Daniels Memorial Health Care Center

Daniels Memorial Health Care Center Presentation to the Board of Directors November 19, 2015 Financial Date Statements or subtitle For the Year Ended June 30, 2015 www.wipfli.com 1

Table of Contents Required Communications/Overview of Audit Review of Audited Financial Statements Financial Analysis Appendix The following information is solely for the use of Daniels Memorial Hospital Association s Board of Directors and management. The financial information was derived from the audited financial statements for the years ended June 30, 2013 through 2015, and from other information obtained through the course of the audit. www.wipfli.com 2

Required Communications Overview of Audit WIPFLI HEALTH CARE PRACTICE Auditor s responsibility under auditing standards generally accepted in the United States To express an opinion about whether the financial statements prepared by management with your oversight are fairly presented in all material respects in conformity with accounting principles generally accepted in the United States (GAAP). Our procedures are designed to obtain reasonable, rather than absolute, assurance about the financial statements. As part of our audit, we considered internal control solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. Scope of audit report Issued an unqualified opinion on the financial statements of Daniels Memorial Hospital (the Hospital ). Required Communications Letter Professional standards require that we provide certain information related to our audit to those charged with governance. This information is provided in our required communications letter dated November 18, 2015. www.wipfli.com 3

Required Communications Overview of Audit WIPFLI HEALTH CARE PRACTICE Key Disclosures in the Required Communications Letter are as follows: We are not aware of any other documents containing audited financial statements and were not requested by management to devote attention to any documents containing audited financial statements. We noted no transactions entered into by the Hospital during the year for which there is a lack of authoritative guidance or consensus and noted no unusual transactions during the audit. The significant accounting policies used by the Hospital are outlined in Note A to the financial statements. www.wipfli.com 4

Required Communications Overview of Audit WIPFLI HEALTH CARE PRACTICE Significant Accounting Estimates Affecting the Financial Statements Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. The most sensitive estimates affecting the financial statements were: Accounts receivable allowance for contractual adjustments and allowance for uncollectible accounts Final settlements on the Medicare and Medicaid cost reports Management Representations We obtained a management representation letter signed by management and dated as of the date the financial statements were available to be issued. A copy is attached to the required communications letter distributed to the Board of Directors as a separate document. www.wipfli.com 5

Required Communications Overview of Audit WIPFLI HEALTH CARE PRACTICE Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. www.wipfli.com 6

Financial Statement Review Balance Sheet Change 2014 to 2015 Percent Change Balance Sheet - Assets 2015 2014 2013 (in thousands) Current assets: Cash and cash equivalents $ 221 $ 264 $ 801 $ (43) -16% Investments 463 312 312 150 48% Patients account receivable - Net 546 620 1,012 (74) -12% Other receivables 6 4-2 49% Estimated third-party payor settlements 90 333 50 (243) 100% Inventories 196 192 207 5 2% Prepaid expenses 55 41 47 13 32% Total current assets 1,576 1,767 2,429 (191) -11% Property and equipment - Net 1,264 1,219 1,390 45 4% Total other assets 236 222 227 14 6% Cash balance has decreased approximately $40k, primarily due to the operating loss, decreased gross patient AR and grant payments. Net accounts receivable decreased approximately $75k. The cost report receivable decreased by $243k from the prior year. TOTAL ASSETS $ 3,077 $ 3,208 $ 4,046 (132) -4% www.wipfli.com 7

Financial Statement Review Balance Sheet Accounts payable increased by $268k. Balance Sheet - Liabilities and Net Assets 2015 2014 2013 Change 2014 to 2015 Percent Change (in thousands) Current liabilities: Current maturities of long-term debt $ 42 $ 41 $ 40 1 3% Accounts payable 404 136 192 268 197% Accrued salaries, wages and benefits 339 323 350 16 5% Total current liabilities 786 500 581 286 57% Unrestricted net assets decreased approximately $375k compared to approximately $715k in 2014 due decreased total loss. Long-term liabilities - 42 84 (42) -100% Total liabilities 786 542 665 243 45% Net Assets: Unrestricted 2,291 2,666 3,381 (375) -14% Total net assets 2,291 2,666 3,381 (375) -14% TOTAL LIABILITIES AND NET ASSETS $ 3,077 $ 3,208 $ 4,046 $ (132) -4% www.wipfli.com 8

Financial Statement Review Statements of Operations Statements of Operations (in thousands) 2015 2014 2013 Operating revenue: Net patient service revenue $ 5,855 $ 6,129 $ 6,651 Other operating revenue 267 240 253 Total operating revenue 6,122 6,369 6,904 Expenses: Administrative services 961 862 768 Fiscal services 261 247 198 Medical records 106 99 112 Dietary 425 504 496 Plant operation and Maintenance 267 271 258 Housekeeping 179 182 185 Laundry & linen 32 58 34 Acute care 585 745 727 Swing bed 57 74 92 Long-term extended care 1,391 1,421 1,234 Emergency services 165 48 63 Central services 156 126 73 Laboratory services 350 457 412 Electrodiagnosis services 11 13 16 Radiology services 272 266 271 Pharmacy 313 165 166 Rehabilitation services 354 341 341 Home health care 98 81 90 Clinic services 966 910 839 Depreciation and amortization 282 292 297 Interest expense 3 4 8 Total operating expenses 7,232 7,165 6,680 Income (loss) from operations (1,110) (796) 224 Total nonoperating revenue 735 81 395 Change in unrestricted net assets $ (375) $ (715) $ 619 Net patient service revenue decreased $274k in 2015. Other operating revenue remained consistent. Overall operating expenses increased approx. $70k Operating loss increased by $315k due to decreased revenue and increased operating expenses. Non-operating revenue increased by $635k due to an increase in grants. Overall loss decreased by $340 over the prior year due to the increase in grant income. www.wipfli.com 9

Financial Analysis The financial ratios appearing in the following graphs are presented to assist in understanding the financial health of the Hospital. The industry benchmark is from the Ingenix, Inc. 2014 Almanac of Hospital Financial and Operating Indicators. The Benchmark Average is for Critical Access Hospitals in the Far West Region. The Montana benchmark is from the Flex Monitoring Team Data Summary Report #10, CAH Financial Indicators Report: Summary of Indicator Medians by State, October 2014. www.wipfli.com 10

Financial Analysis Operating margin measures income (loss) from operations as a percentage of total revenue High values indicate an ability to add new investments in property and equipment without adding excessive new debt Total margin measures the excess of revenues over expenses divided by total revenue Includes non-operating revenues such as grants and contributions www.wipfli.com 11

Financial Analysis Measures the number of days an organization could operate if no cash were collected The Montana calculation includes marketable securities and investments, with no differentiation between short-term and long-term. This would increase Daniels to 42.7 days for 2015 if CD s were included. The Benchmark calculation does not include long-term investments www.wipfli.com 12

Financial Analysis Days revenue in accounts receivable measures the average time it takes to collect accounts Daniels days in receivable are below industry averages This ratio has decreased post system conversion Industry forecast is that this ratio will not be decreasing in the near term www.wipfli.com 13

Financial Analysis Measures the ability to meet principal and interest obligations as they come due Industry forecast is for ratios to decline in the near term Lenders typically are looking for debt service coverage ratios of 1.10 or greater Almanac of Hospital Indicators uses the principal and interest paid method, Flex Monitoring Team CAH Indicators report uses the current maturities method www.wipfli.com 14

Financial Analysis Lower average age of plant values (i.e., years ) indicate a newer fixed asset base and less need for near-term replacement Industry and patients correlate average age of plant with quality of care DMH s average age of plant is comparable to the Montana CAH s www.wipfli.com 15

Financial Analysis Higher fixed asset turnover values suggest operating efficiency. Industry expectations are that this ratio will remain stable in the next few years. Ratio measures revenue dollars generated per dollar of investment in net fixed assets. www.wipfli.com 16

Appendix Summary WIPFLI HEALTH CARE PRACTICE Reimbursement Update Impact of 501(r) Requirement New Accounting Pronouncements 17

Reimbursement Update In March 2014, the President signed into law the Protecting Access to Medicare Act of 2014 (supersedes the SGR Reform Act provisions) by extending the deferral of the physician payment reduction by: Including the a 0.5% update to conversion factor through December 31, 2014, then a 0.0% increase in the conversion factor from January 1, 2015 through March 31, 2015 Physician Work Geographic Adjustment Factor: Extended the 1.0 GAF payment rate floor through March 31, 2015 Ambulance Add-on Payments: Extended the 3% increase in fee schedule amounts for ground ambulance transports in rural areas and the 2% increase for transports in urban areas through March 31, 2015 Sequestration: Extended through 2025 for Medicare payments (previously through 2023) 18

Reimbursement Update White House proposes more than $400 billion in Medicare reductions The President's fiscal year 2016 proposed budget, which was released in February 2015, includes $431 billion in proposed reductions to Medicare, of which $350 billion would come from health care providers. Some of the proposed cuts are as follows: Cut bad debt payments to providers by $31.1 billion (reduce from 65% to 25%) Reduce payments to providers by $29.5 billion by implementing site-neutral policies Adjust Medicare graduate medical education payments by $16.3 billion Reduce CAH payments from 101% to 100% of reasonable costs for a savings of $1.73 billion Eliminate the CAH designation for hospitals located fewer than 10 miles from the nearest hospital for savings of $770 million The 2016 budget also proposed to reduce the payment updates to post-acute care providers for a savings of $102.1 billion, as well as make other post-acute program changes. 19

Reimbursement Update Federal Register Proposed Rule (April 15, 2015): Medicare and Medicaid Programs; Electronic Health Record Incentive Program Modifications to Meaningful Use in 2015 Through 2017 90 day reporting period for 2015 Align 2015 reporting period with the calendar year instead of the federal fiscal year (10/01/2014 9/30/2015) modify the patient action measures in the Stage 2 objectives related to patient engagement 20

Reimbursement Update Critical Access Hospitals (CAHs) that are not meaningful users will be subject to a payment adjustment for fiscal year 2015. This payment adjustment is applicable to a CAH's Medicare reimbursement for inpatient services during the cost reporting period in which they failed to demonstrate meaningful use. Stage 3 proposed rule, we also proposed a change to the EHR reporting period that would apply for the payment adjustments for CAHs, beginning with the FY 2017 payment adjustment year. Proposed that the EHR reporting period for a payment adjustment year for CAHs would be a full calendar year, rather than a full federal fiscal year. Proposed the EHR reporting period for a payment adjustment year would be the calendar year that overlaps the last 3 quarters of the federal fiscal year that is the payment adjustment year. 21

Reimbursement Update WIPFLI HEALTH CARE PRACTICE 22

Reimbursement Update OIG Report released October 7, 2014: OIG did a study using 2009 and 2012 claims data to calculate the percentages and amounts of coinsurance Medicare beneficiaries paid toward outpatient services at CAH s and compared to the what those percentages and coinsurance payments would be under OPPS for 10 outpatient services frequently provided at CAH s. Report discusses that Medicare beneficiaries paid nearly half of the costs for outpatient services at Critical Access Hospitals (CAH). Coinsurance for Medicare beneficiaries is 2-6 times what the coinsurance would be under Outpatient Prospective Payment System (OPPS) Beneficiaries at CAH s pay coinsurance based on CAH charges versus coinsurance based on OPPS rates. CAH charges are typically higher than the OPPS rates that acute-care hospitals receive. In 2012, Medicare beneficiaries paid about $1.5 billion of $3.2 billion of the cost for outpatient services at CAH s. OIG is recommending that CMS seek legislative authority to modify how coinsurance is computed for outpatient services at CAH s. Recommended coinsurance be based on an interim rate rather than charges or that coinsurance be computed as if CAH was paid under OPPS. CMS responded to report but neither concurred or nonconcurred with the recommendation. 23

Reimbursement Update Medicare CAH Coinsurance Study OIG completed a study on coinsurance charged to Medicare patients in a CAH setting versus a PPS hospital setting. The study showed that Medicare patients of CAHs paid, in most cases, higher coinsurance amounts to providers. OIG has proposed that Medicare coinsurance in CAHs be calculated the same as a PPS hospital s Medicare coinsurance calculation for similar services. This could be effective as early as 2015 pending CMS review. This may significantly change how split charges are calculated in provider-based clinics as current technical charges may be too low for new coinsurance in some cases when a flat coinsurance rate was used to determine the fee billed to Medicare patients. This could reduce overall reimbursement in some settings depending on how charges were calculated if the minimum charges now need to be raised to a level equal to the new coinsurance amounts. 24

Reimbursement Update Medicare CAH Swing-Bed Study OIG recently completed a study entitled Medicare Could Have Saved Billions at Critical Access Hospitals If Swing-Bed Services Were Reimbursed Using the Skilled Nursing Facility Prospective Payment System. The report showed that at a high-level, if CAH swing-bed services were reimbursed at the same methodology as Skilled Nursing Facilities (SNFs), the Medicare program could have saved $4.1 billion over a 6 year period. The study included a sample of 100 of the approximately 1,200 CAHs in the country and also reviewed if alternative SNF settings were available based on location of the SNF within 35 millions of a CAH, and also showed the increase in costs at CAHs for swing-bed services and utilization of swing-beds from 2005-2010. The OIG encouraged CMS to request legislative approval to change swing-bed reimbursement from cost-based reimbursement at CAHs under the Medicare program to the prospective payment system method. The findings of the OIG study were first released to CMS in November 2014 and CMS responded that it did agree that changes should be made to CAH designation and payment systems, it did not concur with the OIG s study on several methodological concerns including: The OIG s study of alternative facilities does not consider whether the SNFs located near CAH s that provide swingbed services are easily accessible and the distance does not consider driving distance, but rather a radius. The OIG study does not include the cost of medical transportation of patients to the alternative care SNFs from the CAH acute care inpatient units. The OIG study assumes the same case mix for patients at CAH swing-beds and alternative care facilities and does not consider differences in type and intensity of the two groups of patients. 25

Reimbursement Update: Present Day $512B was spent on Medicare in 2014 54M Medicare beneficiaries today (avg life expectancy = 84 y.o.) 66% of M/C beneficiaries, 65 or older, have multiple chronic conditions 15% of M/C beneficiaries (>8M) account for almost half of the Medicare dollars spent (~$250B) Percentage of workers w high-deductible plans increased from 4% (2006) to 20% (2014) deductible rate often higher than avg employee has in savings Only 10-15% of an individual s health status is attributable to the health care services he/she receives. Rest is driven by personal choice/behavior; genetics and social determinants - living conditions, access to food and education status

Reimbursement Update: Future State Future impact to M/C: 80M - Projected number of M/C beneficiaries by 2020 Every day 10,000 baby boomers turn 65 and Of the 65, 75 and 85 age groups; 85> age group is expanding the fastest and as one ages the costs increase dramatically 2025 est. M/C spending will reach $981B 2030 - Current projected year M/C Hospital Insurance Trust Fund runs out of funds

Reimbursement Update: What Does This All Mean?? CMS has targeted to shift 30% of its total spending to alternative approaches (bundled payments, Medicare Shared Savings program ACO s, etc.) by the end of 2016 and 50% by then end of 2018.

Reimbursement Update: What Does This All Mean?? Present system (cost based or FFS) is not sustainable; high costs/low outcomes; Health care spending consuming more and more of the GDP; increasing acuity of M/C beneficiaries The Triple Aim will continue to gain traction; Lower costs Better outcomes Improved customer satisfaction Affordable Care Act (ACA) is not going away True costs of the ACA will begin to be felt by the consumer Predicted that with increasing enrollment that HIGHER utilization of health care services will occur

Reimbursement Update: What Does This All Mean?? ACO s (Accountable Care Organization) Movement away from hospital centric sick care (present volume payment methodology) to a super outpatient model that will emphasize community-based care and wellness (e.g., PCMH) Consolidation (larger health care systems and/or insurance company mergers) will continue due to reimb pressures; controlling costs (centralized admin services), etc. Disruptors will gain momentum and change health care. Disruptors being Walmart s, CVS, Walgreen s, any internet type of services/apps for cell phones, etc.

Reimbursement Update: What Does This All Mean?? The world of health care is entering a significant time of unsettling change driven by I/T advances and other disrupters. Health care used to have it s own world that was unchallenged and comfortably isolated or in our own cocoon no longer is this the norm.

Impact of 501(r) Requirement WIPFLI HEALTH CARE PRACTICE The PPACA created a new section of the Internal Revenue Code (IRC) 501(r), which created new requirements for a hospital s tax-exempt status as defined in Section 501(c)(3). One of the new requirements is a hospital must take reasonable efforts to determine whether an individual is eligible for assistance under the hospital s financial assistance policy before engaging in extraordinary collection actions against the individual. This reasonable efforts requirement became effective for the Organization as of January 1, 2014. Reasonable collection efforts are defined as follows: A hospital must determine whether an individual is financial assistance policy (FAP) eligible or provide required notices during a notification period ending 120 days after the date of first billing statement. After 120 days from the first billing statement, a hospital may engage in extraordinary collections actions. If FAP eligibility is not determined during the notification period, a hospital must still accept and process a FAP application for an additional 120 days. In total, a hospital must accept and process FAP applications 240 days from the date of the first billing statement. Those hospitals having collection policies comparable to the 120-day requirements discussed above realized little or no change in their aging of self-pay accounts and related bad debt allowance during the year. Those with more aggressive policies prior to the new requirements saw a deterioration of their self-pay aging as bad debt write-offs were delayed. We recommend management continue to monitor the methodology for estimating the provision for bad debts to ensure the methodology incorporates current trends and factors such as IRC 501(r). 32

New Accounting Pronouncements WIPFLI HEALTH CARE PRACTICE Revenue Recognition Supersedes all industry-specific revenue recognition guidance and creates a single revenue recognition model for contracts with customers that will impact almost all entities. Core principle: Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Five-step revenue recognition model allocates revenue to performance obligations contained in a contract Recognize revenue as performance obligations are satisfied: 1. Identify the contract(s) with the customer. 2. Identify separate performance obligations. 3. Determine the transaction price. 4. Allocate the transaction price to the separate performance obligations. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. May significantly change revenue recognition pattern for some industries, but probably not for most health care contracts. There is discussion in the health care industry whether self-pay patients who are cared for regardless of their ability to pay are truly under a contract as defined in the guidance and, accordingly, how revenue will be recognized for these patients. Effective dates: Public companies Periods beginning after December 15, 2016; Calendar year 2017, fiscal year-ends 2018 All other entities Periods beginning after December 15, 2017; Calendar year 2018, fiscal year-ends 2019 AICPA has revenue recognition task forces, including a health care revenue recognition task force, to assist with implementation. 33

New Accounting Pronouncements WIPFLI HEALTH CARE PRACTICE Lease Project FASB is still continuing to consider significant changes to accounting for leases that would require that operating leases with terms extending beyond one year be recorded on an organization s balance sheet. Effective date is unknown at this time but is not expected until 2017 or later. FASB is still deliberating on: Excluding small ticket items. Limiting the changes to lessor accounting. Simplifying the distinction between Type A (financing or current capital leases) and Type B (operating) leases. ~ Type A Record amortization and interest expense ~ Type B Lease expense recognized straight-line 34

Thank You This presentation was prepared by: Nate McCarthy, CPA, Partner 406.442.5520 nmccarthy@wipfli.com Wipfli LLP Health Care Practice 910 N. Last Chance Gulch Helena, MT 59601 www.wipfli.com www.wipfli.com 35