Halifax Hospital Medical Center d/b/a Halifax Health. Financial Report September 30, 2014

Transcription

1 Financial Report September 30, 2014

2 Contents Independent Auditor s Report 1 3 Management s Discussion and Analysis (Unaudited) 4 12 Financial Statements: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position 15 Statement of Cash Flows Statement of Fiduciary Net Position 18 Statement of Changes in Fiduciary Net Position 19 Notes to Financial Statements Required Supplementary Information (unaudited): Schedule of Changes in Net Pension Liability Halifax Pension Plan 54 Schedule of Funding Progress Halifax Pension Plan 55 Schedule of Actuarially Determined Contributions Halifax Pension Plan 56 Notes to Required Supplementary Information Halifax Pension Plan 57 Schedule of Funding Progress Halifax Insurance Subsidy OPEB 58 Schedule of Funding Progress Halifax Implicit Rate Subsidy OPEB 59 Other Supplementary Information: Schedule of Net Position Obligated Group Schedule of Revenues, Expenses and Changes in Net Position Obligated Group 62 Note to Schedules Obligated Group 63

3 Independent Auditor s Report To the Honorable Commissioners of the Board Halifax Hospital Medical Center Daytona Beach, Florida Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities, the aggregate discretely presented component units, and the aggregate remaining fund information of Halifax Hospital Medical Center ( Halifax Health ), as of and for the year ended September 30, 2014, and the related notes to the financial statements, which collectively comprise Halifax Health s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We did not audit the financial statements of Halifax Management System, Inc. ( HMS ), a discretely presented component unit, which statements reflect total assets constituting approximately 13% of the aggregate discretely presented component units total assets as of September 30, 2014, and total revenues constituting approximately 5% of the aggregate discretely presented component units total revenues for the year then ended. We also did not audit the basic financial statements of Halifax Health s fiduciary activities as of and for the year ended September 30, 2014, as presented on pages 18 19, which represent 100% of the total assets and additions of the aggregate remaining fund information. Those statements were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for HMS and Halifax Health s fiduciary activities, is based solely on the reports of the other auditors. We conducted our audit 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to Halifax Health s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Halifax Health s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 1

4 Opinions In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities, the aggregate discretely presented component units, and the aggregate remaining fund information of Halifax Health as of September 30, 2014, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 14 to the financial statements, Halifax Health settled claims related to an investigation by the Office of Inspector General (OIG), U.S. Department of Health and Human Services concerning certain claims that were submitted to Medicare and arose from a qui tam action. Our opinion is not modified with respect to this matter. As explained in Note 2 to the basic financial statements, Halifax Health adopted GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, GASB Statement No. 67, Financial Reporting for Pension Plans an Amendment of GASB Statement No. 25 and GASB Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27, which are applied by retroactively restating the beginning net position of the business-type activities. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that Management s Discussion and Analysis on pages 4 12 and the required supplementary information on pages 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. Other Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise Halifax Health s basic financial statements. The accompanying Obligated Group financial information on pages is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The Obligated Group financial information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, based on our audit the Obligated Group financial information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 2

5 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued, under separate cover, our report dated January 6, 2015, on our consideration of Halifax Health s internal control over financial reporting and on 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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Halifax Health s internal control over financial reporting and compliance. Davenport, Iowa January 6,

6 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 INTRODUCTION This section of the Halifax Hospital Medical Center (the Medical Center ) s annual financial report provides an overview of the organization and management s discussion and analysis of financial performance and results for the fiscal year ended September 30, This analysis should be read in conjunction with the accompanying basic financial statements. The current enabling act of the Medical Center was passed by a special act of the Florida Legislature as Chapter , Laws of Florida (the Act ), which codified all prior laws that established the Medical Center as a special taxing district, a public body corporate and politic of the State of Florida. The Medical Center was originally created in 1925 under the name Halifax Hospital District by Chapter , Laws of Florida, The Medical Center s Board of Commissioners (the Board ) is empowered to levy ad valorem taxes for operating expenses, capital outlays, and other purposes. Pursuant to the Act, the Medical Center has all the powers of a body corporate, including, but not limited to, the power to establish, construct, operate, and maintain such hospitals, medical facilities, and healthcare facilities and services for the preservation of the public health, for the public good, and for the use of the public; the power to enter into contracts; borrow money; establish for-profit and not-for-profit corporations; the power to acquire, purchase, hold, lease, and convey real and personal property; and the power of eminent domain. The Medical Center s geographic territory is primarily northeastern Volusia County, Florida, including the cities of Daytona Beach, Ormond Beach, Holly Hill, Port Orange, DeLand, DeLeon Springs, Oak Hill, Orange City, Osteen, Edgewater, New Smyrna Beach, Pierson, Seville, Debary, Deltona, Lake Helen, Palm Coast, Flagler Beach, and Bunnell. The Medical Center owns and operates three inpatient hospital facilities under one license. The main campus of the Medical Center, located in Daytona Beach, is the inpatient referral center which includes a Level II neonatal intensive care center and a Level II state-certified trauma center, offering open-heart surgery, neurosurgery, inpatient rehabilitation and other specialty inpatient and outpatient services. The Port Orange campus, located ten miles south of the main campus, is a community hospital providing a broad range of services to the residents of Port Orange and southeast Volusia County. The Halifax Behavioral Services (HBS) campus, two miles north of the main campus, provides inpatient and outpatient child, adolescent, and adult psychiatric services. The Medical Center is licensed by the Agency for Health Care Administration (AHCA) to operate with 764 beds and 33 bassinets. The licensed beds by location are set forth in the table below: Licensed Beds by Location Main campus: Inpatient hospital 614 Inpatient rehabilitation 40 Port Orange campus 80 HBS campus 30 Total 764 In addition to its inpatient facilities, the Medical Center owns and operates outpatient centers in Daytona Beach, Port Orange, Ormond Beach, Palm Coast and Deland. 4

7 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 The Medical Center has established not-for-profit corporations (the component units or the affiliates ) to assist in carrying out its purpose to provide health care and related services to the community. The component units are legally separate organizations for which the Medical Center is financially accountable and the nature and significance of their relationship to the Medical Center are such that exclusion would cause the Medical Center s financial statements to be misleading or incomplete. The component units of the Medical Center are: East Volusia Health Services, Inc. ( EVHS ) HH Holdings, Inc. ( Holdings ) Halifax Healthcare Systems, Inc. ( HHCSI ) Halifax Healthy Families Corporation d/b/a Healthy Communities ( Healthy Communities ) Halifax Hospice, Inc. Hospice of Volusia/Flagler ( Hospice ) Halifax Management System, Inc. ( HMS ) Halifax Medical Center Foundation, Inc. ( Foundation ) Halifax Staffing, Inc. ( Staffing ) Patient Business & Financial Services, Inc. ( PBFS ) Volusia Health Ventures, Inc. d/b/a Volusia Health Network ( VHN ) EVHS, Holdings, HHCSI, Healthy Communities, Staffing, and PBFS are considered blended component units of the Medical Center and their financial results are blended with the Medical Center in the accompanying financial statements. Hospice, HMS, Foundation, and VHN are considered discrete component units and are presented in aggregate in a separate column in the financial statements. See Note 1 of the audited financial statements for a description of each component unit and combining schedules. The Medical Center together with all of its component units is referred to as Halifax Health. OVERVIEW OF THE FINANCIAL STATEMENTS This annual financial report includes the independent auditor s report, management s discussion and analysis, and the basic financial statements of the Medical Center. The basic financial statements are intended to describe the net position, results of operations, sources and uses of cash, and the capital structure of the Medical Center. Fiduciary fund statements for the pension trust fund are also provided as part of the basic financial statements. The basic financial statements include notes providing detailed information for select accounts and transactions. In addition to the aforementioned content, the annual financial report includes required supplementary information composed of unaudited schedules of changes in net pension liability, funding progress, and actuarially determined contributions for the Halifax Pension Plan, and schedules of funding progress for the Halifax Insurance Subsidy and for the Halifax Implicit Rate Subsidy postemployment benefit plans. Schedules of net position and revenues, expenses, and changes in net position for the Obligated Group, which is comprised of the Medical Center and Holdings, are included as additional (supplementary) information. 5

8 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 NET POSITION AND CHANGES IN NET POSITION Net position is an indicator of the financial health of an organization. Increases in net position over time indicate that the financial condition is improving while decreases in net position over time signify a declining financial condition. A comparative summary of the financial condition of the Medical Center and the aggregate of its discrete component units is presented below: Condensed Statements of Net Position (In thousands) Discrete Halifax Discrete Halifax Medical Component Health Medical Component Health Center Units Total Center Units Total Current assets $ 292,055 $ 94,194 $ 386,249 $ 268,799 $ 86,919 $ 355,718 Assets whose use is limited, noncurrent 61,301 8,511 69, ,454 8, ,983 Capital assets, net 332,502 36, , ,918 35, ,494 Other noncurrent assets and 2014 deferred outflows 59,425 5,354 64,779 42,026 4,002 46,028 Total assets and deferred outflows $ 745,283 $ 144,675 $ 889,958 $ 819,197 $ 135,026 $ 954, Current liabilities $ 81,450 $ 6,943 $ 88,393 $ 77,210 $ 6,140 $ 83,350 Long-term debt 341,784 6, , ,258 7, ,210 Other noncurrent liabilities 210,211 11, ,392 39,065 2,003 41,068 Total liabilities and deferred inflows 633,445 24, , ,533 16, ,628 Net investment in capital assets 41,656 28,141 69,797 61,535 25,586 87,121 Restricted net position - 5,841 5,841-5,855 5,855 Unrestricted net position 70,182 86, , ,129 87, ,619 Total net position 111, , , , , ,595 Total liabilities, deferred inflows and net position $ 745,283 $ 144,675 $ 889,958 $ 819,197 $ 135,026 $ 954,223 6

9 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 The statements of revenues, expenses, and changes in net position measures the annual operating success of the organization and can be used to determine whether costs have been recovered through operating revenue sources. Following is a comparative summary of the operations of the Medical Center and the aggregate of its discrete component units. Discrete Halifax Discrete Halifax Medical Component Health Medical Component Health Center Units Total Center Units Total Operating revenue $ 434,500 $ 51,522 $ 486,022 $ 419,026 $ 57,899 $ 476,925 Operating expenses 500,177 46, , ,099 48, ,325 Income (loss) from operations (65,677) 4,943 (60,734) 10,927 9,673 20,600 Nonoperating revenues (expenses) Condensed Statement of Revenues, Expenses and Changes in Net Position (In thousands) and gains (losses) (11,292) 6,075 (5,217) (17,954) 8,127 (9,827) Increase (decrease) in net position $ (76,969) $ 11,018 $ (65,951) $ (7,027) $ 17,800 $ 10,773 MANAGEMENT S DISCUSSION OF RECENT FINANCIAL PERFORMANCE Current assets of the Medical Center increased $23.2 million from fiscal year 2013 primarily as a result of an increase in cash and cash equivalents of $16.7 million, an increase in accounts receivable patients, net of $5.0 million, and an increase in investments of $2.6 million. Current assets of the discrete component units increased $7.3 million from fiscal year 2013 primarily as a result of resulting realized investment income of $7.1 million. The Medical Center s assets whose use is limited decreased by $106.1 million from fiscal year 2013 primarily as a result of settlements and related costs that were paid out during the year. Capital assets, net of accumulated depreciation decreased $8.4 million from 2013 at the Medical Center, primarily as a result of capital acquisitions of approximately $13.9 million, offset by depreciation expense of $21.1 million and disposals of certain equipment. Other noncurrent assets and deferred outflows of the Medical Center increased $26.6 million from 2013 primarily due to changes in accounting which required the Medical Center to write off prior period bond issue costs of $9.3 million, record a deferred outflow for pension contributions of $19.0 million and reclassify losses on refunding of debt to deferred outflows. In addition, the value of the interest rate swap increased by $5.3 million. Other noncurrent assets and deferred outflows of the discrete component units increased $1.3 million from 2013 primarily due to changes in accounting which required Hospice to record a deferred outflow for pension contributions of $1.0 million. Current liabilities of the Medical Center increased $4.2 million from September 30, 2013 due to increases in accrued payroll and personal leave of $4.4 million and an increase in the current portion due on longterm debt of $1.3 million, offset by a decrease in other current liabilities of $1.0 million. 7

10 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 The Medical Center s long-term debt decreased approximately $1.5 million from September 30, 2013, to as a result of the reclassification of $3.1 million from long-term debt to current portion due on the 2006A bonds offset by an adjustment in prior period loss on refundings of debt of $1.6 million, which was due to a change in accounting. As of September 30, 2014, the Medical Center s outstanding bonds (Series 2006A, Series 2006B-1, Series 2006B-2, and Series 2008) were rated BBB by Fitch Ratings with a stable outlook, and BBB+ long-term rating by Standard & Poor. The decrease in the discrete component units long-term debt of $2.0 million is the result of the principal payments on the HMS 2010 bonds and note payable. The increase in other noncurrent liabilities of the Medical Center of $171.1 million is primarily due an accounting change that required the Medical Center to record a net pension liability of $113.6 million and related deferred inflows of $40.2 million. In addition, the long-term value of the interest rate swap increased $5.3 million, and other liabilities increased $10.3 million. The increase in other noncurrent liabilities of the discrete component units of $9.2 million is primarily due an accounting change that required Hospice to record a net pension liability of $6.1 million and related deferred inflows of $2.2 million. In addition, other liabilities increased approximately $0.8 million. The Medical Center s net position at September 30, 2014, was $111.8 million, a decrease of $250.8 million from September 30, 2013, as a result of changes in accounting that required the Medical Center to record a net pension liability and related accounts and adjust prior period bond issue costs, revenue generated from patient care and other operations offset by operating expenses, including settlements and related costs, and nonoperating losses. The net position of the discrete component units increased $1.6 million as a result of revenue generated from providing patient care, other operating activities, and nonoperating gains, offset by changes in accounting that required Hospice to record a net pension liability and related accounts, and HMS to write off adjust prior period bond issue costs. Operating Revenues The increase in operating revenues of $15.5 million over 2013 at the Medical Center is primarily the result of an increase in admissions, as well as new services offered by the Medical Center. In September 2013, the Medical Center opened an inpatient neurologic and orthopedic rehabilitation unit at the main campus. In January 2014, the Medical Center purchased Children s Medical Center, an outpatient pediatric primary care practice, with offices in Ormond Beach, Port Orange and Palm Coast. Also in 2014, the Medical Center opened three walk-in outpatient care clinics, Women s Care Now Ormond Beach, Care Now Ormond Beach and Care Now Deltona. 8

11 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 Utilization statistics for the years ended September 30, 2014 and 2013, are as follows: The Medical Center s inpatient admissions for 2014 increased by 60 admissions compared to 2013, and patient days for 2014 increased by 4,463 (3.7%) compared to The increases in admissions and patient days led to an increase in the Medical Center s average daily census by 13 patients per day from the prior year. Operating Expenses Medical Center and Discrete Component Unit Utilization Statistics Medical Center Activity: Admissions 22,381 22,321 Patient days 124, ,833 Average daily census Total outpatient visits 139, ,582 Observation patient day equivalents 9,252 9,547 Other Halifax Health Activity Hospice patient days 202, ,758 Management of the Medical Center continues to focus on cost-reduction measures. Total operating expenses before settlements and related costs of the Medical Center decreased $14.4 million from fiscal year 2013 to 2014 primarily due to decreases in salaries and benefits of $13.0 million. Effective October 1, 2013 the Halifax Pension Plan (the Plan ) was frozen and employees who are eligible for the Plan will no longer accrue service credits. In addition, there were decreases in supply costs of $1.8 million and other expenses of $0.5 million. The Medical Center s depreciation and amortization expense increased $1.3 million from 2013 to 2014, primarily due to new assets placed in service. The Medical Center also incurs expenses related to ad valorem taxes levied. These expenses include payments to Volusia County and the cities of Daytona Beach, Ormond Beach, Holly Hill, and Port Orange (tax collector and appraiser commissions, Medicaid matching funds, and redevelopment taxes) and the costs of nonhospital community health services (physician services, community clinics, prescription drugs, medical supplies, etc.). Ad valorem tax-related expenses were substantially the same from 2013 to On March 10, 2014 the Medical Center and the US Government ( Government ) entered into a settlement agreement with respect to ongoing litigation in a qui tam action ( Settlement Agreement ). Pursuant to the Settlement Agreement, the Medical Center made a settlement payment in the amount of $85 million to the Government on March 14, 2014 and agreed to operate under a five-year Corporate Integrity Agreement which provides for oversight of all physician contracts and compliance with Federal healthcare laws, rules and regulations. In addition, the Medical Center paid $5.4 million in statutory attorney s fees and costs for claims subject to the Settlement Agreement. On July 22, 2014 the Medical Center, the qui tam Relator, the Relator s counsel and the Government entered into a settlement agreement for claims in which the Government had not intervened ( Second Settlement Agreement ). Pursuant to the Second Settlement Agreement, the Medical Center made a settlement payment in the amount of $1 million to the Government and paid $4.5 million in attorney s fees. 9

12 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 The settlement costs and attorney s fees paid in accordance with the Settlement Agreement and the Second Settlement Agreement, together with the Medical Center s defense costs, are recorded in settlements and related costs on the accompanying statement of revenues, expenses and changes in net position. A violation of the Federal Stark Law is a covenant violation under the Medical Center s Master Trust Indenture, and the settlements and related costs caused a violation of certain requirements related to the Medical Center s debt service coverage ratios for the twelve month period ended March 31, 2014, under a reimbursement agreement with JP Morgan Chase Bank, NA ( Bank ) relating to the 2008 bonds. The Medical Center received a waiver from the Bank for both covenant violations. The Medical Center has received a waiver of the covenant violation from the bond insurer on the 2006 series bonds. Nonoperating Revenues, Expenses, Gains and Losses Interest expense of the Medical Center was relatively unchanged from 2013 to Investment income for the Medical Center increased $5.3 million from fiscal year 2013 to fiscal year 2014 as a result of increases in market value of certain investments, and realized gains on those investments. Investment income for the Medical Center includes approximately $5.8 million in unrealized gains on investments as of September 30, KEY FINANCIAL INDICATORS The following represents a summary of key financial indicators of Halifax Health: Key Financial Indicators Total margin* 8.1% 1.9% Days cash on hand* Unrestricted cash to long-term debt 99.7% 122.0% Long-term debt to capitalization 60.4% 42.3% Total net patient service revenue, before provision for bad debts (in millions) $ $ * Calculations exclude settlements and related costs. The total margin increased to 6.2% in fiscal year 2014 due to the increases in operating revenues and investment income from fiscal year The number of days cash on hand, which includes investments and board designated assets whose use is limited, increased from 286 days at September 30, 2013, to 292 days at September 30, 2014, due to decreases in operating expenses during Unrestricted cash (including investments and board designated assets whose use is limited) to long-term debt and decreased and debt to capitalization increased as a result of the use of board-designated funds during

13 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 COMMUNITY BENEFIT Halifax Health provides a continuum of health care services to the community and is involved in numerous outreach programs that help meet the public health needs of the community. Halifax Health provided an estimated $52.3 million in community benefits during fiscal year 2014, which is comprised of amounts paid for community health and wellness services and the cost of uncompensated care. The table below shows the sources and uses of the Medical Center s ad valorem tax revenues, which includes community benefits (in thousands): SCHEDULE OF USES OF PROPERTY TAXES FOR THE YEAR ENDING SEPTEMBER 30, 2014 Gross property tax levy $ 12,465 Tax discounts and uncollectible taxes (270) Net property taxes collected 12,195 Amounts paid to Volusia County and Cities: Tax collector and appraiser commissions (599) Volusia County Medicaid matching assessment (2,538) Redevelopment taxes paid to Cities (607) Subtotal (3,744) Net taxes available for community health, wellness and readiness 8,451 Amounts paid for community health and wellness services: Preventive health services (clinics, Healthy Kids, etc.) (766) Physician services (7,538) Trauma services (6,852) Pediatric and neonatal intensive care services (844) Child and adolescent behavioral services (636) Subtotal (16,636) Deficiency of net taxes available to fund hospital operating expenses (8,185) Uncompensated care provided by Halifax Health, at cost (35,687) Total deficiency of net taxes available to fund hospital operating expenses and uncompensated care provided by Halifax Health, at cost $ (43,872) 11

14 Management s Discussion and Analysis (Unaudited) Year Ended September 30, 2014 RISK FACTORS The health care industry is highly dependent upon a number of factors that could have a significant effect on the future operations and financial condition of the Medical Center and its component units. These factors include, but are not limited to, competition, state and federal regulatory authorities, Medicare and Medicaid laws and regulations, healthcare reform initiatives, environmental laws, advances in technology, changes in demand for health care services, demographic changes, and managed care contract terms and conditions. As of the date of this report, the following known facts, decisions, or conditions may have a significant effect on net position or the results of operations: Salaries in the health care industry continue to be very competitive due to increased costs of attracting and retaining quality physicians, registered nurses, and other health care professionals. The laws and regulations governing the Medicare and Medicaid program are complex and subject to change. As such, changes to these programs could have a negative effect on the financial performance of the Medical Center. Changes to the Medicare and Medicaid programs are listed below. Audits of hospital compliance with Medicare and Medicaid program laws and regulations have increased in recent years and present additional exposure for repayments and fines and penalties. In March 2010, President Barrack Obama signed the Affordable Care Act ( ACA ). The ACA was enacted to increase the quality and affordability of healthcare and lower the uninsured rate. The full effect of the ACA is still undetermined and the following concerns exist: A potential shift to higher deductible plans increases the risk of collection of these deductibles. Medicare and Medicaid DSH payments are expected to be reduced. The State of Florida has not approved Medicaid expansion. Whether subsidies remain in states with federally run exchanges is still undecided. At the state level, the shift from per diem inpatient reimbursement to DRG based payments has been rapidly followed by the expansion of the Medicaid managed care program. These changes have limited the ability of local governments and related providers to positively affect Medicaid payment rates. The State of Florida Low Income Pool Program is scheduled to end after June 30, 2015, with no formal alternative plan yet proposed. 12

15 Statement of Net Position September 30, 2014 (In thousands) Discrete Total Medical Component (Memorandum Assets and Deferred Outflows Center Units Only) Current Assets: Cash and cash equivalents $ 52,509 $ 40,857 $ 93,366 Investments 163,769 49, ,908 Current assets whose use is limited Trustee-held self-insurance funds Accounts receivable, patients, net of estimated uncollectibles of $116,844 and $832, respectively 48,528 3,993 52,521 Inventories 11, ,561 Other current assets 15, ,159 Total current assets 292,055 94, ,249 Restricted Funds Under Indenture Agreements for Debt Service 20, ,386 Noncurrent Assets Whose Use is Limited: Board-designated, funded depreciation 41,105-41,105 Restricted by donor - 5,671 5,671 Board-designated, other - 2,650 2,650 Capital Assets, net 332,502 36, ,118 Goodwill 6,483-6,483 Other Assets 7,363 4,259 11,622 Total assets 699, , ,284 Deferred Outflows: Interest rate swap 24,531-24,531 Pension contribution after measurement 18,970 1,030 20,000 Loss on refunding of debt 2, ,143 Total deferred outflows 45,579 1,095 46,674 Total assets and deferred outflows $ 745,283 $ 144,675 $ 889,958 (Continued) 13

16 Statement of Net Position September 30, 2014 (In thousands) Discrete Total Medical Component (Memorandum Liabilities, Deferred Inflows and Net Position Center Units Only) Current Liabilities: Accounts payable and accrued liabilities $ 46,963 $ 1,523 $ 48,486 Accrued payroll and personal leave time 18,654 1,198 19,852 Current portion of accrued self-insurance liability 4,786-4,786 Current portion of long-term debt 3,155 2,220 5,375 Other current liabilities 7,892 2,002 9,894 Total current liabilities 81,450 6,943 88,393 Noncurrent Liabilities: Long-term debt, less current portion 341,784 6, ,834 Net pension liability 113,647 6, ,818 Accrued self-insurance liability, less current portion 8,792-8,792 Other liabilities 23,065 2,829 25,894 Long-term value of interest rate swap 24,531-24,531 Deferred Inflows Related to Pension 40,176 2,181 42,357 Total liabilities and deferred inflows 633,445 24, ,619 Net Position: Net investment in capital assets 41,656 28,141 69,797 Restricted for debt service Restricted by donors, expendable - 5,427 5,427 Restricted by donors, nonexpendable Unrestricted 70,182 86, ,701 Total net position 111, , ,339 Total liabilities, deferred inflows and net position $ 745,283 $ 144,675 $ 889,958 See Notes to Financial Statements. 14

17 Statement of Revenues, Expenses and Changes in Net Position Year Ended September 30, 2014 Discrete Total Medical Component (Memorandum Center Units Only) Operating Revenues: Net patient service revenue, before provision for bad debt $ 501,464 $ 41,545 $ 543,009 Provision for bad debt (96,815) (754) (97,569) Net patient service revenue 404,649 40, ,440 Ad valorem tax revenue 12,465-12,465 Other revenue 17,386 10,731 28,117 Total operating revenues 434,500 51, ,022 Operating Expenses: Salaries and benefits 202,726 22, ,224 Supplies 80,437 3,147 83,584 Purchased services 50,084 14,132 64,216 Depreciation and amortization 21,119 1,388 22,507 Ad valorem tax-related expenses 6,750-6,750 Leases and rentals 7,817 1,971 9,788 Other 24,809 3,443 28,252 Total operating expenses before settlements and related costs 393,742 46, ,321 Settlements and related costs 106, ,435 Total operating expenses 500,177 46, ,756 Income (loss) from operations (65,677) 4,943 (60,734) Nonoperating Revenues (Expenses): Interest expense (18,325) (325) (18,650) Investment income net 5,730 5,123 10,853 Donation revenue 407 1,277 1,684 Nonoperating gains (losses) net Total nonoperating revenues (expenses) (11,292) 6,075 (5,217) Increase (decrease) in net position (76,969) 11,018 (65,951) Net Position: Beginning of year, as previously reported 362, , ,595 Cumulative effect of accounting changes related to: Net pension liability (162,181) (9,100) (171,281) Bond issue costs (11,676) (348) (12,024) Beginning of year, as restated 188, , ,290 End of year $ 111,838 $ 120,501 $ 232,339 See Notes to Financial Statements. 15

18 Statement of Cash Flows Year Ended September 30, 2014 Discrete Total Medical Component (Memorandum Center Units Only) Cash Flows from Operating Activities: Receipts from third-party payors and patients $ 399,002 $ 41,283 $ 440,285 Payments to employees (218,337) (22,312) (240,649) Payments to suppliers (135,134) (17,959) (153,093) Ad valorem taxes 18,471-18,471 Other receipts 15,842 11,053 26,895 Other payments (140,281) (4,444) (144,725) Net cash provided by (used in) operating activities (60,437) 7,621 (52,816) Cash Flows from Noncapital Financing Activities: Proceeds from donations received 409 1,278 1,687 Payments for acquisition of a business (185) - (185) Transfers and deposits from (to) component units 1,539 (1,539) - Other nonoperating receipts Net cash provided by (used in) noncapital financing activities 1,781 (261) 1,520 Cash Flows from Capital and Related Financing Activities: Acquisition of capital assets (13,980) (2,157) (16,137) Principal paid on long-term debt (1,855) (2,146) (4,001) Payment of interest on long-term debt (18,162) (301) (18,463) Net cash used in capital and related financing activities (33,997) (4,604) (38,601) Cash Flows from Investing Activities: Realized investment income (946) 7,115 6,169 Purchase of investments and assets whose use is limited (161,992) (39,605) (201,597) Proceeds from sales and maturities of investments and assets whose use is limited 272,335 69, ,453 Net cash provided by investing activities 109,397 36, ,025 Net increase in cash and cash equivalents 16,744 39,384 56,128 Cash and Cash Equivalents: Beginning of year 35,765 1,473 37,238 End of year $ 52,509 $ 40,857 $ 93,366 (Continued) 16

19 Statement of Cash Flows Year Ended September 30, 2014 Reconciliation of Income from Operations to Net Cash: Discrete Total Medical Component (Memorandum Center Units Only) Provided by (Used in) Operating Activities: Income (loss) from operations $ (65,677) $ 4,943 $ (60,734) Adjustments to reconcile income (loss) from operations to net cash provided by (used in) operating activities: Depreciation and amortization expense 21,119 1,388 22,507 Unrealized gains on investments considered operating activity Provision for bad debts 96, ,569 Changes in assets and liabilities: Accounts receivable patients (101,829) (1,077) (102,906) Inventories and other current assets 2,654 (7) 2,647 Other assets (7,358) 735 (6,623) Accounts payable and accrued liabilities 12, ,047 Other liabilities (18,611) (641) (19,252) Net cash provided by (used in) operating activities $ (60,437) $ 7,621 $ (52,816) Noncash Investing Activities, unrealized gains (losses) on investments and assets whose use is limited $ 5,800 $ (1,000) $ 4,800 See Notes to Financial Statements. 17

20 Statement of Fiduciary Net Position September 30, 2014 (In thousands) Assets: Investments, at fair value: Money market and mutual funds $ 225,016 Net position restricted for pension benefits $ 225,016 See Notes to Financial Statements. 18

21 Statement of Changes in Fiduciary Net Position Year Ended September 30, 2014 (In thousands) Additions: Investment results: Appreciation in fair value of investments $ 8,939 Interest and dividends 4,129 Investment expenses (114) Net investment results 12,954 Employer s contributions 20,000 Total additions 32,954 Deductions: Administrative expenses 58 Benefits paid directly to participants 15,078 Total deductions 15,136 Increase in net position restricted for pension benefits 17,818 Net Position Restricted for Pension Benefits: Beginning of year 207,198 End of year $ 225,016 See Notes to Financial Statements. 19

22 Notes to Financial Statements Note 1. Description of the Organization Reporting Entity: Halifax Hospital Medical Center (the Medical Center ) was created by a special act of the Legislature of the State of Florida, Chapter , Laws of Florida, as a special taxing district, a public body corporate and politic of the State of Florida and successor to Halifax Hospital District created pursuant to Chapter , Laws of Florida, Special Acts of The Medical Center s Board of Commissioners (the Board ) is empowered to levy ad valorem taxes for operating expenses, capital outlays, and other purposes. The Medical Center, located in Daytona Beach, Florida, is a full-service, accredited, acute care hospital licensed to operate 764 beds. The Medical Center owns and operates three inpatient hospital facilities under one license and several ambulatory facilities. The main campus of the Medical Center is the inpatient referral center, providing Level II neonatal intensive care and a Level II state-certified trauma center, in addition to open-heart surgery, neurosurgery, and other specialty inpatient and outpatient services. The Port Orange campus, located ten miles south of the main campus, is a community hospital providing a broad range of services to the residents of Port Orange and Southeast Volusia County. The Halifax Behavioral Services campus, located two miles north of the main campus, provides child, adolescent, and adult inpatient and outpatient psychiatric services to the residents of Volusia and Flagler Counties. As required by accounting principles generally accepted in the United States of America ( GAAP ), these financial statements represent the primary government, the Medical Center, and its component units. The component units discussed below are included because of the significance of their operational or financial relationships with the Medical Center. The Medical Center, together with its component units, is referred to as Halifax Health. Component Units: East Volusia Health Services, Inc. ( EVHS ); Halifax Healthcare Systems, Inc. ( HHCSI ), HH Holdings, Inc. ( Holdings ); Halifax Healthy Families Corporation d/b/a Healthy Communities ( Healthy Communities ); Halifax Hospice, Inc. Hospice of Volusia/Flagler ( Hospice ); Halifax Management System, Inc. ( HMS ); Halifax Medical Center Foundation, Inc. ( Foundation ); Halifax Staffing, Inc. ( Staffing ); Patient Business & Financial Services, Inc. ( PBFS ); and Volusia Health Ventures, Inc. d/b/a Volusia Health Network ( VHN ) are legally separate organizations for which the Medical Center is financially accountable and the nature and significance of their relationship to the Medical Center are such that exclusion would cause the reporting entity s financial statements to be misleading or incomplete. With the exception of the Foundation, the Medical Center Board appoints the Board of Directors for the other component units, and each has a specific financial benefit or burden to the Medical Center. While the Foundation appoints its own Board of Directors, it also has a specific financial benefit to the Medical Center, and is fiscally dependent on the Medical Center. Accordingly, these organizations represent component units of the Medical Center. Blended Component Units: EVHS, HHCSI, Holdings, Healthy Communities, Staffing, and PBFS were established primarily to provide administrative and other services for and on behalf of the Medical Center. These entities are blended within the financial results of the Medical Center because they have substantially the same governing body as the Medical Center, and management of the Medical Center has operational responsibility for these component units. The Medical Center is the sole member of each blended component unit. EVHS is a not-for-profit corporation organized under the laws of Florida. EVHS was organized for the purpose of entering into joint-venture agreements to enhance the access and quality of patient care provided to the community. 20

23 Notes to Financial Statements Note 1. Description of the Organization (Continued) HHCSI is a not-for-profit corporation organized under the laws of Florida. HHCSI was organized for the purpose of enhancing the access and quality of patient care provided to the community. Holdings is a not-for-profit corporation organized under the laws of Florida that was established to manage the remaining assets that resulted from the sale of Florida Health Care Plan in Healthy Communities is a not-for-profit corporation organized under the laws of Florida that coordinates the delivery of education, health resources, and direct assistance to the community. The services provided by Healthy Communities include administering Healthy Kids (child health insurance program), facilitating the provision of preventive care, and providing education and other activities relating to the general welfare of all children in Volusia and Flagler counties. Staffing is a not-for-profit corporation organized under the laws of Florida, formed for the purpose of providing individuals to staff and manage the Medical Center, its component units, and any other related entities and facilities. The Medical Center is obligated to reimburse Staffing for all costs incurred in meeting its obligations under an agreement between the parties. PBFS is a not-for-profit corporation that operates the patient accounting services for the Medical Center and employs certain staff for this function. Discrete Component Units: Foundation, Hospice, HMS, and VHN are reported as discrete component units. Foundation and VHN have different Boards of Directors from the Medical Center Board and VHN is not exclusive to the Medical Center. Hospice does not have a specific financial benefit or burden to the Medical Center and is not exclusive to the Medical Center. The resources of HMS are considered significant to the Medical Center. Separately audited financial statements for Hospice and HMS may be obtained directly from the Medical Center upon request. The Foundation was organized in 1988 as a not-for-profit corporation under the laws of Florida. The Foundation is the fund-raising organization for the Medical Center. Hospice was organized in 1984 as a not-for-profit corporation under the laws of Florida. Hospice provides palliative medical care and treatment to patients who have less than six months to live via three inpatient care centers and in-home hospice services. The Port Orange care center is a 16-bed inpatient care center located in the City of Port Orange. The West Volusia Care Center is an 18-bed center in Orange City. The Southeast Volusia care center is a 12-bed facility located in Edgewater. HMS was organized in 1984 as a not-for-profit corporation under the laws of Florida. HMS owns and leases to the Medical Center two ambulatory facilities and one hospital facility. Facilities located in Ormond Beach and on the Medical Center s main campus in Daytona Beach provide outpatient hospital services and medical offices. The third facility, located in Port Orange, is an 80-bed inpatient hospital. VHN was organized in 1984 as a not-for-profit corporation under Florida law. VHN operates a preferred provider network of physicians and hospitals in the service area and offers the network and certain related services to employers that are self-insured for the health insurance coverage of their employees. Presented on the following pages are condensed combining schedules for the component units. 21

24 Notes to Financial Statements Note 1. Description of the Organization (Continued) Condensed Combining Statement of Net Position September 30, 2014 (In thousands) Assets and Deferred Outflows Blended Component Units Primary Government Holdings Staffing PBFS HHCSI EVHS Discrete Component Units Total Medical Center Hospice VHN Foundation HMS Total Discrete Component Units Total (Memorandum Only) Current Assets $ 132,392 $ 157,851 $ - $ - $ 101 $ 1,711 $ 292,055 $ 66,598 $ 32 $ 27,564 $ - $ 94,194 $ 386,249 Restricted Funds Under Indenture Agreements for Debt Service 20, , ,386 Noncurrent Assets Whose Use is Limited 41, ,105 2,650-5,671-8,321 49,426 Capital Assets, net 316,819 15, ,502 17, ,706 36, ,118 Other Assets and Deferred Outflows 53, ,572 59,425 4, ,354 64,779 Total assets and deferred outflows $ 564,265 $ 173,634 $ - $ - $ 101 $ 7,283 $ 745,283 $ 92,143 $ 32 $ 33,539 $ 18,961 $ 144,675 $ 889,958 Liabilities, Deferred Inflows and Net Position Current Liabilities $ 81,439 $ - $ - $ - $ 11 $ - $ 81,450 $ 2,648 $ 854 $ 14 $ 3,427 $ 6,943 $ 88,393 Long-Term Debt, less current portion 341, , ,050 6, ,834 Other Liabilities and Deferred Inflows 209,967 (105) ,211 8,786-2,395-11, ,392 Total liabilities and deferred inflows 633,190 (105) ,445 11, ,409 9,477 24, ,619 Net Position: Net investment in capital assets 41, ,656 17, ,501 28,141 69,797 Restricted for debt service Restricted by donors, expendable ,427-5,427 5,427 Restricted by donors, nonexpendable Unrestricted (110,581) 173, (256) 7,280 70,182 63,069 (822) 25,459 (1,187) 86, ,701 Total net position (68,925) 173, (256) 7, ,838 80,709 (822) 31,130 9, , ,339 Total liabilities, deferred inflows and net position $ 564,265 $ 173,634 $ - $ - $ 101 $ 7,283 $ 745,283 $ 92,143 $ 32 $ 33,539 $ 18,961 $ 144,675 $ 889,958 22