MultiCare Health System Year End 2012 Results December 31, 2012 MultiCare Health System (MHS), a Washington nonprofit corporation, is an integrated healthcare delivery system providing inpatient, outpatient, and other healthcare services primarily to the residents of Pierce and South King Counties and, with respect to pediatric care, much of the southwest Washington region. MHS operates 1,130 licensed inpatient hospital beds, seven outpatient surgical sites, home health, hospice, and several other urgent care, primary care and multispecialty clinics located throughout the MHS service area including ambulatory care facilities in Gig Harbor and Covington. The consolidated financial statements include five acute care facilities including Tacoma General Hospital and Allenmore Hospital, which operate under a single hospital license, Mary Bridge Children s Hospital, Auburn Medical Center (acquired by MHS for approximately $96 million from Universal Health Services, Inc. on October 1, 2012) and Good Samaritan Hospital, which operate under separate hospital licenses. The consolidated financial statements also include a medical group that includes MultiCare Clinics, MultiCare Medical Associates, and Urgent Care Centers. MHS includes a wholly owned subsidiary (Medis, Inc.) and three foundations (Mary Bridge Children s Foundation, MultiCare Health Foundation and Good Samaritan Foundation). Summary of Revenues and Expenses The following summary of revenues and expenses has been derived from MHS s financial statements. The financial statements for December 31, 2011 have been audited by independent certified public accountants. The financial statements for the year ended December 31, 2012 have been derived from the unaudited financial statements of MHS and prepared by MHS s management. The unaudited financial information presented includes all adjustments that MHS management considers necessary at this time for a fair presentation of the financial position and results of operations for 2012. Calendar Year Ended December 31, (in thousands) (Unaudited) (Audited) Revenues: Net Patient Service Revenue $ 1,486,471 $ 1,314,577 Other Operating Revenue 69,324 65,499 Net Assets Released from Restriction 3,617 4,246 Total Operating Revenue 1,559,412 1,384,322 Expenses Salaries and Wages 661,168 613,679 Employee Benefits 160,709 152,170 Supplies 187,392 168,060 Purchased Services 103,576 100,711 Depreciation and Amortization 99,232 93,423 Interest 31,248 27,025 Other 169,588 144,416 Total Expenses 1,412,913 1,299,484 Operating Income 146,499 84,838 Nonoperating Income/(Loss): Investment income 83,525 17,375 Swap cash settlements (6,630) (6,591) Change in fair value of swaps 5,243 (33,926) Other, Net (253) (2,353) Total Nonoperating Income/(Loss) 81,885 (25,495) Excess of Revenues Over Expenses $ 228,384 $ 59,343 Page 1
Consolidated Balance Sheets (in thousands) December 31, 2012 December 31, 2011 (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 74,252 $ 168,037 Net Accounts Receivable, Patient 213,938 188,852 Other Receivables 15,371 12,989 Inventories 21,397 17,718 Prepaid Expenses 10,116 11,674 Bond Funds Held in Trust 382 37 Total Current Assets 335,456 399,307 DONOR - RESTRICTED ASSETS 66,783 59,297 LONG-TERM INVESTMENTS 990,186 698,185 PROPERTY, PLANT AND EQUIPMENT: Land and Improvements 67,636 63,129 Buildings 1,338,119 1,203,017 Equipment 627,034 664,854 Total Property, Plant and Equipment 2,032,789 1,931,000 Less: Accumulated Depreciation (846,278) (842,482) Net Property, Plant and Equipment 1,186,511 1,088,518 Construction in Progress 57,401 45,876 Total Property, Plant and Equipment, Net 1,243,912 1,134,394 OTHER ASSETS Unamortized Bond Issue Cost 19,952 18,450 Mark to Market Basis Swap 1,547 938 Other 60,045 42,972 Total Other Assets 81,544 62,360 TOTAL ASSETS 2,717,881 2,353,543 LIABILITIES CURRENT LIABILITIES Accounts Payable and Accrued Expenses 101,348 76,546 Accrued Compensation and Related Liabilities 135,281 110,649 Patient Refunds Payable 5,367 3,318 Accrued Interest Payable 12,451 10,321 Estimated Third Party Payor Settlements 6,689 7,069 Current Portion of Long-Term Debt 10,860 10,384 Total Current Liabilities 271,996 218,287 INTEREST RATE SWAP PENSION & MEDICAL MALPRACTICE LIABILITIES 58,861 63,495 180,835 187,108 LONG-TERM DEBT, NET 862,130 772,107 NET ASSETS Unrestricted Total 1,269,811 1,048,857 Temporarily Restricted 21,584 25,247 Permanently Restricted 52,664 38,442 Total Net Assets 1,344,059 1,112,546 TOTAL LIABILITIES & NET ASSETS $ 2,717,881 $ 2,353,543 Page 2
Consolidated Cash Flow Statements (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Year Ended Calendar Year Ended December 31, December 31, (Unaudited) (Audited) Increase in net assets $ 231,513 $ 27,595 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization 99,232 95,025 Change in fair value of interest rate swaps (5,243) 33,927 Realized and change in unrealized (gains) losses on investments, net (85,606) 1,652 Provision for bad debts 131,893 117,834 (Gain) loss on disposal of assets, net - (198) (Gain) loss on joint ventures (1,176) (352) Restricted contributions for long-term purposes (7,991) (4,004) Changes in operating assets and liabilities: Accounts receivable (156,979) (131,114) Inventories and other current assets (2,593) (4,953) Other assets, net (7,262) (14,922) Accounts payable and accrued expenses and interest payable 28,601 14,262 Accrued compensation and related liabilities 24,632 11,343 Accrued pension, malpractice and other liabilities (6,349) 35,272 Net cash provided by operating activities 242,672 181,367 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (123,186) (119,276) Purchase of Auburn Regional Medical Center assets (95,537) - Proceeds from disposal of assets - 704 Net purchases and sales from trading securities (215,860) (123,192) (Contributions to) Distributions from joint ventures, net 1,026 1,745 Change in donor trusts (942) 1,136 Net cash used in investing activities (434,499) (238,883) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of long-term debt (9,305) (10,279) Proceeds from bond issuance 100,149 - Payment of debt issue expenses (793) - Restricted contributions for long-term purposes 7,991 4,004 Net cash provided by (used in) financing activities 98,042 (6,275) Net increase (decrease) in cash and cash equivalents (93,785) (63,791) CASH AND CASH EQUIVALENTS, beginning of year 168,037 231,828 CASH AND CASH EQUIVALENTS, end of period $ 74,252 $ 168,037 Page 3
SUMMARY OF REVENUE SOURCES The following table shows the combined gross patient service charge percentages for MHS by payor. Calendar Year Ended December 31, Source Medicare 34.2% 33.3% Medicaid 21.1 21.6 Regence/Blue Shield 9.0 9.5 Premera/Blue Cross 9.3 9.5 Personal Pay 5.4 4.6 All Other 21.0 21.5 Total 100.0% 100.0% SUMMARY OF OPERATING DATA The following table presents selected statistical indicators of MHS s patient activity: Statistical Summary Calendar Year Ended December 31, Admissions 1) 43,707 39,566 Adjusted Admissions 94,247 83,721 Patient Days 1) 173,215 158,073 Average Length of Stay (Days) 3.96 4.00 Average Daily Census 473 433 Percent Occupancy (of beds in service) 60.3% 60.7% Emergency Room Visits 186,217 161,451 Provider Visits (primary, specialty & urgent care) 1,079,213 986,930 Outpatient Visits 2) 388,548 396,090 Overall Case Mix Index 1.29 1.28 Surgical Cases 30,483 29,746 1) Admissions and patient days include acute care and rehabilitation volumes and exclude newborns. 2) Outpatient visits exclude ER visits, physician visits, outpatient surgery and lab tests. Over the periods presented, certain departments changed their registration process regarding series patients whereby multiple visits have been changed to count as a single visit. This makes the figures for outpatient visits less comparable over the periods presented. Page 4
MANAGEMENT S DISCUSSION AND ANALYSIS Operating Income Summary. MHS generated operating income of $146.5 million, for the year ended December 31, 2012, compared to $84.8 million during the year ended December 31, 2011. MHS continues to experience increasing admissions as well as a favorable shift in outpatient mix. Progress has continued in the efforts to control and reduce costs in order to meet the challenges that reimbursement pressures pose on financial results. Operating Revenue. Total operating revenue increased $175.1 million (12.6%) from $1.384 billion in the year ended December 31, 2011, to $1.559 billion for the same period in 2012. This change was primarily due to increases in inpatient as well as outpatient volumes during the periods presented. For the year ended December 31, 2012, adjusted admissions increased 12.6% compared to the same period in 2011. Auburn Medical Center contributed $42.6 million in gross revenue to the overall performance. During 2012, MHS received various settlements from payers that contributed approximately $20 million in additional net patient revenue to the organization. Payor mix, however continues to trend toward higher Medicare and higher private pay, which has led to higher bad debt and charity care compared to 2011. Charity care, as a percent of gross patient service revenue, increased to 2.8% for the year ended December 31, 2012 compared to 2.2% in 2011 due to an increase in qualifying patients. Bad debts increased to $132.0 million (2.8% of gross patient service revenue) in 2012, compared to $117.8 million (2.9% of gross patient service revenue) in 2011 due to continued higher levels of patients without insurance. Management continues to pursue several strategies to improve reimbursement including payor contract optimization, denial management, and improved point-of-service cash collections. During 2012 and 2011, MHS received payments in the amount of $6.6 million and $10.3 million, respectively, for meeting the meaningful use criteria for its use of its Electronic Health Records. These amounts are reflected as part of other operating revenue in the summary of revenues and expenses shown. Operating Expenses. Total operating expense increased $113.4 million (8.7%) from $1.299 billion in the year ended December 31, 2011, to $1.413 billion for the same period in 2012. Total operating expense per adjusted admission, however, decreased 3.5% from $15,522 during the year ended December 31, 2011 to $14,992 for the same period in 2012. This is largely due to management s focus on cost reduction measures, which includes a reduction in average length of stay from 4.00 in 2011 to 3.96 in 2012, while continuing to focus on quality patient care. Salaries, as a percent of net patient service revenue, were 44.5% for the year ended December 31, 2012 as compared with 46.7% for the same period in 2011 and full-time equivalents (FTE s) were 7,858 at December 31, 2012 vs. 7,580 in the prior year as a result of the addition of approximately 750 Auburn employees upon acquisition offset by FTE reductions elsewhere throughout the organization. Employee benefits were $8.5 million higher for the year ended December 31, 2012 compared to the prior year primarily due to increases in unemployment expense, pension expense, employee medical and dental benefit expenses, and the addition of Auburn Medical Center. Supplies were $19.3 million (11.5%) higher than the prior year primarily due to increased volumes, including those from Auburn (which represents approximately $4.5 million of the increase). Depreciation was $5.8 million (6.2%) higher than the prior year due to the completion of major construction projects including primarily the nearly $380 million Dally Tower at Good Samaritan, which opened in the first quarter of 2011 and the addition of Auburn assets. Interest expense increased by $4.2 million from 2011 to 2012 primarily due to the issuance of approximately $140 million in new debt in November ($100 million drawn and outstanding as of December 31, 2012) and the conversion of the 2009 bonds from a variable interest-rate mode to fixed rate bonds in July. Other operating expense increased 17.4% in 2012, compared to 2011, primarily due to external consulting in support of cost structure improvement projects and higher building lease costs in 2012 as compared to the same period in 2011. Non-Operating Income. Non-operating gains totaled $81.9 million for the year ended December 31, 2012, compared to losses of $25.5 million during 2011. Investment income was $83.5 million, during the year ended December 31, 2012, compared to investment gains of $17.4 million during 2011. The remainder of the variance is primarily a result of changes in the fair value of interest rate swaps. Net Income. Operating income of $146.5 million, combined with the non-operating gains of $81.9 million, produced an excess of revenues over expenses of $228.4 million for the year ended December 31, 2012, as compared to $59.3 million during 2011. Balance Sheet/Financial Position. As of December 31, 2012, unrestricted cash and investments were $1.065 billion, compared with $866.3 million as of December 31, 2011, an increase of $198.6 million. Cash and investments available within one week or less totaled $910.7 million as of December 31, 2012, compared to $842.5 million, as of December 31, 2011. During 2012, MHS issued $140 million in new debt, of which approximately $100 million was outstanding at December 31, 2012, which was used primarily for the purchase of Auburn Medical Center. Days cash on hand increased 35 days due to positive investment and operating performance, and remains strong at 297 days as of December 31, 2012. Page 5
As of December 31, 2012, total net assets were $1.344 billion compared to $1.113 billion as of December 31, 2011. Unrestricted net assets increased $221.0 million to $1.270 billion as of December 31, 2012, from $1.049 billion as of December 31, 2011. A reduction to unrestricted net assets of $6.7 million was recorded in 2012 associated with an increased pension liability due to changes in the discount rate. Nevertheless, the MHS balance sheet and cash position remain solid as of December 31, 2012 due to strong operating and investment performance. KEY BALANCE SHEET INDICATORS December 31, 2012 December 31, 2011 Days cash on hand 297 262 Cash to long term debt 122.0% 110.7% Monthly liquidity to demand debt 671.6% 335.0% Long term debt to capitalization 40.7% 42.7% Page 6