Spectrum Health System and Affiliates Consolidated Financial Statements March 31, 2018
CHIEF FINANCIAL OFFICER S REPORT The enclosed package represents the consolidated financial statements for Spectrum Health System and Affiliates (the System). The financial statements have been summarized by the System s delivery, insurance and other operations. VOLUME Overall admissions for the Hospital Group are up from prior year. Spectrum Health Grand Rapids adjusted (for outpatient) admissions totaled 88,238 which represents an increase of 5.4% from March 2017 levels, and are ahead of planned levels by 2.3%. Regional hospitals adjusted admissions increased 3.1% over March 2017, but are behind planned levels by 1.4%. Spectrum Health Physicians Services wrvus totaled 3.8 million which was an increase of 5.3% from the prior year, but was 2.2% behind Plan. Health insurance membership was 769,187 as of March 31, 2018, which was a 3.2% decrease compared to March 31, 2017, and was behind Plan by 2.2%. 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - MARGIN Spectrum Health System Priority Health Membership 720,601 122,174 107,792 108,569 794,599 140,024 769,187 155,231 123,859 120,490 118,008 72,688 382,066 412,708 420,778 3/31/2016 3/31/2017 3/31/2018 Commercial Individual Medicaid Senior Products 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 74,707 Spectrum Health System Hospital Group Adjusted Admissions 88,238 83,733 57,763 57,855 59,637 3/31/2016 3/31/2017 3/31/2018 Grand Rapids Regional Hospitals Spectrum Health System Physician Services wrvus 3,313,098 3,605,672 533,526 463,798 3,796,974 563,180 2,849,300 3,072,146 3,233,794 3/31/2016 3/31/2017 3/31/2018 SHMG Regional Hospitals The System s excess of revenue over expense year-to-date March 2018, was $225.8 million or 4.9% of total revenue. The System s operating margin was $133.0 million or 3.0% of net operating revenue. The Delivery System s operating margin was $72.7 million, or 3.1%, which was unfavorable to Plan by $1.1 million and unfavorable to prior year by $14.8 million. Unfavorable volumes in the regions and post-acute; lower than planned reimbursement from payer mix and bad debt, and less than planned realization on operating expense reduction initiatives are offsetting higher than planned volumes and gross revenue within SHGR and SHMG. Priority Health s operating margin was $62.5 million, or 2.3%, which was favorable to Plan by $16.1 million and favorable to prior year by $19.5 million. The favorable variance to Plan was a result of favorable pharmacy initiatives, as well as positive risk adjustment performance related to Medicare settlements, and provider incentive payments. $240.0 $200.0 $160.0 $120.0 $80.0 $40.0 $0.0 $51.9 $169.4 $223.4 Spectrum Health System Operating Margin (in millions) $42.9 $132.2 $133.0 $120.7 $87.5 $62.5 $72.7 3/31/2016 3/31/2017 3/31/2018 Priority Health Delivery System System Total System Plan
CHIEF FINANCIAL OFFICER S REPORT OTHER REVENUE (EXPENSE) Net other revenue of $97.5 million was comprised primarily of $92.5 million of investment gains. The $92.5 million of investment gains consisted of $77.2 million of realized investment returns (interest, dividends and realized gains/losses) and $15.3 million of unrealized investment gains, which are a function of the market. The $97.5 million net other revenue was $32.2 million lower than March 2017. 600.0% 575.0% 550.0% 525.0% 500.0% Priority Health Risk Based Capital % Comparison 547.0% 544.0% 567.0% 545.0% (P) 475.0% LIQUIDITY AND CASH FLOW 450.0% At March 31, 2018, total cash and investments for the System were at $3.0 billion, an increase of $161.4 million from June 30, 2017. The increase is driven by an operating cash flow margin of $299.1 million, non-operating cash increases of $82.2 million related to investment returns and $15.5 million in contributions. These were offset by facility, information technology, and equipment additions totaling $172.4 million, working capital of $44.1 million, and net changes in long term debt of $18.9 million. RATIOS Days cash on hand for the System increased 1.0 day to 192.8 at March 31, 2018 from June 30, 2017. Priority Health s risk based capital (RBC) was 567.0%. Operating cash flow margin was 6.7%, which is below Moody s Aa3 median of 8.9% for 2016. 425.0% 400.0% EQUITY STRUCTURE Debt was approximately $822.7 million at the end of March and fund balance was approximately $3.4 billion. The long term debt to capitalization ratio for the System at March 2018 was 20.5%, which was lower than the Moody s Aa3 median of 29.5% for 2016. Total assets for the System were approximately $5.7 billion. Respectfully submitted, 6/30/2016 6/30/2017 3/31/2018 Risk Based Capital % 225.0 200.0 196.4 Spectrum Health System Days Cash Comparison 191.8 192.8 Matthew E. Cox Senior Vice President & Chief Financial Officer (matthew.cox@spectrumhealth.org) March 2018 175.0 150.0 182.7 (P) 125.0 100.0 6/30/2016 6/30/2017 3/31/2018 System Total Plan (P)
Ratio Analysis - Total System March 31, 2018 Actual Actual Plan S&P Median Moody's Median March 31, 2018 June 30, 2017 June 30, 2018 2016 2016 Profitability Ratios Operating Margin 3.0% 3.4% 2.8% 2.4% 3.7% Total Margin 4.9% 6.1% 3.7% 4.1% 6.6% Return on Assets 5.2% 6.6% 4.1% n/a 5.3% Operating Cash Flow Margin 6.7% 7.0% 6.6% n/a 8.9% Liquidity Indicators Days in Patient Receivables 69.1 53.4 53.8 47.4 48.8 Days Cash (unrestricted) on Hand 192.8 191.8 182.7 210.3 234.2 Current Ratio 1.3 1.3 1.5 n/a 1.7 Cash to Debt % 358.4% 331.4% 349.3% n/a 202.7% Capital Structure Long Term Debt to Capitalization 20.5% 22.1% 20.6% 32.0% 29.5% Proforma Long Term Debt to Capitalization^ 23.2% 25.0% 23.5% n/a n/a Debt Service Coverage 11.1 12.8 9.9 3.9 6.9 Debt to Cash Flow 1.7 1.6 1.9 n/a 2.3 Risk Based Capital (PH only) 567.0% 544.0% 545.0% n/a 457.2% (a) Average Age of Plant 10.0 10.1 9.5 11.0 10.1 Capital expenditures to depreciation 1.2 1.5 1.0 1.2 1.3 (a) Provider Sponsored Health Plan benchmark which consists of eight similar sized health plans. Benchmark data is based on December 31, 2017 statutory filings. Note: Moody's figures are medians for freestanding hospitals, single-state & multi-state healthcare systems with Aa3 bond ratings for 2016. Spectrum Health's current rating from Moody's is Aa3. S&P figures are medians for not-for-profit acute health care, which include stand-alone hospitals and health care systems, for 2016. Spectrum Health's current rating for S&P is AA. ^ Estimated impact of proposed lease accounting standard in FY20.
Key Statistics Better (Worse) Prior Actual than Plan Year* Spectrum Health Grand Rapids Admissions 52,452 1,029 50,861 Patient Days - Acute care 240,367 3,905 239,066 Patient Days - Observation 8,329 (167) 8,951 Patient Days - Long Term Care 58,800 (529) 60,575 Adjusted Admissions 88,238 2,000 83,733 Net Revenue per Adjusted Patient Admission $ 17,426 $ (216) 17,508 Cost per Adjusted Patient Admission $ 16,715 $ 348 16,650 Spectrum Health Regional Hospitals Admissions 10,657 (234) 10,852 Patient Days - Acute care 31,278 (269) 31,965 Patient Days - Observation 3,323 277 3,025 Patient Days - Long Term Care 29,781 489 30,066 Adjusted Admissions 59,637 (854) 57,855 Net Revenue per Adjusted Patient Admission $ 7,077 $ (101) 7,145 Cost per Adjusted Patient Admission $ 6,727 $ 71 6,927 Spectrum Health Post Acute Care Patient Days - Kalamazoo 50,873 453 46,725 Home Health Admissions 8,168 (1,273) 8,437 Hospice Days 88,780 14,316 74,772 Hours of Care - Neuro Homecare 227,583 (23,554) 249,053 Spectrum Health Physician Services Primary Care Covered Lives 397,499 (4,128) 364,319 Priority Health Assigned Lives 99,912 N/A 103,517 Spectrum Health Medical Group Encounters 2,026,094 52,100 1,858,805 wrvu's 3,233,794 (59,637) 3,072,146 wrvu's / Encounter 1.60 (0.07) 1.65 Net Patient Revenue per wrvu $ 87.97 $ (1.46) $ 87.02 Cost per wrvu $ 139.86 $ (2.33) $ 137.74 Spectrum Health Regional Hospital Physician Services Encounters 447,183 (3,812) 401,817 wrvu's 563,180 (25,993) 533,526 wrvu's / Encounter 1.26 (0.05) 1.33 Net Patient Revenue per wrvu $ 111.57 $ 1.91 $ 100.01 Cost per wrvu $ 141.92 $ (4.44) $ 143.39 *Restated to conform with current year presentation Effective August 1, 2017, operations for Fuller RNC transferred to Spectrum Health Grand Rapids
Key Statistics Membership Better (Worse) Prior Actual than Plan Year Group 330,926 (4,520) 327,242 Individual 72,688 (5,918) 118,008 ASO Stop Loss 89,852 3,209 85,466 Total Commercial 493,466 (7,229) 530,716 Senior Products (Medicare and Medigap) 155,231 (1,483) 140,024 Medicaid 120,490 (8,497) 123,859 Total Membership 769,187 (17,209) 794,599 Medical Cost Ratio Total Commercial 88.0% 0.9% 89.7% Senior Products (Medicare and Medigap) 88.0% (0.2)% 87.3% Medicaid 90.3% 2.7% 92.8% Total Medical Cost Ratio 88.2% 0.7% 89.2%
Spectrum Health System Liquidity Worksheet* March 31, 2018 (in thousands) Assets Assets With Assets With Assets > Next-Day Same-Day Liquidity Next-Day Liquidity Liquidity Total Cash & Cash Equivalents $ 50,007 $ - $ - $ 50,007 S&P Rated Money Market Funds (> Am) 78,444 - - 78,444 U.S. Treasury Debt Obligations (> 1 year) - 163,621-163,621 U.S. TIPs - 31,121-31,121 U.S. Agencies (> 1 year) - - 112,745 112,745 Investment Grade Debt (not included above) - 110,372 232,392 342,764 Equities - 111,015 322,111 433,127 Non-Investment Grade Debt - - 719 719 Total $ 128,451 $ 416,129 $ 667,968 $ 1,212,548 Self-Liquidity Backed Debt Same-Day Notice Next-Day Notice > Next-Day Notice Total Series 2015A Variable Rate Demand Obligation (Windows) $ - $ - $ 78,400 $ 78,400 *The table represents assets that would be reasonably available to Spectrum Health System to satisfy a liquidity event. The table does not include assets held by affiliates that would not be reasonably available to satisfy a liquidity event, including assets held by Spectrum Health Foundation and Priority Health, among others.
Consolidating Balance Sheets March 31, 2018 (in thousands) Delivery Priority Corporate Reclass System Health & Subsidiaries & Eliminations Total Cash and cash equivalents $ 151,911 $ 436,490 $ 20,101 $ (10,867) $ 597,635 Short term investments - 340,461 - - 340,461 Patient accounts receivable, net 447,026 - - - 447,026 Other accounts receivable, net 14,258 109,056 1,477 (67) 124,724 Third party receivables 413 - - - 413 Pledges receivable 3,523-8,158-11,681 Inventory 40,845 - - - 40,845 Prepaid expenses and other current assets 14,975 42,374 37,504-94,853 Total Current Assets 672,951 928,381 67,240 (10,934) 1,657,638 Due from affiliates 105,192 71,100 105,260 (281,552) - Investment in system - - 30,750 (30,750) - Assets limited as to use and other LT investments 27,536 648,854 1,361,458 (23,558) 2,014,290 Donor and Restricted Assets Investments - - 174,736-174,736 Assets designated for affiliates (FAS 136) 158,021 - - (158,021) - Pledges receivable 27,284-19,032-46,316 185,305-193,768 (158,021) 221,052 Property and equipment, net 1,491,869 22,502 103,418-1,617,789 Other assets: Investment in Joint Ventures 31,847 - - - 31,847 Goodwill, net 1,696 10,331 8,144-20,171 Other intangible assets and costs 1,805 4,791 - - 6,596 Other long term assets 11,532 4,743 141,426-157,701 46,880 19,865 149,570-216,315 TOTAL ASSETS $ 2,529,733 $ 1,690,702 $ 2,011,464 $ (504,815) $ 5,727,084
Consolidating Balance Sheets March 31, 2018 (in thousands) Delivery Priority Corporate Reclass System Health & Subsidiaries & Eliminations Total Accounts payable and accrued expenses $ 163,590 $ 364,690 $ 53,705 $ (11,093) $ 570,892 Accrued salaries, wages and related withholdings 144,382-82,411-226,793 Health plan claims payable - 338,343 - - 338,343 Short term debt 78,400 - - - 78,400 Current maturities of long term debt 18,148 1,245 1,188-20,581 Total Current Liabilities 404,520 704,278 137,304 (11,093) 1,235,009 Due to affiliates 65,637 142,535 96,939 (305,111) - Third party settlement liabilities 24,978 - - - 24,978 Interest rate swaps 1,045-81,142-82,187 Long term debt, less current portion 651,312 21,587 50,796-723,695 Professional liability accrual - - 59,498-59,498 Accrued pension obligation 2,511-32,254-34,765 Other long term liabilities 19,944 771 114,061-134,776 Net Assets (deficit): Common Stock - 19 - (19) - Additional paid-in capital 67,024 53,993 - (121,017) - Unrestricted 1,099,130 767,519 1,288,227 40,695 3,195,571 Temporarily restricted 124,647-85,308 (92,059) 117,896 Permanently restricted 66,384-65,935 (65,960) 66,359 Total System Net Assets 1,357,185 821,531 1,439,470 (238,360) 3,379,826 Non-controlling interest 2,601 - - 49,749 52,350 Total Net Assets 1,359,786 821,531 1,439,470 (188,611) 3,432,176 TOTAL LIABILITIES AND NET ASSETS $ 2,529,733 $ 1,690,702 $ 2,011,464 $ (504,815) $ 5,727,084
Consolidating Statements of Activities (in thousands) Delivery Priority Corporate Reclass OPERATING REVENUE (net of deductions) System Health & Subsidiaries & Eliminations Total Premium Revenue $ - $ 2,735,451 $ - $ (140,665) $ 2,594,786 Patient service revenue (net of contractual allow & adjustments) 2,361,992 - - (486,606) 1,875,386 Provision for bad debt (103,471) - - - (103,471) Net patient service revenue less provision for bad debts 2,258,521 - - (486,606) 1,771,915 Other 63,013 39,211 3,772 (2,159) 103,837 Total operating revenue 2,321,534 2,774,662 3,772 (629,430) 4,470,538 OPERATING EXPENSES Salaries, wages and employee benefits 1,225,848 (73) 323,130 (152,094) 1,396,811 Supplies and other 881,899 309,594 (339,493) 41 852,041 Health plan payments to other providers - 2,400,019 - (477,375) 1,922,644 Depreciation and amortization 121,323 1,488 23,524-146,335 Interest 19,753 1,155 (673) (544) 19,691 Total operating expenses 2,248,823 2,712,183 6,488 (629,972) 4,337,522 Net operating income 72,711 62,479 (2,716) 542 133,016 Net operating margin % 3.1% 2.3% (72.0)% (0.1)% 3.0% OTHER REVENUE (EXPENSE): Investment Income, net 1,793 16,546 59,411 (544) 77,206 Unrealized gain (loss) on investments, net 390 (388) 15,327-15,329 Gain (loss) on interest rate swaps, net 178-11,360-11,538 Other income (expense) (1,381) (3,172) (8,062) 3,320 (9,295) Contribution received in integration of affiliate 2,742 - - - 2,742 Total other revenue (expenses) 3,722 12,986 78,036 2,776 97,520 EXCESS OF REVENUE OVER (UNDER) EXPENSES 76,433 75,465 75,320 3,318 230,536 Less: Excess of revenue over (under) expenses attributable to noncontrolling interest (115) - - (4,612) (4,727) EXCESS OF REVENUE OVER (UNDER) EXPENSES ATTRIBUTABLE TO SYSTEM $ 76,318 $ 75,465 $ 75,320 $ (1,294) $ 225,809 Total margin % 3.3% 2.7% 92.1% 0.2% 4.9%
Consolidating Statements of Activities (continued) (in thousands) Delivery Priority Corporate Reclass System Controlling System System Health & Subsidiaries & Eliminations Sub-Total Interest Total Net asset balance (deficit) at beginning of year $ 1,176,955 $ 692,054 $ 1,374,402 $ (104,869) $ 3,138,542 $ 45,311 $ 3,183,853 Excess of revenue over (under) expenses 76,318 75,465 75,320 (1,294) 225,809 4,727 230,536 Contributions - - 22,692-22,692-22,692 Expenditures of donor sponsored programs (1,030) - (13,400) - (14,430) - (14,430) Capital transfers (to affiliate) from Foundation 3,076 - (3,076) - - - - Investment income (loss) from restricted net assets 2,169-4,939-7,108-7,108 FAS 136 activity - current year 11,192 - - (11,192) - - - Transfers: Corporate 23,028 - (23,028) - - - - Foundation (1,620) - 1,620 - - - - Other activity 73-1 31 105 2,312 2,417 Net asset balance at end of year $ 1,290,161 $ 767,519 $ 1,439,470 $ (117,324) $ 3,379,826 $ 52,350 $ 3,432,176
Consolidating Statements of Cash Flows (in thousands) Delivery Priority Corporate Reclass OPERATING ACTIVITIES AND OTHER REVENUE System Health & Subsidiaries & Eliminations Total Change in net assets $ 113,134 $ 75,465 $ 65,068 $ (7,843) $ 245,824 Contributions and other net asset activity (1,212) - (14,232) (31) (15,475) Contributions received in integration of affiliates (2,742) - - - (2,742) Unrealized (gain) loss in market value of interest rate swaps (471) - (18,798) - (19,269) Depreciation and amortization 121,323 1,488 23,524-146,335 Changes in operating assets and liabilities: Trading securities Assets limited as to use (1,333) (48,943) (30,760) 1,204 (79,832) Donor restricted investments - - (15,920) - (15,920) FAS136 changes (11,192) - - 11,192 - Decrease (increase) in net AR, inventories, prepaid expenses, third-party settlement receivables and other operating assets (110,929) 14,075 (22,997) 19 (119,832) Increase (decrease) in AP, accrued expenses, accrued salaries and related withholdings, health plan claims payable, third-party settlement liabilities and other operating liabilities 37,541 76,625 11,010 260 125,436 Other (2,443) 32 309 - (2,102) Net cash provided by (used in) operating activities 141,676 118,742 (2,796) 4,801 262,423 and other revenue INVESTING ACTIVITIES Additions to property and equipment, net (99,841) - (29,941) - (129,782) Nexus additions (42,574) - - - (42,574) Investment in System - - 3,350 (3,350) - Integration of affiliates 6,712 - - - 6,712 Other (11,767) - - - (11,767) Net cash provided by (used in) investing activities (147,470) - (26,591) (3,350) (177,411) FINANCING ACTIVITIES Contributions and other net asset activity 1,212-14,232 31 15,475 Proceeds from issuance of long term debt 56,490 - - - 56,490 Payment of long term debt (73,313) (934) (1,151) - (75,398) Inter-company - due to/due from affiliates, net 419 10,895 (10,109) (1,205) - Inter-company transfers 24,484 - (24,484) - - Net cash provided by (used in) financing activities 9,292 9,961 (21,512) (1,174) (3,433) Increase (decrease) in cash 3,498 128,703 (50,899) 277 81,579 Cash, beginning of year 148,413 307,787 71,000 (11,144) 516,056 Cash, end of year $ 151,911 $ 436,490 $ 20,101 $ (10,867) $ 597,635