Document dated November 27, 2017 The following represents Management s discussion of financial and statistical information. It is intended to support certain other reports, included here, or available through public information. It is not intended to supplement or to be used as or to supplement an Official Statement or offering document related to issuance of securities. Some of the statements or presentation of information may rely on analysis, estimates, or assumptions by Management. Annual Report For the Fiscal Year Ended June 30, 2017 Concerning WellSpan Health History and Background of WellSpan Health WellSpan Health ("WSH"), a tax-exempt, not-for-profit corporation described in Section 501(c)(3) of the Code, is parent and sole corporate member of York Hospital, Gettysburg Hospital and Ephrata Community Hospital, the Obligated Group, and other related affiliates. Operating as a communitybased, not-for-profit organization, WSH is committed to developing and coordinating a system for delivery of health care services which improve the health and well-being of the residents of communities in York, Lancaster, Lebanon, Dauphin and Adams Counties in Pennsylvania, and in Northern Maryland. WSH operates six hospitals. In addition to the three hospitals comprising the Obligated Group, WSH operates the WellSpan Surgical and Rehabilitation Hospital, a 73 bed surgical and inpatient rehabilitation hospital. In July 2015, WSH became the parent and sole corporate member of The Good Samaritan Hospital (GSH). Good Samaritan Hospital is a 169 bed acute care hospital located in Lebanon County, Pennsylvania. In January 2016, WSH became the parent and sole corporate member of Philhaven, a behavioral health provider. Philhaven has 13 locations, including a 103 bed hospital and provides counseling and other mental health care services in Dauphin, Lancaster, Lebanon, York, Adams and Cumberland counties. The six hospitals operate 1,127 licensed beds and had 56,709 admissions in fiscal year 2017. WSH also includes 65 ambulatory care and outpatient locations, six retail pharmacy sites, 103 primary care and specialty physician offices, 1,471 medical and dental staff members, a preferred provider organization and third party administrator, two home health service areas, two outpatient surgery centers and one endoscopy center. The facilities operated by WSH affiliates are located in South Central Pennsylvania approximately 60 miles north of Baltimore, Maryland and 100 miles west of Philadelphia, Pennsylvania. For additional information about WellSpan Health, please contact Rick Harley, VP of Treasury Management Services, at 717.337.4123, or visit our website www.wellspan.org.
Management s Discussion of Financial Condition and Performance For fiscal 2017, excess revenues over expenses was $156.2 million compared to $109.8 million for the prior year. Total Operating Revenue was $2.1 billion compared to $2.0 billion for the prior year. Total Operating Revenue increased by $113.0 million, or 5.7% over the prior year totals. Total Operating Expenses were $2.0 billion compared to $1.9 billion for the prior year. Operating income for the year ended June 30, 2017 was $33.4 million compared to $77.5 million for the prior fiscal year. Operating EBITDA and Operating EBITDA margin was $141.6 million and 6.8% for the 2017 fiscal year, compared to $180.9 million and 9.2% for the prior year. Non-operating income for the 2017 fiscal year was $123.7 million compared to $33.9 million for the 2016. Fiscal 2017 operating results were negatively impacted by the development of the Epic electronic health information system and its implementation in the eastern segment of WellSpan s market in May of 2017. The direct costs of the project recorded as expense in fiscal 2017 were $39.9 million. The indirect negative financial impact of the project related primarily to reduced volume due to clinician training, the initial disruption of effective clinical capacity, and additional labor costs are estimated to be approximately an additional $21.8 million. All financial and statistical information presented in this report includes Philhaven for periods subsequent to a merger on January 1, 2016. Balance Sheet Total assets of WSH were $2.5 billion at June 30, 2017 and $2.3 billion at June 30, 2016. Unrestricted cash and investments increased by $99.2 million to $1.1 billion. As of June 30, 2017, $1.0 billion of unrestricted cash and investments is considered liquid within 1 month. Days cash on hand was 212.4 on June 30, 2017, up from 210.5 on June 30, 2016. The following lists the primary changes to days cash on hand. Days cash on hand at June 30, 2016 210.5 Additions: Operating income plus depreciation 22.3 days Investment income 20.0 Debt proceeds, net of repayments 17.5 Reduction in debt proceeds held by trustee 1.4 Other 1.7 Total Additions 62.9 Reductions: Capital expenditures 31.2 Increase in expense per day 18.3 Changes in non-current liabilities 8.7 Changes in non-cash working capital items 2.8 Total Reductions 61.0
Days cash on hand at June 30, 2017 212.4 Investments are managed within a centralized investment management process. Reported income from investments for the 2017 fiscal year was $107.3 million, compared to a loss of $23.1 million for the prior fiscal year. The increase in investment income was reflective of overall market performance during fiscal 2017. For the fiscal year ended June 30, 2017, non-cash working capital changes included an increase in net patient accounts receivable of $21.6 million. Total net patient accounts receivable at June 30, 2017 was $294.3 million. Days of net patient revenues in patient accounts receivable were 53.8 at June 30, 2017, compared to 49.0 days at June 30, 2016. During fiscal 2017, WellSpan made capital investments of $158.3 million. Total long term debt for WellSpan Health at June 30, 2017 was $651.0 million. As of June 30, 2017 long term debt to capitalization was 35.5%. The cash to debt ratio was 175.2%. Income Statement Cash flow from operations (operating income plus depreciation and amortization) for the year ended June 30, 2017 was $119.7 million, compared to $162.1 million for the same period last year. For the year ended June 30, 2017 total revenue was $2.1 billion, an increase of $112.8 million, or 5.8% over the same period last year. Revenue growth was attributable to volume and payment increases from payors. Total admissions increased by 2.9% or 1,611 cases for the year ended June 30, 2017 compared to the same period last year. Excluding the impact of the merger with Philhaven, admissions increased 498 cases. Observation cases and days (one day stays considered outpatient) increased by 14.6%, or 3,261 days compared to the prior year. Other key services experiencing volume growth in the fiscal year were emergency department at 2.6%, laboratory at.2% and surgery at.7%. For the year ended June 30, 2017, total expenses increased $156.9 million or 8.3%. Salaries increased by $114.1 million, or 12.9% compared to the prior year. Included in salary expense for 2017 are additional costs related to the development and implementation of the Epic electronic health information system as mentioned above. Employee benefits expenses decreased by $2.5 million, or.1%, compared to the prior year. The reduction is attributable to retirement benefit costs as a result of a freeze in the company sponsored defined benefit pension plan. For the year ended June 30, 2017 supplies and other expenses increased by $36.2 million, or 6.4% compared to the prior year. Professional fees increased $4.2 million or 9.0%. Bad debt increased by $2.1 million over the same period last year. As a percent of net patient revenue, bad debt expense was 3.8% for the year June 30, 2017 compared to 3.9% for 2016. Fiscal 2016 included activity subsequent to the January 1, 2016 merger of Philhaven. Excluding the impact of the Philhaven merger, total expenses increased $113.6 million or 6.0%. Salaries increased by $92.3 million, or 10.4% compared to the prior year. Employee benefits expenses decreased by $10.9 million, or 3.7%, compared to the prior year. For the year ended June 30, 2017 supplies and other expenses increased by $11.7 million, or 2.0% compared to the prior year. Bad debt increased by $.6 million over the same period last year.
WellSpan Health Consolidated Balance Sheets As of June 30, 2017 and June 30, 2016 (in thousands of dollars) 06/30/17 06/30/16 Assets Current assets Cash and cash equivalents $ 67,546 $ 110,419 Assets limited as to use 6,114 5,795 Accounts receivable, net of allowance for doubtful accounts 294,285 272,643 Other receivables 23,261 20,824 Inventories 21,885 21,928 Prepaid expenses 31,143 27,787 Total current assets 444,234 459,396 Assets whose use is limited, net of current portion Board-designated 1,081,104 945,493 Self-insurance trust 14,161 13,032 Temporarily restricted investments 11,814 8,942 Permanently restricted investments 5,334 5,936 Beneficial interest in perpetual trust 18,983 17,837 Pledges receivable 4,967 5,853 Property and equipment, at cost, net of accumulated depreciation 771,540 735,718 Investments in joint ventures 10,464 10,157 Note receivable 1,461 2,522 Other assets 111,230 67,349 Total assets $ 2,475,292 $ 2,272,235 Liabilities and Net Assets Current liabilities Current portion of long-term debt $ 10,143 $ 10,302 Accounts payable and accrued expenses 94,773 67,706 Accrued interest payable 1,937 1,936 Accrued salaries and wages 102,594 127,341 Advances from third-party payors 5,986 4,877 Estimated self-insurance costs & postretirement benefits 43,823 28,965 Estimated third-party payor settlements 9,039 16,177 Total current liabilities 268,295 257,304 Estimated self-insurance costs 72,936 74,313 Long-term debt, less current portion 640,881 546,113 Accrued Retirement Benefits 203,036 266,354 Swap contracts 50,003 70,126 Other noncurrent liabilities 1,511 1,511 Total liabilities 1,236,662 1,215,721 Minority interest 4,840 5,000 Net assets Unrestricted 1,183,888 1,005,226 Temporarily restricted 25,585 23,195 Permanently restricted 24,317 23,093 Total net assets 1,233,790 1,051,514 Total liabilities and net assets $ 2,475,292 $ 2,272,235
WellSpan Health Consolidated Statements of Operations Year to Date Ended June 30, 2017 and 2016 Actual Budget Actual (in thousands of dollars) FY 2017 FY 2017 FY 2016 Unrestricted revenues, gains and other support Net patient service revenue $ 2,073,633 $ 2,144,388 $ 1,965,017 Provision for uncollectible accounts (79,383) (84,578) (77,295) Other revenue 82,312 38,359 75,260 Net assets released from restrictions used for operations 2,179 739 3,001 Total revenues, gains and other support 2,078,741 2,098,908 1,965,983 Expenses Salaries and wages 998,045 982,894 883,892 Employee benefits 289,603 294,904 292,070 Professional fees 50,848 47,792 46,670 Supplies and other 598,666 588,491 562,477 Depreciation and amortization 86,357 90,220 84,573 Interest 21,866 17,385 18,795 Total operating expenses 2,045,385 2,021,686 1,888,477 Operating income 33,356 77,222 77,506 Loss on Debt Refinancing - - (975) Adjusted Operating income 33,356 77,222 76,531 Other income (expense) Contributions 2,413 2,689 1,509 Investment income, net 107,334 51,085 (23,082) Equity in income of joint ventures 582 1,048 968 Gain (loss) on sale of assets/other (5,788) 11 13,837 Merged Assets - GSH & PH - - 58,358 Change in fair value of interest rate swap 20,123 - (20,569) Other income, net (982) (2,100) 2,925 Total other income (expense) 123,682 52,733 33,946 Excess of revenues over expenses before minority interest 157,038 129,955 110,477 Minority interest (831) (891) (702) Excess of revenues over expenses $ 156,207 $ 129,064 $ 109,775 * Effective January 1, 2017 temporary professional staffing expense was reclassified from Supplies and Other to Professional Fees. For comparative purposes, fiscal year 2016 and the 2017 budget reflects a reclass of $16.3 million from Supplies and Other to Professional Fees.
Obligated Group YORK, GETTYSBURG AND EPHRATA HOSPITALS COMBINED 2017 2016 2015 ** 2014 Admissions: Medical/Surgical/Pediatric 31,674 30,337 30,128 28,961 Mental Health 2,665 2,849 2,651 2,644 Intensive/Coronary Care 1,688 1,805 1,808 1,762 Obstetrics/Gynecology 4,601 4,860 4,965 5,030 Newborn 3,752 3,908 3,931 3,961 NICU 559 654 705 733 Total Admissions 44,939 44,413 44,188 43,091 Observation Cases 21,211 17,992 14,065 13,570 Patient Days: Medical/Surgical/Pediatric 145,767 141,577 141,208 133,202 Mental Health 20,335 20,854 21,622 20,905 Intensive/Coronary Care 14,441 14,407 13,719 14,241 Obstetrics/Gynecology 13,601 14,207 13,922 13,773 Newborn 8,092 8,491 8,506 8,601 NICU 10,904 10,286 9,244 10,146 Total Patient Days 213,140 209,822 208,221 200,868 Outpatient & Ancillary: Emergency Room: Visits (inpatient) 26,653 25,924 25,661 24,688 Visits (outpatient) 117,911 117,421 115,456 111,352 Surgery: Inpatient 10,709 10,345 10,173 9,898 Outpatient 14,891 15,332 15,219 14,975 Laboratory: Inpatient Tests 3,732,788 3,625,103 3,482,324 3,374,789 Outpatient Tests 7,530,468 7,470,162 7,242,995 7,089,055 Note: The following surgeries are not included in the obligated group totals above. 2017 2016 2015 2014 Surgery: Apple Hill Surgical Center 6,923 6,795 6,300 6,818 Gettysburg Hospital Surgical Center - - 60 680 * * Surgical cases transferred to Gettysburg Hospital in August 2014 ** Ephrata Community Hospital added to the Obligated Group in Fiscal 2015; historical periods include ECH activity for comparative purposes
Debt Service Coverage & Capitalization Tables The following table sets forth the Obligated Group s income available for debt service: Obligated Group Years Ended June 30, Debt Service Coverage: 2017 2016 (000's omitted) Excess of revenue over expenses 271,669 134,146 Depreciation and amortization 40,903 40,965 Interest expense 16,820 15,467 Change in unrealized gains on trading securities (68,732) 38,570 Change in fair value of interest rate swap (14,486) 13,893 Income available for debt service 246,174 243,041 Maximum annual debt services requirement 39,113 33,755 Maximum annual debt service coverage ratio 6.3 7.2 The following table sets forth the Obligated Group s capitalization ratios: Obligated Group Years Ended June 30, Debt to Capitalization: 2017 2016 (000's omitted) Long-term debt 497,612 403,252 Unrestricted net assets 1,307,415 1,102,017 Total capitalization 1,805,027 1,505,269 Percent of long - term debt to capitalization 27.6% 26.8%
The following table sets forth WellSpan Health s (consolidated) income available for debt service: Debt Service Coverage: Years Ended June 30, 2017 2016 (000's omitted) Excess of revenue over expenses 156,207 109,775 Loss on debt refinancing - 975 Contribution - merger - (58,358) Depreciation and amortization 86,357 84,573 Interest Expense 21,866 18,795 Change in unrealized gains on trading securities (72,980) 44,610 Change in fair value of interest rate swap (20,123) 20,569 Income available for debt dervice 171,327 220,939 Maximum annual debt services requirement 39,987 35,328 Maximum annual debt services coverage ratio 4.3 6.3 The following table sets forth the WellSpan Health s (consolidated) capitalization ratios: Debt to Capitalization: Years Ended June 30, 2017 2016 (000's omitted) Long-term debt 651,024 559,426 Unrestricted net assets 1,183,888 1,005,226 Total capitalization 1,834,912 1,564,652 Percent of long - term debt to capitalization 35.5% 35.8%
The following sets forth the Payor Mix based on net revenues of the Obligated Group members: York Hospital Fiscal Years Ended 2017 2016 2015 2014 2013 Medicare & MC Managed Care 30% 30% 30% 31% 31% Medicaid & MA Managed Care 8% 9% 7% 7% 7% Highmark & Capital Blue Cross 24% 23% 23% 24% 24% Commercial/Self/Other 4% 6% 4% 5% 5% Managed Care 34% 33% 36% 33% 33% 100% 100% 100% 100% 100% Gettysburg Hospital Fiscal Years Ended 2017 2016 2015 2014 2013 Medicare & MC Managed Care 29% 29% 27% 27% 28% Medicaid & MA Managed Care 5% 5% 4% 4% 4% Highmark & Capital Blue Cross 23% 24% 26% 27% 27% Commercial/Self/Other 5% 5% 4% 5% 4% Managed Care 38% 37% 39% 37% 37% 100% 100% 100% 100% 100% Ephrata Community Hospital Fiscal Years Ended 2017 ** 2016 ** 2015 ** 2014 2013 Medicare & MC Managed Care 27% 28% 33% 30% 29% Medicaid & MA Managed Care 5% 3% 2% 2% 2% Highmark & Capital Blue Cross 29% 32% 35% 33% 32% Commercial/Self/Other 10% 7% 14% 16% 17% Managed Care 29% 30% 16% 19% 19% 100% 100% 100% 100% 100% ** Ephrata Community Hospital added to Obligated Group in Fiscal 2015
The following table sets forth the employees and admission by provider for the obligated group and in aggregate for medical staff and employees: Medical Staff: As of June 30, 2017 2016 Total medical staff 1,471 1,570 Employees: Total obligated group employees: York Hospital 4,160 4,045 Gettysburg Hospital 639 619 Ephrata Community Hospital 1,018 1,035 Total obligated group employees 5,817 5,698 Total WellSpan Health employees 13,410 12,107 % of employees subject to collective bargaining agreement 0.0% 0.0% Admissions by Affiliated Providers: Fiscal 17 Fiscal 16 Obligated Group: Admissions Admissions York Hospital 33,331 33,019 Gettysburg Hospital 4,441 4,406 Ephrata Community Hospital 7,167 6,988 Total Admissions 44,939 44,413 Fiscal 17 Admissions by Employed Providers: Admissions % of Total WellSpan Providers 33,877 75.4% Other 11,062 24.6% Total 44,939 100.0%