Rowan Regional Medical Center, Inc. and Affiliate Combined Financial Statements and Combining Supplemental Schedules
Index Page(s) Report of Independent Auditors Combined Financial Statements Balance Sheets...1 Statements of Operations and Changes in Net Assets...2 Statements of Cash Flows...3 4 Notes to Financial Statements...5 26 Other Financial Information Report of Independent Auditors on Accompanying Information Schedule of Cost of Community Benefit Programs...27 Combining Balance Sheets...28 Combining Statement of Operations...29
Report of Independent Auditors To the Board of Trustees of Novant Health, Inc. In our opinion, the accompanying combined balance sheets and the related combined statements of operations, changes in net assets and cash flows present fairly, in all material respects, the financial position of (the "Company") at December 31, 2011 and 2010 and the combined results of their operations and changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. March 30, 2012 PricewaterhouseCoopers LLP, 800 Green Valley Road, Suite 500, Greensboro, NC 27408 T: (336) 665-2700, F: (336) 665-2699, www.pwc.com/us
Combined Balance Sheets Assets Current assets Cash and cash equivalents $ 12,053 $ 12,937 Accounts receivable, net of allowance for doubtful accounts of $22,658 in 2011 and $19,303 in 2010 21,895 18,486 Short-term investments 3,901 611 Other current assets 3,873 8,451 Total current assets 41,722 40,485 Assets limited as to use 25,680 25,544 Long-term investments 42,652 42,604 Property and equipment, net 97,243 103,343 Investment in affiliate 2,551 - Other assets 3,559 4,167 Total assets $ 213,407 $ 216,143 Liabilities and Net Assets Current liabilities Current portion of long-term debt $ 2,812 $ 2,576 Accounts payable 16,371 1,612 Accrued liabilities 11,938 11,916 Total current liabilities 31,121 16,104 Long-term debt, net of current portion 82,831 85,711 Employee benefits and other liabilities 14,401 7,907 Total liabilities 128,353 109,722 Commitments and contingencies Net assets Unrestricted 82,679 104,428 Temporarily restricted 1,911 1,540 Permanently restricted 464 453 Total net assets 85,054 106,421 Total liabilities and net assets $ 213,407 $ 216,143 The accompanying notes are an integral part of these combined financial statements. 1
Combined Statements of Operations and Changes in Net Assets Years Ended Unrestricted revenues, gains and other support Net patient service revenue $ 158,412 $ 161,100 Other revenue 4,218 7,200 Total unrestricted revenues, gains and other support 162,630 168,300 Expenses Salaries and employee benefits 75,072 73,610 Supplies and other 65,787 63,415 Depreciation and amortization 13,176 14,566 Interest expense 4,795 5,193 Provision for bad debts 15,907 12,486 Total expenses 174,737 169,270 Operating loss (12,107) (970) Other expense Investment income (loss) (222) 3,607 Excess (deficit) of revenues over expenses (12,329) 2,637 Other changes in unrestricted net assets Change in pension liability (8,959) 1,607 Other changes in unrestricted net assets (461) (913) Increase (decrease) in unrestricted net assets (21,749) 3,331 Temporarily restricted net assets Contributions and investment income 573 422 Net assets released from restrictions for operations (202) (142) Increase in temporarily restricted net assets 371 280 Permanently restricted net assets Contributions 11 - Increase in permanently restricted net assets 11 - Increase (decrease) in total net assets (21,367) 3,611 Net assets Beginning of year 106,421 102,810 End of year $ 85,054 $ 106,421 The accompanying notes are an integral part of these combined financial statements. 2
Combined Statements of Cash Flows Years Ended Cash flows from operating activities Increase (decrease) in net assets $ (21,367) $ 3,611 Adjustments to reconcile changes in net assets to net cash provided by (used in) operating activities Depreciation and amortization 13,176 14,566 Provision for bad debts 15,907 12,486 Share of earnings in affiliate, net of distributions (78) - Gain on formation of joint venture (2,122) - Net losses (gains) on assets limited as to use and investments 1,239 (2,428) Changes in operating assets and liabilities Accounts receivable (19,316) (8,894) Investments and assets limited as to use (1,423) (13,320) Accounts payable and accrued liabilities 15,127 (5,157) Accrued pension liability 6,587 (1,843) Other assets and liabilities, net 1,316 (4,686) Net cash provided by (used in) operating activities 9,046 (5,665) Cash flows from investing activities Capital expenditures (3,765) (727) Proceeds from sale of property and equipment 100 13 Cash paid for investment in affiliate (331) - Net proceeds from the liquidation (purchase) of short-term investments (3,290) 3,317 Repayment of notes receivable and other, net - 538 Net cash provided by (used in) investing activities (7,286) 3,141 Cash flows from financing activities Principal payments on long-term debt (2,644) (2,432) Net cash used in financing activities (2,644) (2,432) Net decrease in cash and cash equivalents (884) (4,956) Cash and cash equivalents Beginning of period 12,937 17,893 End of period $ 12,053 $ 12,937 Supplemental disclosure of cash flow information Interest paid $ 4,833 $ 5,241 Supplemental disclosure of noncash financing and investing activities Additions to property and equipment financed through current liabilities439 99 The accompanying notes are an integral part of these combined financial statements. 3
Combined Statements of Cash Flows Years Ended During 2011, Rowan contributed its Hospice business in exchange for an investment in a joint venture. As a result of that transaction, Rowan recognized the following: Investment in affiliate received $ (2,473) Property and equipment contributed 20 Gain on exchange of business for investment in joint venture 2,122 Cash paid for investment $ (331) The accompanying notes are an integral part of these combined financial statements. 4
1. Reporting Entity Rowan Regional Medical Center, Inc. ( Rowan or the Company ) is a nonprofit acute care hospital and a wholly owned subsidiary of Rowan Health Services Corporation ( RHS ). Rowan and its affiliate (the Rowan Foundation) serve the community with programs including health education, prenatal clinics, community clinics and immunization services. Rowan is the sole member of Rowan Regional Medical Center Foundation, Inc. (the Foundation ), a not-for-profit corporation formed to receive and administer charitable contributions for the benefit of Rowan and the people it serves. Rowan Hospice & Palliative Care, LLC is a joint venture with Hospice & Palliative Care Center, LLC that was formed in 2011. Both parties own 50% of the joint venture. The joint venture is accounted for under the equity method of accounting. 2. Summary of Significant Accounting Policies Principles of Combination The combined financial statements include the accounts of the affiliate controlled by Rowan. All significant intercompany transactions and balances have been eliminated. 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 periods. Actual results could differ from those estimates. Significant estimates include, but are not limited to, accounts receivable allowances, third-party payor settlements, useful lives of property and equipment, and pension related assumptions. Fair Values of Financial Instruments Carrying values of financials instruments classified as current assets and current liabilities approximate fair value. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with an original maturity of three months or less, excluding amounts limited as to use by board designation, donors or trustees. Accounts Receivable Accounts receivable consist primarily of amounts owed by various governmental agencies, insurance companies and private patients. Rowan manages these receivables by regularly reviewing the accounts and contracts and by providing appropriate allowances for uncollectible amounts. In evaluating the collectibility of accounts receivable, the Company considers several factors, including historical collection results, the age of the accounts, changes in collection patterns, the composition of accounts by payor type, the status of ongoing disputes with payors and general industry conditions. 5
Other Current Assets Other current assets include inventories (which primarily consist of hospital and medical supplies and pharmaceuticals), prepaid expenses and other receivables. Inventory costs are determined using the average cost method and are stated at the lower of cost or market value. Investments and Assets Limited as to Use Investments and assets limited as to use are classified as trading securities. Accordingly, unrealized gains and losses on investments are included in excess of revenues over expenses, unless the income or loss is restricted by donor or law. Long-term investments and assets limited as to use are classified as noncurrent assets as the Company does not expect to use these funds to meet its current liabilities. Assets limited as to use primarily include assets held by trustees under indenture agreements and assets designated for specific purposes by the Board of Trustees. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the accompanying combined balance sheets. The Company also invests in alternative investments through limited partnerships and limited liability corporations ( LLCs ). These investments are recorded using the equity method of accounting (which approximates fair value) with the related earnings reported as investment income in the accompanying combined financial statements. The values provided by the respective partnership or LLC are based on historical costs, market value, or other estimates that require varying degrees of judgment. Because these investments are not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a market for such investments existed. Such differences could be material. The Company believes the carrying amount of these investments is a reasonable estimate of fair value. Investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in risks in the near term would materially affect the investment balances included in the financial statements. Property and Equipment Property and equipment are recorded at cost, if purchased, or at fair value at the date of donation, if donated. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or the useful life of the asset, whichever is shorter. Following is a summary of the estimated useful lives used in computing depreciation: Buildings 30 40 years Machinery and equipment Furniture and fixtures 3 15 years 7 14 years Certain facilities and equipment held under capital leases are classified as property and equipment and amortized on the straight-line method over the period of the lease term or the estimated useful life of the asset, whichever is shorter. The related obligations are recorded as liabilities. Amortization of equipment under capital lease is included in depreciation and amortization expense. 6
Maintenance and repairs of property and equipment are expensed in the period incurred. All replacements or improvements that increase the estimated useful life of an asset are capitalized. Assets that are sold, retired or otherwise disposed of are removed from the respective asset cost and accumulated depreciation accounts and any gain or loss is included in the results of operations. Operating leases are accounted for in accordance with GAAP, which requires the recognition of fixed rental payments, including rent escalations, on a straight-line basis over the term of the lease. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support, and are excluded from the excess of revenues 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 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. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity. The earnings on permanently restricted net assets are available for use as specified by the donors. Rowan s temporarily restricted and permanently restricted net assets are predominantly held by the Foundation for hospital service costs related to various centers. Contributions Received Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received or the condition is met. 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 met, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of operations as net assets released from restrictions, which is included in other operating revenue. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying financial statements. Income Taxes Rowan is classified as a nonprofit organization pursuant to Section 501(c)(3) of the Internal Revenue Code and is exempt from income taxes on revenue earned from its tax-exempt purposes. Compensated Absences The Company s employees earn vacation days at varying rates depending on years of service. Vacation time accumulates up to certain limits, at which time no additional vacation hours can be earned. Provided this hourly limit is not met, employees can continue to accumulate vacation hours and time can be carried over to future years. Accrued vacation time is included in accrued liabilities on the Company s combined balance sheets. 7
Excess (Deficit) of Revenues over Expenses The statements of operations include excess (deficit) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficit) of revenues over expenses, consistent with industry practice, include permanent transfers of assets to and from affiliate for other than goods and services and changes in pension liabilities. Reclassifications Certain balances in prior fiscal years have been reclassified to conform to the presentation adopted in the current fiscal year. 3. Net Patient Service Revenue Net patient service revenue is presented net of provisions for contractual adjustments and other allowances. Rowan has agreements with third-party payors that provide for payments at amounts different from its established rates. Retroactive adjustments are accrued on an estimated basis in the period the related service is rendered and adjusted in future periods as final settlements are determined. A summary of the payment arrangements with major third-party payors follows: Medicare and Medicaid Inpatient acute care services rendered to program beneficiaries are paid at prospectively determined rates per diagnosis. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Inpatient nonacute services, certain outpatient services, and defined capital and medical education costs related to beneficiaries are paid based on a cost reimbursement methodology. Outpatient services are paid at a prospectively determined rate. Rowan is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by Rowan and audits thereof by the fiscal intermediary. Rowan s cost reports have been audited and settled by the Medicare intermediary through 2006. Medicare cost reports for 2007-2009 have been audited but not finalized. Medicaid cost reports are finalized through 2009. Revenue from the Medicare and Medicaid programs accounted for approximately 44.3% and 9.9%, respectively, of Rowan s net patient service revenue for the year ended 2011, and 38.6% and 8.3%, respectively, of Rowan s net patient service revenue for the year ended 2010. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a possibility that recorded estimates will change by a material amount in the near term. Other Payors Rowan also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to Rowan under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. Payments for services covered by these programs and certain other third-party payor contracts are generally less than billed charges. Provisions for contractual adjustments including Medicare, Medicaid, and managed care total approximately $293,254 (or 62%) and $268,759 (or 58%) of gross patient service revenue for the years ended. 8
The provision for bad debts is determined based on management s assessment of historical and expected net collections, business and economic conditions, the age of the accounts, trends in Federal and state governmental health care coverage and other collection indicators. 4. Charity Care and Community Benefit In accordance with Rowan s mission to improve the health of its community one person at a time, Rowan facilities accept patients regardless of their ability to pay. At the acute facility, uninsured patients qualify for a full write-off of their bills if their household income is at or below 300% of the federal poverty level. Rowan also offers a catastrophic discount for patients with an account balance greater than $5, flexible payment plans and discounts for uninsured patients who do not qualify for our charity care program. Rowan s cost of providing care to indigent patients was $6,048 and $10,370 for the years ended, respectively. Rowan estimates the costs of providing traditional charity care using an estimated ratio of costs to charges. Funds received from gifts or grants to subsidize charity services provided were $46 and $0 for the years ended, respectively. In addition to providing charity care to uninsured patients, Rowan also provides services to beneficiaries of public programs and various other community health services intended to improve the health of the community in which Rowan operates. Rowan uses the following four categories to identify the resources utilized for the care of persons who are underserved and for providing community benefit programs to the needy and our neighborhoods: Traditional charity care includes the cost of services provided to persons who cannot afford health care because of inadequate resources and who are uninsured. Unpaid cost of Medicare represents the unpaid cost of services provided to persons through the government program for individuals age 65 and older as well as those that qualify for federal disability benefits. Unpaid cost of Medicaid represents the unpaid cost of services provided to persons covered by the government program for medically indigent patients. Community benefit programs consist of the unreimbursed costs of certain programs and services for the general community, mainly for indigent patients but also for people with chronic health risks. Examples of these programs include health promotion and education, free clinics and screenings, and other community services. Community benefit programs also include the cost of medical education and research. The amount of the unpaid cost of Medicare, Medicaid and other community benefit programs is reported on page 27 in the accompanying other financial information. 5. Assets Limited as to Use and Investments Short-Term Investments Rowan holds certain investments that are short-term in nature and have maturity dates ranging from three to twelve months. Short-term investments consist primarily of certificates of deposit at. 9
Assets Limited as to Use The designation of assets limited as to use is as follows: Under indenture agreement held by bond trustee $ 18,483 $ 18,348 Under indenture agreement held by mortgage trustee 7,197 7,196 $ 25,680 $ 25,544 Assets limited as to use investments are invested primarily in cash and cash equivalents and corporate, U.S. government and U.S. agency debt obligations. Long-Term Investments The composition of long-term investments at December 31 is set forth in the following table: Cash and cash equivalents $ 2,761 $ 502 U.S. equities 10,932 11,737 International equities 4,693 9,811 Fixed income securities 4,385 5,221 Hedge funds 17,244 11,712 Emerging markets 2,027 3,117 Real estate and other 610 504 $ 42,652 $ 42,604 The Company s investments in hedge funds include limited partnerships, limited liability corporations and off-shore investment funds. The underlying investments of the limited partnerships and limited liability corporations include, among others, futures and forward contracts, options, and securities sold not yet purchased, intended to hedge against changes in the market value of investments. These financial instruments may result in loss due to changes in the market (market risk). Alternative investments are less liquid than the Company s other investments. Rowan s investments in hedge funds represent 40.4% of total long-term investments held at December 31, 2011. These instruments may contain elements of both credit and market risk. Such risks include, but are not limited to, limited liquidity, absence of oversight, dependence upon key individuals, emphasis on speculative investments (both derivatives and non-marketable investments), and nondisclosure of portfolio composition. 10
Investment income (loss) for assets limited as to use and investments is comprised of the following for the years ended December 31: Income (loss) Interest and dividend income $ 664 $ 423 Net realized gains 353 756 Net gains (losses) (1,239) 2,428 $ (222) $ 3,607 6. Other Current Assets Other current assets consist of the following at December 31: Inventories $ 2,670 $ 2,956 Estimated third-party payor settlements - 389 Prepaid expenses 853 831 Other 350 4,275 $ 3,873 $ 8,451 7. Property and Equipment Property and equipment consists of the following at December 31: Land and land improvements $ 3,910 $ 3,910 Leasehold improvements 739 657 Buildings and building improvements 123,383 122,963 Buildings under capital lease obligations 9,090 9,090 Equipment 106,027 113,080 Construction in progress 3,014 793 246,163 250,493 Less: Accumulated depreciation (148,920) (147,150) $ 97,243 $ 103,343 At, land and buildings with a net book value of $2,475 and $3,452 were leased to various unrelated health care organizations, with terms ranging from six months to five years. Depreciation expense and capital lease related amortization expense for the years ended amounted to $13,176 and $14,566. Accumulated amortization for buildings under capital lease obligations was $3,140 and $2,713 at December 31, 2011 and 2010. 11
8. Investment in Affiliate In October 2011, Rowan entered into an agreement with Hospice & Palliative Care, LLC (HPCC) to consolidate the Hospice business of HPCC and Rowan in Rowan County into a joint venture. Rowan accounts for its investment under the equity method of accounting. The following table presents summarized unaudited financial information related to the investment as of December 31, 2011: Assets $ 1,192 Liabilities 356 Equity 836 Total revenue 769 Total expenses 626 Net income 143 Rowan's share of net income 72 9. Other Assets Other assets consist of the following at December 31: Notes receivable and other $ 869 $ 1,245 Pledges receivable, net of allowance 330 369 Deferred financing costs, net of amortization 2,360 2,553 $ 3,559 $ 4,167 Deferred financing costs are amortized using the effective interest method over the life of the related bonds. Pledges Receivable The Company s pledges receivable are expected to be collected as follows: 2012 $ 205 2013 2017 430 Less: Allowance for doubtful accounts (305) $ 635 330 12
10. Accrued Liabilities Accrued liabilities consist of the following at December 31: Accrued compensation $ 4,537 $ 7,306 Postretirement benefit payments 1,680 1,587 Interest 1,275 1,313 Other accrued liabilities 4,446 1,710 $ 11,938 $ 11,916 11. Long-Term Debt Following is a summary of long-term debt at December 31: Mortgage revenue bonds $ 77,635 $ 79,675 Capital lease obligations and other notes payable 7,956 8,555 85,591 88,230 Unamortized premium or discount, net 52 57 85,643 88,287 Less: Current maturities (2,812) (2,576) $ 82,831 $ 85,711 Mortgage Revenue Bonds On August 18, 2004, Rowan issued $87,125 of fixed rate Federal Housing Administration insured mortgage revenue bonds, bearing interest at rates ranging from 3.00% to 5.25%. The bonds are payable in 50 semi-annual installments. The revenue bond indenture and related letter of credit reimbursement agreement place limits on the incurrence of additional borrowings and certain other transactions and require compliance with certain debt covenants. These revenue bonds are collateralized by a first lien on all of Rowan s property, plant and equipment and all current or future properties and receipts, revenues, income, profits or proceeds from operations. The revenue bond indenture requires Rowan to comply with certain covenants, including the maintenance of a minimum debt service coverage ratio. Rowan is in compliance with all covenants as of December 31, 2011, with the exception of the debt service coverage ratio. Rowan has undertaken or will be undertaking all requirements related to the failure to meet this covenant, including assessing and implementing steps necessary to bring the Company into compliance. The failure to meet this ratio does not require an acceleration of the debt maturities, and therefore no change in the classification of the bonds is required. Other Long-Term Debt Other long-term debt consists of various loans and notes on buildings and capital leases, bearing interest at rates ranging from 6.78% to 12.15%. 13
Scheduled maturities of all long-term debt are as follows: Years Ending 2012 $ 2,812 2013 2,964 2014 3,104 2015 3,157 2016 3,130 Thereafter 70,424 $ 85,591 The fair values of Rowan s mortgage revenue bonds are based on a pricing model. At, Rowan s bonds had an approximate fair value of $77,291 and $77,168. All other debt approximates fair value. 12. Employee Benefit Plans and Other Postretirement Benefit Plans GAAP requires an employer to recognize in its statement of financial position an asset for a plan s over funded status, or a liability for a plan s under funded status, measure a plan s assets and its obligations that determine its funded status as of the end of the employer s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Employee Benefit Plans Rowan has a noncontributory defined benefit pension plan (the Rowan Plan) covering all employees who meet the eligibility requirements. The plan was frozen effective December 31, 2003. The assets of the plan are primarily invested in common trust funds, common stocks, bonds, notes and U.S. government securities. Rowan has a supplemental retirement income plan covering highly compensated employees. This is a nonqualified plan which is not subject to ERISA funding requirements. As such, Rowan intends only to fund the plan in amounts equivalent to the plans annual benefit payments. 14
The following table outlines the changes in Rowan s supplemental retirement income plan and defined benefit pension plan obligations, funded status, and the assumptions and components of net periodic benefit costs for the years ended December 31: Accumulated benefit obligation $ 47,420 $ 38,848 Change in benefit obligation Projected benefit obligation at beginning of period $ 39,227 $ 37,976 Service cost 39 25 Interest cost 2,111 2,193 Actuarial loss (gain) 797 (2,083) Assumption change 7,413 2,593 Benefits paid (1,581) (1,477) Projected benefit obligation at end of period $ 48,006 $ 39,227 Change in plan assets Fair value of plan assets at beginning of period 30,110 27,016 Actual return on plan assets 1,089 3,599 Employer contribution 2,662 1,064 Benefits paid, including plan expenses (1,677) (1,569) Fair value of plan assets at end of period $ 32,184 $ 30,110 Funded status $ (15,822) $ (9,117) Components of net periodic benefit cost Service cost $ 39 $ 25 Interest cost 2,111 2,193 Estimated return on plan assets (2,150) (1,897) Amortization of prior service cost 10 30 Recognized net actuarial loss 397 478 Net periodic benefit cost $ 407 $ 829 Amount recognized in the balance sheet Prepaid benefit cost at measurement date $ 3,528 $ 1,256 Accrued benefit cost (1,278) (1,260) Change in unrestricted net assets (18,072) (9,113) Net liability recognized $ (15,822) $ (9,117) Amounts recognized in unrestricted net assets Prior service $ cost 36 $ 46 Net actuarial loss 18,036 9,067 $ 18,072 $ 9,113 Other changes in plan assets and benefit obligations Net loss $ (gain) 8,913 $ (1,642) Amortization of net loss 56 65 Amortization of prior service cost (10) (30) Total recognized in unrestricted net assets $ 8,959 $ (1,607) Total recognized in net periodic benefit cost and unrestricted net assets $ 9,366 $ (778) 15
The assumption changes referenced above are primarily a result of changes in the discount rate in 2011 and 2010. The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from unrestricted net assets into net periodic benefit cost in 2012 are $1,141 and $0, respectively. The following ranges of weighted-average assumptions were used to determine plan benefit obligations at December 31: Discount rate 3.75 4.30% 5.00 5.50% Rate of compensation increase (relates to non-qualified plan) 5.00 % 5.00 % The following ranges of weighted-average assumptions were used to determine net periodic benefit cost for the years ended December 31: Discount rate 5.00 5.50% 6.00 % Expected return on plan assets 7.00 % 7.00 % Rate of compensation increase (relates to non-qualified plan) 5.00 % 5.00 % Plan Assets Rowan s pension plan asset allocation at December 31 and target allocation for 2011 by asset category are as follows: Percentage of Plan Assets Target at December 31, Range Asset category Real estate and other 0% 10% 3.00 % 5.00 % Alternative asset funds 0% 15% 7.00 0.00 Equity securities 25% 70% 46.00 57.00 Debt securities 25% 70% 44.00 38.00 100.00 % 100.00 % 16
The Company s primary investment objective for the Rowan Plan is to invest plan assets in a manner that maximizes the probability of meeting the plan s liabilities when due. The Rowan Plan holds equity mutual funds that are diversified by geography, capitalization, style and investment manager. The Rowan Plan also holds fixed income mutual funds that are diversified by issuer, maturity and investment grade. In addition, the Rowan Plan may hold Treasury Inflation-Protected Securities, alternative asset, real estate and commodity mutual funds. The investment guidelines, asset allocation, and investment performance are reviewed quarterly by the Novant Pension Restoration Committee. The fair values of the Rowan Plan s assets at December 31, 2011, by asset category are as follows: Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Active Markets for Significant other Unobservable Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) Equity securities U.S. equity $ - $ 6,975 $ - Developed non-u.s. equity - 5,800 - Emerging markets equity - 1,859 - Fixed income securities U.S. fixed income - 14,137 - Alternative asset funds - 2,343 - Real estate and other - 1,070 - Total fair value of the Rowan Plan's assets $ - $ 32,184 $ - The fair values of the Rowan Plan s assets at December 31, 2010, by asset category are as follows: Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Active Markets for Significant other Unobservable Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) Equity securities U.S. equity $ - $ 8,664 $ - Developed non-u.s. equity - 6,670 - Emerging markets equity - 1,930 - Fixed income securities: U.S. fixed income - 11,549 - Real estate and other - 1,297 - Total fair value of the Rowan Plan's assets $ - $ 30,110 $ - 17
Cash Flows Rowan s contributions to the supplemental retirement income plan and defined benefit pension plan were $2,662 and $1,064 for the years ended, respectively. The Company expects to make a contribution to the defined benefit pension plan of $1,951 in 2012. The Company does not expect to make contributions to the supplemental retirement income plan in 2012. The following assumed benefit payments, under the Company s defined benefit and nonqualified supplemental retirement plans, which reflect expected future service, as appropriate, and were used in the calculation of projected benefit obligations, are estimated to be paid as follows: Year Ending December 31, 2012 $ 1,603 2013 1,687 2014 1,710 2015 1,769 2016 1,840 2017 2020 11,780 In addition, Rowan sponsors a defined contribution plan. Contributions are determined under various formulas. Costs related to this plan amounted to $2,735 and $3,489 in 2011 and 2010. Rowan participates in the Novant ChoicePlan, a cafeteria plan which provides certain benefits, including basic medical and dental coverage, long-term disability benefits, reimbursement of supplemental dependent care expenses and group life insurance benefits. Rowan contributes predetermined amounts for each full-time and part-time employee, which is allocated to the various benefit options in accordance with the participant s election. Rowan s contributions to the ChoicePlan were approximately $8,112 and $8,074 for the years ended December 31, 2011 and 2010. Other Postretirement Benefit Plans Rowan provides certain fixed dollar amounts for health care and life insurance benefits to certain retired employees. Covered employees may become eligible for these benefits if they meet minimum age and service requirements, and if they are eligible for retirement benefits. Rowan has the right to modify or terminate these benefits. 18
The following table outlines the changes in Rowan s other post-retirement benefit plan obligations, funded status, and the components of net periodic benefit costs for the years ended December 31: Change In Benefit Obligation Benefit obligation at beginning of year $ 376 $ 474 Service cost 8 - Interest cost 8 14 Actuarial loss (gain) (46) 144 Plan participants' contributions 35 38 Benefits paid (122) (294) Benefit obligation at end of year $ 259 $ 376 Funded status $ (259) $ (376) Amounts recognized in the balance sheet Accrued benefit cost $ (259) $ (376) Amounts recognized as changes in unrestricted net assets Net actuarial gain $ (97) $ (682) Components of net periodic benefit cost Service cost $ 8 $ - Interest cost 8 14 Recognized net actuarial gain (632) (779) Net periodic benefit reduction $ (616) $ (765) Other changes in plan assets and benefit obligations recognized in unrestricted net assets Net loss (gain) $ (46) $ 144 Amortization of net loss 632 779 Total recognized in unrestricted net assets $ 586 $ 923 The estimated net gain for the post-retirement plans that will be amortized from unrestricted net assets into net periodic benefit cost in 2012 is $71. The following weighted average assumptions were used to determine postretirement benefit plan obligations at December 31: Discount rate 2.20% 2.75% Health care cost trend on covered charges 9.00% in 2012, 9.50% in 2011, grading to grading to 5.00% in 2020 5.00% in 2020 19
The following weighted average assumptions were used to determine postretirement benefit plan net periodic benefit cost for the years ended December 31: Discount rate 2.75% 3.50% Health care cost trend on covered charges 9.50% in 2011, 10.00% in 2010, grading to grading to 5.00% in 2020 5.00% in 2020 Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would not have a significant effect on the amounts reported as of December 31, 2011. Cash Flows The following assumed benefit payments under the Company s post-retirement benefit plans, which reflect expected future service, as appropriate, and were used in the calculation of projected benefit obligations, are expected to be paid as follows: Years Ending December 31, 2012 $ 77 2013 46 2014 43 2015 37 2016 30 2017 2020 43 13. Fair Value Measurements Rowan categorizes, for disclosure purposes, assets and liabilities measured at fair value in the financial statements based upon whether the inputs used to determine their fair values are observable or unobservable. Observable inputs are inputs which are based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity s own assumptions about pricing the asset or liability, based on the best information available in the circumstances. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset s or liability s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement of the asset or liability. Rowan s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 20
Rowan follows the three-level fair value hierarchy to categorize these assets and liabilities recognized at fair value at each reporting period, which prioritizes the inputs used to measure such fair values. Level inputs are defined as follows: Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets for identical assets or liabilities on the reporting date. Investments classified in this level generally include exchange traded equity securities, futures, pooled short-term investment funds, options and exchange traded mutual funds. Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Investments classified in this level generally include fixed income securities, including fixed income government obligations; asset-backed securities; certificates of deposit; derivatives; as well as certain U.S. and international equities which are not traded on an active exchange. Inputs that are unobservable for the asset or liability. Investments classified in this level include an investment in a preferred stock fund. Asset and liabilities classified as Level 1 are valued using unadjusted quoted market prices for identical assets or liabilities in active markets. Rowan uses techniques consistent with the market approach and income approach for measuring fair value of its Level 2 assets and liabilities. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach generally converts future amounts (cash flows or earnings) to a single present value amount (discounted). As of, the Level 2 assets listed in the fair value hierarchy tables below utilize the following valuation techniques and inputs: Certificates of Deposit The fair value of certificates of deposit is based on cost plus accrued interest. Significant observable inputs include security cost, maturity, and relevant short-term interest rates. Fixed Income and Debt Securities The fair value of investments in fixed income and debt securities is primarily determined using techniques that are consistent with the market approach. Significant observable inputs include benchmark yields, reported trades, observable broker/dealer quotes, issuer spreads, and security specific characteristics, such as early redemption options. U.S. Equity Securities The fair value of investments in U.S. equity securities is primarily determined using the calculated net asset value. The values for underlying investments are fair value estimates determined by external fund managers based on operating results, balance sheet stability, growth, and other business and market sector fundamentals. 21
The following table summarizes fair value measurements, by level, at December 31, 2011 for all financial assets and liabilities measured at fair value on a recurring basis in the financial statements: Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) Total Cash and cash equivalents $ 12,053 $ - $ - $ 12,053 Short-term investments Certificates of deposit - 3,901-3,901 Assets limited as to use Cash and cash equivalents 25,494 - - 25,494 Fixed income securities - 186-186 Total assets limited as to use 25,494 186-25,680 Long-term investments Cash and cash equivalents 2,760 - - 2,760 U.S. equities 8,024 1,697 843 10,564 International equities 3,833 - - 3,833 Fixed income securities 737 3,649-4,386 Emerging markets 2,027 - - 2,027 Total long-term investments 17,381 5,346 843 23,570 Total assets at fair value $ 54,928 $ 9,433 $ 843 $ 65,204 Alternative investments, recorded using the equity method which approximates fair value 19,082 Total assets included in cash and cash equivalents, short-term investments, assets limited as to use and long-term investments $ 84,286 22
The following table summarizes fair value measurements, by level, at December 31, 2010 for all financial assets and liabilities measured at fair value on a recurring basis in the financial statements: Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) Total Cash and cash equivalents $ 8,090 $ 4,847 $ - $ 12,937 Short-term investments Certificates of deposit - 611-611 Assets limited as to use Cash and cash equivalents 19,121 - - 19,121 Fixed income securities - 6,423-6,423 Total assets limited as to use 19,121 6,423-25,544 Long-term investments Cash and cash equivalents 502 - - 502 U.S. equities 10,287 983-11,270 International equities 8,487 - - 8,487 Fixed income securities - 5,221-5,221 Emerging markets 3,117 - - 3,117 Total long-term investments 22,393 6,204-28,597 Total assets at fair value $ 49,604 $ 18,085 $ - $ 67,689 Alternative investments, recorded using the equity method which approximates fair value 14,007 Total assets included in cash and cash equivalents, short-term investments, assets limited as to use and long-term investments $ 81,696 For the years ended, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following: U.S. Equities Balance at January 1, 2010 $ - Actual return on assets - Purchase and sales of assets, net - Transfers in/(out) of Level 3 - Balance at December 31, 2010 - Actual return on assets - Purchase and sales of assets, net 843 Transfers in/(out) of Level 3 - Balance at December 31, 2011 $ 843 23
14. Professional and General Liability Insurance Coverage Rowan participates in a group self-insured program administered by Novant for professional and general liability exposures up to certain limits. Novant has umbrella policies in place above those limits. Rowan also participates in the Novant Health self-insured program for workers compensation and is self-insured for certain health benefits options. These programs are administered by Novant, which allocates a portion of the actuarially determined expense to each affiliate that participates in the programs. Reserves for professional and general liability insurance coverage, workers compensation and health benefits are considered liabilities of Novant and have been excluded from Rowan s balance sheet. 15. Commitments and Contingencies The Company and its affiliate are presently involved in various personal injury, regulatory investigations, tort actions and other claims and assessments arising out of the normal course of business. Management believes that Rowan has adequate legal defenses, self-insurance reserves and/or insurance coverage for these asserted claims, as well as any unasserted claims and does not believe these claims will have a material effect on Rowan s operations or financial position. The health care 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 health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. In recent years, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. 16. Operating Leases Certain operating properties and equipment are leased under noncancelable operating leases. Total rental expense under operating leases was $835 and $778 in 2011 and 2010. Future minimum rentals under noncancelable operating leases with terms of more than one year are as follows: Years Ending December 31, 2012 $ 125 2013 70 2014 70 2015 24 2016 20 Thereafter 90 $ 399 24
17. Concentrations of Credit Risk Rowan provides services primarily to the residents of Rowan County, North Carolina without collateral or other proof of ability to pay. Most patients are local residents who are insured partially or fully under third-party payor arrangements. The mix of net receivables from patients and third-party payors at December 31 is as follows: Medicare 36.8 % 33.9 % Medicaid 11.2 8.3 Other third-party payors 50.9 56.1 Patients 1.1 1.7 100.0 % 100.0 % Rowan places the majority of its cash and investments with corporate and financial institutions. Rowan maintains cash balances in excess of FDIC insured limits; however, the Company has not experienced any losses on such deposits. 18. Related Party Transactions For the years ended, the Company was charged $7,530 and $7,193, respectively, for a pro rata share of certain overhead and other expenses incurred by Novant on the Company s behalf. As of, the Company had an intercompany payable to Novant of $14,144 and an intercompany receivable from Novant of $3,779, respectively. At December 31, 2011 the intercompany payable is included in accounts payable on the combined balance sheet. 19. Functional Expenses Rowan provides general health care services to residents within its geographic region. Expenses relating to providing these services for the years ended December 31 are as follows: Health care services $ 129,347 $ 123,701 General and administrative 45,390 45,569 $ 174,737 $ 169,270 20. Subsequent Events The Company evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through March 30, 2012, the day the financial statements were issued. 25