MANAGEMENT S DISCUSSION OF FINANCIAL AND OPERATING PERFORMANCE Utilization Trends The Corporation has experienced an increase in utilization from the end of 2015 through fiscal year 2017. Occupancy of Northwest Community Healthcare (NCH) was 66% through September 2017, the highest rate in three years, and NCH Hospital s average daily census was at 260 as of September 2017 (up from 223 in FY 2015 and 239 in FY 2016). Average length of stay ( ALOS ) for NCH Hospital increased from 4.1 in FY 2015 to in FY 2016, and increased to 4.6 in FY 2017. The increase in ALOS was partially attributed to the increased volumes within Behavioral Health and inpatient Rehabilitation. Both of which have greater ALOS. Management attributes NCH Hospital s increase in utilization and discharges to greater access to managed care contracts, increases in employed NCH Medical Group physicians, both primary care physicians and specialists, and NCH Hospital s additional inpatient rehabilitation unit (average daily census of 16 as of September 2017) and geriatric psychiatric beds (average daily census of 12 as of September 2017). Outpatient registrations continue to grow, increasing from 347,811 in FY 2015 to 396,151 in FY 2016 and 463,652 in FY 2017. Historical Performance: Twelve Month Period Ended September 30, 2017 Total System consolidated operating revenue for the twelve month period ended September 30, 2017 as compared to the twelve month period ended September 30, 2016 increased by approximately $4.8 million or 0.9%. The increased revenue is due to the implementation of several initiatives across the System generating more volume for NCH Hospital and NCH Medical Group and two new joint ventures. At NCH Hospital, inpatient discharges have increased year over year, the acuity of care has also increased by 1.7%. NCH Hospital outpatient registrations are up 17.0% in part due to a significant increase in reference lab services. The payor mix at NCH Hospital has remained stable over this time period. In FY 2017, Medicare represented 48% of NCH Hospital volume, commercial payors (including managed care) represented 40% of NCH Hospital volume and Medicaid and self-pay patients made up the remaining 12%. Over this same time period, NCH Medical Group s total revenue is up in part due to the employment of additional primary care physicians. Total operating expense increased by 5.9% for the twelve month period ended September 30, 2017 as compared to the prior year ended September 30, 2016. Salaries and employee benefits increased by 6.0% in 2017 as compared to 2016 due to the new joint ventures and additional Medical group practices. Also, professional fees increased by 9.6% in FY 2017 as compared to FY 2016 due to non-recurring costs related to strategies which will provide future benefits. In FY 2017 there was an operating loss of $25.5 million versus an operating income of $2.4 million in FY 2016. The FY 2017 operating loss is the result of increased charity care and
bad debts due to high deductible plans along with one-time reserves for legacy accounts receivable. The previously mentioned increase in professional fees also impacted the fiscal year. Non-operating revenue, net consists primarily of realized and unrealized gains and losses on investments. The gains incurred in 2017 were due primarily to strong investment returns and are reflective of the investment market activity due to stronger economic trends as compared to 2016.
UTILIZATION AND PAYOR MIX Quarter Ended Sep 30 Year Ended Sep 30 2017 2016 2017 2016 Hospital Licensed Beds Average Staffed Beds Average Daily Census Average % Occupancy 253 64% 239 60% 260 66% 239 60% Discharges Average Length of Stay Patient Days 5,221 23,258 4,864 21,975 20,510 4.6 94,962 19,586 87,445 Medicare Case-Mix Index Total Case-Mix Index 1.6132 1.4899 1.6491 1.4667 1.6394 1.4979 1.6533 1.4731 Adjusted Discharges 11,723 11,292 45,883 44,717 Surgeries Inpatient surgeries Outpatient Surgeries (Note 1) Total Surgeries 1,020 2,143 3,163 1,019 2,909 3,928 4,228 11,286 15,514 4,138 11,628 15,766 Emergency Department Visits 18,958 19,017 75,258 74,769 Outpatient Discharge Equivalents 6,502 6,428 25,373 25,131 Outpatient Registrations 116,899 105,220 463,652 396,151 Hospital Payor Mix (Based on Gross Revenue) Medicare Managed Care Medicaid Commercial Insurance Self Pay and Other 48.5% 23.9% 8.6% 16.0% 3.0% 100% 47.7% 25.6% 8.5% 15.7% 2.5% 100% Note 1: Outpatient surgical procedures at Hospital and DSC
CONSOLIDATED HISTORICAL CAPITALIZATION AND INVESTMENT POSITION (In thousands) The table below sets forth the consolidated capitalization and investment position of the Corporation and its subsidiaries as of September 30, 2015, 2016 and 2017 and as adjusted to give effect to the issuance of the Series 2008 Bonds in an aggregate principal amount of $241,585,000. The table also shows the historical ratios of longterm debt (net of current portion) to total capitalization, which is defined as longterm debt plus unrestricted net assets, ratios of unrestricted cash and investments to longterm obligations and days cash on hand. Unrestricted Cash and Investments: September 30, 2015 September 30, 2016 September 30, 2017 Cash, Investments & Board $410,350 $414,505 $445,806 Designated Funds (1) Total Unrestricted Cash and Investments $410,350 $414,505 $445,806 LongTerm Obligations (net of current maturities): Series 2008A Bonds Series 2008B Bonds Series 2008C Bonds Series 2011 Bonds Series 2016A Bonds Series 2016 Bonds Premium Bond issuance costs Total LongTerm Obligations (net of current maturities) $143,515 $ 31,805 $ 31,805 $ 45,200 $ 2,075 $ 30,180 $ 30,180 $ 43,400 $136,690 $ 20,412 $ (2,651) $ 28,510 $ 28,510 $ 41,500 $ 136,690 $ 19,473 $ (2,507) $252,325 $ 260,286 $ 252,176 Unrestricted Net Assets $560,003 $590,406 $604,692 Total Capitalization $812,328 $850,692 $856,868 Ratio of LongTerm Obligations to Capitalization 31.1% 30.6% 29.4% Ratio of Unrestricted Cash and Investments to LongTerm 163% 159% 177% Obligations Days Cash on Hand 311 292 294 Note (1): Investments are carried at market value
ATTACHMENT TO COMPLIANCE CERTIFICATE Compliance Calculations For Reimbursement Agreements Dated as of December 1, 2011 Calculations as of September 30, 2017* A. Days Of Unrestricted Cash on Hand (Section 6.23(a)) 1. Cash, cash equivalents and marketable securities $435,550,774 2. Total Operating expenses of the Credit Group: For Twelve Months ended 9/30/17 $411,340,526 Divided by days (365) $ 1,126,960 3. Ratio of Line A1 to Line A2 386 4. Line A3 must not be less than 100 5. The Members are in compliance Yes B. Historical Debt Services Coverage Ratio (Section 6.23 (b)) 1. Income Available for Debt Service $ 58,810,818 2. Debt Service Requirements $ 14,506,065 3. Ratio of Line B1 to Line B2 4.1:1.0 4. Line B3 must not be less than 1.1:1.0 5. The Members are in compliance Yes *Effective January 1, 2014, the Obligated Group excludes Northwest Community Day Surgery Center, Inc.