EL PASO COUNTY HOSPITAL DISTRICT D/B/A UNIVERSITY MEDICAL CENTER OF EL PASO Report to the Board of Managers and Management January _, 2017 Results of the 2016 financial statement audit, internal control matters and other required communications.
January _, 2017 Board of Managers and Management El Paso County Hospital District El Paso, Texas We have completed our audit of the financial statements of El Paso County Hospital District d/b/a University Medical Center of El Paso (the Medical Center) as of and for the year ended September 30, 2016. This report includes communication required under auditing standards generally accepted in the United States of America, as well as other matters. Our audit plan represented an approach responsive to the assessment of risk of material misstatement in financial reporting for the Medical Center. Specifically, auditing standards require us to: Express an opinion on the September 30, 2016, financial statements of the Medical Center. Issue communications required under auditing standards generally accepted in the United States of America to assist the board in overseeing management s financial reporting and disclosure process. Report on internal control over financial reporting and on compliance and other matters based on an audit of the financial statements performed in accordance with Government Auditing Standards. Report on compliance with requirements that could have a direct and material effect on each major program and on internal control over compliance in accordance with the Uniform Guidance and the State of Texas Uniform Grant Management Standards. This report also presents an overview of areas of audit emphasis, as well as our perspectives on the health care environment. This communication is intended solely for the information and use of the Board of Managers, Management and others within the Medical Center, and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours,
Contents Summary of Our Audit Approach and Results... 1 Significant Estimates... 3 Opinion... 4 Required Communications... 5 Other Matters... 9 Appendices Schedule of Uncorrected Misstatements... Tab 1 Management Representation Letter... Tab 2
Summary of Our Audit Approach and Results Our Approach BKD s audit approach focuses on areas of higher risk the unique characteristics of the Medical Center, your operating environment, the design effectiveness of your internal controls and your financial statement amounts and disclosures. The objective is to express an opinion on the conformity of your financial statements, in all material respects, with accounting principles generally accepted in the United States of America. Areas of Audit Emphasis The principal areas of audit emphasis and results were as follows: Area Results Management Override of Controls The risk that management may override existing and functioning accounting controls is an inherent risk to the Medical Center. No matters are reportable. Revenue Recognition Revenue cut-off impacts the financial statements of the Medical Center. As part of our audit, we evaluated revenue related to services provided in 2016 but recorded after year-end and estimated the net revenue posted out of period. An adjustment was proposed but not recorded for this estimate. 1
Summary of Our Audit Approach and Results (Continued) El Paso County Hospital District Area Results Management Estimates Estimates and judgments made by management materially impact financial statement amounts. The following financial statement areas include material estimates made by management: Allowance for contractual and bad debt adjustments No adjustment was required. Third-party payer settlement estimates No adjustment was required. Potential amounts owed by EPCH for prior Medicaid cost reports have been disclosed, but not accrued, based on management s assessment of the likelihood of payment. Reserve for employee health and workers compensation obligations Amounts recorded were reasonable and no adjustment was proposed. Reserve for professional and general liability risks Amounts recorded were reasonable and no adjustment was proposed. 2
Significant Estimates The preparation of the financial statements requires considerable judgment because some assets, liabilities, revenues and expenses are estimated based on management s assumptions about future outcomes. For example, the allowance for uncollectible accounts is impacted by patients willingness and ability to pay. Other estimates may be dependent on assumptions related to economic or environmental conditions, regulatory reform or changes in industry trends. Some estimates are inherently more difficult to evaluate and highly susceptible to variation because the assumptions relating to future outcomes have a higher degree of uncertainty. To the extent future outcomes are different than expected, management s estimates are adjusted in future periods, sometimes having a significant effect on subsequent period financial statements. The following are considered to be significant estimates for the Medical Center: Third-party Reimbursement Net operating revenues include management s estimates of amounts to be reimbursed by third parties. Amounts received for patient billings are generally less than amounts billed. The difference between what is billed and expected to be received is recorded through contractual adjustments. Management s process of estimating amounts to be received from third parties requires estimation based on payer classification, historical data and payer contract provisions. Estimates of thirdparty reimbursements also include management assumptions about uncertainties related to the continued implementation of health care reform, changes in payer mix and the current state of the economy. Net operating revenues also include estimated amounts due to and from the Medicaid supplemental funding programs. These estimates are based on communications from the state, historical and subsequent funding and include an allowance for recoupment upon final settlement of the funding. Allowance for Doubtful Accounts Primary collection risks related to patient accounts receivable include uninsured patients and patient balances where the insurance payer did not pay the entire balance. Management s estimate for allowance for uncollectible accounts is based on historical collection, payer mix and anticipated trends. Similar to third-party reimbursements, management assumptions about the economy and types of payers affect the estimation of allowance for uncollectible accounts. Employee Health and Workers Compensation Risks Reserves for employee health and workers compensation claims are based on estimates of known claims and estimates for incurred but not reported claims. Management estimates the liability based on specific claim facts and historical claim trends. Professional and General Liability Risks Management records an estimate of a liability based on a valuation provided by an independent actuary. The estimate is based on known claims, claims history and industry specific experience. Management reviews the estimate for the reasonableness of assumptions used in the development of the estimate by the actuary. EPCH Fair Value Adjustments El Paso Children s Hospital became a component unit of UMC in 2016. EPCH applied fresh start accounting upon its emergence from bankruptcy, which required management to estimate the fair value of multiple assets and liabilities, as well as the reorganization value of EPCH. Management engaged a third party valuation firm to assist with this assessment. Net Pension Liability Management records an estimated pension liability based on a valuation provided by an independent actuary. The estimate represents the difference between the projected benefit obligation and the fair value of the plan assets and is based on a variety of assumptions including a discount rate to equate the obligation to present value at the balance sheet date. Management reviews the estimate for the reasonableness of assumptions used in the development of the estimate by the actuary. 3
Opinion Unmodified, or Clean, Opinion Issued We have issued an unmodified opinion as to whether the financial statements of the Medical Center as of and for the year ended September 30, 2016 are fairly presented, in all material respects. 4
Required Communications El Paso County Hospital District Generally accepted auditing standards require the auditor to ensure that those charged with governance receive additional information regarding the scope and results of the audit that may assist you in overseeing management s financial reporting and disclosure process. Below, we summarize these required communications: Auditor s Responsibilities Under Auditing Standards Generally Accepted in the United States of America (GAAS) and the Standards Applicable to Financial Audits Contained in Government Auditing Standards Issued by the Comptroller General of the United States; Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance); and the State of Texas Uniform Grant Management Standards (UGMS) An audit performed 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; Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance); and the State of Texas Uniform Grant Management Standards (UGMS) is designed to obtain reasonable, rather than absolute, assurance about the financial statements and about whether noncompliance with the types of compliance requirements described in the Uniform Guidance and UGMS that could have a direct and material effect on a major or state federal program occurred. In performing auditing procedures, we establish scopes of audit tests in relation to the financial statements taken as a whole. Our engagement does not include a detailed audit of every transaction. Our engagement letter more specifically describes our responsibilities. These standards require communication of significant matters related to the financial statement audit that are relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Such matters are communicated in the remainder of this letter or have previously been communicated during other phases of the audit. The standards do not require the auditor to design procedures for the purpose of identifying other matters to be communicated with those charged with governance. An audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Our engagement letter more specifically describes your responsibilities. 5
Area Comments Significant Accounting Policies Significant accounting policies are described in Note 1 of the financial statements. The Medical Center elected to early adopt Governmental Accounting Standards Board Statement No. 80, Blending Requirements for Certain Component Units an amendment of GASB Statement No. 14 (GASB 80). Adoption of this standard resulted in entities formerly shown as discrete component units being recognized as blended component units. The 2015 financial statements of the Medical Center were restated for this change. Alternative Accounting Treatments We are required to report any discussions with management regarding alternative accounting treatments within accounting principles generally accepted in the United States of America for policies and practices for material items, including recognition, measurement and disclosure considerations related to the accounting for specific transactions, as well as general accounting policies. Management elected to treat EPCH as a new entity based on its application of fresh start accounting. As such, the financial position of EPCH is recognized in the Medical Center s financial statements prospectively from the date that it qualified as a component unit of the Medical Center. Management Judgments and Accounting Estimates Accounting estimates are an integral part of financial statement preparation by management, based on its judgments. Areas involving significant areas of such estimates for which we are prepared to discuss management s estimation process and our procedures for testing the reasonableness of those estimates are listed in the adjacent comments section. See analysis of management s judgments and accounting estimates on page 2. 6
Financial Statement Disclosures These areas involve particularly sensitive financial statement disclosures for which we are prepared to discuss the issues involved and related judgments made in formulating those disclosures. Patient revenue recognition Medicaid supplemental programs Significant estimates and concentrations EPCH bankruptcy resolution Defined benefit pension plan Audit Adjustments During the course of any audit, an auditor may propose adjustments to financial statement amounts. Management evaluates our proposals and records those adjustments that, in its judgment, are required to prevent the financial statements from being materially misstated. Some adjustments proposed were not recorded because their aggregate effect is not currently material; however, they involve areas in which adjustments in the future could be material, individually or in the aggregate. Adjustments Recorded No matters are reportable Proposed Audit Adjustments Not Recorded Tab 1 contains a summary of uncorrected misstatements we aggregated during the current engagement and pertaining to the previous engagement that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements as a whole. Auditor s Judgments About the Quality of the Medical Center s Accounting Policies During the course of the audit, we made observations regarding the Medical Center s application of accounting principles. No matters are reportable Significant Issues Discussed with Management During the audit process, issues were discussed or were the subject of correspondence with management and are listed in the adjacent comments section. Accounting for EPCH Adoption of GASB 80 Accounting implications of OPEB adoption 7
Other Material Written Communications Other material written communications between management and us related to the audit include: Management representation letter (Tab 2) Federal and Texas Single Audit reports We have provided separate communications related to EPCH, El Paso First and the Foundation 8
Other Matters Accounting Implication of Other Post Employment Benefit Plan (OPEB) The Medical Center recently approved implementing an OPEB that will provide health insurance for certain retired employees. This type of plan requires significant disclosures in the Medical Center s financial statements, which generally requires management to engagement an actuary. Additionally, for the Medical Center s 2018 financial statements accounting standards will change such that any unfunded liability will be reported on the Medical Center s balance sheet, and this liability could be significant. Management should work with an actuary to estimate the significance of this liability and the impact on debt capacity and other financial ratios. Information Technology Policies and Procedures During our review of the information technology policy and procedures of the Medical Center, we noted the following matters: The Medical Center s password history rules require a password to not be reused if it is one of the last five passwords used. However, the security system was set to three passwords. We recommend changing these settings to match the Medical Center s policy. Although a disaster strategy exist there is no formalized disaster recovery/business continuity plan in place. In the event of a disaster, lack of a formal plan may make it difficult for the Medical Center to recover in a timely manner causing critical disruptions to business operations. We recommend that the Medical Center initiate a project to develop a comprehensive disaster recovery plan. This communication is intended solely for the information and use of the Board of Managers, management and others within the Medical Center, and is not intended to be, and should not be, used by anyone other than these specified parties. January _, 2017 9