Ochsner Health System Annual Financial Information Disclosure For the Twelve Months Ended December 31, 2011
Forward Looking Information: This Financial Information Disclosure contains disclosures, which contain forward looking statements within the meaning of the Federal securities laws. Forward looking statements include all statements that do not relate solely to historical or current fact and can be identified by the use of words expect, anticipate, intend, project, likely, may, might, estimate, budget and similar words or expressions. These forward looking statements are based on the current plans and expectations of Ochsner Health System ( OHS ) as of the date of this report and are subject to a number of known and unknown risks and uncertainties inherent in the operation of health care facilities, many of which are beyond OHS's control, that could significantly affect current plans and expectations and OHS's future financial position and results of operations. Important factors that could cause results to differ materially from those expected by management include, but are not limited to, general, economic and business, competition from other healthcare facilities in the service areas, an unfavorable pricing environment, inability to achieve expected efficiencies in operations or effectively control health care costs, the efforts of insurers and others to contain health care costs, changes in Medicare or Medicaid reimbursement formulas, the risk that managed care provider arrangements will not be negotiated or renewed on acceptable terms, future divestitures or acquisitions which may have a financial impact, availability and terms of capital to fund future expansion and ongoing capital needs, new laws or regulations, the possible enactment of federal or state health care reform, fines or penalties related to regulatory matters, changes in accounting standards and practices, the outcome of pending and future litigation and government investigations, labor issues and the ability to attract and retain qualified management and other personnel, including physicians, nurses and medical support personnel. Given these uncertainties, bondholders and prospective bondholders are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report. OHS disclaims any obligation, and make no promise, to update any such factors or forward looking statements or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward looking statement, whether as a result of changes in underlying factors, to reflect new information, as a result of the occurrence of events or developments or otherwise. 2
MANAGEMENT S DISCUSSION OF FINANCIAL RESULTS INTRODUCTORY STATEMENT Ochsner Health System ( OHS ) is a Louisiana nonprofit corporation exempt from federal income taxation as an organization described in Section 501(c)(3) of the Code. OHS was formed in July 2006 and became the sole corporate member of Ochsner Clinic Foundation ( OCF ) in September 2006. OHS is also the sole corporate member of Ochsner Community Hospitals ( OCH ), a Louisiana nonprofit corporation, exempt from federal income taxation as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ). OCF is a Louisiana nonprofit corporation, exempt from federal income taxation as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ). OCF, headquartered in New Orleans, Louisiana, either directly or through its fully owned affiliates, owns and operates a 546 bed acute care hospital known as Ochsner Medical Center( OMC ), an 11-story clinic building, a 143- room hotel and related medical facilities located on a main campus in Jefferson Parish at the western end of New Orleans (the Main Campus ). It operates Ochsner Medical Center Westbank, a 165 bed acute care hospital, as a remote campus of Ochsner Medical Center. It also owns and operates 37 health centers throughout southeast Louisiana, owns a hospital in Baton Rouge that operates as Ochsner Medical Center Baton Rouge, operates a hospital in Raceland, Louisiana known as Ochsner St. Anne General Hospital, and several fitness centers that operate as Elmwood Fitness Center. On April 1, 2010, OCF purchased Northshore Regional Medical Center in Slidell, Louisiana now operating as Ochsner Medical Center Northshore ( OMCNS ). OCH was formed on July 17, 2006 for the purpose of acquiring certain medical facilities acquired from Tenet Healthcare Corporation on October 1, 2006, that now operate as Ochsner Medical Center Kenner, Ochsner Baptist Medical Center and Ochsner Medical Center Westbank Campus. Ochsner Medical Center Westbank is leased to Ochsner Clinic Foundation and operates as a remote campus of Ochsner Medical Center. OCF is the only Obligated Group Member under the Master Indenture. Certain affiliates of OCF have been designated as Designated Affiliates and Credit Group Members under the Master Indenture. Under the Master Indenture, Obligated Group Members are jointly and severally liable to make payments with respect to Obligations issued under the Master Indenture. Obligated Group Members may designate entities as Designated Affiliates under the Master Indenture, and may rescind such designation at any time. Designated Affiliates include Brent House Corporation, Ochsner Clinic L.L.C., Ochsner Bayou, L.L.C., East Baton Rouge Medical Center, LLC DBA Ochsner Medical Center Baton Rouge, Ochsner Medical Center Northshore, LLC, Ochsner Home Medical Equipment, LLC, Ochsner Community Hospitals, Ochsner Baptist Medical Center, LLC, Ochsner Medical Center Westbank, LLC and Ochsner Medical Center Kenner, LLC. OCF and the other Credit Group Members constituted 93.7% of the consolidated total assets of OHS as of December 31 2011 and 99.9% of the consolidated total revenue of OHS for the twelve months ended December 31, 2011. 3
MARKET SHARE Ochsner Health System s regional market share, which includes the New Orleans, Baton Rouge, Northshore and Bayou regions, has grown over three fold from 6.8% in 2005 to 20.6% in 2011. When isolating just the New Orleans Metropolitan area, OHS s market share has grown from 15.5% in 2005 to 36.5% in 2011. The growth is the result of acquisitions, organic growth, and an increase in transfers from non-ochsner hospitals through its Regional Referral Center. FINANCIAL RESULTS The System had an Excess of Revenues over Expenses of $35.9 million for 2011 compared to $62.2 million for 2010. Ochsner had Income from Operations of $24.9 for 2011 compared to $48.0 million for 2010. 2010 included as Other Operating Revenue $32.6 million of supplemental payments from federal disaster relief funds provided to Louisiana for hospitals post Hurricane Katrina, $1.0 million in FEMA payments, $2.8 million HUD reimbursement for emergency preparedness and $3.6 million for the gain on the purchase of Northshore Regional Medical Center. After adjusting for those four items, Excess of Revenues over Expenses and Income from Operations in 2011 increased by $13.9 million and $17.1 million respectively over 2010. This increase is despite a year over year reduction in Medicaid and uncompensated care payments of $15.7 million. OHS has experienced a cumulative annual impact of $44.3 million in Medicaid and uncompensated care payment cuts since the State of Louisiana started payment reductions in February 2009. The System had total operating revenue of $1.8 billion for 2011, an increase of $98.1 million or 5.8% compared to 2010. This was principally driven by growth in net patient service revenue as a result of increased patient activity. When comparing 2011 to 2010, OHS has experienced an increase in net patient service revenue of $118.6 million ($110.9 million or 6.4% after adjusting for OMCNS). After adjusting for OMCNS, Ochsner experienced a 3.5% increase in discharges, a 1.4% increase in inpatient days, a 7.8% increase in emergency room visits, a 2.0% increase in outpatient surgical procedures, 2.2% increase in inpatient surgical procedures and a 2.4% increase in clinic visits. A portion of the growth is related to volume transferred to Ochsner Medical Center Main Campus from non-ochsner facilities via an Ochsner Regional Referral Transfer center that was established in 2010. Ochsner created this new service in order to accommodate affiliated hospitals with a streamlined process to transfer their patients to Ochsner. Effective for the 2011 financial statements Ochsner adopted the provisions of ASU No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-07). 2010 was also restated for comparability. ASU 2011-07 requires the presentation of revenues net of the provision for doubtful accounts. Previously, Ochsner s provision for doubtful accounts was included as a component of operating expenses. The provision for bad debt for Ochsner Health System, as a percentage of Net Patient Service Revenue and Net Premium Revenue, was 4.9% for 2011 compared to 7.8% for 2010. The majority of the decrease in bad debt is due to improved efforts to classify patients as charity care when they meet charity care policy guidelines. Bad debt and charity care combined accounted for 7.1% of Net Patient Service Revenue and Net Premium Revenue for 2011 compared to 8.0% for 2010. As mentioned above, Other Operating Revenue for 2010 included $32.6 million of supplemental payments from federal disaster relief funds provided to Louisiana for hospitals post Hurricane Katrina, $1.0 million in FEMA payments, $2.8 million HUD reimbursement for emergency preparedness and $3.6 million for the gain on the purchase of Northshore Regional Medical Center. After adjusting for those four items, 2011 Other Operating Revenue increased by $8.8 million or 22% over 2010. 4
Salaries and wages for 2011 were $822.0 million. After adjusting for OMCNS the increase was $51.2 million or 6.7% over 2010, a portion of which is due to an increase in labor needed to meet the growth in patient volume. Also, additional resources were added in information technology, revenue cycle and medical management areas to enhance capabilities in each of these areas. Benefit expense for 2011, after adjusting for OMCNS, increased by $7.7 million or 6.9%. Medical services to outside providers expense decreased by $1.9 million or 1.5%. The System currently manages almost 29,500 Medicare Advantage members under a capitated arrangement. Medical supplies and services, after adjusting for OMCNS, increased by $10.9 million or 4.2%. Medical Supplies and Services as a percentage of Net Patient Service Revenue and Net Premium Revenue was 16.3% for both 2011 and 2010. Supply chain initiatives in place continue to offset inflation and reduce medical supply costs. Initiatives include items such as physician preference item pricing, product standardization and utilization. Other operating expenses which includes building and equipment, insurance, professional services and general and administrative expenses, after adjusting for OMCNS, increased by $29.0 million or 9.6%. $13.1 million of the increase is for the funding of partially owned subsidiaries formed exclusively for charitable, educational and scientific purposes. These subsidiaries work in collaboration with other hospitals and government entities to improve access to health care for low income and needy persons. Non Operating gains in 2011, primarily from the pooled investment portfolio, were $11.1 million compared to $14.2 million for 2010. 5
LIQUIDITY AND CASH POSITION At December 31, 2011, Ochsner Health System had unrestricted cash and investments of $437.1 million which equates to 93 days cash on hand. The $23.5 million increase over December 2010 includes a $10 million reduction of unrestricted investments due to a decrease in market valuations and an increase of $30.6 million in cash due to reductions in Patients Accounts Receivable. On May 11, 2011, Ochsner closed its Series 2011 $150 million tax exempt bond issue. $15.0 million of the proceeds were used to establish a debt service reserve fund and $7.7 million of the proceeds were used to refund an equipment loan. The remaining proceeds will be used to fund several capital projects. Ochsner was able to recapture $14.0 million in unrestricted cash immediately after closing for the reimbursement of capital expenditures and for working capital. Assets limited to use under bond indenture agreements as of December 31, 2011 is $133.9 million, an increase over December 31, 2010 of $104.9 million. The increase includes $15.0 million for the Series 2011 Bonds debt service reserve fund and the remaining amount is in the construction fund and will be drawn down as funds have been spent on the associated projects. DEBT & ANNUAL DEBT SERVICE COVERAGE RATIO As of December 31, 2011, OHS had $666.6 million in total long term debt outstanding compared to $512.8 million at December 31, 2010. This includes the addition of Series 2011 $150 million tax exempt bond issue. The long term debt to capitalization ratio for OHS was 61.1% versus 51.7% in 2010. Debt Service Coverage Calculation: 2011 2010 Income Available for Debt Service 126,092 145,863 Annual Debt Service 30,060 30,452 Annual Debt Service Coverage Ratio 4.2x 4.8x 6
OCHSNER HEALTH SYSTEM EXCESS OF (DEFICIENCY IN) REVENUES OVER EXPENSES For the Twelve Months Ended December 31, 2011 and December 31, 2010 (Thousands) 2011 2010 DIFF NET PATIENT REVENUE 1,530,148 1,455,427 74,721 PROVISION FOR BAD DEBTS (83,069) (126,955) 43,886 NET PATIENT SERVICE REVENUE LESS PROVISION FOR BAD DEBTS 1,447,079 1,328,472 118,607 PREMIUM REVENUE 298,222 287,442 10,780 RESTRICTED FUNDS TRANSFER 3,581 3,461 120 OTHER OPERATING REVENUE 47,505 78,925 (31,420) TOTAL OPERATING REVENUE 1,796,387 1,698,300 98,087 SALARIES AND WAGES 821,948 762,579 (59,369) BENEFITS 121,820 112,910 (8,910) DEPRECIATION AND AMORTIZATION 62,085 57,659 (4,426) INTEREST 28,059 26,027 (2,032) MEDICAL SERVICES TO OUTSIDE PROVIDERS 123,019 124,933 1,914 MEDICAL SUPPLIES AND SERVICES 278,136 263,804 (14,332) OTHER OPERATING EXPENSES 336,444 302,383 (34,061) TOTAL OPERATING EXPENSES 1,771,511 1,650,295 (121,216) INCOME FROM OPERATIONS 24,876 48,005 (23,129) NON-OPERATING GAINS AND LOSSES 11,072 14,172 (3,100) EXCESS OF <DEFICIENCY IN> REVENUE OVER EXPENSES 35,948 62,177 (26,229) 7
OCHSNER HEALTH SYSTEM CONSOLIDATED BALANCE SHEET As of December 31, 2011 and December 31, 2010 (Thousands) ASSETS 2011 2010 CASH AND CASH EQUIVALENTS 123,974 93,861 ASSETS LIMITED AS TO USE REQUIRED FOR CURRENT LIABILITIES 3,732 3,754 PATIENT ACCOUNTS RECEIVABLE - NET 167,319 197,882 ACCOUNTS RECEIVABLE - OTHER 32,731 16,850 PLEDGES RECEIVABLE - NET 1,517 1,614 INVENTORY 34,672 35,788 PREPAID EXPENSES AND OTHER CURRENT ASSETS 22,279 20,703 ESTIMATED THIRD PARTY PAYOR SETTLEMENTS - NET 13,886 5,675 TOTAL CURRENT ASSETS 400,110 376,127 ASSETS LIMITED AS TO USE BY BOARD FOR CAPITAL IMPROVEMENTS, CHARITY, AND RESEARCH 313,146 319,779 UNDER BOND INDENTURE AGREEMENTS 133,899 29,009 UNDER LOAN AGREEMENT 3,311 2,428 UNDER SELF INSURANCE TRUST FUND 10,224 8,587 DONOR RESTRICTED LONG TERM INVESTMENTS 43,820 45,831 TOTAL ASSETS LIMITED AS TO USE 504,400 405,634 LESS ASSETS LIMITED FOR CURRENT LIABILITY (3,732) (3,754) TOTAL NON-CURRENT ASSETS LIMITED AS TO USE 500,668 401,880 INVESTMENTS IN UNCONSOLIDATED AFFILIATES, REAL ESTATE AND OTHER 7,620 7,758 PROPERTY NET OF ACCUM DEP 608,246 547,718 GOODWILL - NET 43,077 43,097 OTHER INTANGIBLE ASSETS - NET 11,433 11,556 OTHER ASSETS 16,510 16,230 TOTAL ASSETS 1,587,664 1,404,366 8
OCHSNER HEALTH SYSTEM CONSOLIDATED BALANCE SHEET As of December 31, 2011 and December 31, 2010 (Thousands) LIABILITIES AND NET ASSETS 2011 2010 ACCOUNTS PAYABLE 72,469 73,993 ACCRUED INTEREST 4,195 3,033 ACCRUED SALARY AND WAGES 58,625 52,960 ACCRUED COMPENSATION FOR ABSENCES 34,642 31,768 DEFERRED REVENUE 10,109 2,759 OTHER 37,367 42,399 PENSION OBLIGATIONS - CURRENT PORTION 344 5,430 BONDS PAYABLE - CURRENT 5,360 5,100 NOTES PAYABLE 52,969 52,969 LONG TERM DEBT - CURRENT PORTION 5,634 3,097 TOTAL CURRENT LIABILITIES 281,714 273,508 PENSION AND POST RETIREMENT OBLIGATIONS 144,614 72,264 BONDS PAYABLE - NON CURRENT 583,085 439,415 LONG TERM DEBT 83,521 73,405 OTHER LONG TERM LIABILITIES 16,560 11,437 TOTAL LIABILITIES 1,109,494 870,029 UNRESTRICTED FUND BALANCE 424,825 479,540 TEMPORARILY RESTRICTED FUND BALANCE 30,792 32,432 PERMANENTLY RESTRICTED FUND BALANCE 22,553 22,365 TOTAL NET ASSETS 478,170 534,337 TOTAL LIABILITIES AND NET ASSETS 1,587,664 1,404,366 9
OCHSNER HEALTH SYSTEM UTILIZATION STATISTICS 2007 2008 2009 2010 2011 Average Licensed Beds (1) 1,063 1,091 1,079 1,235 1,246 Average Number of Beds in Use (2) 1,021 1,084 1,111 1,278 1,293 Discharges 46,160 50,090 52,995 58,943 62,463 Patient Days (3) 222,805 232,561 240,649 258,803 268,437 Average Daily Census (3) 610 637 659 722 735 Percent Occupancy (3) 59.79% 58.78% 59.32% 56.49% 56.89% Average Length of Stay (3) 4.8 4.6 4.5 4.4 4.3 Adjusted Patient Days (3) 382,559 403,675 440,485 468,384 494,533 Ochsner OMC OMC Ochsner Medical OMC Ochsner Baton North OMC Baptist Center WestBank St Anne Rouge Shore Kenner Med Ctr TOTAL Average Licensed Beds (1) 546 165 35 136 157 125 83 1,246 Average Number of Beds in Use (2) 573 181 35 136 165 120 83 1,293 Discharges 27,847 9,375 2,017 7,551 5,601 6,648 3,424 62,463 Patient Days (3) 148,749 32,052 7,181 24,367 22,440 20,620 13,028 268,437 Average Daily Census (3) 408 88 20 67 61 56 36 735 Percent Occupancy (3) 71.16% 48.52% 56.21% 49.09% 37.26% 47.06% 43.00% 56.89% Average Length of Stay (3) 5.3 3.4 3.6 3.2 4.0 3.1 3.8 4.3 Adjusted Patient Days (3) 253,924 54,572 25,175 55,419 35,495 39,111 30,836 494,533 (1) Data excludes NICU and Nursery Beds (2) Data excludes Nursery beds, but includes NICU beds, a large number of beds in use will yield an amount greater than the number of licensed beds. (3) Data excludes Normal Newborn Days. OCHSNER HEALTH SYSTEM GROSS REVENUE BY PAYOR FYE FYE Payor Groupings 12/31/2011 12/31/2010 Managed Care and Commercial 39.0% 39.0% Medicare Managed Care 21.0% 21.0% Medicare - Traditional 22.0% 21.0% Medicaid 14.0% 14.0% Other 4% 5% TOTAL 100% 100% 10