Basic Financial Statements and Required Supplementary Information (With Independent Auditors Report Thereon)
Table of Contents Management s Discussion and Analysis Required Supplementary Information (Unaudited) 1 11 Independent Auditors Report 12 Basic Financial Statements: Balance Sheets 14 Statements of Revenues, Expenses and Changes in Net Assets Years ended June 30, 2009 and 2008 15 Statements of Cash Flows Years ended 16 17 37 Page
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Our discussion and analysis of Medical University Hospital Authority s (the Authority) financial performance provides an overview of the activities for the fiscal years ended June 30, 2009, 2008, and 2007. The intent of this discussion and analysis is to provide further information regarding the Authority s financial performance as a whole. Readers should also review the basic financial statements, along with the notes to the basic financial statements, to further enhance their understanding of the Authority s financial performance. Financial Highlights Fiscal 2009 and 2008 At June 30, 2009, the Authority s assets of $898.0 million exceeded its liabilities of $656.7 million by $241.3 million. Net assets, the residual interest in the assets after liabilities are deducted, increased by $3.5 million in 2009, as compared to a decrease of $19.7 million in 2008. The Authority reported operating income in 2009 of $26.4 million, as compared to an operating loss of $4.7 million in 2008, an improvement of $31.2 million. Net nonoperating expenses, excluding payments from or to The Medical University of South Carolina (the University), were $23.1 million for 2009, as compared to $14.4 million in 2008, an increase of $8.7 million or 60.4%. Net nonoperating receipts from the University were $0.2 million in 2009, as compared with a net payment made to the University of $0.6 million in 2008. Financial Highlights Fiscal 2008 and 2007 At June 30, 2008, the Authority s assets of $909.2 million exceeded its liabilities of $671.3 million by $237.9 million. Net assets, the residual interest in the assets after liabilities are deducted, decreased $19.7 million in 2008, as compared to an increase of $26.4 million in 2007. The Authority reported an operating loss in 2008 of $4.7 million, as compared to operating income of $35.3 million in 2007, a decrease of $40.0 million or 113.3%. Net nonoperating expenses, excluding payments to The Medical University of South Carolina (the University), were $14.4 million for 2008, as compared to $6.7 million in 2007, an increase of $7.7 million or 114.9%. Nonoperating expenses related to the University were $0.6 million and $2.2 million in 2008 and 2007, respectively. Overview of the Financial Statements The Authority, a component unit of the University, owns and operates the clinical teaching sites of the University and serves the State of South Carolina as a principal diagnostic and treatment referral center. The Authority s basic financial statements consist of three statements a Balance Sheet; a Statement of Revenues, Expenses and Changes in Net Assets; and a Statement of Cash Flows. These basic financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, and provide detailed information about the activities of the Authority and generally provide an indication of the Authority s financial health. 1 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 The Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets The Balance Sheet and the Statement of Revenues, Expenses and Changes in Net Assets report information about the Authority s resources and its activities. The Balance Sheet presents the assets, restricted and unrestricted, and all liabilities using the accrual basis of accounting. The Statement of Revenues, Expenses, and Changes in Net Assets reports all of the revenues and expenses for the time period indicated, regardless of when cash is received or paid, as well as payments to the University. These two statements report the Authority s net assets and changes in them. The Statement of Cash Flows The final required statement is the Statement of Cash Flows. This statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing, and capital and noncapital-related financing activities. The Authority s Net Assets The Authority s net assets are the difference between its assets and liabilities reported in the Balance Sheets. A comparative summary of assets, liabilities, and net assets follows: Assets, Liabilities, and Net Assets (In thousands) 2009 2008 2007 Assets: Current assets $ 236,786 236,574 238,602 Investments 80,534 66,426 127,247 Capital assets, net 562,153 586,317 461,759 Other assets 18,529 19,856 18,787 Total assets $ 898,002 909,173 846,395 Liabilities: Current liabilities $ 150,979 153,322 98,440 Long-term debt 494,249 516,698 490,421 Other liabilities 11,423 1,301 29 Total liabilities $ 656,651 671,321 588,890 Net assets: Invested in capital assets, net of related debt $ 70,482 80,805 56,689 Restricted under indenture agreements 82,587 78,306 71,975 Unrestricted 88,282 78,741 128,841 Total net assets $ 241,351 237,852 257,505 2 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Analysis of the Financial Position as of June 30, 2009, Compared to June 30, 2008 Total assets decreased by 1.2% from 2008 to 2009. Patient accounts receivable, net of estimated uncollectible amounts, increased from $130.4 million to $141.7 million, largely as a result of increases in patient activity and a price increase. Capital assets decreased during the fiscal year by $24.2 million, largely as a result of depreciation recorded by the Authority, offset by additions to capital assets related primarily to renovation and remodeling projects carried out in the existing facilities. Total liabilities decreased by 2.2% from 2008 to 2009. Long-term debt, including current installments, decreased by $17.1 million due to scheduled repayments on outstanding credit facilities. No new debt was incurred by the Authority in the current year. Accounts payable, other accrued expenses and other liabilities increased by $9.6 million, largely resulting from the unanticipated retrospective settlement of fiscal 2005 and 2006 Medicaid disproportionate share program costs (see note 7 to the Authority s financial statements), for which a liability of $23.7 million ($11.3 million long-term) is included in the Authority s balance sheet as of June 30, 2009. From the data presented, readers of the Balance Sheet are able to determine the assets available to continue the operations of the Authority. They are also able to determine how much is owed to vendors, employees, and others. Finally, the Balance Sheet provides a picture of the net assets (assets minus liabilities) and their availability for expenditure. Analysis of the Financial Position as of June 30, 2008, Compared to June 30, 2007 Total assets increased by 7.4% from 2007 to 2008. Patient accounts receivable, net of estimated uncollectible amounts, increased from $118.7 million to $130.4 million, largely as a result of increases in patient activity and a price increase. Capital assets increased during the fiscal year by $124.6 million, largely as a result of construction and opening of the new hospital, as further discussed under Other Factors below. Total liabilities increased by 14.0% from 2007 to 2008. Long-term debt, including current installments, increased by $40.3 million. During fiscal 2008, the Authority drew $48.8 million on a line of credit provided by Bank of America related to the purchase of new equipment for the replacement hospital (see note 5 to the Authority s financial statements). Accounts payable and other accrued expenses increased by $14.0 million, largely resulting from increased spending for the opening of the new hospital. From the data presented, readers of the Balance Sheet are able to determine the assets available to continue the operations of the Authority. They are also able to determine how much is owed to vendors, employees, and others. Finally, the Balance Sheet provides a picture of the net assets (assets minus liabilities) and their availability for expenditure. 3 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Operating Results and Changes in the Authority s Net Assets Revenues, Expenses and Changes in Net Assets (In thousands) 2009 2008 2007 Operating revenues: Net patient service revenue $ 885,163 802,380 733,302 Other revenue 17,327 19,502 15,748 Total operating revenues 902,490 821,882 749,050 Operating expenses: Compensation and employee benefits 392,148 388,992 314,693 Services and supplies 431,889 405,171 376,157 Depreciation and amortization 52,093 32,379 22,946 Total operating expenses 876,130 826,542 713,796 Operating income (loss) 26,360 (4,660) 35,254 Nonoperating revenue (expense): Investment income 2,644 3,440 3,164 Interest expense (25,753) (17,881) (9,829) Income (loss) before payments from (to) the University 3,251 (19,101) 28,589 Nonoperating income (expense) payments from (to) the University 248 (552) (2,210) Increase (decrease) in net assets 3,499 (19,653) 26,379 Net assets, beginning of year 237,852 257,505 231,126 Net assets, end of year $ 241,351 237,852 257,505 The Statement of Revenues, Expenses and Changes in Net Assets presents the revenues earned and expenses incurred during the year. Activities are reported as either operating or nonoperating. Operating revenues are received for providing goods and services. Operating expenses are paid to acquire or produce the goods and services and to carry out the mission of the Authority. Nonoperating revenues and expenses are the result of activities for which goods and services are not provided. The utilization of capital assets is reflected in the financial statements as depreciation and amortization, which is the impact of amortizing the cost of each asset over its expected useful life. Changes in total net assets as presented in the Balance Sheet are based on the activity presented in the Statement of Revenues, Expenses and Changes in Net Assets. 4 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Analysis of Operating Results for the Year ended June 30, 2009, Compared to the Year ended June 30, 2008 Net Patient Service Revenue Compared to fiscal year 2008, net patient service revenue increased by approximately $82.8 million, or 10.3%. Gross patient charges increased by $248.5 million, or 15.9%, from 2008 to 2009 due to increases in patient activity and comprehensive rate increases. Additionally, net revenue recognized related to the Disproportionate Share Hospital (DSH) Program administered by the state Department of Health and Human Services decreased in 2009 to $43.7 million from $76.8 million in 2008. The significant decrease is related primarily to the unanticipated retrospective settlement of fiscal 2005 and 2006 Medicaid disproportionate share program funds in the current year in the amount of $21.1 million (refer to note 7 to the Authority s financial statements for further information). The DSH Program is an important source of patient care financing for the Authority and any material reduction in such funding has a correspondingly material adverse effect on the Authority s operations. There can be no assurance that the Authority will continue to qualify for future participation in the DSH Program or that the DSH Program will not ultimately be discontinued or materially modified. Payer class percentages changed somewhat from 2009 to 2008, showing a slight decrease in Medicaid, Private Insurance/Managed Care and Indigent/Self Pay/Other payor classes and increases in Blue Cross and Medicare, as shown in the table below. Percentage of Total Charges by Payer Class 2009 2008 Blue Cross 18.9% 17.1% Medicare 32.2 29.2 Medicaid 17.9 18.3 Private Insurance/Managed Care 14.2 15.9 Medically Indigent/Self Pay/Other 16.8 19.5 Total 100.0% 100.0% 5 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Inpatient Business Activity Inpatient days of care increased by 0.8%, from 188,005 in 2008 to 189,478 in 2009, as summarized below. Average length of stay for all patients increased slightly from 5.6 days in 2008 to 5.7 days in 2009. The average census increased in 2009 to 519 from the 2008 average of 515. Admissions decreased slightly in 2009 to 33,704 from the 2008 level of 33,728. Inpatient surgical procedures increased from 14,113 in 2008 to 15,657 in 2009, an increase of 10.9%. The Medicare case mix index for the Authority, which is a measure of inpatient acuity, increased from 1.89 in fiscal year 2008 to 2.03 in fiscal year 2009. Summary of Inpatient Days 2009 2008 Medical services 85,305 84,207 Surgical services 52,346 49,436 Psychiatric services 22,338 23,704 Women s services 29,489 30,658 Total inpatient days 189,478 188,005 Outpatient Business Activity Outpatient visit volume increased by 117,210, or 13.8%, from 846,757 in 2008 to 963,967 in 2009. Emergency/Trauma visits increased to 72,512 in 2009 from the 2008 level of 70,589. Outpatient surgical procedures performed in 2009 totaled 9,212, as compared to 7,946 in 2008, an increase of 15.9%. Deductions from Revenue Contractual and other adjustments, expressed as a percentage of gross revenue, increased by 390 basis points from 2008 to 2009. Contractual and other adjustments expressed in dollar terms increased by $248.5 million from 2008 to 2009. The increase is due to the fact that reimbursements from Medicare, Medicaid, and third-party insurers are less than billed charges and increases in charges are not matched by increased reimbursement rates. The provision for uncollectible accounts decreased $9.3 million from 2008 to 2009, or 11.3%, to a total of $73.0 million for the year ended June 30, 2009. Additionally, charity care, as measured by established charges, totaled $65.6 million in 2009 as compared to $78.5 million in 2008, a decrease of $12.9 million or 16.4%. The overall decrease in such amounts is generally related to the Authority s continued focus on enhancing both policy and process related to identification and qualification of patients for available insurance coverage. In total, these measures of uncompensated care (bad debts plus charity care) totaled 7.4% and 10.5% of gross patient charges for fiscal 2009 and 2008, respectively. Operating Expenses Operating expenses increased by $49.6 million, from $826.5 million in 2008 to $876.1 million in 2009. This 6.0% increase is primarily the result of increases in services and supplies expense of $26.7 million, or 6.6%, and in depreciation and amortization expense of $19.7 million, or 60.9%. 6 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Supply costs and pharmaceutical costs continue to increase at rates exceeding those of general inflation. Depreciation and amortization expense increased primarily as a result of the opening of the new hospital in February 2008. Summary of Operating Expenses by Function (In thousands) 2009 2008 Patient services $ 638,233 630,161 General and administrative 185,804 164,002 Depreciation and amortization 52,093 32,379 Total operating expenses $ 876,130 826,542 Analysis of Operating Results for the Year ended June 30, 2008, Compared to the Year ended June 30, 2007 Net Patient Service Revenue Compared to fiscal year 2007, net patient service revenue increased by approximately $69.1 million, or 9.4%. Gross patient charges increased by $159.9 million, or 11.1%, from 2007 to 2008 due to increases in patient activity and comprehensive rate increases. Additionally, net revenue recognized from the Disproportionate Share Hospital (DSH) Program administered by the state Department of Health and Human Services decreased in 2008 to $76.8 million, from $87.1 million in 2007. The DSH Program is an important source of patient care financing for the Authority and any material reduction in such funding has a correspondingly material adverse effect on the Authority s operations. There can be no assurance that the Authority will continue to qualify for future participation in the DSH Program or that the DSH Program will not ultimately be discontinued or materially modified. Payer class percentages changed somewhat from 2007 to 2008, showing a slight decrease in Medicaid and increases in Medicare, Private Insurance/Managed Care, and Medically Indigent/Self Pay/Other, as shown in the table below. Percentage of Total Charges by Payer Class 2008 2007 Blue Cross 17.1% 17.1% Medicare 29.2 29.1 Medicaid 18.3 19.0 Private Insurance/Managed Care 15.9 15.6 Medically Indigent/Self Pay/Other 19.5 19.2 Total 100.0% 100.0% 7 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Inpatient Business Activity Inpatient days of care increased by 0.4%, from 187,212 in 2007 to 188,005 in 2008, as summarized below. Average length of stay for all patients increased from 5.4 days in 2007 to 5.6 days in 2008. The average census increased in 2008 to 515 from the 2007 average of 513. Admissions increased in 2008 to 33,728 from the 2007 level of 33,567. Inpatient surgical procedures increased from 13,118 in 2007 to 14,113 in 2008, an increase of 7.6%. The Medicare case mix index for the Authority, which is a measure of inpatient acuity, increased slightly from 1.86 in fiscal year 2007 to 1.89 in fiscal year 2008. Summary of Inpatient Days 2008 2007 Medical services 84,207 80,897 Surgical services 49,436 50,787 Psychiatric services 23,704 25,787 Women s services 30,658 29,741 Total inpatient days 188,005 187,212 Outpatient Business Activity Outpatient visit volume increased by 73,712, or 9.5%, from 773,045 in 2007 to 846,757 in 2008. Emergency/Trauma visits increased to 70,589 in 2008 from the 2007 level of 63,473. Outpatient surgical procedures performed in 2008 totaled 7,946, as compared to 7,843 in 2007, an increase of 1.3%. Deductions from Revenue Contractual and other adjustments, expressed as a percentage of gross revenue, increased by 0.8% from 2007 to 2008. The contractual and other adjustments expressed in dollar terms increased by $83.5 million from 2007 to 2008. The increase is due to the fact that reimbursements from Medicare, Medicaid, and third-party insurers are typically less than billed charges and increases in charges are not matched by increased reimbursement rates. The provision for uncollectible accounts increased $7.3 million from 2007 to 2008, or 9.7%, to a total of $82.3 million for the year ended June 30, 2008. Additionally, charity care, as measured by established charges, totaled $78.5 million in 2008 as compared to $57.7 million in 2007, an increase of $20.8 million or 36.0%. The overall increase in such amounts is generally related to an increased level of associated write-offs in 2008, coupled with the Authority s inherent inability to recover any consequential amount of comprehensive 2008 rate increases from the patient population. Additionally, the Authority continues its work on enhancing both policy and process related to identification and qualification of patients under its charity care policies. In total, these measures of uncompensated care (bad debts plus charity care) totaled 10.5% and 9.7% of gross patient charges for fiscal 2008 and 2007, respectively. Operating Expenses Operating expenses increased by $112.7 million, from $713.8 million in 2007 to $826.5 million in 2008. This 15.7% increase is primarily the result of increases in compensation and employee benefits of $74.3 million, or 23.6%, and in services and supplies expense of $29.0 million, or 7.7%. 8 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 Presently, there is a national shortage of registered nurses and technical personnel in such areas as diagnostic imaging, laboratory, anesthesia, radiation therapy, and pharmacy. The Authority has implemented salary adjustments and other scheduling and staffing initiatives to help address these shortages. Also, supply costs and pharmaceutical costs continue to increase at rates exceeding those of general inflation. Summary of Operating Expenses by Function (In thousands) 2008 2007 Patient services $ 630,161 536,631 General and administrative 164,002 154,219 Depreciation and amortization 32,379 22,946 Total operating expenses $ 826,542 713,796 Capital Asset and Debt Administration At the end of 2009, the Authority had $562.2 million invested in capital assets, net of accumulated depreciation, as detailed in note 4 to the financial statements. Total capital asset additions of $32.6 million in 2009 decreased by $124.4 million from the 2008 level of $157.0 million. The 2009 increase in capital assets is the result of additions to machinery and equipment of $14.9 million and building improvements of $34.9 million, offset by transfers out of construction in progress of $43.3 million. At the end of 2008, the Authority had $586.3 million invested in capital assets, net of accumulated depreciation, as detailed in note 4 to the financial statements. Total capital asset additions of $157.0 million in 2008 increased by $51.5 million from the 2007 level of $105.5 million. The 2008 increase in capital assets is the result of additions to machinery and equipment of $80.1 million and building improvements of $262.1 million, offset by transfers out of construction in progress of $248.6 million. The Authority uses both internal funds from operations and external debt capital in financing its capital acquisitions. The most significant debt financing programs are discussed in further detail under Other Factors below. Payments to the University Total payments received from the University were $0.2 million in 2009 as compared with net support provided to the University of $0.6 million in 2008. The change from the previous year is related to the suspension of the Primary Care Agreement under which the Authority paid $800,000 to the University annually to promote the education of students and residents of the University. Other Factors The Authority has begun a phased-approach replacement of much of its principal patient care facilities, a project planned for completion in stages over the next 20 years. Phase I of the project involved building a facility comprised of a four-story diagnostic and treatment center, a seven-story hospitality (bed) tower, and a garden atrium uniting the two sections of the building. Phase I of the project was completed in fiscal 2008. The new 9 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 641,000-square-foot facility (Ashley River Tower) was opened on February 4, 2008. No new clinical health services have been added as a result of this phase of the project. There are 156 replacement beds involved. As a result of the opening of the new facility, the Authority closed Charleston Memorial Hospital (CMH) in November 2008. The majority of operations of CMH, concentrated primarily in the emergency department and the transitional care unit, as well as associated CMH-based clinical support functions, were relocated to the new hospital. On December 22, 2004, the Authority issued $422,060,000 of FHA Insured Mortgage Hospital Facilities and Refunding Revenue Bonds, Series 2004, consisting of $303,965,000 Series A Tax-Exempt Bonds and $118,095,000 Series B Taxable Bonds for the purpose of providing funds to (a) pay the costs of Phase I of the project mentioned above, (b) pay a portion of the interest accruing on the Bonds during construction of Phase I, (c) prepay the outstanding amount of the Charleston County Memorial Hospital Revenue Note, (d) advance refund the $102,835,000 Hospital Facilities Refunding Revenue Bonds, Series 2002A, (e) fund a debt service reserve fund with respect to the Bonds, and (f) pay certain costs incurred in connection with the issuance of the Bonds. The Authority entered into an Enhanced Total Return Contract (the ETRC) with Bank of America, N.A. (in such capacity, the Counterparty) to assist the Authority in minimizing the difference between the interest rate on $127,650,000 of the Series A Tax-Exempt Bonds, being the Series A Tax-Exempt Serial Bonds maturing February 15, 2027 through August 15, 2028, and the Series A Tax-Exempt Term Bond maturing August 15, 2034 (the ETRC Bonds) and reinvest earnings related thereto during the construction period of the Phase I project. The ETRC essentially converts the Authority s borrowing cost for the ETRC Bonds during the construction period from a fixed rate mode to a variable rate mode based on and subject to a Bond Market Association interest rate cap of 4.93%. The effective term of the ETRC extends from the date of issuance of the ETRC Bonds until December 1, 2009. The aggregate surplus of funds, if any, to be realized in connection with the ETRC, accumulates during the construction period in a separate custodial account (the ETRC Account) not associated with or pledged as security for any of the Bonds. After completion of the project, surplus funds in the ETRC Account, if any, shall be directed to the Redemption Fund for a Special Mandatory Redemption of Series A Tax-Exempt Bonds commencing with the term bond maturing August 15, 2031 and then with the term bond maturing August 15, 2034. 10 (Continued)
Management s Discussion and Analysis June 30, 2009, 2008, and 2007 On December 29, 2004, the South Carolina Jobs-Economic Development Authority issued $61,000,000 of Economic Development Revenue Bonds, Series 2004. Proceeds of the bonds were loaned to MUFC Central Energy Plant, LLC, a single member limited liability company organized under the laws of the State of South Carolina, whose sole member is Medical University Facilities Corporation. Pursuant to a Loan Agreement between the issuer and the borrower, the borrower shall use the proceeds to finance the construction of an approximately 52,000 square foot central energy plant and certain other improvements, renovations, and furnishings, fixtures, and equipment to provide steam and chilled water for the use and benefit of the new 156-bed Phase I Authority project mentioned above. Pursuant to the loan agreement, the borrower is obligated to make payments to the issuer in amounts sufficient to pay the principal and interest on the Bonds. Applicable GASB principles indicate that MUFC Central Energy Plant, LLC should be reported as a blended component unit of the Authority. Based on the GASB principles, the audited financial statements include the MUFC Central Energy Plant, LLC using the blended method. On March 15, 2007, the construction of the Central Energy Plant was substantially completed, and the plant was put into service. On February 1, 2008, MUFC Central Energy Plant, LLC converted the then-outstanding $59.4 million bonds into Indexed Floating Rate Bonds to reduce cost of capital and annual debt service payments detailed in note 5 to the financial statements. Management is closely monitoring the economic downturn in the U.S. economy, which continued in fiscal 2009 and has not fully abated subsequent to June 30, 2009. Associated factors which might negatively impact the Authority include, but are not limited to: Less-than-adequate access to capital to meet the Authority s future capital needs; Volatility in financing costs and limited ability to hedge those risks using instruments such as the ETRC described above; and An uncertain state and federal government reimbursement environment, which is further complicated by ongoing discussions of federal healthcare reform. Any of the above factors, along with others both currently in existence and which may or may not arise in the future, could have a material adverse impact on the Authority s financial position and operating results. Contacting the Authority s Financial Management This financial report is designed to provide interested parties with a general overview of the Authority s finances and to show the Authority s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Authority s Chief Financial Officer at Medical University Hospital Authority, P.O. Box 250332, Charleston, SC 29425. 11
KPMG LLP Suite 2000 303 Peachtree Street, NE Atlanta, GA 30308 Independent Auditors Report The Board of Trustees Medical University Hospital Authority Charleston, South Carolina: We have audited the accompanying balance sheets of Medical University Hospital Authority (the Authority), a component unit of The Medical University of South Carolina, as of June 30, 2009 and 2008, and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Authority s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medical University Hospital Authority as of, and the changes in its financial position and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated October 15, 2009 on our consideration of the Authority 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 12 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.
Management s Discussion and Analysis is not a required part of the basic financial statements, but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures to this information, consisting principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. October 15, 2009 13
Balance Sheets Assets 2009 2008 Current assets: Cash and cash equivalents $ 25,598,624 14,558,099 Held by trustees under indenture agreements required for current liabilities 10,932,391 24,597,950 Patient accounts receivable, net of allowance for uncollectible accounts of $54,700,000 and $70,400,000 in 2009 and 2008, respectively 141,694,753 130,350,270 Due from third-party payors 8,966,000 15,957,000 Other current assets 49,593,913 51,110,745 Total current assets 236,785,681 236,574,064 Investments held by trustees under indenture agreements 80,534,369 66,426,525 Capital assets, net 562,153,671 586,316,688 Deferred borrowing costs 18,528,603 19,855,592 Total assets $ 898,002,324 909,172,869 Liabilities and Net Assets Current liabilities: Current installments of long-term debt $ 22,848,824 17,507,581 Current installments of capital lease obligations 1,478,614 2,140,283 Due to related parties 12,044,663 20,127,320 Accounts payable 44,445,285 47,564,736 Accrued payroll, withholdings, and benefits 49,341,187 46,599,215 Other accrued expenses 20,820,344 19,382,519 Total current liabilities 150,978,917 153,321,654 Long-term debt 494,248,541 516,697,829 Capital lease obligations 161,467 1,300,977 Due to third-party payors 11,262,093 Total liabilities 656,651,018 671,320,460 Net assets: Invested in capital assets, net of related debt 70,482,278 80,805,409 Restricted under indenture agreements 82,587,020 78,306,062 Unrestricted 88,282,008 78,740,938 Total net assets 241,351,306 237,852,409 Commitments and contingencies Total liabilities and net assets $ 898,002,324 909,172,869 See accompanying notes to financial statements. 14
Statements of Revenues, Expenses and Changes in Net Assets Years ended 2009 2008 Operating revenues: Net patient service revenue $ 885,162,629 802,380,410 Other revenue 17,327,916 19,501,645 Total operating revenues 902,490,545 821,882,055 Operating expenses: Compensation and employee benefits 392,148,342 388,990,663 Services and supplies 431,889,348 405,171,026 Depreciation and amortization 52,092,849 32,378,733 Total operating expenses 876,130,539 826,540,422 Operating income (loss) 26,360,006 (4,658,367) Nonoperating revenue (expense): Investment income 2,643,709 3,439,530 Interest expense (25,752,577) (17,881,066) Income (loss) before payments from (to) The Medical University of South Carolina 3,251,138 (19,099,903) Nonoperating income (expense) payments from (to) The Medical University of South Carolina 247,759 (552,241) Increase (decrease) in net assets 3,498,897 (19,652,144) Net assets, beginning of year 237,852,409 257,504,553 Net assets, end of year $ 241,351,306 237,852,409 See accompanying notes to financial statements. 15
Statements of Cash Flows Years ended 2009 2008 Cash flows from operating activities: Cash received from patients and third-party payors $ 904,976,376 766,862,496 Other cash receipts 17,507,000 20,881,532 Cash payments to suppliers and employees (820,232,353) (765,808,196) Net cash provided by operating activities 102,251,023 21,935,832 Cash flows from noncapital financing activities: Payments from (to) The Medical University of South Carolina 247,759 (552,241) Net cash provided by (used in) noncapital financing activities 247,759 (552,241) Cash flows from capital and related financing activities: Capital expenditures (40,576,753) (139,796,674) Proceeds from disposal of equipment 6,726 2,808 Payments of principal on long-term debt (17,495,282) (8,628,361) Proceeds from issuance of long-term debt 48,796,091 Payment of bond insurance premium (3,060,890) (2,527,899) Payments on capital lease obligations (1,801,179) (674,234) Interest payments (30,732,304) (28,209,640) Net cash used in capital and related financing activities (93,659,682) (131,037,909) Cash flows from investing activities: Proceeds from sale of investments 1,200,631 6,094,516 Investment income received 2,579,597 6,130,715 Purchases of investments (7,131,319) (2,491,184) Net cash (used in) provided by investing activities (3,351,091) 9,734,047 Net increase (decrease) in cash and cash equivalents 5,488,009 (99,920,271) Cash and cash equivalents at beginning of year 69,845,426 169,765,697 Cash and cash equivalents at end of year $ 75,333,435 69,845,426 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating income (loss) $ 26,360,006 (4,658,367) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation and amortization 52,092,849 32,378,733 Provision for uncollectible accounts 73,010,218 82,277,917 Loss on disposal of equipment 340,522 36,786 Changes in operating assets and liabilities: Patient accounts receivable (84,354,701) (93,914,636) Due from third-party payors 6,991,000 (3,737,000) Other current assets 10,596,932 (24,802,798) Accounts payable (1,426,464) 9,645,981 Other accrued expenses and accrued payroll, withholding and benefits 26,723,318 10,817,343 Related parties, net (8,082,657) 13,891,873 Net cash provided by operating activities $ 102,251,023 21,935,832 Reconciliation of cash and cash equivalents at end of year to the balance sheets: In current assets $ 25,598,624 14,558,099 Held by trustees under indenture agreements 49,734,811 55,287,327 Cash and cash equivalents at end of year $ 75,333,435 69,845,426 See accompanying notes to financial statements. 16
(1) Summary of Significant Accounting Policies Medical University Hospital Authority (the Authority) is a multidimensional healthcare system headquartered in Charleston, South Carolina. The Authority is a principal diagnostic and treatment referral center for the State of South Carolina, and also owns and operates the principal clinical teaching institutions for The Medical University of South Carolina (the University). The primary facilities used by the Authority, all located on or near the Authority s main campus in Charleston, consist of the following: Ashley River Tower McClennan-Banks Ambulatory Care Center Children s Hospital Storm Eye Institute Institute of Psychiatry Digestive Disease Center Transplant Center Hollings Cancer Center MUSC Heart and Vascular Center On February 4, 2008, the Authority opened the Ashley River Tower hospital comprised of a four-story diagnostic and treatment center and a seven-story hospitality (bed) tower. Following the opening of the new facility, in November 2008 the Authority closed Charleston Memorial Hospital (CMH). The majority of the operations of CMH, concentrated primarily in the emergency department and the transitional care unit, as well as associated CMH-based clinical support functions, were relocated to the new hospital. The Authority is a component unit of the University, as defined by provisions of Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity (Statement 14). The Authority s component unit relationship to the University principally arises from the Authority s financial accountability to the University as defined in Statement 14. In particular, the legislation establishing the Authority as a stand-alone healthcare system effective July 1, 2000 requires that the members of the University s Board of Trustees also constitute the Board of Trustees of the Authority. These financial statements present the Authority and its blended component unit, MUFC Central Energy Plant, LLC (CEP). A blended component unit, although a legally separate entity, is in substance an indistinguishable part of its primary government s operations and, therefore, the financial information for the blended component unit is combined with the financial information of the primary government for purposes of financial statement reporting. As described further in note 5, CEP is a conduit debt issuer for the benefit of the Authority. As such, CEP is fiscally dependent on the Authority and, as required by applicable GASB principles, is considered a blended component unit of the Authority. 17 (Continued)
The significant accounting policies used by the Authority in preparing and presenting its financial statements follow: (a) (b) (c) (d) Cash Equivalents The Authority considers investments in highly liquid individual debt instruments (with an original maturity of three months or less) and similar fund positions, as well as its position in the state investment pool and the guaranteed investment contracts (which can be liquidated at the Authority s discretion without financial loss), to be cash equivalents. Inventories Inventories, consisting principally of medical supplies and pharmaceuticals, are stated at the lower of cost (first-in, first-out) or replacement value. Investments and Investment Income Investments consist of internally or externally restricted cash equivalents, and treasury obligations with original maturities greater than three months, all of which are carried at fair value, principally based on quoted market prices. Investment income or loss from investments (including realized and unrealized gains and losses on investments and interest) is reported as nonoperating revenue. Capital Assets Capital assets are recorded at cost or, if donated, at fair value at the date of receipt. Depreciation is provided over the useful life of each class of depreciable assets using the straight-line method. Equipment under capital lease obligations is amortized using the straight-line method over the estimated useful life of the equipment, and such amortization is included in depreciation and amortization in the accompanying statements of revenues, expenses and changes in net assets. A summary of depreciable lives follows: Land improvements Buildings and improvements Machinery, equipment, and vehicles 3 8 years 5 40 years 3 20 years Capital assets are reviewed for impairment whenever prominent events or changes in circumstances occur that affect the Authority s capital assets. Such events or changes in circumstances that may be indicative of impairment include evidence of physical damage, enactment or approval of laws or regulations or other changes in environment factors, technological changes or evidence of obsolescence, changes in the manner or duration of use of a capital asset, and construction stoppage. A capital asset generally is considered impaired if both (a) the decline in service utility of the capital asset is large in magnitude and (b) the event or change in circumstance is outside the normal life cycle of the capital asset. 18 (Continued)
(e) (f) (g) (h) (i) Statement of Revenues, Expenses and Changes in Net Assets For purposes of presentation, transactions deemed by management to be ongoing, major or central to the provision of healthcare services are reported as operating revenues and operating expenses. Peripheral or incidental transactions, including financing costs and investment income, are reported as nonoperating revenues and expenses. Net Patient Service Revenue Net patient service revenue is reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered, and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations, as well as the provision for uncollectible accounts. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Charity Care The Authority provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Authority does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Enterprise Fund Accounting The Authority utilizes the enterprise fund method of accounting. Revenues and expenses are recognized on the accrual basis using the economic resources measurement focus. Substantially all revenues and expenses are subject to accrual. Pursuant to and as permitted by GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the Authority has elected to not apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB) issued after November 30, 1989 (which policy is consistent with that of the University). The Authority applies the provisions of all relevant pronouncements of the GASB and pronouncements of the FASB issued prior to November 30, 1989 that do not conflict with GASB pronouncements. Net Assets Net assets of the Authority are classified into the following components: Net assets invested in capital assets, net of related debt, consist of capital assets net of accumulated depreciation and reduced by outstanding balances of any borrowings used to finance the purchase or construction of those assets. Net assets restricted under indenture agreements are amounts deposited with trustees as required by bond indentures or other debt agreements. Unrestricted net assets are remaining net assets that do not meet either of the above definitions. 19 (Continued)
When the Authority has both restricted and unrestricted resources available to finance a particular program, it is the Authority s policy to use restricted resources before unrestricted resources. (j) Costs of Borrowing Financing costs and the deferred accounting loss on refunding are being amortized over the terms of the related indebtedness using the interest method. Interest cost is capitalized on qualified construction expenditures, net of income earned on related trusteed assets, as a component of the cost of the related projects. For qualifying capital projects that are not financed with specific proceeds of tax-exempt debt, the Authority capitalizes interest cost on such projects based on accumulated expenditures and a weighted average borrowing rate. (k) (l) Income Taxes The Authority is a political subdivision of the State of South Carolina. Additionally, the Authority has received its determination letter from the Internal Revenue Service, indicating that related income is exempt from income tax under Section 501(a) of the Internal Revenue Code, as an organization described under Section 501(c)(3). Accordingly, there is no provision for income tax. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates include the allowances for uncollectible accounts and contractual adjustments, and estimated third-party payor settlements. In particular, laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates related to these programs will change by a material amount in the near term. (m) Recent Accounting Pronouncements On June 30, 2008, the GASB issued Statement No. 53, Accounting and Financial Reporting for Derivative Instruments (Statement No. 53). Statement No. 53 is intended to improve how state and local governments report information about derivative instruments financial arrangements used by governments to manage specific risks or make investments in their financial statements. The Statement specifically requires governments to measure most derivative instruments at fair value in their financial statements that are prepared using the economic resources measurement focus and the accrual basis of accounting. The guidance in Statement No. 53 also addresses hedge accounting requirements. Statement No. 53 is effective for financial statements for reporting periods beginning after June 15, 2009. Accordingly, the Statement will be effective for the Authority s fiscal year 2010. The Authority is currently evaluating the impact that Statement No. 53 will have on its financial position and changes in its financial position. 20 (Continued)
(2) Cash, Cash Equivalents and Investments The Authority s bank balances at follow: 2009 2008 Insured (FDIC and SIPC) $ 750,830 713,011 Uninsured, uncollateralized, or collateralized by securities held by the pledging institution or by its trust department or agent in other than the Authority s name 31,124,584 15,396,137 Total $ 31,875,414 16,109,148 Carrying amount (cash and cash equivalents) $ 25,598,624 14,558,099 A summary of investments follows: Fair value Percentage Maturities Interest rate Credit rating June 30, 2009: Cash $ 107,367 0.1% N/A N/A N/A State investment pool 818 N/A N/A Not rated U.S. Treasury note 6,698,883 7.3 2/15/2011 AAA U.S. Treasury tri-party repurchase agreement 35,033,066 38.3 N/A N/A Not rated Commercial paper 33,120,187 36.2 8/15/2009 N/A A1 Money market funds 16,506,439 18.1 N/A N/A AAAm $ 91,466,760 Fair value Percentage Maturities Interest rate Credit rating June 30, 2008: Cash $ 341,650 0.4% N/A N/A N/A State investment pool 962 N/A N/A Not rated U.S. Treasury note 6,634,979 7.3 2/15/2011 5.00% AAA U.S. Treasury tri-party repurchase agreement 29,102,169 31.9 N/A N/A Not rated Guaranteed investment contract 4,607,668 5.1 N/A 3.08% AAA Guaranteed investment contract 4,603,780 5.1 N/A 2.21% AAA Commercial paper 32,943,477 36.2 8/15/2008 N/A A1 Money market funds 12,789,790 140.0 N/A N/A AAAm $ 91,024,475 The Authority s investment strategy has been developed to, among other things, ensure that the investment portfolio remains in compliance with the investments deemed permissible under the indenture agreement described in note 5. There is no formalized deposit or investment policy that otherwise addresses credit risk, interest rate risk, or foreign currency risk. 21 (Continued)
Guidelines for fixed income investments and cash equivalents follow: 1. Direct obligations of the United States (U.S.) government, securities issued by federal agencies backed by the full faith and credit of the U.S. government, and securities issued by certain nonfull faith and credit federal agencies. 2. Cash, money market funds and certificates of deposit that are either appropriately collateralized, insured or issued by investment grade financial institutions. 3. Investment agreements, including guaranteed investment contracts, commercial papers, repurchase agreements and other securities are subject to credit rating minimums, acceptance by related insurers, and other provisions as described in the indenture agreements. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. Except for restrictions imposed by the aforementioned indenture agreement, the Authority places no limit on the amount the Authority may invest in any one issuer. As of June 30, 2009, more than 5% of the Authority s investments are in Autobahm Funding Co. LLC commercial paper and money market funds managed by Fidelity Investments. Investment income is comprised of the following for the years ended : 2009 2008 Dividend and interest income $ 1,801,535 6,130,714 Net increase in the fair value of investments 842,174 498,885 2,643,709 6,629,599 Less capitalized investment income 3,190,069 $ 2,643,709 3,439,530 (3) Other Current Assets The composition of other current assets follows: 2009 2008 Prepaid expenses and deposits $ 6,102,005 4,913,768 Prepaid hospital license tax (note 7) 6,797,179 Inventories 18,002,894 20,414,157 Amounts due from the South Carolina Medicaid Disproportionate Share Hospital program (note 7) 14,805,626 12,376,680 Other 10,683,388 6,608,961 $ 49,593,913 51,110,745 22 (Continued)