (in Thousands) Years Ended June 30, Dollar Total % Actual Budget Change Change Net patient services revenue $ 423,017 $ 417,078 $ 5, % Management services revenue 20,852 20, % Other operating revenue 14,379 11,576 2, % Total operating revenues 458, ,180 9, % Salaries and benefits 227, ,798 (6,196) 2.7% Medical and other supplies 97,002 94,535 2, % Medical and other fees and services 50,102 46,916 3, % Maintenance, utilities, and rent 21,401 21,435 (34) 0.2% Depreciation and amortization 22,110 23,373 (1,263) 5.4% Other 10,571 10,932 (361) 3.3% Total operating expenses 428, ,989 (2,201) 0.5% Operating income 29,460 18,191 11, % Non operating revenues net of non operating expenses (2,973) (3,385) % Income before contributions $ 26,487 $ 14,806 $ 11, % 12

15 BUDGET RESULTS (CONTINUED) MANAGEMENT S DISCUSSION AND ANALYSIS In comparing actual versus budgeted 2013 results, the following is noted: The District completed its fiscal year 2013 $11.7 million, or 78.9%, in excess of budgeted income before contributions of $14.8 million. The excess of profitability compared to budget is primarily attributable to income from operations. The District s operating income surpassed budget expectations by $11.3 million, or 61.9%. Net patient services revenue exceeded budget by $5.9 million, or 1.4%, mainly due to the recognition of $4.2 million of provider fee grant revenue and $2.9 million fee for service intergovernmental transfer revenue discussed above that was not anticipated in the District s fiscal year 2013 budget. Management services revenue and other operating revenue exceeded budget by $3.1 million, or 9.7%, in total. This variance was attributable to the recognition of $2.5 million of unbudgeted Medicare HITECH revenue. The District realized a favorable variance in total operating expenses of $2.2 million, or 0.5%, in fiscal year This favorable expense variance was primarily due to salaries and benefits and depreciation and amortization expense which were $6.2 million, or 2.7%, and $1.3 million, or 5.4%, lower than expected, offset by medical and other supplies and medical and other fees and services which surpassed budget expectations by $2.5million, or 2.6%, and $3.2million, or 6.8%, respectively. 13

16 MANAGEMENT S DISCUSSION AND ANALYSIS CAPITAL ASSETS At June 30, 2013, the District had $270.2 million invested in a variety of capital assets, as reflected in the following schedule (in thousands), which represents a net decrease (additions less retirements and depreciation) of $4.7 million from the end of the prior year. June 30, June 30, Dollar Total % Change Change Land $ 13,832 $ 13,832 $ 0.0% Buildings and improvements 300, ,166 7, % Equipment 146, ,782 7, % Construction in progress 6,851 6, % 468, ,575 14, % Less accumulated depreciation 214, ,343 14, % 253, ,232 (477) 0.2% Property under capital leases less accumulated amortization 16,485 20,683 (4,198) 20.3% Capital assets, net $ 270,240 $ 274,915 $ (4,675) 1.7% Material additions during FY 2013 included (in thousands): Construction and equipment costs related to: Helipad $ 2,396 Electrical infrastructure replacement $ 1,966 Nursing units remodel $ 702 Graduate medical education classrooms and administration $ 688 MRI suite Acequia Wing $ 439 Wound care center $ 345 Labor and delivery triage area $ 296 Nuclear medicine scanners $ 966 Voic and phone upgrades $ 761 Cogeneration turbine engine $

17 MANAGEMENT S DISCUSSION AND ANALYSIS LONG TERM DEBT At June 30, 2013, the District had approximately $204,411,000 in capital lease obligations, notes payable, and revenue and general obligation bonds outstanding as described in Notes 8 and 9 of the consolidated financial statements. The general obligation bonds represent the general obligation of the District. The District has the power and is obligated to cause annual ad valorem taxes to be levied upon all property within the District, subject to taxation by the District, and collected by the County of Tulare for payment, when due, of the principal and interest on the bonds. The bond indenture agreements contain various restrictive covenants which include, among other things, minimum debt service coverage, maintenance of minimum liquidity, restrictions on certain additional indebtedness, and requirements to maintain certain financial ratios. In September 2011, the District entered into an $18.1 million tax exempt master lease agreement for the purpose of refunding the $18.0 million of Series 2005 revenue bonds outstanding. The lease provides for equal monthly payments of principal and interest beginning October 22, 2011 and ending March 22, The lease is secured by a security interest in the equipment funded by the 2005 revenue bonds as well as other equipment recently purchased by the District. The current refunding of the Series 2005 bonds resulted in decreased debt service payments of approximately $2.2 million over the next 8.5 years and an economic gain (difference between the present value of the debt service payments on the old and new debt) of approximately $1.8 million. In July 2012, the District issued $75,800,000 of Kaweah Delta Health Care District Revenue Bonds, Series The 2012 bonds bear interest at rates of 2.0% to 5.0%. Approximately $9.8 million of the net proceeds of the bonds will be used by the District to expand its ambulatory surgery services, to expand its endoscopy service, to complete capital improvements related to the graduate medical education program, and for other infrastructure improvements. Approximately $68.0 million of the net proceeds was used to prepay existing debt, including the 1999A, 2003B, and 2004 revenue bonds. The 2012 revenue bonds maturing on or after June 1, 2017 are subject to redemption at the option of the District prior to their respective stated maturities at amounts ranging from 100% to 102% of face value. The 2012 revenue bonds require the District to make minimum sinking fund payments beginning in June The current refunding of the Series 1999A, 2003B, and 2004 bonds resulted in decreased debt service payments of approximately $8.7 million over the next 21 years and an economic gain (difference between the present value of the debt service payments on the old and new debt) of approximately $7.1 million. 15

18 MANAGEMENT S DISCUSSION AND ANALYSIS ECONOMIC OUTLOOK The District s Board and management considered many factors when setting the fiscal year 2014 budget. Of primary importance in setting the 2014 budget is the status of the California economy, the fiscal policy of the state and federal governments, the availability and affordability of labor, the general rise of health care related costs, and local and regional competition for health care services. Specific factors and assumptions incorporated in the District s fiscal year 2014 budget include: Inpatient utilization is projected to increase by 2.7% from 2013 levels reflecting an average daily patient census of 377. Outpatient activity expressed in equivalent inpatient days is projected to increase 1.9% from Implementation of a comprehensive adjustment of all retail charges to approximate a 60 th percentile position with the market, retain overall gross patient charges neutrality and result in an estimated $700,000 increase in net patient service revenue. Medicare rate decreases (market basket increases reduced by 2.0% for continued sequestration reductions) of approximately 1.2% related to general acute inpatient services, 0.3% for outpatient services, 0.6% for skilled nursing and subacute services, 1.7% for home health services, and 1.3% for rural health clinic services. No anticipated change to acute rehabilitation and acute psychiatric Medicare reimbursement. A 5.0% reduction in Medi Cal fee for service acute medical/surgical and rehabilitation services effective January 1, 2014 due to the transition to a DRG based payment system, with no change in reimbursement anticipated for skilled nursing, subacute, psychiatric, home health, outpatient, and rural health clinic Medi Cal fee for service reimbursement. Includes $1.0 million in anticipated fee for service intergovernmental transfer revenue related to the first six months of the fiscal year and $3.0 million provider fee grant revenue. Medi Cal managed care reimbursement rate increases of approximately 3.0% based on scheduled rate increases included in multi year contracts. Includes $3.0 million of Medi Cal managed care program intergovernmental transfer revenue and $1.5 million of Low Income Health Program ( LIHP ) payments for the first six months of the fiscal year. Annual scheduled rate increases for non government managed care payers for contracts negotiated in prior years as well as expected new negotiated increases with managed care plans averaging 4.0%. Projected unreimbursed charity care costs for fiscal year 2014 of $15.4 million. Overall expense per adjusted patient day is projected to increase by 3.6% from the prior year. Through the first two months of fiscal year 2014, the District has posted an unaudited operating income of $566,000, a 0.8% operating margin, putting the District approximately $1.9 million behind its budgeted operating income of $2.4 million. Through August 31, 2013, the District experienced net income before contributions of $1.2 million, a 1.4% excess margin, representing a negative variance of $1.8 million from its year to date budgeted income before contributions of $2.9 million. The operating income and income before contributions budget variances are attributable to lower thanexpected inpatient volume and associated net patient services revenue for the first two months of the fiscal year. 16

19 Board of Directors Kaweah Delta Health Care District Report on Financial Statements REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated financial statements of Kaweah Delta Health Care District, which comprise the consolidated balance sheets as of June 30, 2013 and 2012, and the related consolidated statements of revenues, expenses, and changes in net position, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kaweah Delta Health Care District as of June 30, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 17

20 Other Matter Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 1 through 16 and the supplemental pension benefit information on page 51 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Stockton, California October 15,

21 CONSOLIDATED BALANCE SHEETS

22 CONSOLIDATED BALANCE SHEETS ASSETS JUNE 30, CURRENT ASSETS Cash and cash equivalents $ 2,095,399 $ 9,516,045 Current portion of board designated and trusteed assets 8,826,674 11,341,473 Accounts receivable Net patient accounts 86,700,477 83,867,080 Other 4,897,197 3,423,952 91,597,674 87,291,032 Inventories 5,277,167 5,120,913 Medicare and Medi Cal settlements 10,760,109 8,135,931 Prepaid expenses 4,250,289 4,779,384 Total current assets 122,807, ,184,778 NON CURRENT CASH AND INVESTMENTS less current portion Board designated assets 188,931, ,063,477 Bond and lease assets held in trust 14,405,794 7,063,504 Assets in self insurance trust fund 8,268,888 9,170, ,606, ,297,947 CAPITAL ASSETS Land 13,832,285 13,832,285 Buildings and improvements 300,498, ,165,712 Equipment 146,849, ,781,682 Construction in progress 6,851,478 6,795, ,031, ,574,938 Less accumulated depreciation 214,276, ,342, ,755, ,232,076 Property under capital leases less accumulated amortization 16,484,556 20,682, ,239, ,914,880 OTHER ASSETS Property not used in operations 3,052,444 3,063,691 Health related investments 3,077,574 3,402,775 Other 13,998,024 13,045,862 20,128,042 19,512,328 TOTAL ASSETS $ 624,781,313 $ 598,909,933 20

23 CONSOLIDATED BALANCE SHEETS LIABILITIES AND NET POSITION JUNE 30, CURRENT LIABILITIES Line of credit $ $ 4,000,000 Accounts payable and accrued expenses 21,185,123 23,712,645 Accrued payroll and related liabilities 24,009,202 24,006,719 Long term debt current portion 5,919,248 5,597,993 Total current liabilities 51,113,573 57,317,357 LONG TERM DEBT less current portion Bonds payable 173,760, ,561,700 Notes payable 116, ,146 Capital leases 24,614,711 26,685, ,491, ,479,456 OTHER LONG TERM LIABILITIES 14,444,907 13,624,681 Total liabilities 264,049, ,421,494 NET POSITION Net investments in capital assets 80,297,940 81,900,935 Restricted Expendable 19,957,021 23,343,094 Non expendable minority interest 1,611,450 1,396,034 Non expendable permanent endowments 4,902,742 4,033,128 Unrestricted 253,962, ,815,248 Total net position 360,731, ,488,439 TOTAL LIABILITIES AND NET POSITION $ 624,781,313 $ 598,909,933 See accompanying notes 21

24 CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION YEARS ENDED JUNE 30, OPERATING REVENUES Net patient services revenue $ 423,017,013 $ 408,617,963 Other revenues Management services revenue 20,852,576 19,390,883 Other 14,378,609 12,789,943 Total other revenues 35,231,185 32,180,826 Total operating revenues 458,248, ,798,789 OPERATING EXPENSES Salaries and wages 186,906, ,936,208 Employee benefits 40,695,791 40,260,844 Total employment expenses 227,602, ,197,052 Medical and other supplies 97,001,807 93,160,152 Medical and other fees 36,823,163 34,493,417 Purchased services 13,278,818 12,222,795 Repairs and maintenance 15,207,653 14,065,678 Utilities 4,881,110 4,839,746 Rents and leases 1,312,428 1,463,575 Depreciation and amortization 22,110,104 22,794,519 Other 10,570,989 8,388,763 Total operating expenses 428,788, ,625,697 OPERATING INCOME 29,459,940 25,173,092 NON OPERATING REVENUES (EXPENSES) Tax revenue 3,892,674 4,018,341 Investment income 1,849,767 1,987,888 Interest expense (8,715,835) (9,472,076) Total non operating revenues (expenses) (2,973,394) (3,465,847) INCOME BEFORE CAPITAL CONTRIBUTIONS 26,486,546 21,707,245 CAPITAL CONTRIBUTIONS 756,357 5,932,671 Change in net position 27,242,903 27,639,916 NET POSITION beginning of year 333,488, ,848,523 NET POSITION end of year $ 360,731,342 $ 333,488, See accompanying notes

25 CONSOLIDATED STATEMENTS OF CASH FLOWS

26 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, CASH FLOWS FROM OPERATING ACTIVITIES Cash received from patient services revenue $ 419,133,119 $ 401,790,619 Cash received from management services and other operating revenues 33,743,193 29,951,213 Cash payments for salaries, wages, and related benefits (229,366,095) (225,779,863) Cash payments for other operating expenses (183,185,985) (167,568,635) Net cash from operating activities 40,324,232 38,393,334 CASH FLOWS FROM NON CAPITAL FINANCING ACTIVITIES Tax revenue 1,084, ,594 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Interest payments on bonds payable, capital leases, and notes payable (10,081,680) (9,794,141) Principal payments on bonds payable, capital leases, and notes payable (8,067,993) (4,884,723) Net proceeds from revenue bonds and municipal leases 79,059,703 17,974,422 Current refunding of revenue bonds (69,489,800) (18,360,000) Contributions received for capital expenditures 756, ,711 Tax revenue related to general obligation bonds 2,808,391 3,002,394 Purchase of capital assets (15,053,816) (6,311,464) Proceeds from disposal of capital assets 29,200 48,172 Net cash used for capital and related financing activities (20,039,638) (17,565,629) CASH FLOWS FROM INVESTING ACTIVITIES Interest income on investments 2,429,404 2,593,076 Purchase of investments (160,248,503) (87,469,269) Health related investment distributions 154, ,000 Proceeds from sales and maturities of investments 129,972,831 71,123,216 Net cash used for investing activities (27,692,268) (13,488,977) NET CHANGE IN CASH AND CASH EQUIVALENTS (6,323,391) 8,270,322 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 90,738,552 82,468,230 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 84,415,161 $ 90,738,552 24

27 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE SHEET Cash and cash equivalents in current assets $ 2,095,399 $ 9,516,045 Cash and cash equivalents in non current cash and investments Board designated cash and investments 63,914,924 67,948,422 Bond and lease assets held in trust 18,146,517 13,269,955 Assets in self insurance trust fund 258,321 4,130 $ 84,415,161 $ 90,738,552 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 29,459,940 $ 25,173,092 Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization 22,110,104 22,794,519 Provision for bad debts 12,605,170 19,856,474 (Gain) loss on disposal of capital assets (18,607) 107,337 Changes in: Increase in accounts receivable (16,911,812) (17,877,956) Increase in inventories, prepaid expenses, and other assets (4,620,782) (11,533,404) (Increase) decrease in accounts payable and accrued expenses, accrued payroll, and related liabilities, and other long term liabilities (2,299,781) (126,728) Net cash from operating activities $ 40,324,232 $ 38,393,334 See accompanying notes 25

28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION AND ACCOUNTING POLICIES A summary of significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: Reporting entity Kaweah Delta Health Care District (the District ) is a political subdivision of the state of California, organized and existing under the State of California Local Health Care District Law as set forth in the Health and Safety Code of the state of California. The District is governed by a separately elected Board of Directors. The accounting policies of the District conform to those recommended by the Health Care Committee of the American Institute of Certified Public Accountants. The District s consolidated financial statements are presented in accordance with the pronouncements of the Governmental Accounting Standards Board ( GASB ), and the Financial Accounting Standards Board ( FASB ) when applicable. The District is not generally subject to state and federal income taxes. The District provides health services to individuals who reside primarily in the local geographic area. Principles of consolidation The consolidated financial statements of the District include the accounts of the District, Kaweah Delta Hospital Foundation (the Foundation ), Sequoia Regional Cancer Center, LLC ( SRCC ), Sequoia Regional Cancer Center Medical Oncology, LLC ( SRCC MO ), and TKC Development, LLC ( TKC ). SRCC, SRCC MO, TKC, and the Foundation are component units that have been blended for presentation purposes. The District has a 75% interest in TKC, which leases real estate and equipment from the District and then subleases the real estate and equipment to SRCC and SRCC MO. The District has a 75% interest in SRCC and a 45% interest in SRCC MO, management services organizations providing staff, facilities, and administration services to the radiation oncology department of the District and a medical oncology physician group, respectively. The District provides key management, administrative, and support services to SRCC and SRCC MO, including all of their employees, leased buildings and equipment, accounting, human resources, information technology, housekeeping, risk management, and maintenance services. The Foundation was established in March 1980 as an exempt organization under Internal Revenue Code Section 501(c)(3) to raise funds to support the operation of the District. The Foundation s bylaws provide that all funds raised be distributed to or be held for the benefit of the District. The Foundation s general funds, which represent the Foundation s unrestricted resources, will be distributed to the District in amounts and in periods determined by the Foundation s Board of Trustees. All intercompany transactions have been eliminated in the District s consolidated financial statements. 26