Financial Statements and Report of Independent Certified Public Accountants MCG Health, Inc. d/b/a Georgia Regents Medical Center June 30, 2015 and 2014
MCG Health, Inc. Table of contents Management s discussion and analysis (unaudited) 1-10 Report of Independent Certified Public Accountants 11-12 Financial statements: Statements of net position 13-14 Statements of revenues, expenses and changes in net position 15 Statements of cash flows 16-17 Notes to financial statements 18-40
MCG Health, Inc. 1 Management s discussion and analysis (unaudited) (dollars in thousands) Introduction MCG Health, Inc. d/b/a Georgia Regents Medical Center (the Company or GRMC) is a nonprofit corporation organized to further the health sciences, patient care, research and education missions of Georgia Regents University (the University or GRU). The Company s operations and contributions can be briefly summarized as follows: Table 1 Summary Statistics and Investments in Missions by Company A summarized comparison of the Company s volume statistics and amounts invested in missions for the years ended June 30, 2015, 2014, and 2013, follows: 2015 2014 2013 Discharges 19,510 19,054 19,115 Outpatient visits 365,403 360,250 358,090 $ $ $ Margin allocation 1,154 4,727 7,959 Supplemental Academic and Research Support - - 14,613 Charity at cost 35,892 36,717 26,520 Graduate medical education 30,285 28,647 27,914 Capital expenditures 63,282 58,704 31,738 Overview of the Financial Statements and Financial Analysis The following discussion and analysis provides an overview of the financial position and performance of the Company as of and for the years ended June 30, 2015 and 2014, with selected comparative information as of and for the year ended June 30, 2013. It includes the financial statements of MCG Health, Inc., GRMC-GRMA, SPC-General Company, and GRMC-GRMA, SPC-GRMC, SP (formerly MCG Health, Inc. Insurance Company). This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes therein. Unless otherwise indicated, dollar amounts are in thousands. The Company s annual financial report includes: statements of net position, statements of revenues, expenses, and changes in net position, statements of cash flows and the notes to the financial statements. These basic financial statements and related notes provide information about the financial activities of the Company. The Company s Net Position The statement of financial position presents the financial position of the Company at the end of the fiscal year and includes all of the Company s assets and liabilities. The difference between total assets and total liabilities is net position. Net position is one indicator of the current financial condition of the Company at a point in time, while the change in net position is an indication of whether the Company s overall financial condition improved or worsened during the year. Assets and liabilities are generally measured using current or net realizable value. One notable exception is capital assets, which are stated at historical cost less accumulated depreciation.
MCG Health, Inc. 2 Table 2 Assets, Liabilities and Net Position A summarized comparison of the Company s assets, liabilities and net position at June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ Current assets 197,391 211,371 190,095 Noncurrent assets 402,124 378,513 371,025 Total assets 599,515 589,884 561,120 Current liabilities 91,441 88,720 83,817 Noncurrent liabilities 224,977 217,343 200,024 Total liabilities 316,418 306,063 283,841 Invested in capital assets, net of related debt 56,517 41,411 54,282 Unrestricted 226,580 242,410 222,997 Total net position 283,097 283,821 277,279 Assets Table 3 Components of Current Assets A comparison of current assets as of June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ Cash and cash equivalents 35,351 39,724 39,172 Short-term investments 33,774 43,405 36,305 Internally designated cash, cash equivalents and short-term investments 3,500 4,870 4,295 Investments restricted as to use - Restricted for current liabilities - 6,520 1,244 Patient accounts receivable, net 77,875 77,172 65,146 Third-party payor receivables 4,488 2,116 13,549 Other receivables 8,838 8,673 11,293 Inventory 15,783 13,806 13,154 Other current assets 17,782 15,085 5,937 197,391 211,371 190,095 Significant changes to current assets are due to the following: Patient accounts receivables, net of allowance for doubtful accounts, increased $703,000 or 0.9% in 2015 and $12 million or 18.4% in 2014, due to increased net patient revenue and higher valuation due to revenue cycle improvement activities. Third-party payor receivables increased $2.4 million in 2015 and decreased $11.4 million in 2014 due to timing of supplemental payments from the State of Georgia. These balances reflect payments due from third-party programs. Other receivables increased $165,000 or 1.9% in 2015 and decreased $2.6 million or 23.2% in 2014, both changes are due to changes in collateral posted with the interest rate swap counterparty. Detailed information regarding changes to cash and cash equivalents and short-term investments is included in the statements of cash flows.
MCG Health, Inc. 3 Table 4 Components of Noncurrent Assets A comparison of noncurrent assets as of June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ Investments 132,655 128,661 126,966 Capital assets, net 266,522 233,995 205,352 Notes receivable from related party 395 2,035 5,000 Investments held by trustee - 11,432 31,640 Other 2,552 2,390 2,067 Significant changes to noncurrent assets are due to the following: 402,124 378,513 371,025 Capital assets increased $32.5 million or 13.9% in 2015 and increased $28.6 million or 13.9% in 2014. Capital expenditures were $63.3 million in 2015 and $58.7 million in 2014, net of amounts accrued at year-end. These additions to capital assets were offset by asset depreciation and disposals. Changes in the balances from year-to-year are primarily due to capital expenditures from the 2012 notes payable that financed projects, which include, among other items, construction of a digestive health center, a hybrid endovascular suite, expansion and renovation of the bone marrow transplant area, children s medical center emergency department renovations, energy performance upgrades throughout the entire facility and many other refurbishments of corridors, operating rooms and suites. Capital related expenditures also include capital lease obligation for imaging equipment, patient monitoring technology, and a unified communication system. Additionally, outflows for capital expenses relate to clinical expansion, information technology, and facility improvements. Investments held by trustee reflect the remaining proceeds from the 2012 note payable. Changes in the balances from year-to-year are primarily due to expenditures from the bond proceeds on bond-financed projects and expenditures from the 2012 note payable on loan financial projects. Liabilities Total liabilities increased by $10.4 million or 3.4% from June 30, 2014 to June 30, 2015, and by $22.2 million or 7.8% from June 30, 2013 to June 30, 2014, primarily due to capital lease obligations. Net Position The increase in net position invested in capital assets of $15.1 million or 36.5% from June 30, 2014 to June 30, 2015 and decrease of $12.9 million or 23.7% from June 30, 2013 to June 30, 2014 was primarily due to the difference in capital expenditures made from operating funds (as opposed to bond proceeds) and the depreciation and disposal of existing capital assets. Debt-financed capital assets are not reflected in net assets invested in capital assets until the related debt is paid down. Unrestricted net position decreased by $15.8 million or 6.5% from June 30, 2014 to June 30, 2015, and increased by $19.4 million or 8.7% from June 30, 2013 to June 30, 2014. Operating Results and Changes in the Company s Net Position The statement of revenues, expenses and changes in net position represents the results of the Company s operations and other changes in net position for the year.
MCG Health, Inc. 4 Table 5 Operating Results and Changes in Net Position A summarized comparison of revenues, expenses and changes in net position for the years ended June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 Change in financial position: $ $ $ Operating revenues 595,352 556,629 536,105 Operating expenses 579,980 542,180 498,085 Operating income 15,372 14,449 38,020 Nonoperating revenue (expense): Interest expense (7,717) (6,145) (5,229) Investment income, net 2,230 8,845 6,636 Unrealized gain (loss) on interest rate sw ap (2,034) (369) 12,517 Net (loss) gain on disposition of capital assets (1,187) (106) (154) Academic and research support to University - - (14,613) Supplemental contribution to the GRU Early Retirement Program (6,015) (6,050) (6,081) Increase (decrease) in net position before combined margin allocation, additions to permanent endowments, restricted contributions and restricted investment income 649 10,624 31,096 Nonoperating expense Combined margin allocation (1,154) (4,727) (7,959) Increase (decrease) in net position before additions to permanent endowments, restricted contributions and restricted investment income (505) 5,897 23,137 Operating Revenues Table 6 Operating Revenues A summarized comparison of the components of operating revenues for the years ended June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ Net patient service revenue 543,365 509,921 491,692 Revenue from contractual services 28,569 28,297 28,297 Other operating revenue 23,418 18,411 16,116 595,352 556,629 536,105 Table 7 Operating Revenues Percentages A summarized comparison by percentage of the components of operating revenues for the years June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 Net patient service revenue 91.3% 91.6% 91.7% Revenue from contractual services 4.8% 5.1% 5.3% Other operating revenue 3.9% 3.3% 3.0% 100.0% 100.0% 100.0%
MCG Health, Inc. 5 Net patient service revenue is primarily driven by the volume and payor mix of patients treated. A comparative summary of patient activity statistics for the years ended June 30, 2015, 2014 and 2013, follows: Table 8 Patient Activity Statistical Summary 2015 2014 2013 Inpatient admissions 18,580 18,251 18,094 Outpatient visits 365,403 360,250 358,090 Emergency room visits 89,415 85,273 89,196 The Company s inpatient admissions increased from 2014 to 2015 by 1.8% and increased from 2013 to 2014 by 0.8%. The combined total for emergency room visits and outpatient visits increased by 2.1% from 2014 to 2015 and decreased by 0.3% from 2013 to 2014. The majority of patient care revenue is received under contractual arrangements with governmental payors and managed care insurers. The following charts show the distribution of gross patient service revenue by primary payor source for the years ended June 30, 2015, 2014 and 2013: Payors FY 2015 Medicaid Pending 2% Self-Pay 7% Agencies 11% Managed Care 22% Commercial 3% Medicaid 22% Medicare 33% Medicaid Pending 3% Self-Pay 8% Agencies 10% Managed Care 22% Payors FY 2014 Medicaid Pending 3% Self-Pay 8% Agencies 10% Managed Care 22% Payors FY 2013 Commercial 3% Commercial 3% Medicaid 20% Medicare 34% Medicaid 20% Medicare 34%
MCG Health, Inc. 6 Table 9 Components of Net Patient Service Revenue A comparison of the components of net patient service revenue for the years ended June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ Gross patient service revenue 1,990,441 1,755,950 1,606,257 Georgia Medicaid Indigent Care Trust Fund revenue 8,152 10,363 14,349 Georgia Medicaid upper payment limit revenue 19,347 14,844 10,786 South Carolina Medicaid disproportionate share revenue 4,207 4,323 3,845 Provision for contractual adjustments (including charity care) (1,432,379) (1,235,342) (1,081,870) Provision for doubtful accounts (46,403) (40,217) (61,675) 543,365 509,921 491,692 Gross patient service revenue increased by $234 million or 13.4% from 2014 to 2015 due to a 5% rate increase implemented in January 2015 and an increase in the severity and complexity of inpatient cases. Gross patient service revenue increased by $150 million or 9.3% from 2013 to 2014 due to a 5% rate increase implemented in January 2014 and an increase in the severity and complexity of inpatient cases. The Company is generally reimbursed by governmental and third-party payors based on negotiated fixed rates that are not dependent on the Company s billed gross charges. Annual increases in these rates are set through government regulation or third-party contracts and tend to not keep pace with the Company s implemented rate increases. This results in increases to the provision for contractual adjustments that outpace increases in gross charges on a percentage basis. The provision for contractual adjustments increased $197,000 or 15.9% in 2015 and $153,500 or 14.1% in 2014. The Company makes a provision for accounts on which collection is deemed doubtful. Changes in this provision occur due to rate increases implemented by the Company, changes in payor mix, collection performance and the classification of account write-offs as bad debt (which is a component of the provision for doubtful accounts) and charity care (which is a component of the provision for contractual adjustments). The provision for doubtful accounts increased $6.2 million or 15.4% in 2015 due to the 5% charge increase in January 2015. The decrease of $21.5 million or 34.7% in 2014 was due to the writing off of pending Medicaid over 90 days and an increased number of patients qualified for charity care. In 2009, the Company instituted an upfront process for better identifying and qualifying patients for charity care, which resulted in the increase in charity care allowances. Certain state programs include supplemental payments that are made outside of individual claim reimbursements. Changes associated with these state programs resulted from annual reimbursement determinations that are made at the discretion of the state responsible for administering the associated program. The net reimbursement benefits associated with these programs are recognized as a reduction in the associated contractual adjustments. A summary of changes in these components follows: Georgia Medicaid Indigent Care Trust Fund revenue decreased by $2.2 million or 21.3% in 2015 and decreased by $4.0 million or 27.8% in 2014. Georgia Medicaid upper payment limit revenue increased $4.5 million or 30.3% in 2015 and increased $4.1 million or 37.6% in 2014. South Carolina Medicaid disproportionate share program revenue decreased $116 thousand or 2.7% in 2015 and increased $478,000 or 12.4% in 2014.
MCG Health, Inc. 7 Other operating revenues increased by $5.0 million or 27.2% from 2014 to 2015 and increased by $2.3 million or 14.2% from 2013 to 2014. Both years changes are primarily attributable to fluctuations in grant revenue and revenue from other contractual arrangements. Operating Expenses A summarized comparison of operating expenses for the years ended June 30, 2015, 2014 and 2013, follows: Table 10 Operating Expenses 2015 2014 2013 $ $ $ Salaries and w ages 215,149 203,907 199,337 Employee benefits and payroll taxes 47,665 44,703 47,384 Purchased services 69,779 68,453 45,845 Medical and surgical supplies 130,966 117,203 111,884 Insurance 4,309 6,608 1,708 Non-medical supplies and other expenses 43,750 41,610 38,743 Depreciation and amortization 30,023 30,613 26,824 IT and telecommunications 28,403 18,421 17,713 Repairs and maintenance 9,936 10,662 8,647 579,980 542,180 498,085 The primary components of changes in operating expenses are: Increase in salaries and wages ($11.2 million or 5.5% in 2015 and $4.6 million or 2.3% in 2014) Fluctuations in employee benefits and payroll taxes (increase of $3.0 million or 6.6% in 2015 and decrease of $2.7 million or 5.6% in 2014) Increases in purchased services ($1.3 million or 1.9% in 2015 and $22.6 million or 49.3% in 2014) Increases in medical and surgical supplies expense ($13.8 million or 11.7% in 2015 and $5.3 million or 4.7% in 2014) Increases in non-medical supplies and other expense ($2.1 million or 5.1% in 2015 and $2.9 million or 7.4% in 2014) Increases in IT and telecommunications expense ($10.0 million or 54.2% in 2015 and $708 thousand or 3.9% in 2014) Fluctuations in depreciation and amortization (decrease of $590 thousand or 1.9% in 2015 and increase of $3.8 million or 14.1% in 2014) The increase in IT and telecommunications expense from 2014 to 2015 is primarily the result of the outsourcing of certain services which were performed by Company employees in 2014 and in prior years and were included in salaries and wages in these years. In 2015, the net increase in total operating expenses of $37.8 million or 7.0% is primarily the result of the increase in salaries and wages due to the implementation of a plan to make improvements to quality, safety, and patient satisfaction within the hospital. An element of the plan resulted in increased nursing and technical staffing levels. Management realized significant improvement in several quality and safety measures as a result of the plan. In 2014, the net increase in total operating expenses of $44.1 million or 8.8% is primarily the result of the increase in purchased services due to the implementation of an agreement to support a full range of clinical services while still maintaining the infrastructure to foster education and research. In prior years, similar agreements were classified as nonoperating expense.
MCG Health, Inc. 8 Nonoperating Revenues and Expenses As presented in Table 5, nonoperating revenues and expenses consist of interest expense, investment income, unrealized gain (loss) on interest rate swap, net loss on disposition of capital assets, supplemental contribution to the Georgia Regents University (GRU or the University) Early Retirement Program and combined margin allocation. Interest Expense The Company incurs interest expense on its short-term borrowings, long-term borrowings and the combined margin allocation to GRU. During fiscal years 2015 and 2014, the Company experienced an increase in interest expense, net of capitalized interest, of $1.6 million or 25.6% and $916 thousand or 17.5%, respectively. The increase related primarily to the capital lease obligation and a reduction in capitalization of interest expense as project assets have been placed into service. Investment Income Table 11 Components of Net Investment Income A summarized comparison of net investment income for the years ended June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ Dividend and interest income 3,637 3,480 3,690 Net realized gain (loss) on investments 1,558 798 (338) Net change in unrealized gains (losses) on investments (2,359) 5,158 3,835 Management fees (606) (591) (551) 2,230 8,845 6,636 During the year ended June 30, 2015, as compared to fiscal 2014, the Company experienced a decrease in net investment income of $6.6 million or 74.8%. This decrease is primarily a result of the decrease in unrealized gains. During the year ended June 30, 2014, as compared to fiscal 2013, the Company experienced an increase in net investment income of $2.2 million or 33.2%. This increase is primarily a result of the increase in realized and unrealized gains. Unrealized Gain/ Loss on Interest Rate Swap In 2015, the Company recorded changes to the fair value of the interest rate swap associated with the Series 2014A and 2014B Bonds as unrealized gains or losses. Changes to the fair value of the interest rate swap occur due to changes in the London Inter Bank Offered Rate (LIBOR) that have occurred since the initiation of the swap on April 1, 2008. Decreases in LIBOR result in unrealized losses and increases in LIBOR result in unrealized gains. The Company recorded an unrealized loss of $2.0 million in 2015. In 2014, the Company recorded changes to the fair value of the interest rate swap associated with the Series 2008A and 2008B bonds as unrealized gains or losses. Changes to the fair value of the interest rate swap occur due to changes in the London Inter Bank Offered Rate (LIBOR) that have occurred since the initiation of the swap on April 1, 2008. Decreases in LIBOR result in unrealized losses and increases in LIBOR result in unrealized gains. The Company recorded an unrealized loss of $369 thousand in 2014. Net Losses and Gains on Disposition of Capital Assets In 2015 and 2014, on the routine disposition of capital assets, the Company recorded a net loss of approximately $1.2 million and $106 thousand, respectively.
MCG Health, Inc. 9 Supplemental Contribution to GRU s Early Retirement Program Supplemental contributions made to a related party, GRU, for individuals who participated in an early retirement program offered prior to the official commencement of operations by the Company on July 1, 2000, are included in nonoperating expenses. The expense for the early retirement program was $6.0 million for 2015, 2014, and 2013. For additional information, refer to Note 11 to the accompanying financial statements. Supplemental Academic and Research Support On July 1, 2013, the Company entered into a Clinical Services Agreement with GRMA. This agreement replaced the academic and research support that had been provided in prior years. In 2014, the Company provided $22.8 million of supplemental funding to GRMA to further provide a full range of clinical services while maintaining the infrastructure to foster education and research. In 2015, the Company provided $23.3 million of supplemental funding to GRMA to further provide a full range of clinical services while maintaining the infrastructure to foster education and research. This expense is included in the Statement of Revenues and Expenses as purchased services as part of operating expense in 2015 and 2014. Combined Margin Allocation Under the Master Lease Agreement, an operating agreement with the Board of Regents of the University System of Georgia (Regents) effective July 1, 2000, the Company is required to pay an annual margin allocation calculated as 40% of its adjusted defined income, as defined in the Master Lease Agreement. Under the Personnel Agreement, a separate operating agreement with Regents effective July 1, 2003, the Company is required to make an annual margin allocation contribution calculated as 3% of its adjusted defined income. Based on the Company s Statement of Revenues, Expenses and Changes in Net Position, adjusted defined income is the change in unrestricted net position, excluding unrealized gains and losses related to changes in the fair value of the interest rate swap. The 40% payment and 3% contribution together represent the combined margin allocation. Table 12 Components of Combined Margin Allocation A comparative summary of the combined margin allocation for the years ended June 30, 2015, 2014 and 2013, follows: 2015 2014 2013 $ $ $ 40% margin allocation payment under the Master Lease Agreement 1,073 4,397 7,404 3% margin allocation contribution under the Personnel Agreement 81 330 555 Combined margin allocation 1,154 4,727 7,959 Capital Asset and Debt Administration Capital Assets As of June 30, 2015, 2014 and 2013, the Company had $266.5 million, $234.0 million and $205.4 million, respectively, invested in capital assets, net of accumulated depreciation, as detailed in Note 6 to the accompanying financial statements. In 2015, 2014 and 2013, the Company purchased new capital assets totaling $49.6 million, $41.0 million and $31.8 million, respectively.
MCG Health, Inc. 10 Debt On April 1, 2008, the Company issued a total of $135.0 million of Development Authority of Richmond County Revenue Bonds (2008 Bonds), Series 2008A and 2008B. Proceeds from the 2008 Bonds were to be used to fund certain construction and renovation projects and to purchase new and replacement equipment. The 2008 Bonds were also used to refund outstanding capital lease obligations and pay for certain costs associated with the issuance of the 2008 Bonds. Concurrently with the issuance of the Series 2008A and 2008B variable-rate Bonds, the Company entered into a variable-to-fixed interest rate swap. The intention of the swap was to effectively change the Company s variable interest rate on the 2008 Bonds to a synthetic fixed rate of 3.302%. This swap was entered into as a means of lowering the Company s borrowing costs, as compared to traditional fixed-rate bonds. Each 2008 Bond series was initially secured by irrevocable letters of credit. All principal and interest payments are drawn from the letter of credit and are reimbursed by the Company under the terms of separate reimbursement agreements with the issuers of the letters of credit. Each letter of credit was set to expire on June 27, 2015. Each 2008 Bond Series was generally secured through the trust indenture by the gross revenues of the Company. On July 15, 2014, the Company refunded the 2008A and 2008B Bonds with the 2014A and 2014B Bonds, which are a direct bank placement of bonds in the amount of $60,945,000 for each of the 2014A and 2014B Bonds. The amortization of the 2014A and 2014B Bonds is approximately the same as the amortization of the 2008A and 2008B Bonds. The 2014A Bonds are variable rate bonds that incur interest at a rate of 68% of LIBOR plus 79 basis points and are placed with their bank through July 1, 2024. The 2014B Bonds are variable rate bonds that incur interest at a rate of 68% of the sum of LIBOR and 125 basis points and are placed with their bank through July 1, 2026. On June 27, 2012, the Company entered into a note in the amount of $50.0 million. Funds from the note are to be used to fund certain construction and renovation projects and to purchase new and replacement equipment. The note bore a fixed interest rate of 2.05% for a three-year term through July 1, 2015, and the interest was due monthly. On June 30, 2015, the Company entered into a modification of the terms of the note. Effective July 1, 2015, the note is modified to a variable interest note and incurs interest at a rate of LIBOR plus 0.65%. The note is extended for a three year term through July 1, 2018, and the interest is due monthly. On June 27, 2013, the Company entered into capital lease obligations as part of a Management Services Agreement to purchase certain types of medical equipment and technology. As of June 30, 2015, the balance of obligations under capital leases was $38.6 million. For additional information, refer to Note 9 to the accompanying financial statements. On September 1, 2014, the Company entered into a capital lease obligation to purchase a unified communication system. As of June 30, 2015, the balance of this obligation under capital lease was $2.4 million. Contacting the Company s Financial Management The Company s financial statements are designed to present users with a general overview of the Company s finances and to demonstrate the Company s accountability. If you have any questions about the annual financial report or need any additional information, please contact Greg Damron, Vice President and Chief Financial Officer, 1120 15th Street (BI 2086), Augusta, Georgia 30912.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Audit Tax Advisory Grant Thornton LLP 801 Brickell Ave., Suite 2450 Miami, FL 33131 T 305.341.8040 F 305.341.8099 www.grantthornton.com The Board of Directors of MCG Health, Inc.: We have audited the accompanying financial statements of MCG Health, Inc. (the Company),, which comprise the statements of net position as of June 30, 2015 and 2014, and the related statements of revenues, expenses and changes in net position and cash flows for the years then ended, and the related notes to the financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 Company 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd
12 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the net position of MCG Health, Inc., as of June 30, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Required supplementary information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 1 through 10 be presented to supplement the basic financial statements. Such information, although not a required part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. This required supplementary information is the responsibility of management. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America. These limited procedures consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Miami, Florida August 28, 2015 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd
MCG Health, Inc. 13 Statements of net position June 30 2015 2014 Assets Current assets: $ $ Cash and cash equivalents 35,350,826 39,724,360 Short-term investments 33,774,168 43,405,074 Cash equivalents internally designated for self-insurance liability funding 413,714 1,601,083 Short-term investments internally designated for self-insurance liability funding 3,086,206 3,269,222 Investments restricted as to use - Required for current liabilities - 6,519,573 Patient accounts receivable, net of allow ance for doubtful accounts of approximately $46,373,000 in 2015 and $44,111,000 in 2014 77,875,232 77,171,987 Due from third-party payors 4,487,967 2,115,649 Other receivables 8,837,493 8,673,081 Inventory 15,783,004 13,806,289 Other current assets 17,782,349 15,084,783 Noncurrent assets: Total current assets 197,390,959 211,371,101 Investments internally designated for self-insurance liability funding 12,712,724 11,590,031 Long-term investments 119,941,556 117,071,340 Capital assets, net 266,522,448 233,995,093 Notes receivable from related party 395,038 2,034,761 Investments restricted as to use - 11,431,635 Other assets 2,552,011 2,390,337 Total assets 599,514,736 589,884,298 The accompanying notes are an integral part of these financial statements.
MCG Health, Inc. 14 Statements of net position (cont d) June 30 2015 2014 $ $ Liabilities and net position Current liabilities: Accounts payable 28,895,933 31,758,312 Accrued salaries and w ages 10,927,207 7,731,702 Accrued compensated absences 14,847,312 14,409,537 Accrued expenses and other current liabilities 6,248,451 5,850,767 Due to related party - Margin allocation 1,153,926 4,726,769 Due to related parties 9,576,938 7,147,891 Due to third-party payors 4,601,265 4,293,625 Current portion of accrued professional liability costs 2,000,708 2,140,215 Current portion of obligations under capital lease 6,247,895 4,213,437 Current portion of long-term debt 6,941,667 6,447,500 Total current liabilities 91,441,302 88,719,755 Noncurrent liabilities: Long-term debt 162,060,833 168,542,500 Obligations under capital lease, net of current 34,755,439 22,256,304 Accrued professional liability costs 6,002,123 6,420,643 Interest rate sw ap liability 22,158,481 20,124,078 Net position Total liabilities 316,418,178 306,063,280 Invested in capital assets, net of related debt 56,516,617 41,410,936 Unrestricted 226,579,941 242,410,082 Total net position 283,096,558 283,821,018 The accompanying notes are an integral part of these financial statements.
MCG Health, Inc. 15 Statements of revenues, expenses and changes in net position For the years ended June 30 2015 2014 $ $ Operating revenues: Net patient service revenue (net of provision for doubtful accounts of approximately $46,403,000 in 2015 and $40,217,000 in 2014) 543,364,675 509,921,136 Revenue from contractual services 28,569,119 28,297,463 Other operating revenue 23,418,511 18,410,839 Total operating revenues 595,352,305 556,629,438 Operating expenses: Salaries and w ages 215,148,418 203,907,335 Employee benefits and payroll taxes 47,664,964 44,703,414 Purchased services 69,779,189 68,453,165 Medical and surgical supplies 130,966,337 117,203,395 Insurance 4,309,378 6,607,818 Non medical supplies and other expenses 43,750,285 41,609,414 Depreciation and amortization 30,022,731 30,612,716 IT and telecommunications 28,402,822 18,421,377 Repairs and maintenance 9,936,008 10,661,540 Total operating expenses 579,980,132 542,180,174 Operating income 15,372,173 14,449,264 Nonoperating revenue: Interest expense (7,716,853) (6,145,316) Investment income, net 2,230,466 8,844,931 Unrealized loss on interest rate sw ap (2,034,403) (368,994) Net loss on disposition of capital assets (1,187,400) (106,190) Supplemental contribution to the Georgia Regents University Early Retirement Program (6,014,836) (6,050,202) Increase in net position before combined margin allocation, additions to permanent endowments, restricted contributions and restricted investment income 649,147 10,623,493 Nonoperating expense - Combined margin allocation (1,153,926) (4,726,769) (Decrease) increase in net position before restricted contributions and restricted investment income (504,779) 5,896,724 Change in restricted contributions (219,681) 644,471 (Decrease) increase in net position (724,460) 6,541,195 Net position, beginning of year 283,821,018 277,279,823 Net position, end of year 283,096,558 283,821,018 The accompanying notes are an integral part of these financial statements.
MCG Health, Inc. 16 Statements of cash flows For the years ended June 30 2015 2014 $ $ Cash flows from operating activities: Cash received from and on behalf of patients 539,969,101 509,893,381 Other receipts from operations 53,450,869 44,884,200 Cash paid to employees (261,187,300) (258,690,323) Cash paid to suppliers (293,940,039) (247,822,844) Net cash provided by operating activities 38,292,631 48,264,414 Cash flows from noncapital financing activities: Interest paid on line of credit and margin allocation (45,024) (76,475) Payment to related party Margin allocation (4,726,769) (7,959,403) Supplemental contribution to the Georgia Regents University Early Retirement Program (6,014,836) (6,050,202) Net cash used in noncapital financing activities (10,786,629) (14,086,080) Cash flow s from capital and related financing activities: Principal paid on revenue bonds (3,560,000) (3,450,000) Principal paid on term loan (2,887,500) - Purchases of capital assets (39,741,181) (45,868,578) Proceeds from disposition of capital assets 8,092 - Payment of prinicpal on obligations under capital leases (5,472,786) - Interest payments (8,135,026) (6,761,189) (Payment) receipt of collateral on interest rate sw ap mark to market (1,000,000) 3,760,000 Capital (disbursements) contributions (219,681) 644,471 Net cash used in capital and related financing activities (61,008,082) (51,675,296) Cash flow s from investing activities: Interest and dividends on investments 13,731,411 11,468,060 Payment on notes receivable 1,639,723 2,965,239 Purchases of investments (157,232,924) (96,425,412) Proceeds from sales of investments 169,802,967 101,171,359 Net cash provided by investing activities 27,941,177 19,179,246 Net (decrease) increase in cash and cash equivalents (5,560,903) 1,682,284 Cash and cash equivalents, beginning of year 41,325,443 39,643,159 Cash and cash equivalents, end of year 35,764,540 41,325,443 The accompanying notes are an integral part of these financial statements.
MCG Health, Inc. 17 Statements of cash flows (cont d) For the years ended June 30 2015 2014 Reconciliation of operating income to net cash provided by operating activities: $ $ Operating income 15,372,173 14,449,264 Adjustments: Depreciation and amortization 30,022,731 30,612,716 Provision for doubtful accounts 46,402,897 40,217,232 Changes in: Patient accounts receivable (47,106,142) (52,243,139) Due to/from third-party payor (2,064,678) 11,314,550 Other receivables 835,588 (1,140,500) Inventory (1,976,715) (651,805) Other current assets (2,697,566) (4,082,360) Accounts payable (6,397,641) 16,191,606 Due to related parties 2,429,047 (7,053,245) Accrued expenses 4,030,964 (873,077) Accrued professional liability (558,027) 1,523,172 Net cash provided by operating activities 38,292,631 48,264,414 Reconciliation of cash and cash equivalents to the statements of net position: Cash and cash equivalents 35,350,826 39,724,360 Cash equivalents internally designated for self-insurance liability funding 413,714 1,601,083 Total cash and cash equivalents 35,764,540 41,325,443 Supplemental schedule of noncash investing and financing activities: Capital additions included in accounts payable 3,535,262 7,661,104 Capital additions under capital lease obligation 20,006,379 34,307,593 Sale lease-back of capital assets - 20,920,176 Noncash payments on capital lease obligation - (7,837,852) (Decrease) increase in fair value of investments (800,282) 5,956,585 In July 2014, GRMC refunded existing bonds and issued new bonds. The follow ing amounts w ere noncash funding activities related to this transaction: Series 2014 Bonds 121,890,000 - Debt issuance costs (460,000) - Refunded Series 2008A Bonds (76,440,000) - Refunded Series 2008B Bonds (44,990,000) - - - The accompanying notes are an integral part of these financial statements.
MCG Health, Inc. 18 Notes to financial statements 1 Description of Reporting Entity and Summary of Significant Accounting Policies Reporting Entity MCG Health, Inc. d/b/a Georgia Regents Medical Center (GRMC or the Company) is a nonprofit corporation organized to further the health sciences, patient care, research and education missions of Georgia Regents University (the University) primarily through management of the medical center. The Company, which is controlled by MCG Health System, Inc. d/b/a Georgia Regents Health System (the System), a component unit of the State of Georgia, consists of a licensed 632-bed acute care hospital and related outpatient care facilities principally located in Augusta, Georgia. The Company provides services primarily to residents of east central Georgia and west central South Carolina, an area known as the Central Savannah River Area (CSRA). On July 1, 2000, the Company began operating under an affiliation agreement with the Board of Regents of the University System of Georgia (Regents) to operate the Hospital (the Affiliation Agreement). Under the terms of the affiliation and related agreements, Regents transferred to the Company specified assets and liabilities, including patient receivables, inventories, capital assets and routine accounts payable. All patient care facilities remain the property of Regents. Pursuant to the transfer and related agreements, the Company also leases patient care facilities, office space and certain employees from Regents. On July 1, 2010, the Company entered into the Joint Operating Agreement with Medical College of Georgia Physician Practice Group Foundation d/b/a Georgia Regents Medical Associates (GRMA) and the newly formed MCG Health System, Inc. d/b/a Georgia Regents Health System (the System), a separately organized non-profit corporation formed for the purpose of achieving joint coordination and planning among the Company, GRMA, and the University. Under the Joint Operating Agreement, the System approves the strategic plans and budgets of the Company and GRMA, provides shared services to the Company and GRMA, and has the ability to amend or cause to be amended the Affiliation Agreement and the other related party agreements between the Company and Regents and provides to the System many of the rights previously held by Regents. Effective July 1, 2010, the System became a component unit of the State of Georgia. As the System appoints a majority of the Company s board, the Company became a component unit of the System, which is a component unit of the State of Georgia, as defined by provisions of Governmental Accounting Standards Board (GASB) Statement No 14, The Financial Reporting Entity, due to the State of Georgia s ability to significantly influence the programs and activities of the Company through the System. Basis of Accounting For financial reporting purposes, the Company is considered a special-purpose government entity engaged only in business-type activities. Accordingly, the financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. For purposes of display, transactions deemed by management to be ongoing, major, or central to the provision of healthcare services are reported as operating revenues and operating expenses. All other activities are reported as nonoperating activities. The Company s financial statements are prepared on the accrual basis of accounting using the economic resources measurement focus and are based on accounting principles applicable to governmental units as established by the Governmental Accounting Standards Board (GASB) and the provisions of the American Institute of Certified Public Accountants Audit and Accounting Guide, Health Care Entities, to the extent that they do not conflict with GASB.
MCG Health, Inc. 19 Scope of Statements The accompanying financial statements include the financial position and activities of GRMC-GRMA, SPC-General Company, and GRMC-GRMA, SPC-GRMC, SP (formerly MCG Health, Inc. Insurance Company), an offshore captive insurer, which commenced operations during 2005 and is a blended component unit, as defined in GASB Statement No. 14, due to the fact that the component units governing bodies are substantively the same as the governing body of the Company and the services provided by the component units are exclusively for the benefit of the Company. All intercompany transactions and balances have been eliminated in the accompanying financial statements. The Company holds non-controlling interests in the following companies as of June 30: 2015 2014 REACH Call, Inc. 3.37% 3.62% MCGHI/PPG Reproductive Lab, LLC. 50.00% 50.00% Georgia Regional Academic Health Information Exchange 50.00% 50.00% The Company accounts for its interest in each of these companies using the equity method of accounting. The related investments are included within other assets in the Company s statements of net position. The related share of earnings or losses are included within non-medical supplies and other expenses in the Company s statements of revenues, expenses and changes in net position. 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 affecting the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates include the determination of the allowances for doubtful accounts and contractual adjustments, reserves for employee healthcare claims, accrued professional liability costs, interest rate swap and estimated third-party payor settlements. In particular, laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates related to these programs will change by a material amount in the near term. Revisions to prior year s estimates of third-party liabilities and estimate RAC program recoveries resulted in an increase in operating income of $2,100,000 and $6,452,000 for the years ended June 30, 2015 and 2014, respectively. Cash and Cash Equivalents and Investments Cash and cash equivalents include highly liquid investments (with an original maturity of three months or less) and money market accounts. Investments consist of money market funds, certificates of deposit with original maturities greater than three months, marketable securities, corporate bonds and treasury obligations. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the accompanying statements of net position. Investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in nonoperating revenue. The Company classifies all equity securities and debt securities maturing within one year of the statement of net position, not otherwise designated for long-term use, as current assets. Investments in securities with maturity dates beyond one year from the statement of net position date and other investments designated for long-term use are classified as noncurrent assets.
MCG Health, Inc. 20 Inventories Inventories, consisting primarily of pharmaceuticals and medical supplies, are stated at the lower of cost (first-in, first-out method) or market value. Capital Assets Capital assets are stated at cost on the date of acquisition. The Company s capitalization policy for assets includes all items with a unit cost of more than $5,000. Depreciation on capital assets is calculated using the straight-line method over the estimated useful lives of the assets, as determined utilizing Estimated Useful Lives of Depreciable Hospital Assets, Revised 2008 Edition published by the American Hospital Association. Ranges of estimated useful life for various capital asset categories are as follows: Asset Class Building improvements Buildings Computer hardw are Medical equipment Furniture and fixtures Leasehold improvements Softw are Vehicles Estimated Useful Lives 20 to 25 years 25 years 3 to 5 years 5 to 10 years 15 to 20 years 5 to 25 years 3 to 5 years 4 to 10 years Repairs and maintenance costs are charged to expense as incurred. Long-lived Asset Impairment Long-lived assets are reviewed for impairment if circumstances suggest that there is a significant, unexpected decline in service utility of a long-lived asset. The service utility of a long-lived asset is the usable capacity that at acquisition was expected to be used to provide service. An assessment of recoverability is performed prior to any write-down of assets and an impairment charge is recorded on those assets for which the estimated fair value is below its carrying amount. No material impairment charges to long-lived assets were recorded for the fiscal years ended June 30, 2015 and 2014. Costs of Borrowing Interest incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Net Position Net position is classified as unrestricted, invested in capital assets, net of related debt, and restricted, as follows: Unrestricted Net Position These net position balances represent resources that can be used at the Company s discretion in carrying out its objectives. Invested in Capital Assets, Net of Related Debt These net positions represent capital assets, net of accumulated depreciation, and are reduced by the current balances of any outstanding borrowings used to finance the acquisition of those assets. When the Company has both restricted and unrestricted resources available to finance a particular program, it is the Company s policy to use restricted resources before unrestricted resources.