Basic Consolidated Financial Statements (With Independent Auditors Report Thereon)
Table of Contents Page(s) Management s Discussion and Analysis 1 10 Independent Auditors Report 11 Basic Consolidated Financial Statements: Consolidated Balance Sheets 12 13 Consolidated Statements of Revenue, Expenses, and Changes in Net Assets 14 Consolidated Statements of Cash Flows 15 16 Notes to Consolidated Financial Statements 17 41
Management s Discussion and Analysis This discussion and analysis of Public Hospital District No. 2 of King County, Washington, dba Evergreen Healthcare (the District) provides an overview of the District s financial activities for the years ended. Please read it in conjunction with the District s consolidated financial statements, which follow this analysis. The District is a municipal corporation of the State of Washington formed under the provisions of Chapter 70.44 of the Revised Code of Washington. The District is considered a political subdivision of the State of Washington and is allowed by law to be its own Treasurer. The District includes the incorporated cities of Kirkland, Redmond, Woodinville, Kenmore, and Duvall, portions of Bothell, Bellevue, Clyde Hill, Sammamish, Lake Forest Park, and the town of Yarrow Point, as well as adjacent unincorporated areas. The District s primary operations include Evergreen Hospital Medical Center (the Medical Center), an acute care hospital with 290 licensed beds detailed as follows (the District also has 17 designated Skilled Nursing Beds, which currently are not in use): Number of License Type of beds beds category Critical Care 20 Acute Family Maternity 36 Acute/Newborn Medical/Surgical 219 Acute Hospice 15 Acute Total beds 290 The Medical Center is accredited by the Joint Commission. The Medical Center provides comprehensive tertiary medical-surgical services, maternity and neonatal services, emergency services, radiation oncology, diagnostic imaging, laboratory, and related ancillary services. The District also operates primary care group practices, a freestanding inpatient hospice unit, the Booth Gardner Parkinson s Care Center, the Multiple Sclerosis Center, and Evergreen Home Care Services, a comprehensive home health agency that serves patients throughout King and south Snohomish counties. The employed primary care group practices are comprised of 46 primary care providers and include a senior care clinic specializing in geriatric primary care services. The District also operates several hospital based physician clinics including cardiology, pulmonary, stroke, congestive heart failure, and physiatry. Since 1972, the District s patient and family centered care philosophy, combined with its commitment to advancing medical solutions, has enabled the District to focus on providing excellent patient care. The District is governed by a board of five publicly elected commissioners, each elected by district residents to serve a six-year term in accordance with the laws of the State of Washington. The commissioners have delegated day-to-day operations of the District and the Medical Center to the Chief Executive Officer/Superintendent. 1 (Continued)
Management s Discussion and Analysis Utilization Statistics Historical patient utilization data of the District s facilities is shown in the following table: Utilization statistics (excluding newborns) 2011 2010 2009 Licensed beds (1) 290 290 290 Acute care admissions 16,299 15,255 15,430 Acute care average length of stay 3.34 3.34 3.34 Acute care patient days 53,536 50,910 51,598 Occupancy 63.5% 60.4% 62.3% Acute care adjusted admissions 31,572 30,314 30,704 Outpatient surgeries 2,599 2,704 2,662 Home health episodes and admissions 7,025 6,357 5,858 Hospice program days 111,916 109,078 105,320 Emergency room visits 55,698 53,909 55,240 (1) Licensed beds at December 31 Sources of Patient Revenue The District derives a substantial portion of its operating revenue from federal and state programs and insurance plans that pay for all or a portion of the healthcare services provided to its patients. As a consequence, the District s operating revenue depends to a great extent on the availability and level of reimbursement or payment under those programs and plans. The following table sets forth the percentages of the District s gross patient revenue applicable to various programs and plans for the fiscal years ended December 31, 2011, 2010, and 2009. 2011 2010 2009 Medicare 36.2% 33.8% 32.3% Medicaid 8.4 8.8 8.4 Premera 18.5 18.1 18.3 Regence 11.0 12.2 13.2 First Choice 5.1 5.4 5.5 Other third-party payors 17.1 17.7 18.8 Patient self-pay 3.7 4.0 3.5 Challenges Facing the District Challenges that face the District are similar to those that face the healthcare industry across the country. Among those issues are: Financial Health: The District continues to implement service enhancement and growth plans, discussed below, which result in significant capital outlays. The investment in new and expanded facilities may put 2 (Continued)
Management s Discussion and Analysis financial constraints on the organization; however, management believes the District is positioned to better serve the needs of the community. Competition: The Puget Sound has experienced increased market consolidation and collaboration between healthcare providers over the past year. In addition, eastside and Seattle providers have opened healthcare facilities both within and around the District boundaries with the intention of drawing patients from our service area. Partnerships: In 2011, the District entered into a strategic partnership with Seattle Cancer Care Alliance to expand cancer care services provided on the Eastside. In addition, the District signed an agreement to create a partnership with Virginia Mason Medical Center. This strategic partnership will create a virtual health care system that broadens the geographic network of both health care systems via clinical collaborations focused on exceptional clinical outcomes and value. The initial collaborations are focused on cardiology, neurosciences and home care services. Operating Costs: Overall patient volumes were slightly higher than 2010. The District has continued working to manage its operating costs in line with volumes. Labor is the most significant operating cost for the District. During 2011, the District implemented various cost saving initiatives including mandatory furlough days for staff working in overhead departments in order to reduce labor costs. Labor Availability: Throughout 2011, the District was able to maintain reduced reliance on higher cost agency personnel as more registered nurses became available in the labor market. Labor shortages continued for various technical positions. Approximately 52% of the District s 3,300 employees are members of one of four labor unions. In 2011, the District renegotiated its labor contract with Service Employees International Union (SEIU) employees, which represents approximately 650 employees. Payor Reimbursement: Reimbursement for patient services from federal, state, and private insurance payors continues to be a concern as healthcare costs continue to rise. The District monitors reimbursement closely and works with payors to keep payment levels in line with operating cost increases. In 2011 and 2010 the District received repayment requests under the Medicare Recovery Audit Contractor (RAC) program and returned $664 thousand and $113 thousand in net asserted overpayments, respectively. Regulatory Environment: Continued focus by regulatory agencies on the healthcare industry s pricing and charity care practices may impact the District. Other substantial changes are anticipated in the U.S. healthcare system including numerous provisions affecting the delivery of healthcare services, the financing of healthcare costs, the recently passed Affordable Care Act and uncertainty surrounding the act, reimbursement of healthcare providers and the legal obligations of health insurers, providers and employers. Management will consider evaluating how it will respond to various healthcare reform components as they develop. The District recognizes that providing the community with high-quality healthcare goes beyond offering outstanding programs and services. As the community continues to grow and age, the District must keep pace with the need for more types of services. The population within the District s boundaries is now 283,991. Population is projected to be 298,053 in 2016. The District s Master Site Plan filed with the City of Kirkland in 2003 includes facility and service expansions based on projected needs. 3 (Continued)
Management s Discussion and Analysis In 2011, the District initiated or completed the following related projects: Completion of the relocation and expansion of the Woodinville primary care and urgent care center Completion of the relocation and expansion of the Redmond primary care and urgent care center Opened freestanding emergency services in Redmond Full integration of the cardiology physician practice acquired in December 2010 Expansion of cancer services Implementation of computerized physician order entry The replacement of medical, surgical, and imaging equipment and upkeep of current facilities Overview of the Consolidated Financial Statements The District s consolidated financial statements consist of three components: Balance Sheets; Statements of Revenues, Expenses, and Changes in Net Assets; and Statements of Cash Flows. The activities of Evergreen Healthcare Foundation are consolidated with the District s financial statements. These consolidated financial statements and related notes provide information about the activities of the District, including resources held by the District designated for specific purposes. The balance sheets include all the District s assets and liabilities, using the accrual basis of accounting, as well as an indication about which assets can be utilized for general purposes and which are restricted for a specific purpose. The Statements of Revenues, Expenses, and Changes in Net Assets report all of the revenues, expenses, and changes in net assets during the time periods indicated. The Statements of Cash Flows report the cash provided by the District s operating activities, as well as other cash sources such as investment income and issuance of new debt and use of cash such as cash payments for capital asset additions and improvements and repayment of debt. 4 (Continued)
Management s Discussion and Analysis Contacting the District s Financial Management This financial report provides the reader with a general overview of the District s finances and operations. If you have questions about this report or need additional financial information, please contact the Chief Financial Officer or Director of Finance at Evergreen Healthcare, 12040 NE 128th Street, Kirkland, Washington 98034-3013. Summary of Assets, Liabilities, and Net Assets 2011 2010 2009 Cash and cash equivalents $ 5,136,785 1,039,463 9,100,321 Patient accounts receivable, less allowance for uncollectible accounts 48,117,348 44,384,439 40,043,071 Other current assets 17,997,006 19,199,128 18,591,379 Total current assets 71,251,139 64,623,030 67,734,771 Restricted as to use and board-designated cash and investments 100,142,936 104,835,915 97,334,654 Capital assets, net 325,932,102 316,780,394 317,944,185 Other assets 11,857,669 11,903,914 11,579,138 Total assets $ 509,183,846 498,143,253 494,592,748 Summary of Assets, Liabilities, and Net Assets 2011 2010 2009 Current portion of long-term debt and capital lease obligations $ 12,385,578 11,393,359 10,734,948 Other current liabilities 49,163,888 45,762,845 48,522,329 Total current liabilities 61,549,466 57,156,204 59,257,277 Long-term liabilities 238,849,749 239,740,805 250,960,508 Total liabilities 300,399,215 296,897,009 310,217,785 Net assets: Invested in capital assets 86,632,827 77,651,867 69,672,458 Restricted 11,110,811 6,990,621 6,634,571 Unrestricted 111,040,993 116,603,756 108,067,934 Total net assets 208,784,631 201,246,244 184,374,963 Total liabilities and net assets $ 509,183,846 498,143,253 494,592,748 5 (Continued)
Management s Discussion and Analysis In 2011, current assets include the current portion of assets restricted as to use and board-designated assets (6.4% of total current assets), accounts receivable (68%) and cash and other current assets. In 2011, current assets overall increased by $6.6 million primarily due to an increase of $4.1 million in cash and cash equivalents plus an increase of $3.7 million in net patient accounts receivables related to price and volume increases, which was offset by a $1.2 million decrease in other current assets. The District continues to devote resources for essential capital projects and improvements. During 2011, the District invested approximately $27.3 million in buildings, information technology, and equipment. The increase in capital assets described above was offset by $30 million of depreciation expense. Restricted as to use and board-designated cash and investments decreased in 2011 primarily due to a $4.7 million decrease in funded depreciation due to lower than expected operating results. Current liabilities increased $4.4 million in 2011. Current liabilities include accounts payable (31.4% of total current liabilities), accrued compensation (39.9%), current portion of long-term debt and capital lease obligations (20.1%), current portion of professional liability, accrued interest, and estimated settlements related to third-party and professional liabilities. In 2011, long-term liabilities of $238.9 million include long-term debt and capital lease obligations of $226.9 million as well as a reserve for professional liability of $2.9 million. The District issued approximately $28.5 million in limited tax general obligation (LTGO) bonds to refund the 2001 LTGO debt of $29.1 million. This refinancing of the 2001 bonds was done to minimize interest costs for the District. The District projects it will save approximately $2.3 million due to lower interest rates over the life of the 2011 debt. In 2010, current assets overall decreased by $3.1 million primarily due to the reduction of $8.1 million in cash and cash equivalents, offset by a $4.3 million increase in net patient accounts receivables related to price increases. In 2010, restricted as to use and board designated cash and investments increased primarily due to a $7 million increase in funded depreciation resulting from the improvement in operating results. During 2010, the District invested approximately $26.5 million in buildings and equipment. The increase in capital assets described above was offset by $27.6 million of depreciation expense. In 2010, current liabilities included accounts payable (31% of total current liabilities), accrued compensation (45%), current portion of long-term debt and capital lease obligations (20%), current portion of professional liability, accrued interest, and estimated settlements related to third-party and professional liabilities. In 2010, long-term liabilities included long-term debt and capital lease obligations of $227.7 million as well as a reserve for professional liability of $3.1 million. The District issued approximately $35.9 million in limited tax general obligation (LTGO) bonds to refund the 1998 LTGO debt of $37.4 million. This refinancing of the 1998 bonds was done to minimize interest costs for the District. The District projects it will save approximately $2 million due to lower interest rates over the life of the 2010 debt. 6 (Continued)
Management s Discussion and Analysis Net Assets Invested in Capital Assets This classification includes the District property, plant, and equipment net of accumulated depreciation and outstanding debt obligations related to those capital assets. Donor-Restricted Expendable and Nonexpendable Net Assets Restricted expendable net assets represent resources that the District is legally or contractually obligated to spend in accordance with restrictions placed by donors and/or external parties that have placed time or purpose restrictions on the use of the asset. Restricted nonexpendable net assets represent resources that the District may not spend as the donor and/or external parties have placed a restriction on preservation of the assets. Unrestricted Net Assets This category includes other funds available to the District that do not meet the definition of restricted or invested in capital net of related debt. 7 (Continued)
Management s Discussion and Analysis Summary of Revenues, Expenses, and Changes in Net Assets 2011 2010 2009 Operating revenues: Net patient service revenue $ 383,059,193 354,940,009 347,910,297 Other operating revenue 32,138,843 34,231,826 34,916,758 Total operating revenues 415,198,036 389,171,835 382,827,055 Operating expenses: Salaries, wages, and employee benefits 257,111,886 241,535,449 234,931,511 Supplies and purchased services 139,675,288 119,267,985 124,417,616 Depreciation and amortization 30,022,968 27,762,020 29,433,772 Total operating expenses 426,810,142 388,565,454 388,782,899 Excess (deficit) of revenues over expenses from operations (11,612,106) 606,381 (5,955,844) Nonoperating income, net of expenses: Property taxes 24,429,906 24,103,621 23,835,074 Interest and amortization expense (11,192,391) (11,299,632) (11,779,389) Investment income 2,200,708 2,302,517 2,003,955 Other, net (557,483) 70,104 330,362 Net nonoperating income 14,880,740 15,176,610 14,390,002 Excess of revenues over expenses 3,268,634 15,782,991 8,434,158 Other changes in net assets 4,269,753 1,088,290 1,689,338 Total change in net assets 7,538,387 16,871,281 10,123,496 Net assets, beginning of year 201,246,244 184,374,963 174,251,467 Net assets, end of year $ 208,784,631 201,246,244 184,374,963 Financial Highlights Revenue In 2011, gross patient revenue increased by approximately $134.5 million or 16.7%. Gross patient revenue is the total fees charged to patients for services. The increase was due to a targeted rate increase of 8.3% overall implemented on January 1, 2011 and increased volumes. Individual rate adjustments ranged from 0% to more than 20% increases. The overall gross revenue increase due to volumes was 5.4%. Admissions were 6.8% above 2010 and patient days were 5.2% above 2010. Average length of stay remained at 3.34 days. Surgery cases decreased by 2.7% in 2011 over 2010. Hospice volume increased by an overall 2.7% and Home Health volume increased 10.5%. Other volumes were similar to 2010 levels except for growth in ultrasound. 8 (Continued)
Management s Discussion and Analysis In 2011, net patient service revenue increased by approximately $28.1 million or 7.9%. Net patient revenue consists of gross patient revenue less contractual adjustments, bad debt and charity. This increase was due to price increases, increases in reimbursement, and lower than expected bad debts in 2011. Contractual adjustments increased $101.9 million or 24.9% and the provision for bad debts increased approximately by $1.3 million or 5.5%. Charity care and administrative adjustments increased approximately $3.1 million or 18.9%. Other operating revenue from joint ventures decreased by approximately $745 thousand primarily related to reduced income in both the Radia and Evergreen Surgical Center joint ventures. In 2010, gross patient revenue increased by approximately $43 million or 5.7%. The increase was primarily due to a targeted rate increase of 8.0% overall implemented on January 1, 2010. Individual rate adjustments ranged from 0% to more than 20% increases. The price changes resulted in an overall gross revenue increase of 3.9%. Patient volumes were consistent with or slightly lower than 2009. Admissions were 1.2% below 2009 and patient days were 1.3% below 2009. Length of stay remained at 3.34 days. Surgery cases increased by 2.8% in 2010 over 2009. Hospice volume increased by an overall 2.4% and Home Health volume increased 8.5%. Evergreen Medical Group clinic visits were 5.5% below 2009. Other volumes were similar to 2009 levels except for growth in ultrasound and rehabilitation therapy and outreach laboratory. The overall gross revenue increase due to volumes was 1.8%. In 2010, net patient service revenue increased by approximately $7 million or 2.0%. Net patient revenue consists of gross patient revenue less contractual adjustments, bad debt and charity. This increase was due to price and volume increases, increases in reimbursement, and lower than expected bad debts in 2011. Contractual adjustments increased $33 million or 8.9% and the provision for bad debts increased approximately by $324 thousand or 1.4%. Charity care increased approximately $1.4 million or 14.4% reflecting the 2009 policy changes that expanded charity eligibility at various levels of income and administrative adjustments increased $1.2 million or 30.3%. Other operating revenue from joint ventures decreased by approximately $685 thousand primarily related to reduced income in both the Radia and Evergreen Surgical Center joint ventures. Operating Expenses In 2011, salaries and wages increased approximately $14.2 million or 7.4% due to employee salary increases and an increase in the District s average employed full-time equivalents (FTEs). The FTEs increased by 61 in 2011 at 2,592 compared to 2,531 FTEs in 2010. The employee benefit expenses increased in 2011 by approximately $1.4 million over 2010. This was primarily due to an increase of $1 million in payroll taxes and pension costs, which were directly related to the increases in salaries and wages. Supplies increased approximately $9 million or 18.2% primarily due to increased costs for surgical supplies, medical gases, and computer hardware as well as supplies needed to support increased volumes. Other supply costs were similar to 2010. Professional fees increased by approximately $450 thousand in 2011 due to a decrease in physician expense of $768 thousand offset by an increase of $1 million in consulting costs. 9 (Continued)
Management s Discussion and Analysis Other purchased services increased in 2011 by approximately $5.4 million primarily due to a $1.5 million increase in the use of contracted personnel and $1.4 million increase related to the opening of the new emergency department in Redmond. The costs associated with the new emergency department related to ambulance, radiology and janitorial services. In additions, costs for marketing and printing services were increased by $740 thousand and other purchased medical services were increased by $330 thousand. Repairs and maintenance expenses increased $825 thousand due to increases in maintenance contract costs. In 2011, the other operating expenses increased by $4.7 million compared to 2010. This increase consisted of $1.4 million additional lease expense for the new Redmond emergency department and relocation of Redmond urgent care and primary care clinics as well as the relocation of the Woodinville urgent care and primary care clinics. In addition, malpractice expense increased by $2.9 million due primarily to the elimination of the margin for risk of adverse deviation that resulted in a reduction of expense of $1.3 million in 2010. The remaining $1.2 million increase of other operating expenses was primarily due to revenue taxes paid to the state on the higher net patient revenue in 2011. Revenue taxes of 1.5% are paid to the state on net nongovernmental patient revenue. In 2010, salaries and wages increased approximately $4.4 million due to employee salary increases. The full-time equivalents (FTEs) were 2,531 compared to 2,553 in 2009. In 2010, the increase in employee benefit expenses of approximately $2.2 million over 2009 was primarily due to an increase in self-insured employee medical benefits. The District also continued to see an increase in related payroll taxes and pension costs that were directly related to the increases in salaries and wages. In 2010, supplies increased by $600 thousand primarily due to increased costs for surgical supplies, medical gases and computer hardware. Professional fees increased $720 thousand primarily due to increased physician recruiting expense. Other purchased services were reduced in 2010 by approximately $2.4 million primarily due to a reduction in the use of contracted personnel. Nonoperating Income, Net of Expense Nonoperating income, net of expense totaled $14.8 million in 2011, which was a decrease of $296 thousand over 2010. Taxation income increased $326 thousand and investment income decreased $102 thousand primarily due to lower interest rates and decreased investment funds. Interest and amortization expense decreased by $107 thousand primarily due to the addition of a capital lease. Other expenses increased by $627 thousand primarily due to the cost of issuance for the 2011 bonds. In 2010, nonoperating income net of expense totaled $15.2 million, an increase of $3.7 million over 2009. The District recognized $24.1 million of income from taxation which, was offset by interest and amortization expense of $11.3 million. Investment income was increased by $299 primarily due to increase in investment funds. 10
KPMG LLP Suite 900 801 Second Avenue Seattle, WA 98104 Independent Auditors Report The Board of Commissioners Public Hospital District No. 2, King County, Washington dba Evergreen Healthcare: We have audited the accompanying consolidated balance sheets of Public Hospital District No. 2, King County, Washington, dba Evergreen Healthcare, as of, and the related consolidated statements of revenues, expenses, and changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the District s management. Our responsibility is to express consolidated opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Hospital District No. 2, King County, Washington, dba Evergreen Healthcare, as of, and the results of its revenues, expenses, and changes in net assets and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 1 through 10 be presented to supplement the basic consolidated financial statements. Such information, although not a part of the basic consolidated financial statements, is required by U.S. generally accepted accounting principles as it is an essential part of financial reporting for placing the basic consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which 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 consolidated financial statements, and other knowledge we obtained during our audit of the basic consolidated 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. April 18, 2012 11 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity
Consolidated Balance Sheets Assets 2011 2010 Current assets: Cash and cash equivalents $ 5,136,785 1,039,463 Current portion board-designated assets 2,891,696 2,399,169 Current portion of assets restricted as to use 1,610,977 1,656,863 Patient accounts receivable, less allowance for uncollectible accounts of $20,043,113 in 2011 and $20,526,220 in 2010 48,117,348 44,384,439 Inventory 4,364,831 4,263,430 Prepaid expenses and other current assets 9,129,502 9,799,664 Third-party payor receivable and other settlements, net 1,080,002 Total current assets 71,251,139 64,623,030 Assets limited as to use, less current portion of amounts required for current liabilities: Board-designated cash and investments 90,643,101 99,502,157 Restricted as to use cash and investments 9,499,835 5,333,758 100,142,936 104,835,915 Capital assets: Land 5,343,638 5,343,638 Construction in process 4,372,686 18,747,187 Depreciable capital assets, net of accumulated depreciation 316,215,778 292,689,569 325,932,102 316,780,394 Other assets, net 11,857,669 11,903,914 Total assets $ 509,183,846 498,143,253 12 (Continued)
Consolidated Balance Sheets Liabilities and Net Assets 2011 2010 Current liabilities: Accounts payable and accrued expenses $ 19,335,429 17,801,905 Accrued compensation and related liabilities 24,562,479 25,489,828 Accrued interest payable 873,271 932,305 Current portion of long-term debt and capital lease obligations 12,385,578 11,393,359 Third-party payor payable and other settlements, net 3,000,405 Estimated current portion of professional liability 1,392,304 1,538,807 Total current liabilities 61,549,466 57,156,204 Long-term estimated professional liability 2,930,620 3,119,819 Other noncurrent liabilities 9,005,433 8,885,818 Long-term debt and capital lease obligations, net of current portion 226,913,696 227,735,168 Total liabilities 300,399,215 296,897,009 Net assets: Invested in capital assets, net of related debt 86,632,827 77,651,867 Restricted: Expendable for specific activities 8,720,517 4,587,923 Expendable for debt service 1,303,867 1,321,371 Nonexpendable permanent endowments 1,086,427 1,081,327 Unrestricted 111,040,993 116,603,756 Total net assets 208,784,631 201,246,244 Total liabilities and net assets $ 509,183,846 498,143,253 See accompanying notes to consolidated financial statements. 13
Consolidated Statements of Revenue, Expenses, and Changes in Net Assets Years ended 2011 2010 Net patient service revenue (net of provision for bad debts of $24,741,087 in 2011 and $23,451,528 in 2010) $ 383,059,193 354,940,009 Other operating revenue 32,138,843 34,231,826 Total operating revenue 415,198,036 389,171,835 Expenses: Salaries and wages 205,869,305 191,715,922 Employee benefits 51,242,581 49,819,527 Supplies 58,830,498 49,763,169 Professional fees 9,799,399 9,349,197 Other purchased services 35,998,940 30,646,736 Repairs and maintenance 10,493,169 9,667,805 Other operating expenses 24,553,282 19,841,078 Depreciation and amortization 30,022,968 27,762,020 Total operating expenses 426,810,142 388,565,454 Excess (deficit) of revenues over expenses from operations (11,612,106) 606,381 Nonoperating income, net of expenses: Property taxes 24,429,906 24,103,621 Interest and amortization expense (11,192,391) (11,299,632) Investment income 2,200,708 2,302,517 Other, net (557,483) 70,104 Net nonoperating income 14,880,740 15,176,610 Excess of revenue over expenses 3,268,634 15,782,991 Capital grants and contributions 4,269,753 1,088,290 Total change in net assets 7,538,387 16,871,281 Net assets, beginning of year 201,246,244 184,374,963 Net assets, end of year $ 208,784,631 201,246,244 See accompanying notes to consolidated financial statements. 14
Consolidated Statements of Cash Flows Years ended 2011 2010 Cash flows from operating activities: Cash received from and on behalf of patients $ 408,355,317 376,204,106 Payments to suppliers and contractors (137,739,397) (117,291,187) Payments to employees (258,039,235) (245,645,190) Income distributions received from joint ventures 7,190,217 8,030,813 Net cash provided by operating activities 19,766,902 21,298,542 Cash flows from noncapital financing activities: Nonoperating expenditures (Arbitrage payments) (184,891) Noncapital contributions 4,204,370 1,548,663 Property taxes received for community programs 4,220,170 3,066,111 Net cash provided by noncapital financing activities 8,239,649 4,614,774 Cash flows from capital and related financing activities: Purchases of capital assets (26,543,203) (25,484,476) Net proceeds from sale of capital assets 53,523 (13,489) Principal payments on long-term debt and capital lease obligations (39,909,920) (48,616,972) Proceeds from issuance of long term debt 28,460,000 35,905,000 Proceeds from premium from issuance of long term debt 372,687 2,326,112 Payment of issuance cost (113,670) (149,574) Payment of deferred loss (142,300) (236,075) Payment for loss on extinguishment of debt (761,799) (553,521) Proceeds from property taxes related to debt service 20,209,736 21,037,510 Cash paid for interest on long-term debt, net of capitalized interest (11,981,330) (13,000,327) Net cash used in capital and related financing activities (30,356,276) (28,785,812) Cash flows from investing activities: Purchases of board-designated assets and assets restricted as to use (26,577,928) (42,951,849) Proceeds from sale of board-designated assets and assets restricted as to use 30,824,266 35,275,174 Investment income 2,200,709 2,488,313 Net cash provided by investing activities 6,447,047 (5,188,362) Net increase (decrease) in cash and cash equivalents 4,097,322 (8,060,858) Cash and cash equivalents, beginning of year 1,039,463 9,100,321 Cash and cash equivalents, end of year $ 5,136,785 1,039,463 15 (Continued)
Consolidated Statements of Cash Flows Years ended 2011 2010 Reconciliation of operating gain (loss) to net cash from operating activities: Excess (deficit) of revenues over expenses from operations $ (11,612,106) 606,381 Adjustments to reconcile excess (deficit) of revenues over expenses from operations to net cash provided by operating activities: Depreciation and amortization 30,022,968 27,762,020 Provision for bad debts 24,741,087 23,451,528 Undistributed income of joint ventures 307,132 211,986 Changes in operating assets and liabilities: Patient accounts receivable, less allowance for uncollectible accounts (28,473,996) (27,792,896) Inventory (101,401) (413,756) Prepaid expenses and other assets 896,241 1,025,139 Accounts payable and accrued expenses, net of amounts related to construction in progress 861,354 3,033,459 Accrued compensation and related liabilities (927,349) (4,109,741) Estimated third-party payor and other settlements, net 4,080,407 (595,548) Professional liability and other noncurrent liabilities (27,435) (1,880,030) Net cash provided by operating activities $ 19,766,902 21,298,542 Supplemental disclosures of noncash investing, capital, and financing activities: Change in capital asset additions included in accounts payable and accrued expenses $ (672,170) 1,168,539 Capital lease additions 2,241,331 See accompanying notes to consolidated financial statements. 16
(1) Organization and Summary of Significant Accounting Policies (a) Organization Public Hospital District No. 2, King County, Washington, dba Evergreen Healthcare (the District) is a municipal corporation established under Chapter 70.44 Revised Code of the State of Washington. The purpose of the District is to own and operate hospitals and other healthcare facilities and provide healthcare services to area residents. The District s primary operations include Evergreen Hospital Medical Center (the Medical Center), an acute care hospital; Evergreen Home Health Services, a home health agency; Evergreen Hospice Services, a program serving the terminally ill; and Evergreen Medical Group, a primary care group consisting of family practice physicians, physician assistants and certified nurse practitioners; and Evergreen Healthcare Foundation. The District acquired the net assets of Eastside Cardiology Associates, a private physician practice, in December 2010. As a result of the acquisition, 10 cardiac physicians and approximately 80 full-time equivalents became employees of the Medical Center. The cardiology group operates as a hospital based clinic. Evergreen Healthcare Foundation (the Foundation) is a separately incorporated nonprofit foundation. The purpose of the Foundation is to: (a) receive grants, bequests, donations, and contributions on behalf of; (b) provide fund-raising and other support to; and (c) make contributions to the District. Consequently, the financial position and the results of operations of the Foundation are consolidated in the accompanying financial statements. For the years ended 2011 and 2010, the Foundation raised approximately $5,500,000 and $2,200,000 in contributions and its assets comprise 2.2% and 1.3% of total assets, respectively. Significant balances among the operating divisions have been eliminated. (b) Basis of Presentation The consolidated financial statements have been prepared on the accrual basis of accounting. Under this method of accounting, revenue is recognized when earned and expenses are recorded when liabilities are incurred without regard to receipt or disbursement of cash. The District reports its financial information in a form, which complies with the pronouncements of the Governmental Accounting Standards Board (GASB) and the Audit and Accounting Guide for Healthcare Organizations of the American Institute of Certified Public Accounts. Pursuant to Governmental Accounting Standards Board Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the District has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB), including those issued after November 30, 1989, that do not conflict with or contradict GASB pronouncements. (c) Financial Reporting Entity As required by accounting principles generally accepted in the United States of America, these consolidated financial statements present the District, the primary government, and its component 17 (Continued)
unit, the Foundation. The Foundation meets the requirement for consolidating and has been included in the consolidated financial statements. (d) (e) (f) (g) 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid financial instruments with original maturities of three months or less, excluding assets restricted as to use and board designated assets. Deposits of up to $250,000 are covered by federal depository insurance and any deposits in excess of $250,000 are covered by collateral held in a multifinancial institution collateral pool administered by the Washington Public Deposit Protection Commission. Patients Accounts Receivable Receivables arising from revenue for services to patients are reduced by an allowance for estimated uncollectible accounts based on recent collection experience and other circumstances, which may affect the ability of patients to meet their obligations. There are various factors that can impact the collection trends and the estimation process, such as changes in the economy, the increased burden of copays and deductibles to be made by patients and business practices related to collection efforts. Accounts deemed uncollectible are charged against this allowance. Assets Limited as to Use Assets limited as to use include assets designated by the Board of Commissioners (the Board) for capital improvements and community service programs. The Board retains control of the assets and may, at its discretion, subsequently change the use for other purposes. Assets restricted as to use include certain assets of the Foundation that are restricted by donor stipulations. Assets restricted as to use also include unexpended proceeds and income generated from certain outstanding bond series restricted for the payment of principal, interest and expenditures for construction and equipment costs. The Supplemental Executive Retirement Plan (SERP) is also recorded in board designated assets. The SERP is a postretirement plan covering the executive management team. Amounts required to meet related current liabilities have been classified as current assets in the accompanying balance sheets. These assets are carried at fair value with changes in fair value reported as investment income. 18 (Continued)
(h) (i) Inventory Inventory consists of pharmaceutical, medical-surgical, and other supplies used in the operation of the District. Inventory is stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Capital Assets Capital assets are recorded at cost. Donated items are recorded at fair value at the date of the contribution. Depreciation expense is computed using the straight-line method based on the following estimated useful lives of the assets: Land improvements Buildings Equipment 10 20 years 25 40 years 3 20 years Maintenance and repairs are expensed as incurred. Expenditures that materially increase values, change capacities, or extend useful lives of plant and equipment are capitalized. Equipment under capital lease is amortized on the straight-line method over the shorter of the lease term or estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the accompanying statements of revenues, expenses, and changes in net assets. (j) (k) (l) Compensated Absences The District s employees earn vacation days at varying rates depending on years of service. Accrued vacation is reported as a current liability as employees utilize their vacation days within the following year. Bond Issuance Costs Bond issuance costs are amortized on an effective interest method over the life of the respective bond issues. Bond issuance costs associated with the issuance of the 2011 and 2010 Limited Tax General Obligation bonds were $114,000 and $150,000 as of. These costs are included in other assets on the balance sheet. Net Assets Net assets of the District are classified in five components. Net assets invested in capital assets net of related debt consist of capital assets net of accumulated depreciation, reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. Restricted expendable net assets are net assets that must be used for a particular purpose, as specified by grantors or contributors external to the District. Restricted nonexpendable net assets equal the principal portion of permanent endowments. Unrestricted net assets are remaining net assets that do not meet the definition of invested in capital assets net of related debt or restricted. The District will 19 (Continued)
first apply restricted resources when an expense is incurred for purposes for which both unrestricted and restricted net assets are available. (m) Operating Revenue and Expenses The District s statements of revenues, expenses, and changes in net assets distinguish between operating and nonoperating revenue and expenses. Operating revenue results from exchange transactions associated with providing healthcare services the District s principal activity. Nonexchange revenue, including property taxes received or grants and contributions received for purposes other than capital asset acquisition, are reported as nonoperating income. Operating expenses are all expenses incurred to provide healthcare services. Other operating revenue includes tenant lease receipts, income from joint ventures, outreach laboratory service revenue, retail revenue from the District s retail operations, educational offerings, grant funds to support specific programs, restricted donations, and other services. (n) (o) Net Patient Service Revenues The District has agreements with third-party payors that provide for payments to the District at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Charity care The District accepts all patients regardless of their ability to pay. A patient is classified as a charity patient by reference to an established policy of the District. The estimated cost of charity care are determined by calculating the ratio of operating costs to charges, and then applying this ratio to total charity care charges. The estimated costs of charity care provided by the District were $6,112,000 and $5,411,000 for 2011 and 2010, respectively. Because the District does not pursue collection of amounts determined to qualify as charity care, associated charges are not included in net patient service revenue. 20 (Continued)
(p) Nonoperating Income, Net of Expenses The District received property taxes of approximately $24,430,000 in 2011 and $24,104,000 in 2010. These property taxes represented regular levy proceeds and voter approved excess levies. These funds were used as follows: 2011 2010 Amount used for tax supported programs $ 4,220,170 3,066,111 Amount used for debt service on general obligation bonds 20,209,736 21,037,509 $ 24,429,906 24,103,620 Of the amount used for debt service on general obligation bonds, $11,049,000 and $11,405,000 as of, respectively, is related to interest payments. The property taxes received are reflected in nonoperating income. Interest expense related to long-term debt is included in nonoperating expenses. Investment income relates to interest income and unrealized gains and losses on board-designated assets and earnings on cash deposits. (q) Federal Income Taxes No provision has been made for federal income taxes, as the District is a municipal corporation exempt from federal tax, under Section 115 of the code. The Foundation is an organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code and is generally not subject to federal income taxes. However, the Foundation is subject to income taxes on any net income that is derived from a trade or business, regularly carried on, and not in furtherance of the purposes for which it was granted exemption. No income tax provision has been recorded as the net income, if any, from any unrelated trade or business, in the opinion of management, is not material to the basic consolidated financial statements taken as a whole. (r) Recently Adopted Accounting Standards In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The District will implement the provisions of ASU 2011-11 as of January 1, 2013. 21 (Continued)
In 2010, FASB issued ASU No. 2010 24, Health Care Entities Presentation of Insurance Claims and Related Insurance Recoveries, which clarifies that insurance recoveries should not be netted against a related claim liability. The claim liability amount should be calculated without consideration of insurance recoveries. This standard was effective for the 2011 fiscal year. The adoption of this standard did not have a material impact on the District s consolidated financial statements. In 2010, the FASB issued ASU No. 2010 23, Health Care Entities Measuring Charity Care for Disclosure, which requires a standardized process be used by healthcare entities that provide charity care to determine the measurement basis. This standard was effective for the 2011 fiscal year. The adoption of this standard did not have a material impact on the District s consolidated financial statements. (2) Net Patient Service Revenue The District has arrangements with third-party payors that provide for payments to the District at amounts different from its established rates. A summary of the payment arrangements with major third-party payors is as follows: (a) (b) Medicare Inpatient acute care services rendered to Medicare program beneficiaries are paid at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis related groups (DRGs). Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG. Inpatient nonacute services and defined capital and medical education costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology. The District is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the District and audits thereof by the Medicare fiscal intermediary. The District s cost reports have been reviewed and/or audited by the Medicare fiscal intermediary through 2006. The District received interim cost report settlements resulting in an adjustment to increase net patient service revenue by $0 and $2,206,000 in 2011 and 2010, respectively. Most outpatient services to Medicare beneficiaries are paid prospectively based on ambulatory payment classifications (APCs). Medicaid Prior to July 1, 2005, inpatient acute care services rendered to Medicaid program beneficiaries were paid on a prospective payment system. In the spring of 2005, the Washington State Legislature and Centers for Medicare and Medicaid Services approved a Medicaid Certified Public Expenditures (CPE) program for inpatient reimbursement. The CPE program uses public expenditures by certain public hospitals to earn federal matching funds. Certified public expenditures are qualifying expenditures made by the hospital to serve Medicaid eligible or uninsured patients. The program was designed to preserve a significant amount of federal match funding for the State of Washington (the State) and maintain the 22 (Continued)