Consolidated Financial Statements (With Independent Auditors Report Thereon)
KPMG LLP 4200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Independent Auditors Report The Board of Directors The Children s Mercy Hospital: Report on the Financial Statements We have audited the accompanying consolidated financial statements of The Children s Mercy Hospital and Affiliates (the Hospital), which comprise the consolidated balance sheets as of, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Children s Mercy Hospital and Affiliates as of, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.
Other Matter Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in exhibits 1 and 2 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Minneapolis, Minnesota October 16, 2015 2
Consolidated Balance Sheets (In thousands) Assets 2015 2014 Current assets: Cash and cash equivalents $ 102,856 140,381 Short-term investments 3 28,406 Patient accounts receivable, net of allowance for doubtful accounts of $35,757 and $17,839 in 2015 and 2014, respectively 169,628 141,908 Other receivables 16,598 18,115 Inventories 11,291 8,907 Prepaid expenses 12,638 10,763 Current portion of pledges receivable 1,842 3,084 Total current assets 314,856 351,564 Property and equipment, net 499,831 488,361 Assets limited as to use: Held under self-insurance arrangements 7,142 13,473 Total assets limited as to use 7,142 13,473 Beneficial interest in the net assets of the Foundation 199,792 206,631 Pledges receivable 4,260 2,475 Investment in unconsolidated joint ventures 2,809 3,057 Long-term investments 491,609 368,203 Income beneficiary and charitable remainder trusts 37,153 39,528 Restricted deposits 2,111 2,058 Other assets 36,592 35,106 Total assets $ 1,596,155 1,510,456 Liabilities and Net Assets Current liabilities: Current portion of long-term debt $ 4,729 4,553 Accounts payable and accrued expenses 77,209 76,187 Accrued payroll and related expenses 72,916 61,117 Total current liabilities 154,854 141,857 Reserve for professional liability claims 44,369 47,488 Other noncurrent liabilities 1,162 4,091 Long-term debt, net of current portion 184,800 189,477 Long-term postretirement medical liability and other liabilities 34,302 30,889 Total liabilities 419,487 413,802 Net assets: Unrestricted 918,945 823,788 Temporarily restricted 180,155 195,745 Permanently restricted 77,568 77,121 Total net assets 1,176,668 1,096,654 Total liabilities and net assets $ 1,596,155 1,510,456 See accompanying notes to consolidated financial statements. 3
Consolidated Statements of Operations Years ended (In thousands) 2015 2014 Unrestricted revenues, gains, and other support: Net patient service revenue $ 1,010,495 901,908 Provision for bad debt 54,834 26,993 Net patient service revenue less provision for bad debt 955,661 874,915 Contract revenue 116,137 94,722 Other revenue and public assistance: Net assets released from restrictions for use in operations 14,062 12,301 Other grants and contracts 19,690 18,174 Cafeteria and other 6,135 6,149 United Way 944 898 County courts 252 491 City of Kansas City, Missouri 787 807 Total unrestricted revenues, gains, and other support 1,113,668 1,008,457 Operating expenses: Salaries, wages, and benefits 641,275 581,998 Supplies 110,812 99,194 Purchased services 110,263 98,034 Other operating expenses 105,362 97,757 Depreciation 53,257 53,158 Insurance 10,544 17,067 Interest 13,444 13,830 Gain on sale of property and equipment (98) (6) Loss on impairment of property and equipment 5,012 Total operating expenses 1,044,859 966,044 Operating income 68,809 42,413 Other income (loss): Equity in losses of unconsolidated joint ventures (170) (586) Unrestricted gifts and bequests 7,714 1,892 Net investment income 25,874 17,495 Unrealized gain on land held for sale 76 1,530 Net gain (loss) on hedging transactions (2,063) 738 Total other income, net 31,431 21,069 Excess of revenues, gains, and other support over expenses 100,240 63,482 Other changes in unrestricted net assets: Net assets released from restrictions used for purchase of property and equipment 8,770 4,574 Net unrealized change in investments (12,670) 19,278 Change in postretirement benefit obligation (1,696) 137 Transfer of oil and gas leases from Foundation 513 Total other changes in unrestricted net assets (5,083) 23,989 Increase in unrestricted net assets $ 95,157 87,471 See accompanying notes to consolidated financial statements. 4
Consolidated Statements of Changes in Net Assets Years ended (In thousands) Temporarily Permanently Unrestricted restricted restricted Total Balance, June 30, 2013 $ 736,317 176,464 71,361 984,142 Excess of revenues, gains, and other support over expenses 63,482 63,482 Contributions restricted by donor 11,222 40 11,262 Net assets released from restrictions for use in operations (12,301) (12,301) Change in beneficial interest in net assets of the Foundation 24,792 2,191 26,983 Net assets released from restrictions used for purchase of property and equipment 4,574 (4,574) Net unrealized change in investments 19,278 19,278 Net unrealized change in income beneficiary and charitable remainder trusts 142 3,529 3,671 Change in postretirement benefit obligation 137 137 Increase in net assets 87,471 19,281 5,760 112,512 Balance, June 30, 2014 823,788 195,745 77,121 1,096,654 Excess of revenues, gains, and other support over expenses 100,240 100,240 Contributions restricted by donor 8,844 71 8,915 Net assets released from restrictions for use in operations (14,062) (14,062) Change in beneficial interest in net assets of the Foundation (1,573) 2,722 1,149 Net assets released from restrictions used for purchase of property and equipment 8,770 (8,770) Net unrealized change in investments (12,670) (12,670) Net unrealized change in income beneficiary and charitable remainder trusts (29) (2,346) (2,375) Transfer of oil and gas leases 513 513 Change in postretirement benefit obligation (1,696) (1,696) Increase (decrease) in net assets 95,157 (15,590) 447 80,014 Balance, June 30, 2015 $ 918,945 180,155 77,568 1,176,668 See accompanying notes to consolidated financial statements. 5
Consolidated Statements of Cash Flows Years ended (In thousands) 2015 2014 Cash flows from operating activities: Change in net assets $ 80,014 112,512 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 53,257 53,158 Gain on sale of property and equipment (98) (6) Loss on impairment of property and equipment 5,012 Amortization of debt issuance costs 127 116 Amortization of bond premium 3,288 1,813 Amortization of bond discount 43 34 Amortization of deferred lease incentive (585) (585) Provision for bad debt 54,834 26,993 Equity in losses of unconsolidated joint ventures 170 586 Change in beneficial interest in the net assets of the Foundation 6,839 (19,216) Unrealized gain on land held for sale (76) (1,530) Net gain on hedging transactions 2,063 (738) Net unrealized change in investments 12,670 (19,278) Net realized gains on investments (13,020) (6,187) Change in income beneficiary and charitable remainder trusts 2,375 (3,671) Change in postretirement benefit obligation 1,696 (137) Contributions restricted by donor, net of amounts used for operations (3,503) (931) Changes in assets and liabilities: Patient accounts receivable (82,554) (40,023) Premiums receivable 1,555 Other receivables 1,517 (9,055) Inventories (2,384) (815) Prepaid expenses (1,875) (365) Other assets (2,064) (8,869) Accounts payable and accrued expenses (1,041) 18,290 Accrued payroll and related expenses 11,799 6,058 Reserve for professional liability claims (3,119) 8,102 Restricted deposit (53) 1,031 Other noncurrent liabilities (2,344) 253 Postretirement medical liability and other liabilities 1,717 5,182 Net cash provided by operating activities 119,693 129,289 Cash flows from investing activities: Purchase of property and equipment (64,838) (68,579) Purchase of short-term investments (155) (396) Purchase of long-term investments (186,325) (151,337) Proceeds from sale of property and equipment 673 6 Proceeds from sale of short-term investments 28,378 25,932 Proceeds from sale of long-term investments 60,302 30,209 Purchase of assets limited as to use (204) (541) Proceeds from sale of assets limited as to use 6,470 6,108 Dividend received from unconsolidated joint ventures 78 72 Net cash used in investing activities (155,621) (158,526) Cash flows from financing activities: Repayments of long-term debt (4,544) (4,335) Debt issuance costs incurred (13) Contributions received 2,960 2,660 Net cash used in financing activities (1,597) (1,675) Net decrease in cash and cash equivalents (37,525) (30,912) Cash and cash equivalents, beginning of year 140,381 171,293 Cash and cash equivalents, end of year $ 102,856 140,381 Supplemental disclosure of cash flow information: Cash paid during the year for interest, net of amounts capitalized $ 13,220 14,094 Noncash transaction: Issuance of capital lease $ 563 See accompanying notes to consolidated financial statements. 6
(1) Organization and Basis of Presentation The Children s Mercy Hospital and Affiliates (the Hospital) consists of a 301-bed teaching hospital for children located in Kansas City, Missouri, and a 53-bed hospital for children located in Overland Park, Kansas. The mission of the Hospital is to provide the highest level of medical care, technology, services, equipment, and facilities promoting the health and well-being of children in the region, from birth through adolescence. Patients and their families are treated with compassion in a family centered environment that recognizes their physical, emotional, financial, social, and spiritual needs. The comprehensive healthcare environment provided by the Hospital includes clinical services, research, and teaching efforts, which are designed to serve today s and tomorrow s children, and the community in which they live. The Hospital is supported by The Children s Mercy Hospital Foundation (the Foundation), which was formed for the purpose of financial resource development and investment management for the benefit of the Hospital. The Foundation has not been consolidated or combined in the accompanying consolidated financial statements, as it is controlled by a separate and distinct board of directors. However, the Hospital has recorded its underlying beneficial interest in the net assets of the Foundation in the accompanying consolidated financial statements (note 11). The Hospital has control and authority over Children s Mercy Integrated Care Solutions (CMICS). CMICS was formed in 2012 as Children s Mercy Pediatric Care Network (CMPCN) and changed its name to CMICS on January 16, 2015. CMICS brings together a network consisting of the Hospital and community-based physicians who together provide medical care to children in the greater Kansas City area. CMICS provides leadership and resources to support patient outreach, medical home development, care coordination, and disease management and prevention. The Hospital owns CMH Insurance Company, LLC, a limited liability company domiciled in Vermont through May 31, 2014 and was redomiciled to Missouri on June 1, 2014. The Hospital is the sole voting member of the LLC, which provides excess liability coverage for the Hospital (note 10). The accompanying consolidated financial statements include the accounts of The Children s Mercy Hospital (CMH), Children s Mercy s Family Health Partners, Inc. (CMFHP), CMICS, and CMH Insurance Company, LLC. Significant intercompany accounts and transactions have been eliminated in the consolidation. (2) Summary of Significant Accounting Policies (a) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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. Actual results could differ from those estimates. 7 (Continued)
(b) (c) (d) (e) (f) Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less that have not otherwise been classified as long-term assets due to a designation for long-term purposes. Investments and Investment Income Investments in debt and equity securities are measured at fair value in the accompanying consolidated balance sheets. Net investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in excess of revenues, gains and other support over expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from excess of revenues, gains and other support over expenses. Periodically, the Hospital reviews its investment portfolio to determine whether any unrealized losses on securities are other than temporary. During 2015 and 2014, no other-than-temporary impairments were recognized. The Hospital considers all investments as available-for-sale. Assets Limited as to Use Assets limited as to use primarily include assets held by trustees established for the purpose of funding certain self-insured risks. Inventories Inventories are stated at the lower of cost or market. Cost is principally determined using the average cost method. Property and Equipment Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method based on the following useful lives: Buildings and fixed equipment Movable equipment 5 40 years 3 15 years Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation in the consolidated financial statements. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Gifts of long-lived assets such as buildings or equipment are reported as unrestricted support, and are excluded from the excess of revenues, gains, and other support over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used 8 (Continued)
to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. (g) (h) (i) (j) (k) (l) Investment in Unconsolidated Joint Ventures The Hospital has invested in certain unconsolidated joint ventures and accounts for such investments using the equity method of accounting based on the relative percentage of ownership. Deferred Debt Issuance Costs Financing and legal costs incurred in connection with the issuance of long-term debt are being amortized over the term of the related debt using the effective-interest method. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Hospital has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Hospital in perpetuity. Donor-Restricted Gifts Unconditional promises to give cash and other assets to the Hospital are reported at fair value at the date the promise is received. Conditional promises to give are reported at fair value when the conditions have been substantially met. Intentions to give are not recorded until they become unconditional promises to give. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, 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 accompanying consolidated statements of operations as net assets released from restrictions. Donor-restricted gifts for which the restriction is met in the same year the gift is made are reported as unrestricted contributions in the current year. Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policy. Charity care is awarded on a sliding scale of 25%, 50%, 75%, or 100% of billed charges based upon guidelines set forth in the policy. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Excess of Revenues, Gains, and Other Support over Expenses The accompanying consolidated statements of operations include excess of revenues, gains, and other support over expenses. Changes in unrestricted net assets that are excluded from excess of revenues, gains, and other support over expenses, consistent with industry practice, include net assets released from restrictions used for purchase of property and equipment, net unrealized change in available-for-sale investments, transfers of assets to and from affiliates for other than goods and services, and changes in the postretirement benefit obligation. 9 (Continued)
(m) (n) Derivative Instruments and Hedging Activities The Hospital accounts for derivatives and hedging activities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging, which requires that all derivative instruments be recognized as either assets or liabilities in the consolidated balance sheets at their respective fair values. Fair Value of Financial Instruments The Hospital utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Hospital determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. (o) Net Patient Service Revenue and Other Revenue 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. For uninsured patients that do not qualify for charity care, the Hospital recognizes revenue on the basis of its standard rates for services provided less an uninsured discount that approximates cost as determined by the cost-to-charge ratio. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Hospital analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, the Hospital analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debt, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which 10 (Continued)
includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Hospital records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Hospital s self-pay writeoffs, net of recoveries, increased $13,542 from $23,374 for 2014 to $36,916 for 2015 as the result of negative trends experienced in the collection of amounts from self-pay patients. The Hospital has not changed its charity care or uninsured discount policies during fiscal years 2015 and 2014. However, the Hospital changed the allowance for doubtful accounts accounting policy for fiscal year 2015, which resulted in an increase in the reserve balance at June 30, 2015. Other revenue primarily consists of contract revenue for professional services and other clinical related activities provided by the Hospital to third parties. Revenue is accrued based upon terms of negotiated contracts. (p) (q) Estimated Malpractice Costs The provision for estimated medical malpractice claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. Income Taxes The Internal Revenue Service has determined that the Hospital and CMFHP are not-for-profit organizations as described under 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 Internal Revenue Code. CMH Insurance Company, LLC is a disregarded entity for tax purposes in 2015 and 2014. CMICS is a not-for-profit Kansas corporation, subject to federal and state income taxes. For the years ended, CMICS activities produced a taxable loss of $5,854 before net operating loss carryforward and a tax income of $730, respectively. Management was unable to conclude that it was more likely than not that CMICS would realize the benefits of the cumulative net loss carryforward of $33,961 generated during years 2012, 2013, 2014, and 2015. Accordingly, a valuation allowance has been recorded to offset the future benefit available from the deferred tax asset. No income tax expense or liability has been reflected in the consolidated financial statements. The Hospital and its affiliates follow ASC Subtopic 740-10, Income Taxes Overall. ASC Subtopic 740-10 provides specific guidance on how to address uncertainty in accounting for income tax assets and liabilities, prescribing recognition thresholds and measurement attributes. At June 30, 2015 and 2014, there were no uncertain tax positions. 11 (Continued)
(r) (s) Income Beneficiary and Charitable Remainder Trusts The Hospital receives income in conjunction with certain income beneficiary and charity remainder trusts. Income is received based on the terms of the specific trust agreements, either in perpetuity with no corresponding transfer of trust assets, or otherwise as established by the agreement. The Hospital records the fair value of its beneficial interest in the trusts and the holdings in the trusts, which is based on quoted market prices of the underlying assets. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. (3) Net Patient Service Revenue The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established charges. A summary of the reimbursement guidelines with top tier payors is as follows: Medicaid Missouri The Medicaid (Title XIX) and CHIP (Title XXI) programs in the state of Missouri are administered by the Missouri Department of Social Services, MO Healthnet Division. Medical services are made available to Medicaid beneficiaries through three managed care plans as well as the traditional Medicaid program. Title XIX beneficiaries are served either through one of the three managed care plans or the traditional Medicaid program, while Title XXI beneficiaries are served only through one of the three managed care plans. The Hospital has contracts with all three managed care plans and the state of Missouri as well as a reimbursement arrangement through Children s Mercy Integrated Care Solutions. Reimbursement to the Hospital is received through a combination of fee schedule, discount off charges and capitation for outpatient and physician services and per diem and capitation for inpatient services. Kansas The Medicaid (Title XIX) and CHIP (Title XXI) programs in the state of Kansas are administered by the Kansas Department of Health and Environment Division of Health Care Finance under a program known as KanCare. Prior to the implementation of KanCare on January 1, 2013, medical services were made available through two managed care plans as well as the traditional fee-for-service Medicaid program. Medical services are made available for almost all Medicaid recipients and all Title XXI recipients through three managed care plans. The Hospital has contracts with all three managed care plans and continues to receive some payments directly from the State for the small number of children not enrolled with one of the managed care plans, that is, the developmentally disabled. Reimbursement from the three KanCare managed care plans includes a combination of fee schedule and discount off charges for outpatient and physician services, and DRGs and discount off charges for inpatient services. Revenue from the Medicaid programs accounted for approximately 38% and 42% of the Hospital s net patient service revenue for the years ended, respectively. Laws and regulations 12 (Continued)
governing the Medicaid program are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. The Hospital has also entered into contractual agreements with certain commercial insurance carriers, HMOs, and preferred provider organizations. Reimbursement to the Hospital under these agreements is received largely through discount off charge arrangements for inpatient and outpatient services and via fee schedules for physician services. Net patient service revenue, as reflected in the accompanying consolidated statements of operations, consists of the following: 2015 2014 Gross patient charges: Inpatient $ 888,610 791,546 Outpatient 821,389 710,712 Professional 223,252 218,584 Total gross patient charges 1,933,251 1,720,842 Deductions from gross patient charges: Contractual allowances non-medicaid 478,765 414,417 Contractual allowances Medicaid 443,991 404,517 Total deductions from gross patient charges 922,756 818,934 Net patient service revenue 1,010,495 901,908 Provision for bad debts 54,834 26,993 Net patient service revenue less provision for bad debts $ 955,661 874,915 (4) Charity Care The cost incurred for services and supplies furnished under the Hospital s charity care policy aggregated $12,881 and $17,022 in 2015 and 2014, respectively. (5) Children s Mercy Integrated Care Solutions CMICS entered into multiple capitated risk agreements with a third-party Medicaid insurer (health plan) on January 1, 2012 and a risk agreement with a second Medicaid insurer beginning February 1, 2014 to provide contractual services for in-network activities involving CMH and has contractually committed to be responsible for any gains or losses of the health plan from fee-for-service claim payment activities associated with the capitated membership. CMICS s contractual revenue stream consists of monthly capitation payments received from the health plans and potential gains and/or losses from fee-for-service claim payment activities associated with the capitated membership. Pursuant to the capitation arrangements with health plans, gross monthly premiums for 13 (Continued)
qualified beneficiaries are determined and allocated between the health plans for payment of fee-for-service claims to non-cmh providers and to CMICS for capitation payments. CMICS has contracted with CMH for all sub-capitation activities, which have been eliminated in the consolidation. CMICS recognizes monthly capitation payments as revenue when earned. Gains related to fee-for-service claims are realized when CMICS is entitled to excess money initially retained by the health plans for payment of fee-for-service claims. Losses are recorded as incurred. At, CMICS recorded receivables of $7,085 and $5,913, representing the estimated settlements with the health plans for the net results of fee-for service activities with non-cmh providers and recorded liabilities of $4,855, and $490, due to health plans for overpayment of monthly capitation payments. (6) Investments The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value of available-for-sale securities by major security type and class of security at were as follows: Gross Gross unrealized Aggregate unrealized holding Aggregate cost basis holding gains (losses) fair value At June 30, 2015 Short-term investments: Money market funds $ 3 3 Total short-term investments $ 3 3 Assets limited as to use: Money market funds $ 272 272 U.S. government: Agency bonds 3,225 12 3,237 Treasury notes 3,616 19 (2) 3,633 Total assets limited as to use $ 7,113 31 (2) 7,142 14 (Continued)
Aggregate Gross Gross unrealized unrealized holding Aggregate cost basis holding gains (losses) fair value Long-term investments: U.S. government: CMO's/Mortgage Backed Securities $ 90,479 501 (125) 90,855 Mutual funds: Government and Corporate Bond 131,973 334 (3,335) 128,972 Domestic Equity 152,938 17,635 (1,225) 169,348 International Equity 94,692 7,364 102,056 Mineral Rights Investment Trusts Oil and Gas Account 508 (130) 378 Total long-term investments $ 470,590 25,834 (4,815) 491,609 At June 30, 2014 Short-term investments: Government and Corporate Bond mutual funds $ 25,209 100 (263) 25,046 Total short-term investments $ 25,209 100 (263) 25,046 Assets limited as to use: Money market funds $ 541 541 U.S. government: Agency bonds 6,715 32 (7) 6,740 Treasury notes 6,177 18 (3) 6,192 Total assets limited as to use $ 13,433 50 (10) 13,473 Long-term investments: U.S. government: Agency bonds $ 102,628 187 102,815 Mutual funds: Government and Corporate Bond 84,826 1,153 (852) 85,127 Domestic Equity 90,281 22,177 112,458 International Equity 56,627 11,176 67,803 Total long-term investments $ 334,362 34,693 (852) 368,203 15 (Continued)
Net investment income for assets limited as to use, cash and cash equivalents, and other investments are comprised of the following for the years ended : 2015 2014 Net investment income Interest and dividend income $ 12,854 11,308 Net realized gain on sale of investments 13,020 6,187 Total net investment income $ 25,874 17,495 Other changes in unrestricted net assets: Net unrealized change in investments $ (12,670) 19,278 (7) Property and Equipment Property and equipment at consisted of the following: 2015 2014 Land $ 20,369 18,549 Buildings and fixed equipment 554,423 530,683 Movable equipment: Owned 405,170 373,085 Leased under capitalized lease 563 563 980,525 922,880 Accumulated depreciation (507,828) (461,911) 472,697 460,969 Construction in progress 27,134 27,392 Property and equipment, net $ 499,831 488,361 Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. The Hospital capitalized $661 and $543 of net interest cost during the years ended, respectively. 16 (Continued)
(8) Long-Term Debt and Capital Lease Obligations Long-term debt and capital lease obligations as of consisted of the following: 2015 2014 Health and Facilities Revenue Bonds, Series 2009, interest at rates ranging from 4.00% to 5.625% at June 30, 2015, principal payments ranging from $2,635 in 2016 to $15,885 in 2039. $ 169,596 172,110 Health and Facilities Revenue Bonds, Series 2008 A, interest at variable rate, 1.14% at June 30, 2015, principal payments ranging from $115 in 2016 to $810 in 2032. 5,010 5,125 Health and Facilities Revenue Bonds, Series 2008 B, interest at variable rate, 0.95% at June 30, 2015, principal payments ranging from $1,875 in 2016 to $2,350 in 2023. 16,950 18,775 Capital lease obligation 473 563 Long-term debt and capital lease obligation 192,029 196,573 Less current maturities (4,729) (4,553) Less discount on 2009 bonds (2,500) (2,543) Long-term debt and capital lease obligation, excluding current portion $ 184,800 189,477 The Foundation has entered into a guaranty agreement, which unconditionally guarantees the full payment of principal and interest on the Hospital s long-term debt (note 11). The related trust indenture provides, among other things, for certain covenants related to the incurrence of additional indebtedness, the lease, sale or disposition of property, and the maintenance of certain financial ratios. As of June 30, 2015, the Hospital was in compliance with all financial covenants. The Hospital has entered into interest rate swap agreements to hedge against large fluctuations in the variable rate indebtedness. The amount outstanding at June 30, 2015 and terms of the agreements are as follows: Notional amount Series of swap Interest rate 2002 $ 5,010 3.50% 2003 16,950 3.31 2007 90,350 4.01 The Hospital has accounted for these derivatives in accordance with ASC Topic 815. ASC Topic 815 requires that the interest rate swaps be recorded at fair value in the consolidated financial statements and the change 17 (Continued)
in the interest rate swaps fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The fair values of derivative instruments held as of are as follows: Liability derivatives 2015 2014 Balance sheet Balance sheet location Fair value location Fair value Derivatives designated as hedging instruments under ASC Topic 815: Interest rate contracts Accounts Accounts payable and payable and accrued accrued expenses $ 26,161 expenses $ 24,098 Total derivatives designated as hedging instruments under ASC Topic 815 $ 26,161 $ 24,098 The effect of derivative instruments on the consolidated statements of operations for the years ended June 30, 2015 and 2014 is as follows: Amount Amount recognized in recognized Location of Amount of income on in income Amount of (loss) (loss) derivative on derivative (loss) reclassified reclassified (ineffective (ineffective recognized in from from portion portion Derivatives in net assets on net assets into net assets and amount and amount ASC Topic 815 derivative income into income excluded from excluded from cash flow hedging (effective (effective (effective effectiveness effectiveness relationships portion) portion) portion) testing) testing) 2015: Interest rate contracts $ N/A $ Other income (expense) $ (2,063) 2014: Interest rate contracts $ N/A $ Other income (expense) $ 738 In connection with the advance refunding of the outstanding debt in prior years, the Hospital discontinued hedge accounting of the related interest rate swaps. The 2002, 2003, and 2007 Series interest rate swaps remain outstanding at June 30, 2015. 18 (Continued)
Changes in the fair value of the interest rate swaps resulted in a $(2,063) loss and a $738 gain, which is reflected in total other income, net in the consolidated statements of operations in 2015 and 2014, respectively. Unamortized bond issue costs included in other assets in the accompanying consolidated balance sheets were $1,523 and $1,636 at, respectively. Aggregate future principal payments on long-term debt obligations are as follows: Long-term Capital lease debt obligation Year ending June 30: 2016 $ 4,625 133 2017 4,810 133 2018 5,010 133 2019 5,185 133 2020 5,415 11 Thereafter 166,511 Total $ 191,556 543 Less amount representing interest under capital lease obligation 70 $ 473 The Hospital leases office and clinical space under long-term operating leases. At June 30, 2015, noncancelable lease commitments were as follows: 2016 $ 7,441 2017 6,724 2018 6,034 2019 5,098 2020 4,259 Thereafter 15,291 Rent expense was $9,174 and $8,215 in 2015 and 2014, respectively. 19 (Continued)
(9) Pledges Receivable The Hospital has received certain pledges to support construction projects and operations. The following sets forth the gross value of pledges, which have been restricted for the construction and remodeling projects: Year ending June 30: 2016 $ 1,842 2017 764 2018 615 2019 376 2020 230 Thereafter 2,973 Total $ 6,800 Pledges receivable have been discounted at rates ranging from 0.04% to 6.28% as of, and are reflected in the consolidated balance sheets net of a discount of $698 and $572 in 2015 and 2014, respectively. (10) Insurance and Self-Insurance Risks The Hospital maintains a self-insured retention for the professional liability exposures for the Missouri hospital, all outpatient locations, and various healthcare professionals to the extent allowed by law (limitations for some healthcare professionals exist based on Kansas law). This self-insured retention has limits of $2,000 each occurrence with no annual aggregate. The Hospital maintains claims made excess healthcare professional liability and managed care errors and omissions liability through a wholly owned captive, CMH Insurance Company, LLC, which is 100% reinsured. Additionally, the Hospital maintains occurrence umbrella liability excess of primary automobile, general liability including named patient perils and employee benefit liability, employers liability (workers compensation), nonowned aircraft and helipad liability, and security guard liability through CMH Insurance Company, LLC. The Hospital records a liability based upon the recommendation of an independent actuary. CMH Insurance Company, LLC provides coverage for the Hospital s liability claims in excess of the underlying professional and general liability limits, subject to a $2,000 each claim and $4,000 per policy year inner aggregate deductible. CMH Insurance Company, LLC also provides coverage in excess of the underlying nonprofessional and nongeneral liability policies at various attachment points, subject to a single $1,000 inner aggregate deductible. Included in other assets is $5,049 and $5,669 of receivables related to the excess liability ceded to reinsurers at June 30, 2015 and 2014, respectively. This amount is also recorded as a liability based upon historical losses as determined by the independent actuary. The Hospital is contingently liable for all reinsurance ceded to others; however, management only engages reputable reinsurers with strong financial ratings and monitors their financial condition. CMH Insurance Company, LLC retained the risk on the Kansas Physicians Professional Liability Program for per physician limits of $200 per occurrence and $600 annual aggregate for the June 1, 2004 through May 31, 2008 annual policy periods. Since May 31, 2008, this Kansas Physician Professional Liability exposure has been retained in the Hospital s underlying self-insured professional liability layer. 20 (Continued)
The Hospital has established reserves for possible losses on both asserted and unasserted claims based upon an independent actuarial study. The actuarially estimated claims have been discounted using a discount rate of 1.5% at. The Hospital has recognized $4,651 and $10,164 of expenses related to these self-insured risks during 2015 and 2014, respectively. In the opinion of management of the Hospital, there are no claims or incidents that will result in settlements in excess of amounts provided by insurance policies and established reserves for claims. The Hospital provides for health insurance and workers compensation coverage through a combination of self-insurance and third-party insurers. Reserves have been established for known claims and an estimate of claims that have been incurred but not reported. (11) The Children s Mercy Hospital Foundation The Foundation was formed in 1990 for the purpose of financial resource development and investment management for the sole benefit of the Hospital. The Foundation has been recognized as a not-for-profit organization as described under Section 501(c)(3) of the Internal Revenue Code by the Internal Revenue Service and is exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. Pursuant to ASC Topic 958-310, Not-for-Profit Entities, the Hospital recognizes its interest in the unrestricted, temporarily and permanently restricted net assets of the Foundation. Accordingly, the Hospital has recorded its beneficial interest in the Foundation of $199,792 and $206,631 in 2015 and 2014, respectively. In addition, the Hospital has reflected the change in its beneficial interest in the Foundation for the years ended as follows: 2015 2014 Change in beneficial interest: For temporarily restricted purposes $ (1,573) 24,792 For permanently restricted purposes 2,722 2,191 1,149 26,983 Cash transfers to the Hospital: For operating fund support (6,681) (6,520) For research and education (1,307) (1,247) (7,988) (7,767) Change in beneficial interest, net of cash transfers $ (6,839) 19,216 21 (Continued)
A condensed summary of the Foundation s financial position at and results of its activities for the years then ended is as follows: 2015 2014 Total assets, pledges receivable, and investments $ 200,004 206,872 Accounts payable $ 212 241 Net assets 199,792 206,631 Total liabilities and net assets $ 200,004 206,872 Change in net assets $ (6,839) 19,216 Net assets, beginning of year 206,631 187,415 Net assets, end of year $ 199,792 206,631 (12) Restricted Net Assets Temporarily restricted net assets consist of assets held by the Foundation, which will be used to support Hospital operations, and amounts held by the Hospital to support construction and research activities as of as follows: 2015 2014 Held by Foundation for Hospital operations $ 159,221 168,782 Held by Hospital for construction and research activities 20,934 26,963 $ 180,155 195,745 Permanently restricted net assets held whereby use of the income derived from the assets may be used for the following purposes: 2015 2014 Permanently restricted net assets: Endowment for Hospital operations $ 41,338 43,683 Chairs/professorships 14,626 12,719 Child abuse prevention/rehabilitation 462 462 Education/lectureships/scholarships 3,464 3,123 Indigent care 1,258 1,247 Other departmental specific 5,815 5,597 Research 10,336 9,994 Equipment 269 296 $ 77,568 77,121 22 (Continued)
(13) Concentrations of Credit Risk The Hospital grants credit without collateral to its patients, most of whom are insured under third-party payor agreements. The mix of receivables from patients and third-party payors at are as follows: 2015 2014 Medicaid sponsored programs 34% 32% Commercial managed care 61 61 Commercial insurance and other 5 7 100% 100% (14) Functional Expenses The Hospital provides general healthcare services to residents within its geographic location. Expenses related to providing these services are as follows: 2015 2014 Healthcare services $ 789,405 729,098 General and administrative 193,150 186,963 Research 40,592 31,658 Education 21,712 18,325 $ 1,044,859 966,044 (15) Contingencies The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for healthcare services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for healthcare services previously billed. Management believes the Hospital is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. (16) Fair Value Measurements (a) Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Hospital s financial instruments at. The fair value of financial instrument is the amount that would 23 (Continued)
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 2015 2015 2014 2014 Carrying Fair Carrying Fair amount value amount value Financial assets: Cash and cash equivalents $ 102,856 102,856 140,381 140,381 Short-term investments 3 3 28,406 28,406 Patient accounts receivable, net 169,628 169,628 141,908 141,908 Other receivables 16,598 16,598 18,115 18,115 Long-term investments 491,609 491,609 368,203 368,203 Income beneficiary and charitable remainder trusts 37,153 37,153 39,528 39,528 Assets limited as to use 7,142 7,142 13,473 13,473 457 retirement assets 26,723 26,723 24,038 24,038 Restricted deposits 2,111 2,111 2,058 2,058 Pledges receivable 6,102 6,102 5,559 5,559 Financial liabilities: Current portion of long-term debt $ 4,729 4,705 4,553 4,526 Accounts payable and accrued expenses 77,209 77,209 76,187 76,187 Accrued payroll and related expenses 72,916 72,916 61,117 61,117 Long-term reserve for professional liability claims 44,369 44,369 47,488 47,488 Long-term debt, net of current portion 184,800 206,452 189,477 204,803 Long-term postretirement medical liability 7,579 7,579 6,851 6,851 457 retirement liability 26,723 26,723 24,038 24,038 The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. The fair values of the financial instruments shown in the table as of June 30, 2015 and 2014 represent management s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Hospital s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Hospital based on the best information available in related circumstances. 24 (Continued)