AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION TABLE OF CONTENTS Independent Auditors' Report 1 Audited Consolidated Financial Statements: Consolidated Balance Sheets 2 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Net Assets 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Other Financial Information: Independent Auditors' Report on Other Financial Information 28 2010: Consolidating Balance Sheet 29 Consolidating Statement of Operations 31 2009: Consolidating Balance Sheet 32 Consolidating Statement of Operations 34
CONSOLIDATED BALANCE SHEETS ASSETS Current assets: Cash and cash equivalents $ 37,399,874 $ 24,381,863 Accounts receivable, less allowance for uncollectible accounts ($19,765,760 in 2010 and $17,595,126 in 2009) (note 10) 35,334,743 36,256,082 Inventories 2,416,347 2,327,477 Other current assets 5,276,967 5,181,455 Total current assets 80,427,931 68,146,877 Property, plant and equipment, less accumulated depreciation (notes 4, 5 and 11) 154,339,408 121,315,192 Other assets: Unamortized bond issuance costs, net 2,167,443 512,833 Other 6,564,167 5,554,537 8,731,610 6,067,370 Assets whose use is limited (notes 6 and 12): Board designated and donor restricted investments 78,557,318 72,563,147 Held by trustee under revenue bond and note agreements (note 5) 75,364,076 10,621,067 Employee benefit plans and other 2,966,288 1,711,052 Beneficial interest in perpetual trusts 5,162,041 5,007,048 162,049,723 89,902,314 Total assets $405,548,672 $285,431,753 2
LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued expenses $ 17,996,714 $ 13,819,502 Accrued salaries, wages and related accounts 18,158,189 18,680,156 Accrued interest 2,310,950 405,365 Amounts payable to third-party payors (note 3) 8,053,395 4,507,237 Current portion of long-term debt 2,291,523 2,153,441 Notes payable (note 5) 30,000,000 Total current liabilities 48,810,771 69,565,701 Accrued pension (note 7) 48,572,617 44,003,073 Self-insurance reserves and other liabilities 25,014,090 20,123,121 Noncontrolling interests in consolidated affiliates 1,486,584 1,065,596 Long-term debt, less current portion (note 5) 160,104,009 34,441,589 Total liabilities 283,988,071 169,199,080 Net assets: Unrestricted 105,954,057 101,731,750 Temporarily restricted 3,779,453 2,865,133 Permanently restricted 11,827,091 11,635,790 121,560,601 116,232,673 Total liabilities and net assets $405,548,672 $285,431,753 See accompanying notes. 3
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended Net patient service revenues (notes 3 and 8) $380,629,536 $357,141,349 Investment income (note 6) 2,551,852 2,102,934 Other revenues 15,350,474 14,163,264 Total revenues 398,531,862 373,407,547 Expenses (note 9): Salaries, wages and fringe benefits (note 7) 225,904,031 213,257,215 Supplies and other expenses 108,019,206 101,368,455 Provision for bad debts 36,615,632 31,771,344 Depreciation and amortization 18,304,731 17,533,771 Interest 3,279,272 2,142,053 Total expenses 392,122,872 366,072,838 Income from operations 6,408,990 7,334,709 Nonoperating gains (losses): Gain (loss) on investments (note 6) 4,192,684 (18,479,554) Noncontrolling interests in net loss (income) of consolidated affiliates 382,903 (507,814) Contributions to community agencies (note 8) (1,703,566) (546,441) Other 1,125,465 943,910 Nonoperating gains (losses), net 3,997,486 (18,589,899) Excess (deficiency) of revenues and nonoperating gains (losses) over expenses 10,406,476 (11,255,190) Net unrealized loss on investments (note 6) (202,344) (101,987) Net assets released from restrictions for capital purchases 211,860 474,672 Pension adjustment (note 7) (6,193,685) (29,443,001) Increase (decrease) in unrestricted net assets $ 4,222,307 $ (40,325,506) See accompanying notes. 4
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS Years Ended Temporarily Permanently Unrestricted Restricted Restricted Total Net Assets Net Assets Net Assets Net Assets Balances at July 1, 2008 $142,057,256 $ 2,716,834 $12,956,450 $157,730,540 Deficiency of revenues and nonoperating gains (losses) over expenses (11,255,190) (11,255,190) Grant proceeds received for capital purchases 189,677 189,677 Restricted gifts and bequests 413,069 413,069 Investment income and net loss on investments (note 6) (206,640) (605,010) (811,650) Net unrealized loss on investments (note 6) (101,987) (58,130) (430,655) (590,772) Pension adjustment (note 7) (29,443,001) (29,443,001) Net assets released from restrictions for capital purchases 474,672 (189,677) (284,995) Increase (decrease) in net assets (40,325,506) 148,299 (1,320,660) (41,497,867) Balances at June 30, 2009 101,731,750 2,865,133 11,635,790 116,232,673 Excess of revenues and nonoperating gains (losses) over expenses 10,406,476 10,406,476 Grant proceeds received for capital purchases 211,860 211,860 Restricted gifts and bequests 845,370 845,370 Investment income and net gain (loss) on investments (note 6) 150,121 (211,940) (61,819) Net unrealized gain (loss) on investments (note 6) (202,344) (81,171) 403,241 119,726 Pension adjustment (note 7) (6,193,685) (6,193,685) Net assets released from restrictions for capital purchases 211,860 (211,860) Increase in net assets 4,222,307 914,320 191,301 5,327,928 Balances at June 30, 2010 $105,954,057 $ 3,779,453 $11,827,091 $121,560,601 See accompanying notes. 5
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended Operating activities and net gains: Increase (decrease) in net assets $ 5,327,928 $ (41,497,867) Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities and net gains: Depreciation and amortization 18,406,490 17,569,479 Loss on disposals of fixed assets 71,352 Land donated to the City of Manchester 1,167,823 Restricted investment income and net loss on investments 61,819 811,650 Restricted gifts and bequests (845,370) (413,069) Pension adjustment 6,193,685 29,443,001 Net realized and unrealized (gains) losses on investments (3,993,588) 19,439,202 Changes in operating assets and liabilities: Accounts receivable, net 921,339 (63,524) Inventories (88,870) (254,467) Other current assets (12,884) (1,082,679) Accounts payable and accrued expenses 4,177,212 (361,089) Accrued salaries, wages and related accounts (521,967) 3,932,705 Accrued interest 1,905,585 (86,681) Accrued pension (1,624,141) (2,470,283) Self-insurance reserves and other liabilities 4,890,969 3,002,642 Amounts payable to third-party payors 3,546,158 (2,122,116) Net cash provided by operating activities and net gains 39,583,540 25,846,904 Investing activities: Acquisition of property, plant and equipment (52,191,170) (27,980,678) (Increase) decrease in other noncurrent assets (1,396,413) 123,809 Increase in assets whose use is limited (68,019,764) (10,211,852) Physician practice acquisitions (134,057) (951,664) Net cash used by investing activities (121,741,404) (39,020,385) Financing activities: Proceeds of debt, notes payable, net of issuance costs and discount 125,981,771 37,398,521 Repayment of notes payable, debt and capital lease obligations (32,189,600) (22,181,807) Advanced rental payments from lessee 2,765,583 Restricted investment income and net (loss) gain on investments (61,819) (811,650) Restricted gifts and bequests 1,024,535 314,229 Noncontrolling interests in consolidated affiliates 420,988 197,742 Net cash provided by financing activities 95,175,875 17,682,618 Increase in cash and cash equivalents 13,018,011 4,509,137 Cash and cash equivalents at beginning of year 24,381,863 19,872,726 Cash and cash equivalents at end of year $ 37,399,874 $ 24,381,863 Noncash investing and financing activities: Assets acquired under capital lease agreements $ 127,946 $ 2,718,889 See accompanying notes. 6
1. Organization Elliot Health System and Affiliates (the System) consists of Elliot Health System (EHS), a not-forprofit corporation which functions as a parent company to several not-for-profit and for-profit health care entities, and its wholly-owned subsidiaries. EHS is the sole member of the following not-forprofit entities: Elliot Hospital, a provider of health care services whose affiliates also include Elliot Physician Network (EPN), a network of primary care physicians and Elliot Professional Services (EPS), a network of specialty care physicians (collectively referred to as the Hospital); Visiting Nurse Association of Manchester and Southern New Hampshire, Inc. (the VNA), a provider of home health care and hospice services; and Mary and John Elliot Charitable Foundation, a charitable foundation which supports the System. EHS is also the sole stockholder of Elliot Health System Holdings, Inc. and Subsidiaries, a for-profit corporation which owns interests in health care related partnerships and provides real estate and business management services. In the fiscal year ending June 30, 2010, the sole corporate member for EPN and EPS changed from the System to Elliot Hospital. This reorganization of entities had no impact on these consolidated financial statements. Elliot Hospital (excluding EPN and EPS) and EHS comprise the Obligated Group as defined under a Master Trust Indenture dated October 1, 2003 (as amended) under the 2003 and 2009 bond offerings. 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of EHS and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation. Charity Care The System has a formal charity care policy under which patient care is provided without charge or at amounts less than its established rates to patients who meet certain criteria. The System does not pursue collection of amounts determined to qualify as charity care, and therefore they are not reported as revenue. Cash and Cash Equivalents Cash and cash equivalents include short-term investments and secured repurchase agreements which have a maturity of three months or less when purchased. The System maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The System has not experienced any losses on such accounts. 7
2. Significant Accounting Policies (Continued) Net Patient Service Revenues The System has agreements with third-party payors that provide for payments at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, per diem payments and fee schedules. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Changes in these estimates are reflected in the consolidated financial statements in the year in which they occur. Accounts Receivable The allowance for uncollectible accounts is provided based on an analysis by management of the collectibility of outstanding balances. Management considers the age of outstanding balances and past collection efforts in determining the allowance for uncollectible accounts. Accounts deemed uncollectible are charged off against the established allowance. Income Taxes The System and all related entities, with the exception of Elliot Health System Holdings, Inc. and Subsidiaries, are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Code and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. Elliot Health System Holdings, Inc. is a holding company and its subsidiaries are for-profit companies subject to federal and state taxation. Income taxes are recorded based upon the liability method. Performance Indicator For purposes of display, transactions deemed by management to be ongoing, major or central to the provision of health care services are reported as operating revenue and expenses. Peripheral transactions are reported as nonoperating gains or losses. The consolidated statement of operations also includes excess (deficiency) of revenues and nonoperating gains (losses) over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues and nonoperating gains (losses) over expenses, consistent with industry practice, include the change in net unrestricted unrealized gains and losses on investments (unless considered other-than-temporary), and net assets released from restriction for capital purchases and pension liability adjustments. 8
2. Significant Accounting Policies (Continued) Classification of Net Assets Gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of donated assets. Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. When a donor restriction expires (when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of operations as either net assets released from restrictions (for noncapital related items) or as net assets released from restrictions used for capital purchases (capital related items). Permanently restricted net assets have been restricted by donors to be maintained in perpetuity. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. Investments and Investment Income Investments, including funds held by trustee under revenue bond agreements, are carried at fair value in the consolidated balance sheets. Realized gains or losses on the sale of investment securities are determined by the specific identification method. Investment income on unrestricted investments is reported with revenues and other support. Unrestricted investment income on temporarily and permanently restricted investments and net realized gains (losses) are reported as nonoperating gains (losses). Unrealized gains and losses on investments are excluded from the excess (deficiency) of revenues and nonoperating gains (losses) over expenses unless the losses are considered other than temporary. Periodically, management reviews investments for which the market value has fallen significantly below cost and recognizes impairment losses where they believe these declines are otherthan-temporary. Beneficial Interest in Perpetual Trusts The System has an irrevocable right to receive income earned on certain trust assets established for its benefit. Distributions received by the System are restricted by the donor for use in nursing education and women's and children's services. The System's interest in the fair value of the trust assets is included in assets whose use is limited. Changes in the market value of beneficial trust assets are reported as increases or decreases to permanently restricted net assets. Investment Policies The System's investment policies provide guidance for the prudent and skillful management of invested assets with the objective of preserving capital and maximizing returns. The invested assets include endowment, specific purpose and board designated (unrestricted) funds. Endowment funds are identified as permanent in nature, intended to provide support for current or future operations and other purposes identified by the donor. These funds are managed with disciplined longer-term investment objectives and strategies designed to accommodate relevant, reasonable, or probable events. 9
2. Significant Accounting Policies (Continued) Temporarily restricted funds are temporary in nature, restricted as to time or purpose as identified by the donor or grantor. These funds have various intermediate/long-term time horizons associated with specific identified spending objectives. Board designated funds have various intermediate/long-term time horizons associated with specific spending objectives as determined by the Board of Directors. Management of these assets is designed to maximize total return while preserving the capital values of the funds, protecting the funds from inflation, and providing liquidity as needed. The objective is to provide a real rate of return that meets inflation, plus 4.5%, over a long-term time horizon (greater than 7 to 10 years). The System targets a diversified asset allocation that places emphasis on achieving its long-term return objectives within prudent risk constraints. Spending Policy for Appropriation of Assets for Expenditure In accordance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the System considers the following factors in making a determination to appropriate or accumulate donorrestricted endowment funds: (a) the duration and preservation of the fund; (b) the purpose of the organization and the donor-restricted endowment fund; (c) general economic conditions; (d) the possible effect of inflation and deflation; (e) the expected total return from income and the appreciation of investments; (f) other resources of the organization; and (g) the investment policies of the organization. Spending policies may be adopted by the System, from time to time, to provide a stream of funding for the support of key programs. The spending policies are structured in a manner to ensure that the purchasing power of the assets is maintained while providing the desired level of annual funding to the programs. To date, the System has implemented a spending policy for only one fund, the Women's Aid Home d/b/a Pearl Manor Fund. This fund was established for the purpose of providing assistance, comfort, care and treatment for the elderly populations of Manchester, New Hampshire and the surrounding communities. The spending policy provides for a current year distribution of up to 5% of the fund's average year-end value for the prior three fiscal years. The fund value at June 30, 2010 was $4,626,405. Inventories Inventories of supplies and pharmaceuticals are carried at the lower of cost, determined on a weightedaverage method, or market. Bond Issuance Costs/Original Issue Discount The bond issuance costs incurred to obtain financing for construction and renovation programs and the original issue discount are being amortized by the straight-line method over the life of the bonds. The original issue discount is presented as a reduction of the face amount of bonds payable. 10
2. Significant Accounting Policies (Continued) Property, Plant and Equipment Property, plant and equipment is stated at cost at time of purchase, or fair market value at time of donation, less reductions in carrying value based upon impairment and less accumulated depreciation. The System's policy is to capitalize expenditures for major improvements and charge maintenance and repairs as expenditures which do not extend the lives of the related assets. The provision for depreciation is computed on the straight-line method at rates intended to amortize the cost of the related assets over their estimated useful lives. Assets which have been purchased but not yet placed in service are included in construction in progress and no depreciation expense is recorded. Federal Grant Revenue and Expenditures Revenues and expenses under federal grant programs are recognized as the related expenditure is incurred. Advertising Expense Advertising costs are expensed as incurred and totaled approximately $1,313,000 and $1,149,000 in 2010 and 2009, respectively. Retirement Benefits The System maintains a defined benefit pension plan for certain of its employees, the Elliot Health System Pension Plan (the Plan). Effective July 1, 2006, the Plan was amended to close the Plan to employees hired after June 30, 2006. Eligible employees hired prior to July 1, 2006 are grandfathered under the Plan and will continue to accrue benefits as long as they remain at a participating System entity and in an eligible status. The System's funding policy is to contribute amounts to the Plan sufficient to meet minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as might be determined to be appropriate from time to time. The Plan is intended to constitute a plan described in Section 414(k) of the Internal Revenue Code, under which benefits derived from employer contributions are based on the separate account balances of participants in addition to the defined benefits under the Plan. The System provides a defined contribution program for all eligible employees hired on or after July 1, 2006. Under this program, eligible employees may receive annual employer contributions to a System sponsored tax sheltered annuity plan or 401(k) plan up to 3% of annual base pay. The System also provides discretionary matching contributions to a tax sheltered annuity plan or 401(k) plan equal to up to one-half of the employee's contribution to a maximum 4% of their annual base pay. Total expense incurred by the System was $1,650,560 and $2,672,800 under these defined contribution plans for the years ended, respectively. 11
2. Significant Accounting Policies (Continued) The System sponsors deferred compensation plans for certain qualifying employees. The amounts ultimately due to employees are to be paid upon the employees attaining certain criteria, including age. At, approximately $2,966,000 and $1,711,000, respectively, is reflected in both assets whose use is limited and in other long-term liabilities related to such agreements. Workers' Compensation The System established a self-insured irrevocable workers' compensation trust to fund anticipated losses for workers' compensation claims. The System maintains an excess insurance policy to limit its exposure on claims to $500,000 per occurrence. Reserves for claims made and potential unreported claims have been established to provide for incurred but unpaid claims. The amount of the reserve has been determined by an actuarial consultant. Employee Health and Dental Insurance The System maintains its own self-insurance plan for employee health and dental. Under the terms of the plan, employees meeting certain eligibility requirements and their dependents are eligible for participation and, as such, the System is responsible for the administration of the plan and any resultant liability incurred. The System maintains individual and aggregate stop-loss insurance coverage. Employee Fringe Benefits Most of the System's entities have an "earned time" plan. Under this plan, each qualifying employee "earns" paid leave for each pay period worked. These hours of paid leave may be used for vacations, holidays or illnesses. Hours earned but not used are vested with the employee and are paid to the employee upon termination. The System accrues a liability for such paid leave as it is earned. Malpractice Loss Contingencies The System has been and is insured against malpractice loss contingencies under claims-made insurance policies. A claims-made policy provides specific coverage for claims made during the policy period. The System maintains excess professional and general liability insurance policies to cover claims in excess of liability retention levels. The System has established a reserve to cover professional liability exposure for incurred but unpaid claims. The amount of the reserve has been determined by an actuarial consultant. The possibility exists, as a normal risk of doing business, that malpractice claims in excess of insurance coverage may be asserted against the System. Litigation The System is involved in litigation and regulatory reviews arising in the ordinary course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the System's financial position, results of operations or cash flows. 12
2. Significant Accounting Policies (Continued) Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Financial instruments consist of cash and cash equivalents, investments, accounts receivable, assets whose use is limited or restricted, accounts payable, estimated third-party payor settlements and long-term debt. The fair value of all financial instruments other than long-term debt approximates their relative book value as these financial instruments have short-term maturities or are recorded at fair value as disclosed in note 12. The fair value of the System's long-term debt is estimated using discounted cash flow analyses, based on the System's current incremental borrowing rates for similar types of borrowing arrangements, and is disclosed in note 5 to the consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for the allowance for uncollectible accounts, long-lived assets, insurance costs, employee benefit plans, contractual allowances, third-party payor settlements and contingencies. It is reasonably possible that actual results could differ from those estimates. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Reclassifications Certain 2009 amounts have been reclassified to conform with the current year presentation. Subsequent Events Management of the System evaluated events occurring between the end of its fiscal year and September 17, 2010, the date the consolidated financial statements were available to be issued. Recent Accounting Pronouncements In June 2009, the FASB issued the ASC Subtopic 105, Generally Accepted Accounting Principles (GAAP), which establishes the ASC as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The subsequent issuances of new standards will be in the form of Accounting Standards Updates (ASU) that will be included in the codification. This ASC is effective for the System for the year ended June 30, 2010. Historical U.S. GAAP references have been updated to comply with the codification. The adoption of this guidance did not have any effect on the System's consolidated financial position, results of operations or cash flows. 13
2. Significant Accounting Policies (Continued) In August 2009, the FASB issued ASU No. 2009-05 which provides amended guidance for the fair value measurement of liabilities. ASU No. 2009-05 clarifies, among other things, that in circumstances in which a quoted market price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using valuation techniques specified in the ASU. The ASU is effective for the first reporting period beginning subsequent to issuance. The System is currently evaluating the impact this accounting pronouncement will have on its consolidated financial statements. In April 2009, the FASB issued SFAS No. 164, Not-for-Profit Entities: Mergers and Acquisitions Including an amendment of FASB Statement No. 142 (primarily codified under ASC 958). The objective of SFAS No. 164 is to improve the relevance, representational faithfulness and comparability of the information that a not-for-profit entity provides in its financial reports about a combination with one or more other not-for-profit entities, businesses, or nonprofit activities. To accomplish that, this guidance establishes principles and requirements for how a not-for-profit entity: (a) determines whether a combination is a merger or an acquisition; (b) applies the carryover method in accounting for a merger; (c) applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer; and (d) determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition. This guidance also improves the relevance, representational faithfulness and comparability of the information a not-for-profit entity provides about goodwill and other intangible assets after an acquisition by amending FASB Statement No. 142, Goodwill and Other Intangible Assets, to make it fully applicable to not-for-profit entities and will be effective for all mergers and acquisitions completed after June 30, 2010 by the System. In August 2010, the FASB issued ASU No. 2010-23 which provides amended guidance for the measurement of charity care for disclosure. The objective of ASU No. 2010-23 is to reduce the diversity in practice regarding the measurement basis used in the disclosure of charity care. To accomplish that, this guidance requires that cost be used as the measurement basis for charity care disclosure purposes and that cost be identified as the direct and indirect costs of providing the charity care. This amendment also requires disclosure of the method used to identify or determine such costs. The ASU is effective for the year ending June 30, 2012. The System does not expect that the of impact this accounting pronouncement will be significant to its consolidated financial statements. In August 2010, the FASB issued ASU No. 2010-24 which addresses the diversity in the accounting for medical malpractice and similar liabilities and their related anticipated insurance recoveries by health care entities that mostly have netted insurance recoveries against the accrued liability, although some have presented the anticipated insurance recovery and the liability on a gross basis. The amendments to Topic 954 clarify that a health care entity should not net insurance recoveries against a related claim liability; the amount of the claim liability should be determined without consideration of insurance recoveries. This ASU is effective for the fiscal year ending June 30, 2012. The System does not expect that the impact of this accounting pronouncement will be significant to its consolidated financial statements. 14
3. Net Patient Service Revenues The following summarizes net patient service revenues for the years ended : Gross patient service revenues $698,936,745 $642,418,225 Less contractual allowances: Medicare 157,033,773 137,353,339 Medicaid 53,285,997 46,623,947 Managed care and other 107,987,439 101,299,590 318,307,209 285,276,876 Net patient service revenues $380,629,536 $357,141,349 Various entities of the System maintain contracts with the Social Security Administration (Medicare) and the State of New Hampshire Division of Health and Human Services (Medicaid). The entities are paid a prospectively determined fixed price for Medicare and Medicaid inpatient acute care services depending on the type of illness or the patient's diagnostic related group classification. Reimbursement for Medicare for outpatient services is based upon a prospective standard rate for procedures performed or services rendered. Home health care and hospice services are reimbursed prospectively on a per episode or per diem basis. Physician services are reimbursed on established and/or negotiated fee schedules. Capital costs and certain Medicare and Medicaid outpatient services are also reimbursed on a prospectively determined fixed rate. The entities receive payment for other Medicare and Medicaid inpatient and outpatient services on a reasonable cost basis which are settled with retroactive adjustments upon completion and audit of related cost finding reports. The percentage of net patient service revenue earned from the Medicare and Medicaid programs was 25% and 5% in both 2010 and 2009. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs. The System believes that it is in substantial compliance with all applicable laws and regulations. However, there is at least a reasonable possibility that recorded estimates could change by a material amount in the near term. Differences between amounts previously estimated and amounts subsequently determined to be recoverable or payable are included in net patient service revenues in the year that such amounts become known. The differences between amounts previously estimated and amounts subsequently determined to be recoverable from third-party payors (decreased) increased net patient service revenues by approximately $(271,000) and $2,761,000 in 2010 and 2009, respectively. The various System entities also maintain contracts with Anthem Blue Cross, Cigna, Harvard Pilgrim Health Care, certain commercial carriers, managed care plans and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per discharge and per day, discounts from established charges and fee schedules. 15
4. Property, Plant and Equipment The major categories of property, plant and equipment at are as follows: Operating properties: Land and land improvements $ 6,553,074 $ 6,249,294 Buildings and fixed equipment 106,983,757 106,824,526 Major movable equipment 116,807,842 113,046,950 Construction and projects in progress 50,844,913 5,199,846 281,189,586 231,320,616 Less accumulated depreciation (153,377,535) (138,875,404) 127,812,051 92,445,212 Rental properties: Land and land improvements 3,696,302 4,339,908 Buildings and fixed equipment 33,877,848 33,357,636 Major movable equipment 40,020 Construction and projects in progress 870,835 1,017,986 38,485,005 38,715,530 Less accumulated depreciation (11,957,648) (9,845,550) 26,527,357 28,869,980 Net property, plant and equipment $ 154,339,408 $ 121,315,192 Construction in progress at June 30, 2010 primarily relates to costs incurred to construct, equip and develop an ambulatory care center in the City of Manchester. Estimated future commitments under noncancelable construction contracts related to the project total approximately $37,500,000 at June 30, 2010. 5. Debt Notes payable and long-term debt at consist of the following: Notes payable: New Hampshire Health and Education Facilities Authority - Series 2008M notes with interest at a variable rate, paid in full during 2010 $ $30,000,000 16
5. Debt (Continued) Long-term debt: Business Finance Authority of the State of New Hampshire - Revenue Bonds: Elliot Hospital Obligated Group Series 2009A Bonds with interest ranging from 4.0% to 6.125% per year and required sinking fund installments of amounts ranging from $735,000 to $10,840,000 through October 1, 2039. The bonds may be redeemed in whole or in part on or after October 1, 2019 at par $130,000,000 $ Less unamortized original issue discount (2,151,222) 127,848,778 New Hampshire Health and Education Facilities Authority - Revenue Bonds: Elliot Hospital Obligated Group Series 2003B bonds with interest ranging from 4.25% to 5.6% per year and required sinking fund installments of amounts ranging from $1,310,000 to $2,660,000 through October 1, 2022. The bonds may be redeemed in whole or in part on or after October 1, 2013 at par 25,460,000 26,770,000 Less unamortized original issue discount (164,997) (178,374) 25,295,003 26,591,626 Bank notes payable 7,547,853 7,688,347 Capital lease obligations see note 11 1,703,898 2,315,057 162,395,532 36,595,030 Less current portion (2,291,523) (2,153,441) $160,104,009 $34,441,589 The System has a mortgage payable to a bank in the amount of $4,797,853 at a currently variable interest rate of 2.848%. Principal and interest payments are required through May 2014. The System also has a secured note with a bank in the amount of $2,500,000 at a fixed interest rate of 6%. Interest only payments are required through March 2012. The System has a third party note in the amount of $250,000. The note is unsecured with a 0% interest rate. No principal payment is required until March 2012. Under the terms of the Series 2009A bonds payable to the Business Finance Authority of the State of New Hampshire and Series 2003B bonds payable to the New Hampshire Health and Education Facilities Authority (collectively, the Authorities) at June 30, 2010, debt service reserve funds are required to provide for payment of principal and interest if the Obligated Group fails to make required payments. The funds are held by a trustee and can be returned to the Obligated Group as the requirements of the fund (which are equal to the maximum amount of principal and interest due in any one future year) are decreased. The Obligated Group's agreement with the Authorities for the Series 2009A and 2003B bonds grants the Authorities a security interest in Elliot Hospital's gross receipts and a mortgage on Elliot Hospital's existing and future facilities and equipment. In addition, under the terms of the master indenture, the Obligated Group is required to meet certain covenant requirements. At June 30, 2010, the Obligated Group was in compliance with these requirements. 17
5. Debt (Continued) The funds held by the trustee under the revenue bond and note agreements at June 30 are comprised of the following: Debt service interest fund $ 692,520 $ 430,948 Debt service reserve fund 14,521,458 2,357,406 Construction fund and other 60,150,098 7,832,713 $75,364,076 $10,621,067 Interest paid totaled $4,590,015 and $2,328,287 for the years ended, respectively. Interest capitalized during the years ended June 30, 2010 totaled $3,216,328 and $82,652, respectively. Aggregate annual payments required under the bond and capital lease agreements and mortgage notes payable for each of the five years ending June 30, 2015 are approximately $2,292,000; $5,035,000; $2,680,000; $2,751,000; and $2,826,000; respectively. The fair value, based on current market rates, of the System's notes payable and long-term debt was approximately $166,246,000 and $67,796,000 as of, respectively. 6. Assets Whose Use is Limited Assets whose use is limited at are comprised of the following: Fair Fair Cost Value Cost Value Cash and equivalents $ 62,207,401 $ 62,207,401 $26,261,599 $26,261,599 Marketable equity securities 32,925,148 33,973,034 20,721,091 21,185,330 U.S. Government obligations and corporate bonds 53,229,024 51,592,567 32,504,915 31,813,535 Employee benefit plans and other 2,966,288 2,966,288 1,711,052 1,711,052 Beneficial interest in perpetual trusts 5,039,225 5,162,041 5,287,472 5,007,048 Limited partnership interest in hedge funds 6,423,750 6,148,392 3,923,750 3,923,750 $ 162,790,836 $ 162,049,723 $90,409,879 $89,902,314 18
6. Assets Whose Use is Limited (Continued) Board designated and donor restricted investments of various System entities are pooled into the Elliot Common Trust Fund LLC and is comprised of the following at : Board designated: Capital, working capital and community service $56,992,742 $52,724,558 Self-insurance 12,334,048 11,820,051 69,326,790 64,544,609 Donor restricted and other 9,230,528 8,018,538 $78,557,318 $72,563,147 Unrestricted investment income and realized gains (losses) on investments are summarized as follows: Investment income $ 2,551,852 $ 2,102,934 Nonoperating investment income 318,822 368,876 Realized gain (loss) on sale of investments 3,984,286 (12,130,290) Other-than-temporary loss on investments (110,424) (6,718,140) Change in net unrealized loss on investments (202,344) (101,987) 6,542,192 (16,478,607) Restricted investment income and net gains (losses) on investments are summarized as follows: Investment income and net gain (loss) on investments (61,819) (811,650) Net unrealized gain (loss) on investments 322,070 (488,785) 260,251 (1,300,435) Total restricted and unrestricted $ 6,802,443 $ (17,779,042) Management continually reviews its investment portfolio and evaluates whether declines in the fair value of securities should be considered other-than-temporary. Factored into this evaluation are the general market conditions, the issuer's financial condition and near-term prospects, conditions in the issuer's industry, the recommendation of advisors and the length of time and extent to which the market value has been less than cost. 19
6. Assets Whose Use is Limited (Continued) The following table summarizes the aggregate unrealized losses on investments held at June 30: Less Than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses 2010 Marketable equity securities $18,064,269 $ (2,316,219) $ 2,342,094 $ (816,915) $20,406,363 $ (3,133,134) U.S. Government obligations and corporate bonds 2,322,332 (69,604) 546,618 (146,503) 2,868,950 (216,107) $20,386,601 $ (2,385,823) $ 2,888,712 $ (963,418) $23,275,313 $ (3,349,241) 2009 Marketable equity securities $ 5,854,680 $ (491,488) $ 1,337,257 $ (432,213) $ 7,191,937 $ (923,701) U.S. Government obligations and corporate bonds 4,421,459 (44,548) 5,099,398 (662,985) 9,520,857 (707,533) $10,276,139 $ (536,036) $ 6,436,655 $ (1,095,198) $16,712,794 $ (1,631,234) Aggregate unrealized gains totaled $2,608,128 and $1,123,669 at, respectively. During the years ended, the System recorded realized losses for other-thantemporary declines in the fair value of investments of $110,424 and $6,718,140, respectively. Management believes that, given the small percentage declines below cost and management's intent and ability to hold the securities, any losses recognized on the sale of such investments will not be material to the consolidated financial statements. 7. Retirement Benefits A reconciliation of the changes in the Elliot Health System Pension Plan's projected benefit obligation and the fair value of plan assets and a statement of funded status of the plan as of and for the years ended are as follows: Changes in benefit obligation: Projected benefit obligations, beginning of year $(144,611,988) $(125,049,002) Service cost (6,483,530) (6,198,863) Interest cost (9,703,629) (8,585,834) Benefits paid 2,406,607 2,226,392 Actuarial loss (14,485,873) (7,217,525) Administrative expenses paid 188,959 212,844 Projected benefit obligations, end of year $(172,689,454) $(144,611,988) 20
7. Retirement Benefits (Continued) The weighted-average assumptions used to develop the projected benefit obligation as of June 30, 2010 and 2009: Discount rate 5.85% 6.50% Rate of compensation increase 4.00 4.25 Changes in plan assets: Fair value of plan assets, beginning of year $ 100,608,915 $ 108,018,647 Actual return on plan assets 16,214,217 (12,970,496) Contributions by plan sponsor 9,889,271 8,000,000 Benefits paid (2,406,607) (2,226,392) Actual administrative expense paid (188,959) (212,844) Fair value of plan assets, end of year $ 124,116,837 $ 100,608,915 Funded status: Fair value of plan assets $ 124,116,837 $ 100,608,915 Benefit obligations (172,689,454) (144,611,988) Funded status of the plan $ (48,572,617) $ (44,003,073) Amounts recognized in the statement of financial position at consist of: Net liability recognized $ (48,572,617) $ (44,003,073) Amounts recognized in unrestricted net assets at consist of: Net actuarial loss $ 57,498,115 $ 51,458,802 Prior service credit (885,475) (1,039,847) Total amount recognized $ 56,612,640 $ 50,418,955 21
7. Retirement Benefits (Continued) Pension Plan Assets The fair values of the System's pension plan assets and target allocations as of June 30, 2010, by asset category are as follows (see note 12 for level definitions): Quoted Prices in Signif- Signif- Percent- Active icant icant age Target Markets Observ- Unob- of Plan Allo- for Identical able servable Assets, cation Assets Inputs Inputs June 30, 2010 Total (Level 1) (Level 2) (Level 3) 2009 Short-term investments: 0%-8% 5% Money market fund $ 8,293,534 $ 8,293,534 $ $ Equity securities: 50%-70% 59% Common stocks 41,505,892 41,505,892 Mutual funds equity 19,365,505 19,365,505 Other equities 8,968,366 8,968,366 Preferred stocks 95,957 95,957 Fixed income: 30%-50% 36% US Government and agency obligations 10,914,862 1,349,121 9,565,741 Municipal bonds 2,388,982 2,388,982 Mutual funds fixed 9,667,430 9,667,430 Corporate and foreign bonds 21,283,205 21,283,205 Collateralized mortgage obligations 118,145 118,145 Unallocated insurance contract 1,514,959 1,514,959 $124,116,837 $110,529,010 $12,072,868 $ 1,514,959 The table below sets forth a summary of changes in plan assets using unobservable inputs (Level 3): Balance, beginning of year $ 1,645,186 $ 1,572,872 Unrealized gains related to instruments still held at the reporting date 94,586 105,603 Purchases, sales, issuances and settlements (net) (224,813) (33,289) Balance, end of year $ 1,514,959 $ 1,645,186 22
7. Retirement Benefits (Continued) Management of the assets is designed to maximize total return while preserving the capital values of the fund, protecting the fund from inflation, and providing liquidity as needed for plan benefits. The objective is to provide a rate of return that meets inflation, plus 5.5%, over a long-term horizon. These funds are managed as permanent funds with disciplined longer term investment objectives and strategies designed to meet cash flow requirements of the plan. Funds are managed in accordance with ERISA and all other regulatory requirements. Net periodic pension cost includes the following components at : Service cost $ 6,483,530 $ 6,198,863 Interest cost 9,703,629 8,585,834 Expected return on plan assets (9,717,700) (9,649,021) Amortization: Actuarial loss 1,950,043 548,013 Prior service credit (154,372) (154,384) Net periodic pension cost $ 8,265,130 $ 5,529,305 The weighted-average assumptions used to develop net periodic pension cost for the years ended were as follows: Discount rate 6.50% 6.60% Expected return on plan assets 7.75 8.25 Rate of compensation 4.25 4.50 In selecting the long-term rate of return on assets, the System considered the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of the plan. This included considering the trust's asset allocation and the expected returns likely to be earned over the life of the plan, as well as the historical returns on the types of assets held and the current economic environment. The loss and prior service credit amount expected to be recognized in net periodic benefit cost in 2011 are as follows: Actuarial loss $ 4,083,546 Prior service credit (154,372) Contributions The System expects to contribute $11.1 million to its pension plan in 2011. $ 3,929,174 23
7. Retirement Benefits (Continued) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Fiscal Year Pension Benefits 2011 $ 2,800,000 2012 3,400,000 2013 3,900,000 2014 4,500,000 2015 5,200,000 Years 2016 2020 37,800,000 8. Community Benefits (Unaudited) The System provided charity care which, at established charges, amounted to $16,455,713 and $15,510,228 for the years ended, respectively. Estimated costs incurred to provide charity care were $8,787,546 and $8,434,603 for the years ended, respectively. Other community benefits provided by the System included various community service programs such as patient transport services, prenatal and educational programs, health screenings, health publications and other health information services, the cost of which amounted to $3,301,791 and $3,280,478 for the years ended, respectively. The cost of providing community benefits for the years ending are summarized below: Charity care $ 8,787,546 $ 8,434,603 Community service programs 3,301,791 3,280,478 Contributions to community agencies and land donation to the City of Manchester in 2010 1,703,566 546,441 $13,792,903 $12,261,522 The detail of all contributions to community agencies for the years ended are listed below: Manchester Community Health Center $ 300,000 $ 325,000 Child Health Services 218,338 216,195 Other relief efforts 17,405 5,246 Land donated to the City of Manchester 1,167,823 Total contributions to community agencies $ 1,703,566 $ 546,441 24
9. Functional Expenses The System provides general health care services to residents within its geographic location including inpatient, outpatient, physician, home care, and emergency care. Expenses related to providing these services are as follows: Health care services $268,175,362 $250,293,712 General and administrative 123,947,510 115,779,126 $392,122,872 $366,072,838 10. Concentration of Credit Risk The System grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors was as follows: Medicare 29% 27% Medicaid 7 9 Managed care and other 20 24 Patients (self pay) 29 27 Anthem Blue Cross 15 13 100% 100% 11. Leases The System leases various office facilities and equipment from unrelated parties under noncancelable operating leases. Total rental expense for these leases for the years ended was approximately $10,503,382 and $9,101,320, respectively. The System also leases equipment under lease agreements that are classified as capital leases. The cost of equipment under the capital lease was $2,976,910 at June 30, 2010. Accumulated amortization of the leased equipment at June 30, 2010 was $1,163,273. Amortization of assets under capital leases is included in depreciation and amortization expense. 25