Henry Mayo Newhall Memorial Hospital
Financial Statements
Years Ended September 30, 2012 and 2011
The report accompanying these financial statements was issued by
BDO USA, LLP, a Delaware limited liability partnership and the U.S.
member of BDO International Limited, a UK company limited by guarantee.
Henry Mayo Newhall Memorial Hospital
Financial Statements
Years Ended September 30, 2012 and 2011
Henry Mayo Newhall Memorial Hospital
Contents
Independent Auditors’ Report
3
Financial Statements
Statements of Financial Position
5-6
Statements of Operations
7
Statements of Changes in Net Assets
8
Statements of Cash Flows
9 – 10
Notes to Financial Statements
11 – 35
2
Financial Statements
Henry Mayo Newhall Memorial Hospital
Statements of Financial Position
September 30,
2012
2011
30,960,621
9,872,243
11,766,358
$ 18,354,730
14,668,877
11,837,294
38,074,467
1,142,140
3,218,948
4,123,933
2,511,986
4,890,219
1,423,685
-
31,614,665
1,207,799
645,743
3,343,540
2,606,787
4,710,252
107,984,600
88,989,687
4,907,825
4,604,978
133,216,338
140,751,595
Pledged lease
2,590,680
2,629,504
Deferred financing costs, net
7,326,344
7,876,733
Other assets
2,785,893
1,125,350
$ 258,811,680
$ 245,977,847
Assets
Current assets
Cash and cash equivalents
Short-term investments
Assets limited as to use
Patient accounts receivable, less bad debt allowances
of $5,997,410 and $5,598,285, respectively
Receivable from affiliate
Other receivables
Inventories
Prepaid expenses and other current assets
Quality assurance fee receivable
California Hospital Foundation grant receivable
Prepaid quality assurance fees
Total current assets
Assets limited as to use, less current portion
Property, plant and equipment, net
Total assets
5
$
Henry Mayo Newhall Memorial Hospital
Statements of Financial Position
September 30,
2012
2011
Liabilities and Net Assets
Current liabilities
Current portion of long-term debt
Current portion of obligations under capitalized leases
Accounts payable
Accrued payroll and benefits
Accrued expenses
Accrued interest
Quality assurance fee payable
Deferred quality assurance fee income
Total current liabilities
$
3,010,000
881,449
9,075,562
13,770,582
1,157,301
2,914,010
6,313,904
-
$
2,885,000
751,814
11,075,696
12,436,128
1,032,128
2,979,597
4,710,252
37,122,808
35,870,615
113,645,199
116,677,761
10,087,818
10,969,267
Deferred contribution revenue
2,590,680
2,629,504
Accrued malpractice liability
4,878,000
3,748,000
168,324,505
169,895,147
Net assets
Temporarily restricted
Unrestricted
1,235,039
89,252,136
1,017,780
75,064,920
Total net assets
90,487,175
76,082,700
$ 258,811,680
$ 245,977,847
Long-term debt, less current portion
Obligations under capitalized leases, less current portion
Total liabilities
Commitments and contingencies
Total liabilities and net assets
See independent auditors’ report and accompanying notes to financial statements.
6
Henry Mayo Newhall Memorial Hospital
Statements of Operations
Years Ended September 30,
2012
Unrestricted revenues
Net patient service revenue
Provision for bad debts
$ 239,445,334
(15,878,659 )
Net patient service revenue less provision for bad debts
2011
$ 215,235,795
(8,657,369 )
223,566,675
206,578,426
2,437,247
5,839,609
247,352
1,604,935
3,581,075
355,524
232,090,883
212,119,960
77,013,341
23,107,859
7,565,175
31,852,455
20,167,715
4,461,957
7,508,943
15,545,729
2,421,299
4,504,785
17,669,775
12,239,526
74,047,434
22,099,481
6,859,908
29,857,027
21,631,227
3,069,624
7,558,821
13,843,213
2,263,631
4,598,650
13,978,356
10,211,639
224,058,559
210,019,011
Operating income
8,032,324
2,100,949
Other income (loss)
Contributions
Interest income
Other nonoperating income, net
Electronic health records grant income
Equity in income of Joint Venture
38,824
428,103
3,604
2,296,996
606,568
40,746
41,133
159,287
578,050
11,406,419
2,920,165
2,780,797
1,887,292
Nonpatient revenue
California Hospital Foundation grant revenue
Net assets released from restrictions used for operations
Total unrestricted revenues
Expenses
Salaries and wages
Employee benefits
Registry
Supplies
Purchased services
Repairs and maintenance
Interest
Depreciation and amortization
Insurance, net
Facility costs
Quality assurance fee hospital tax
Other operating costs
Total expenses
Excess of revenues over expenses
Net assets released from restrictions used for purchases
of property, plant and equipment
Net increase in unrestricted net assets
$
14,187,216
$
4,807,457
See independent auditors’ report and accompanying notes to financial statements.
7
Henry Mayo Newhall Memorial Hospital
Statements of Changes in Net Assets
Years Ended September 30,
2012
Unrestricted net assets
Excess of revenues over expenses
Net assets released from restrictions used for
purchases of property, plant and equipment
$ 11,406,419
2011
$
2,920,165
2,780,797
1,887,292
Net increase in unrestricted net assets
14,187,216
4,807,457
Temporarily restricted net assets
Contributions
Net assets released from restrictions
3,245,588
(3,028,329 )
Net increase (decrease) in temporarily restricted net assets
217,259
2,147,755
(2,242,816 )
(95,061 )
Increase in net assets
14,404,475
4,712,396
Net assets, beginning of year
76,082,700
71,370,304
$ 90,487,175
$ 76,082,700
Net assets, end of year
See independent auditors’ report and accompanying notes to financial statements.
8
Henry Mayo Newhall Memorial Hospital
Statements of Cash Flows
Years Ended September 30,
2012
Cash flows from operating activities
Increase in net assets
$
Adjustments to reconcile change in net assets to net cash
provided by operating activities:
Depreciation and amortization
Provision for bad debts
Amortization of deferred financing costs, net
Equity in income of Joint Venture
Distribution from Joint Venture
Capitalization of interest
(Gain) loss on disposal of fixed assets
(Gain) loss on investments
Changes in assets and liabilities:
Patient accounts receivable
Receivable from affiliate
Other receivables
Inventories
Prepaid expenses and other current assets
Prepaid quality assurance fees tax
Quality assurance fee receivable
California Hospital Foundation grant receivable
Other assets
Accounts payable
Accrued payroll and benefits
Accrued expenses
Accrued interest
Deferred quality assurance fee income
Accrued malpractice liability
Net cash provided by operating activities
14,404,475
2011
$
4,712,396
15,545,729
15,878,659
527,827
(606,568 )
535,000
170,490
13,843,213
8,657,369
539,602
(578,050 )
440,000
(162,714 )
(26,024 )
(199,176 )
(22,338,461 )
65,659
(2,573,205 )
(780,393 )
94,801
4,710,252
(4,890,219 )
(1,423,685 )
(117,397 )
(2,000,134 )
1,334,454
125,173
(65,587 )
1,603,652
(341,000 )
(8,060,574 )
(328,611 )
386,069
(134,541 )
(95,873 )
(4,710,252 )
113,531
(2,052,056 )
1,771,045
(550,942 )
(56,369 )
4,710,252
(61,000 )
19,859,522
18,157,295
(8,010,472 )
4,625,566
17,633,376
(17,865,287 )
(22,726,624 )
10,344,855
(93,255 )
23,512,281
(23,734,194 )
Net cash used in investing activities
(3,616,817 )
(12,696,937 )
Cash flows from financing activities
Payments on long-term debt
Payments on capital lease obligations
(2,885,000 )
(751,814 )
(2,770,000 )
(817,066 )
Net cash used in financing activities
(3,636,814 )
(3,587,066 )
Cash flows from investing activities
Acquisition of property, plant and equipment
Proceeds from sale of short-term investments
Advances to Joint Venture
Decrease in assets limited as to use
Increase in assets limited as to use
9
Henry Mayo Newhall Memorial Hospital
Statements of Cash Flows (Continued)
Years Ended September 30,
2012
2011
Net increase in cash and cash equivalents
12,605,891
1,873,292
Cash and cash equivalents, beginning of year
18,354,730
16,481,438
$ 18,354,730
Cash and cash equivalents, end of year
$
30,960,621
Supplemental disclosure of cash flow information
Cash paid for interest during the year
$
7,046,705
Supplemental disclosure of non-cash transactions
Pledged lease (See Note 12)
Bond premium amortization (See Note 6)
$
$
(38,824 )
(22,563 )
$
$
$
7,238,302
(38,246 )
(22,957 )
See independent auditors’ report and accompanying notes to financial statements.
10
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
1. Organization
Henry Mayo Newhall Memorial Hospital (the “Company” or “Hospital”) is a California not-for-profit
public service benefit acute care hospital providing patient services to individuals in Santa Clarita,
California.
The Hospital is affiliated with Santa Clarita Health Care Association, Inc. and its affiliates through
common management. Santa Clarita Health Care Association and one of its subsidiaries, Santa
Clarita Health Care Management Group, Inc., had no activity during the years ended September
30, 2012 and 2011. In addition, the Hospital is also affiliated with Henry Mayo Newhall Memorial
Health Foundation (the “Foundation”). The Foundation shares some members of management with
the Hospital, however, the Hospital has no control over the Foundation or any ongoing interests in
the net assets of the Foundation.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company prepares its financial statements in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 954, “Health Care Entities.”
The Company’s accounting policies used in the preparation of the accompanying financial
statements are in conformity with accounting principles generally accepted in the United States of
America and have been consistently applied.
Management’s Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. The significant estimates made in the
preparation of the Company’s financial statements relate to the assessment of the carrying value
of accounts receivable and bad debt allowances, accruals for malpractice liability and other
similar risks, amounts payable or receivable under health insurance plans and amounts payable or
receivable from the government. While management believes that these estimates are
reasonable, actual results could be materially different from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include certain highly liquid investments with original maturities of
three months or less when purchased, that are not held as collateral.
Short-Term Investments
Short-term investments are comprised of certificates of deposits (“CD”s) with maturities of three
months to one year, short-term bonds and commercial paper. Short-term bonds and commercial
paper at September 30, 2012 and 2011 in the amounts of $9,872,243 and $12,164,222,
respectively, are recorded at fair value.
11
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Patient Accounts Receivable
Patient accounts receivable are stated at the amounts billed to patients or third-party payors and
others less contractual allowances. The carrying amount of patient accounts receivable is reduced
by bad debt allowances that reflect management’s best estimate of the amounts that will not be
collected. Bad debt allowances are based on management’s review of the historical collection
experience of all balances.
The Company provides for an allowance against patient accounts receivable for an amount that
could become uncollectible, whereby such receivables are reduced to their estimated net
realizable value. The Company estimates this allowance based on the aging of their accounts
receivable, historical collection experience from the payors, and other relevant factors. There are
various factors that can impact the collection trends, such as changes in the economy, which in
turn have an impact on unemployment rates and the number of uninsured and underinsured
patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection
efforts. These factors continuously change and can have an impact on collection trends and the
Company’s estimation process. These impacts may be material.
The Company’s policy is to attempt to collect amounts due from patients, including co-payments
and deductibles due from patients with insurance, at the time of service while complying with all
federal and state laws and regulations, including, but not limited to, the Emergency Medical
Treatment and Labor Act (“EMTALA”).
Certain classes of patient accounts receivable are charged off against allowances after a
designated period of collection efforts. Subsequent cash recoveries are recognized as income in
the period when they occur.
The Company provides outpatient and emergency trauma services (“AB99”) for Medi-Cal and other
beneficiaries. The Hospital has been designated as a Private Trauma Hospital, as defined by the
Centers for Medicare & Medicaid Services (“CMS”), in the County of Los Angeles, and receives
supplemental reimbursements for such trauma services that it provides during its fiscal year.
Based on agreements entered into and related reimbursements received to date, the Company
determined that no reserves were necessary for its receivables relating to the California AB99
payor category totaling approximately $1,777,000 and $0 as of September 30, 2012 and 2011,
respectively. There are various factors that can impact the supplemental reimbursements and the
changes in these factors can have a material impact on future collection of these amounts.
Inventories
Inventories consist primarily of pharmaceuticals and medical supplies and are stated at the lower
of cost, which is determined using the weighted-average method, or market.
Assets Limited as to Use
Assets limited as to use include assets set aside by trustees under indenture agreements. These
investments, consisting primarily of U.S. federated treasury obligations, U.S. agency securities,
and a guaranteed investment contract are stated at fair value. The guaranteed investment
contract is stated at fair value, which approximates contract value. Assets limited as to use that
are required for obligations classified as current liabilities are reported as current assets.
12
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Investment income or loss (including realized gains and losses on investments, interest and
dividends) is included in the excess of revenues over expenses. Unrealized gains and losses on
investments are included in the excess of revenues over expenses unless the investments are
trading securities. At September 30, 2012 and 2011, unrealized gains were approximately $15,000
and $62,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided over the estimated
useful life of each class of depreciable asset and is computed using the straight-line method.
Equipment under capital lease obligations is amortized on the straight-line method over the
shorter period of the lease term or the estimated useful life of the equipment. Such amortization
is included in depreciation and amortization in the financial statements. The estimated useful
lives of the related assets are as follows:
Building and improvements
Equipment and furniture
10 to 40 years
2 to 15 years
Maintenance, repairs and investments in minor equipment are charged to operations. Expenditures
which materially increase the value of properties or extend the useful lives are capitalized.
Deferred Financing Costs
Deferred financing costs are amortized using the effective interest method, over the terms of the
related bonds or loans.
Deferred financing costs, net, totaled $7,326,344 and $7,876,733 as of September 30, 2012 and
2011, respectively. Of these amounts, $2,833,011 and $3,085,393 relate to the issuance of the
2001 Bonds (see Note 6), which is amortized over the life of the bonds. $4,493,333 and $4,791,340
relate to the 2007 Bond Series A & B, as of September 30, 2012 and 2011, respectively, which are
also amortized over the life of the bonds. Amortization expense of approximately $550,000 and
$563,000 was recorded for the years ended September 30, 2012 and 2011, respectively.
Amortization expenses is expected to be approximately $538,000, $524,000, $510,000, $495,000,
$479,000 and $4,781,000 for the years ending September 30, 2013, 2014, 2015, 2016, 2017 and
thereafter, respectively.
Fair Value Measurements
FASB ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) provides a framework for
measuring fair value and requires enhanced disclosures about fair value measurements. These
guidelines clarify that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants.
ASC 820 requires disclosure about how fair value is determined for assets and liabilities and
establishes a hierarchy for which these assets and liabilities must be grouped, based on significant
levels of inputs as follows: Level 1 quoted prices in active markets for identical assets or
liabilities; Level 2 quoted prices in active markets for similar assets and liabilities and inputs that
are observable for the asset or liability; or Level 3 unobservable inputs for the asset or liability,
13
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
such as discounted cash flow models or valuations. The determination of where assets and
liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the
fair value measurement.
The following is a description of the valuation methodologies used for instruments measured at
fair value, including the general classification of such instruments pursuant to the valuation
hierarchy:
Level 1: These assets include the part of the Company’s cash equivalents, short-term investments,
and assets limited as to use which consist of money market mutual funds, U.S. federated treasury
obligations, corporate bonds, commercial paper, and U.S. agency securities.
Level 2: These assets include the part of the Company’s assets limited as to use which consists of
a guaranteed investment contract.
The following table presents the financial instruments carried at fair value as of September 30,
2012 (as described above):
Level 1
Short-term investments:
Corporate bonds
Assets limited as to use:
U.S. federated treasury obligations
U.S. agency securities
Guaranteed investment contract
Total assets at fair value
$
9,872,243
Level 2
$
Level 3
-
12,154,559
1,464,124
-
3,055,500
$ 23,490,926
$ 3,055,500
$
Total
- $
-
$
9,872,243
12,154,559
1,464,124
3,055,500
- $ 26,546,426
The following table presents the financial instruments carried at fair value as of September 30, 2011
(as described above):
Level 1
Short-term investments:
Corporate bonds
Assets limited as to use:
U.S. federated treasury obligations
U.S. agency securities
Guaranteed investment contract
Total assets at fair value
$ 12,164,222
Level 2
$
Level 3
-
11,905,258
1,481,514
-
3,055,500
$ 25,550,994
$ 3,055,500
$
$
Total
-
$ 12,164,222
-
11,905,258
1,481,514
3,055,500
-
$ 28,606,494
Guaranteed Investment Contract
The Hospital invests in a guaranteed investment contract with Transamerica Occidental Life
Insurance Company (“TOL”). This has a guaranteed interest rate of 4.99% and is paid semiannually.
14
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
The Hospital may withdraw all or any portion of the principal balance to the extent permitted by
delivery of two (2) business days’ prior written notice to TOL hereto specifying the portion of the
principal balance to be withdrawn on the withdrawal date specified in such notice. Withdrawals
may be made only for the purposes specified in the bond agreements, as defined (see Note 6).
Such withdrawals shall be (a) necessary to avoid a payment default on the bonds, (b) in
connection with a partial or complete refunding of the bonds, (c) in connection with a partial or
complete defeasance of the bonds or (d) to preserve the tax-exempt status of the bonds.
Withdrawals may not be made for reinvestment purposes. Furthermore, without TOL’s prior
written consent, amounts may not be withdrawn from the deposit fund in connection with the
delivery of a letter of credit, surety bond or other security instrument in substitution for the cash
held in the bond fund, whether or not permitted under the bond agreements. TOL shall not be
obligated to permit (i) more than one (1) withdrawal per month hereunder pursuant to this
Section, (ii) a withdrawal in an amount less than $1,000 or (iii) any withdrawal without first
receiving written notice in accordance with the terms of the contract.
Excess of Revenues over Expenses
The statements of operations include excess of revenues over expenses. Changes in unrestricted
net assets which are excluded from excess of revenues over expenses, consistent with industry
practice, include unrealized gains and losses on investments other than trading securities,
permanent transfers of assets to and from affiliates for other than goods and services, and
contributions of long-lived assets (including assets acquired using contributions which by donor
restriction are to be used for the purposes of acquiring such assets).
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by the Hospital has been limited by donors
to a specific time period or purpose. Permanently restricted net assets are those that must be
maintained by the Hospital in perpetuity.
At September 30, 2012 and 2011, the Hospital had $1,235,039 and $1,017,780 of temporarily
restricted net assets, respectively. The Hospital did not have any permanently restricted net
assets at September 30, 2012 and 2011.
California Quality Assurance Fee Program
The State of California enacted Assembly Bill 1383 (“AB 1383”) effective January 1, 2010, as
amended by Assembly Bill 1653 (collectively, the “Program”), to provide one-time supplemental
payments to certain medical facilities such as the hospitals owned and operated by the Company’s
subsidiaries that serve a disproportionate share of indigent and low-income patients. The Hospital
paid $13,978,356 in fees which are reflected in total expenses in the statement of operations. The
Hospital received $13,978,356 in supplemental payments related to the program for the year
ended September 30, 2011, $10,397,281 of which is recorded as a reduction to contractual
adjustments in net patient service revenue and $3,581,075 is recorded as Foundation grant
revenue from the California Hospital Foundation & Trust (“CHFT”) in the statements of operations
for the year ended September 30, 2011.
On April 13, 2011, SB 90 provided a six-month extension of the Hospital Fee Program for dates of
service from January 1, 2011 through June 30, 2011. The Hospital paid $4,710,252 in fees which
are reflected in total expenses in the statements of operations. The Hospital received $4,771,404
15
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
in supplemental payments related to the program through September 30, 2012, $3,740,020 of
which is recorded as a reduction to contractual adjustments in net patient service revenue and
$1,031,384 is recorded as Foundation grant revenue from the CHFT in the statements of
operations for the year ended September 30, 2012. These amounts were deferred at September
30, 2011 as CMS granted final approval of SB90 on December 29, 2011.
In September 2011, the State of California enacted Senate Bill (“SB 335”) which provides a 30month extension of the Hospital Fee Program for date of service from July 1, 2011 through
December 31, 2013. The elements related to the fee-for-service payments were approved by CMS
on June 22, 2012 and final CMS approval for managed care payments is expected in 2013.
Implementation of SB 335 was delayed to August 2012 as a result of pending legal advice obtained
by the California Hospital Association, although certain technical changes to the legislation
required by CMS are included in Senate Bill 920. Through September 30, 2012, the Hospital has
recognized $12,959,523 in fees which are reflected in total expenses in the statements of
operations. The Hospital has recognized $12,959,523 in supplemental payments to be received
related to the program for the year ended September 30, 2012, $8,151,298 of which is recorded as
a reduction to contractual adjustments in net patient service revenue and $4,808,225 is recorded
as Foundation grant revenue from the CHA in the statements of operations for the year ended
September 30, 2012. As of September 30, 2012, the Hospital has paid $6,313,904 in fees and
received $3,261,079 in supplemental payments from the program and $3,384,540 in Foundation
grant payments from the CHFT related to SB 335 with future programs fees of $6,645,619 in fees
and $4,890,219 in supplemental payments and $1,423,685 in Foundation grants recorded as a
current asset and current liability in the statements of financial position.
Electronic Health Records Incentive Program
The American Recovery and Reinvestment Act of 2009 (“ARRA”) established incentive payments
under the Medicare and Medicaid programs for certain professionals and hospitals that
meaningfully use certified electronic health record (“EHR”) technology or adopt or implement
such technology. The Medicare incentive payments will be paid out to qualifying hospitals over
four consecutive years on a transitional schedule. To qualify for Medicare incentives, hospitals and
physicians must meet EHR “meaningful use” criteria that become more stringent over three stages
that have yet to be finalized by CMS.
The Medi-Cal programs require hospitals to register for the program prior to 2016, to engage in
efforts to adopt, implement or upgrade certified EHR technology in order to qualify for the initial
year of participation, and to demonstrate meaningful use of certified EHR technology in order to
qualify for payment for up to three additional years.
For the year ended September 30, 2012, the Hospital has recorded $2,296,996 related to the
Medicare and Medi-Cal programs in other income in the statements of operations. These incentives
have been recognized following the gain contingency model, whereby recognition of gain
contingencies under ASC 450 are not allowed until there is satisfactory resolution of the
uncertainty that realization has occurred.
Net Patient Service Revenue
The Hospital recognizes net patient service revenue in the period in which services are performed.
The Hospital has agreements with third-party payors that provide for payments to the Hospital at
amounts different from its established charges. Payment arrangements include prospectively
16
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
determined rates per discharge, reimbursed costs, discounted charges, and per diem payments.
Net patient service revenue is reported at the estimated net realizable amounts from patients,
third-party payors, and others for services rendered, including estimated retroactive adjustments
under reimbursement agreements with third-party payors (including the Medicare and Medi-Cal
programs). Retroactive adjustments are accrued on an estimated basis in the period the related
services are rendered and adjusted in future periods as final settlements are determined. These
retroactive adjustments may be material.
Patient service revenue, net of contractual allowances and discounts (but before the provision for
bad debts), recognized in the period from these major payor sources, are as follows:
Years ended September 30,
2012
Medicare
Medi-Cal
HMO/PPO
Self-Pay
Others
$
70,461,253
16,243,403
138,223,600
13,814,618
702,461
$ 239,445,334
2011
$
61,667,212
9,141,933
133,297,741
10,523,885
605,024
$ 215,235,795
Charity Care
The Hospital provides care without charge or at amounts less than its established rates to patients
who meet certain criteria under its charity care policy. In fiscal 2011, the charity care policy was
broadened and now includes criteria such as patients with a prior history of bad debt without
payments, patients who have expired, homeless patients, incarcerated patients whose services
were provided prior to arrest, and patients with a history of unemployment, or a history of
ongoing major illness causing multiple hospitalizations. Other types of exceptions to the above
categories require management approval on a specific case by case basis. Net patient service
revenue is reflected net of the charity care reserves. Charity care reserves are based on gross
revenue foregone. The actual costs for charity care in accordance with the Hospitals charity care
policy aggregated approximately $7,606,000 and $11,673,000 for the years ended September 30,
2012 and 2011, respectively.
Charity care reserves included in contractual discounts and the provision for bad debts each year
are as follows:
Years ended September 30,
2012
2011
Provision of bad debt
Charity care reserve
$
15,878,659
12,565,976
$
Total charity care and provision for bad debts
$
28,444,635
$ 25,199,438
17
8,657,369
16,542,069
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Advertising
Advertising costs are expensed as incurred. Advertising expense during the years ended
September 30, 2012 and 2011 was approximately $850,000 and $735,000, respectively.
Donated Services
Volunteers perform various services. The services donated are not reflected in the accompanying
financial statements as expense and income from donations, as these services do not meet the
criteria for recognition.
Interest Expense
Interest expense, which includes amortization of deferred financing costs, during the years ended
September 30, 2012 and 2011 was approximately $7,509,000 and $7,559,000, respectively. Total
interest costs capitalized during the years ended September 30, 2012 and 2011 was approximately
$0 and $163,000, respectively.
Income Taxes
The Hospital is a not-for-profit corporation and has been recognized as tax-exempt pursuant to
Section 501 (c)(3) of the Internal Revenue Code (“IRC”). Under FASB ASC 740, Uncertainty in
Income Taxes, interest and penalties, if any, are recorded to interest expense and other operating
costs, respectively. There were no interest or penalties recorded for the years ended
September 30, 2012 and 2011. The tax years subject to examination by major tax jurisdictions
include the years 2008 and forward by the U.S. Internal Revenue Service (“IRS”). For California,
the tax years subject to examination include the years 2007 and forward.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying values of its long-lived assets for possible
impairment. Whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable, the Company records an adjustment to reduce the related
assets to their net realizable value. The Company believes that no material impairment of its
long-lived assets exists at September 30, 2012 and 2011, respectively.
Accrual for General and Professional Liability Risks
The Company records reserves for claims when they are probable and reasonably estimable. The
Company maintains reserves, which are based on actuarial estimates by an independent third
party, for the portion of their professional liability risks, including incurred but not reported
claims. The Company estimates reserves for losses and related expenses using expected lossreporting patterns. Reserves are not discounted. There can be no assurance that the ultimate
liability will not exceed the Company’s estimates. Adjustments to the estimated reserves are
recorded in the Company’s statements of operations in the periods when such amounts are
determined. These adjustments may be material.
18
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
New Accounting Pronouncements
In August 2010, the FASB issued ASU 2010-23, Health Care Entities (Topic 954): Measuring Charity
Care for Disclosures – a consensus of the FASB Emerging Issues Task Force. The amendments in
this ASU require that cost be used as the measurement basis for charity care disclosure purposes
and that cost be identified as the direct and indirect costs of providing the charity care. The
amendments in this ASU also require disclosure of the method used to identify or determine such
costs. This ASU is effective for fiscal years beginning after December 15, 2010 and should be
applied retrospectively to all prior periods presented. The Company adopted this amendment
during the fiscal year ended September 30, 2012 with retrospective offset to the fiscal years
ended September 30, 2011 and it did not have a material impact on the Company’s financial
position and results of operations.
In August 2010, the FASB issued ASU 2010-24, Health Care Entities (Topic 954): Presentation of
Insurance Claims and Related Insurance Recoveries (a consensus of the FASB Emerging Issues Task
Force). This ASU clarifies that a health care entity should not net insurance recoveries against a
related claim liability. Additionally, the amount of the claim liability should be determined
without consideration of insurance recoveries. This ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010. A cumulative – effect adjustment
should be recognized in opening retained earnings in the period of adoption if a difference exists
between any liabilities and insurance receivables recorded as a result of applying the amendments
in this ASU. Retrospective application and early application are both permitted. The Company
adopted this amendment during the fiscal year ended September 30, 2012. The Company
recorded a receivable and corresponding liability in the amount of $1.4 million for the year ended
September 30, 2012 but did not elect retrospective application for the year ended September 30,
2011.
In July 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-07, Health Care
Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad
Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The ASU
represents a consensus of the EITF on Issue No. 09-H, “Health Care Entities: Presentation and
Disclosure of Net Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts.”
The amendments in this ASU require certain health care entities to change the presentation in
their statements of operations by reclassifying the provision for bad debts associated with patient
service revenue from an operating expense to a deduction from patient service revenue (net of
contractual allowances and discounts). Additionally, those health care entities are required to
provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts.
The amendments also require disclosures of patient service revenue (net of contractual
allowances and discounts) as well as qualitative and quantitative information about changes in the
allowance for doubtful accounts. The Hospital early adopted this amendment, as permitted,
during the year ended September 30, 2011.
During fiscal year 2012, the Company adopted FASB ASU No. 2011-04, Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which
amends ASC 820, Fair Value Measurement. This ASU requires the categorization by level for items
that are required to be disclosed at fair value and information about transfers between Level 1
and Level 2 and additional disclosure for Level 3 measurements. In addition, the ASU provides
guidance on measuring the fair value of financial instruments managed within a portfolio and the
application of premiums and discounts on fair value measurements. The adoption did not have a
material effect on the Company’s financial statements.
19
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Subsequent Events
Management has evaluated events that have occurred subsequent to September 30, 2012 through
December 21, 2012, the date on which the financial statements were available to be issued.
3. Net Patient Service Revenue
Gross patient service revenue is recorded on the basis of the Company’s usual and customary
charges. The Company has agreements with third-party payors that provide for payments to the
Company at amounts different from its established rates. The difference between charges
generated from agreements with third-party payors and the related payment amounts are
reflected as contractual discounts as shown below:
2012
Years ended September 30,
2011
Gross patient service revenue
Contractual discounts
$ 1,178,429,918
(938,984,584 )
$ 1,107,085,414
(891,849,619 )
Net patient service revenue
$
$
239,445,334
215,235,795
A summary of the payment arrangements with major third party payors is as follows:
Medicare
Inpatient acute services rendered to Medicare program beneficiaries are paid at prospectively
determined rates per discharge (“DRGs”). These rates vary according to a patient classification
system that is based on clinical, diagnostic and other factors. Outpatient services related to
Medicare beneficiaries are paid at prospectively determined rates according to Ambulatory
Payment Classifications (“APCs”). Other payments, including disproportionate share and Medicare
bad debt expense reimbursement, are based on the Hospital’s cost reports, and are estimated
using historical trends and current factors.
The Hospital is reimbursed at a tentative rate, with final settlement determined after submission
of annual cost reports and audits thereof by the Medicare fiscal intermediary. The Hospital’s
Medicare Cost reports have been final settled by the Medicare fiscal intermediary through
September 30, 2007 and audited by the Medicare fiscal intermediary through September 30, 2011.
The 2012 cost report has not been filed as of the date of the financial statements. Annual cost
reports are generally due five months after the financial year end.
Laws and regulations governing the Medicare program are complex and subject to interpretation.
As a result, there is at least a reasonable possibility that recorded estimates could change by a
material amount in the near term.
Cost report settlement estimates are recorded based upon as-filed cost reports and are usually not
adjusted until a final Notice of Program Reimbursement (“NPR”) is issued. Due to litigation in
class action suits over the determination of the Supplemental Security Income (“SSI”) percentage
which affects the disproportionate share reimbursement, the Centers for Medicare and Medicaid
Services (“CMS”) suspended issuing any NPRs for 2007 cost reporting years and forward. On March
16, 2012, CMS began issuing updated SSI ratios for 2006 through 2009, and on October 17, 2012,
20
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
CMS issued updated SSI ratios for 2010. The issuance of final NPRs could result in changes to
existing cost reporting estimates and these changes could be material to the Hospital. Accordingly
the Company updated its estimates relating to open cost reporting of prior years using the revised
SSI ratios and recorded a receivable, in aggregate, of approximately $1,020,000 during the year
ended September 30, 2012. Additionally, the Company joined a second round of litigation relating
to Medicare’s recent settlement with providers relating to the manner in which CMS handled the
budget neutrality adjustment associated with the rural floor wage index in setting the Medicare
inpatient prospective system rates (“Rural Floor”). The Company has not yet recorded any
settlement revenue relating to the Rural Floor litigation.
The Hospital is currently undergoing an audit under the Recovery Audit Contractor (“RAC”)
Program. The final results of this audit are not estimable at this time; however, the impact may
be material to the financial statements. The Hospital recorded a reserve accrual of approximately
$499,000 which is included, net of patient accounts receivable in the statements of financial
position.
HMO/PPO
The Company also has entered into payment agreements with certain commercial insurance
carriers, health maintenance organizations (“HMOs”), and preferred provider organizations
(“PPOs”). The basis for payment to the Company under these agreements includes prospectively
determined rates per discharge, discounts from established charges, and prospectively determined
daily rates.
Self-Pay and Other
The Hospital offers managed care-style discounts to most uninsured patients, which enables the
Hospital to offer lower rates to those patients who historically have been charged standard gross
charges. Under this method, the discount offered to uninsured patients is recognized as a
contractual allowance instead of provision for bad debts, which reduces net patient revenues at
the time the uninsured patient accounts are recorded and reduces provision for bad debts. The
uninsured patient accounts, net of contractual allowances recorded, are further reduced to their
net realizable value through provision for bad debts or as charity care based on historical
collection trends and other factors that affect the estimation process. For the years ended
September 30, 2012 and 2011, provision for bad debts were approximately $15,879,000 and
$8,657,000, respectively. See Charity Care under Note 2 for further information.
The other payor category is comprised primarily of indemnity, workers’ compensation, and other
commercial payors. Payment usually occurs on a negotiated settlement basis at some discount to
the Hospital’s gross charges.
Medi-Cal
Inpatient services rendered to Medi-Cal program beneficiaries are reimbursed at a negotiated per
diem rate. Outpatient services are reimbursed based upon fee schedules. For the years ended
September 30, 2012 and 2011, the State of California’s Enhanced Medi-Cal Trauma program (AB
99) provided approximately $0 and $2,727,000, respectively, in additional receipts for this class of
net patient service revenues.
21
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
4. Assets Limited as to Use
The composition of assets limited as to use at September 30, 2012 and 2011, is set forth in the
following table. Investments are stated at fair value (see Note 2).
2012
Under indenture agreement, held by trustees:
U.S. federated treasury obligations
U.S. agency securities
Guaranteed insurance contract
$ 12,154,559
1,464,124
3,055,500
Total assets limited as to use
Less current portion
2011
$
16,674,183
11,766,358
Noncurrent portion
$
4,907,825
11,905,258
1,481,514
3,055,500
16,442,272
11,837,294
$
4,604,978
5. Property, Plant and Equipment
A summary of property, plant and equipment at September 30, 2012 and 2011, is as follows:
Building and improvements
Equipment and furniture
Building, improvements and equipment under capital
leases
Less accumulated depreciation and amortization
Construction-in-progress
Land
Property, plant and equipment, net
2012
2011
$ 155,551,359
89,876,497
$ 146,409,149
83,250,110
13,379,607
13,379,607
258,807,463
(134,596,861 )
243,038,866
(119,142,803 )
124,210,602
123,896,063
6,892,303
2,113,433
14,742,099
2,113,433
$ 133,216,338
$ 140,751,595
Depreciation expense for the years ended September 30, 2012 and 2011 amounted to
approximately $15,546,000 and $13,843,000, respectively. At September 30, 2012 and 2011,
assets held under capital lease obligations, amounted to $13,379,607 for both years, and related
accumulated depreciation amounted to $9,948,107 and $9,481,222, respectively.
6. Long-Term Debt
2001 Series A Hospital Refunding Revenue Bonds
On February 1, 2001, California Statewide Communities Development Authority issued $54,895,000
of 2001 Series A Hospital Refunding Revenue Bonds (the “2001 Bonds”). The 2001 Bonds are
22
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
insured by the State of California and secured by a deed of trust on substantially all of the
Hospital's property. The Hospital is allowed to secure up to $7,000,000 of operating financing with
a senior lien. Accordingly, the Hospital obtained the loan financing which was subsequently paid
off. The proceeds of the 2001 Bonds were used to pay off the 1988 bonds, construction liens from
the costs of repairing the facility from the January 1994 Northridge earthquake, and to provide
working capital.
The bond regulation agreement, as amended, also requires the Hospital and its related affiliate,
the Foundation, to maintain certain financial covenants including a maximum annual debt service
coverage ratio of 1.25 times, a current ratio of at least 2.0 times, and days cash on hand of 30
days and other reporting requirements. The bond agreement also contains certain restrictions on
other borrowings and spending of the Hospital and its related affiliates. The Hospital was in
compliance with the covenants as of September 30, 2012.
The 2001 Bonds bear interest at annual rates ranging from 4.0% to 5.125%, payable semi-annually.
A principal payment was made in the amount of $1,375,000 in fiscal year 2012. Beginning 2012,
the Hospital must establish a sinking fund, which is held by the trustee of the bonds, that requires
annual payments ranging from $1,375,000 in that year to $3,345,000 in 2030. The sinking fund will
provide for two principal installments of $13,125,000 on October 1, 2018, and $32,525,000 on
October 1, 2030.
At September 30, 2012 and 2011, the carrying values of the 2001 Bonds were as follows:
September 30,
2012
Current
Noncurrent
2011
$
1,440,000
42,835,000
$
1,375,000
44,275,000
$
44,275,000
$
45,650,000
Maturities of the 2001 Bonds subsequent to September 30, 2012, are as follows:
Years ending September 30,
Principal
2013
2014
2015
2016
2017
2018 and thereafter
$
1,440,000
1,515,000
1,590,000
1,670,000
1,755,000
36,305,000
$
44,275,000
Insured Revenue Bonds Series 2007A & 2007B
On August 1, 2007, California Statewide Communities Development Authority issued $45,000,000
of Insured Revenue Bonds Series 2007A (the “2007 Bonds Series A”), and $30,000,000 of Insured
Revenue Bonds Series 2007B (the “2007 Bonds Series B”), (collectively, the “2007 Bonds”). The
proceeds of the 2007 Bonds are to be used to finance and refinance acquisition, construction,
improvement and equipping of healthcare facilities owned and operated by the Hospital, fund a
bond reserve account and finance the costs of issuance of the bonds. The 2007 Bonds are insured
23
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
by the Office of Statewide Health Planning and Development (“OSHPD”) of the State of California
pursuant to the California Health Facility Construction Loan Insurance Law.
The 2007 Bonds Series B are further insured by Ambac Assurance Corporation. If monies are not
available to pay the principal or interest on the 2007 Bonds Series B and the insurance from the
OSHPD is not in full force and effect, or the OSHPD is in default of the payment, the trustee will
take such steps as are necessary to collect upon the payments. The obligations of the 2007 Bonds
are on parity with the obligations with respect to the 2001 Bonds.
The bond regulation agreement also requires the Hospital and its related affiliate, the Foundation,
to maintain certain financial covenants including a maximum annual debt service coverage ratio of
1.25 times, a current ratio of at least 2.0 times, and to maintain at the end of each year at least
30 days cash on hand and other reporting requirements. The bond agreement also contains certain
restrictions on other borrowings and spending of the Hospital and its related affiliates as of
September 30, 2012. The Hospital was in compliance with the covenants listed at September 30,
2012.
The 2007 Bond Series B were originally issued as variable rate bonds subject to change at each
auction period. These bonds however have a built in conversion feature, whereby they could be
converted to fixed rate bonds at the option of the Company, which the Company converted during
fiscal year 2008.
The 2007 Bonds Series A bear interest, at annual rates ranging from 4.25% to 5.00%, payable semiannually. Principal payments are due annually in amounts ranging from $775,000 starting in fiscal
year 2011 to $1,070,000 in 2018. Beginning 2019, the Company must establish a sinking fund,
which is held by the trustee of the bonds, that requires annual payments ranging from $1,125,000
in that year to $1,245,000 in 2021. Beginning in 2022, the Company must establish a sinking fund
that requires annual payments ranging from $1,305,000 in that year to $1,765,000 in 2028.
Finally, beginning in 2029, the Company must establish a sinking fund that requires annual
payments ranging from $1,855,000 in that year to $2,910,000 in 2038, the final year of maturity.
The 2007 Bonds Series A are secured by present and future gross revenues of the Hospital, as
defined.
At September 30, 2012 and 2011, the carrying values of the 2007 Bonds Series A were as follows:
September 30,
2012
2011
Current
Noncurrent
Original Issue Premium, net
$
845,000
42,570,000
340,199
$
810,000
43,415,000
362,761
Net
$ 43,755,199
$
44,587,761
24
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Maturities of the 2007 Bonds Series A subsequent to September 30, 2012, are as follows:
Years ending September 30,
Principal
2013
2014
2015
2016
2017
2018 and thereafter
$
845,000
880,000
925,000
970,000
1,020,000
38,775,000
$
43,415,000
The 2007 Bonds Series B bear interest, at annual rates ranging from 4.00% to 5.20%, payable semiannually. In fiscal year 2011, the Company established a sinking fund, which is held by the trustee
of the bonds, that requires annual payments ranging from $675,000 in that year to $775,000 in
fiscal year 2015. Beginning in 2016, the Company must establish a sinking fund that requires
annual payments ranging from $800,000 in that year to $875,000 in 2019. Beginning in 2020, the
Company must establish a sinking fund that requires annual payments ranging from $900,000 in
that year to $1,200,000 in 2029. Finally, beginning in 2030, the Company must establish a sinking
fund that requires annual payments ranging from $1,225,000 in that year to $1,575,000 in 2038,
the final year of maturity. The 2007 Bonds Series B are secured by present and future gross
revenues of the Hospital, as defined.
At September 30, 2012 and 2011, the carrying values of the 2007 Bonds Series B were as follows:
September 30,
2012
Current
Noncurrent
2011
$
725,000
27,900,000
$
700,000
28,625,000
$
28,625,000
$
29,325,000
Maturities of the 2007 Bonds Series B subsequent to September 30, 2012, are as follows:
Years ending September 30,
Principal
2013
2014
2015
2016
2017
2018 and thereafter
25
$
725,000
750,000
775,000
800,000
825,000
24,750,000
$
28,625,000
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
7. Pension Plan
The Hospital maintains a deferred compensation annuity plan (defined as an IRC Section 403(b)
plan), which covers employees who elect to participate.
The Hospital provides matching contributions equal to 5% of participants’ eligible annual
compensation up to the amount allowed by the Internal Revenue Service for the calendar year.
Employer matching contributions are funded annually based on the calendar year. For the years
ended September 30, 2012 and 2011, the Company’s matching contributions were approximately
$1,732,000 and $1,675,000, respectively.
8. Receivable from Affiliate
ASC 958-20-15 “Transfers of Assets to a Not-For-Profit Organization or Charitable Remainder
Trust That Raises or Holds Contributions for Others” requires organizations similar to the Hospital
and the Foundation to record on the designated organization as a temporarily restricted asset,
those funds raised by the Foundation for the benefit of the Hospital.
The amounts raised on behalf of the Hospital by the Foundation or due from the Foundation are
recorded as a receivable from affiliate as follows:
September 30,
2012
Program receivables
Other receivables, net
2011
$
1,128,533
13,607
$
1,017,780
190,019
$
1,142,140
$
1,207,799
9. Related Party Transactions
The Foundation received contributions of approximately $2,545,000 and $1,815,000 for the
benefit of Hospital programs such as the ICU and NICU for the years ended September 30, 2012
and 2011, respectively (see Note 10). At September 30, 2012 and 2011, the Hospital had a net
receivable from the Foundation in the amount of $1,142,140 and $1,207,799, respectively (see
Note 8). During the years ended September 30, 2012 and 2011, funds in the amount of
approximately $2,434,000 and $1,677,000, respectively, were received from the Foundation and
spent by the hospital on these programs. Hospital contributed $665,000 and $0 to the Foundation
for general operations the fiscal year ended September 30, 2012 and 2011, respectively.
10. Temporarily Restricted Net Assets
Funds received from the Foundation for the benefit of Hospital programs such as the ICU, NICU
and Emergency Room are recorded as temporarily restricted contributions.
For the years ended September 30, 2012 and 2011, approximately $304,000 and $334,000 in grant
monies had been received, and approximately $594,000 and $649,000 had been incurred in
accordance with the Bioterrorism grant program, respectively. Various compliance requirements
exist surrounding the grants received from the county of Los Angeles. Noncompliance with certain
of these requirements may result in repayment of the monies received to the county.
26
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
During the year ended September 30, 2012, the Hospital received approximately $347,000 in
federal grant money from the Department of Health and Human Services (HRSA) and purchased
equipment with the funds in accordance with the program.
Contributions and grants that were recorded as temporarily restricted contributions and funds
relating to these temporarily restricted net assets were transferred to unrestricted net assets
when used or incurred for the program.
Temporarily restricted net assets are available for the following purposes at September 30, 2012
and 2011:
September 30,
2012
Foundation funds:
Emergency Room
Breast Imaging Center
Other Equipment
ICU/NICU
Other
$
Bio Terrorism
Total
$
293,517
211,314
213,839
409,548
315
2011
$
67,589
125,029
225,924
396,805
202,433
1,128,533
1,017,780
106,506
-
1,235,039
$ 1,017,780
11. Tower Imaging Joint Venture
On December 21, 2005, the Company entered into a 50% joint venture agreement with Tower
Imaging Medical Group, Inc., a California professional corporation (“TIMG”), whereby the
Company and TIMG (together the “Partners”) formed Tower Imaging Valencia, LLC, a California
limited liability company (the “Joint Venture”). The Tower Imaging Joint Venture is a for-profit
enterprise. The Partners each made initial contributions of $25,000 into the Joint Venture. During
the years ended September 30, 2012 and 2011, no contributions were made by the Partners. The
Company accounts for the investment in the Joint Venture under the equity method of
accounting. Under the equity method, the Company recognizes its share of the earnings or losses
in the Joint Venture.
The Joint Venture was formed for the purpose of providing outpatient radiology services outside of
the Hospital, and by participating with TIMG to jointly develop the imaging facilities, the Company
anticipates to further its charitable healthcare mission by improving access to quality, costeffective diagnostic imaging services for residents of the Santa Clarita service area. The Partners
share the profits and losses of the Joint Venture in a pre-determined ratio of 50% and 50%, in
accordance with the Joint Venture agreement. Allocation of cash distributions to the LLC
members is to be made in proportion to the respective percentage interests of the Company and
TIMG. During the year ended September 30, 2012, the Joint Venture distributed a total of
$1,148,000 or $574,000 for each partner from the Joint Venture. During the year ended September
30, 2011, the Joint Venture distributed a total of $880,000, or $440,000 for each partner from the
Joint Venture. The term of the Joint Venture agreement is ten years, unless terminated sooner or
extended as provided in the Joint Venture agreement.
27
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
As members of the Joint Venture, TIMG and the Company have the obligation to guarantee, in the
form of credit support, to a third-party credit lender pro rata amounts based on that member’s
percentage interest. In return, each member making such guarantee is to receive an annual credit
enhancement fee equal to a fair market value percentage rate of the amount of the liability
guaranteed by each member, and the credit enhancement fee is to be paid prior to any
distributions to the members. In the event there is a default of the guaranteed obligation, then
such member has all of the rights against the Joint Venture including, without limitation, to
receive the credit enhancement fee until such member is exonerated from the underlying liability.
At September 30, 2012, the Company and TIMG have not guaranteed any debt relating to the Joint
Venture.
In accordance with the Joint Venture agreement, the day-to-day business and affairs of the Joint
Venture is managed by TIMG, and in return TIMG receives compensation for such management
service that is mutually agreed upon between the Company and TIMG. TIMG’s management service
includes developing and maintaining appropriate quality control programs, preparation of monthly
management and financial reports, maintaining the accounting policies and procedures, and
providing and training of all non-physician personnel, among others.
The Company agreed to provide certain services to the Joint Venture such as information
technology and maintenance services among others. In addition, the Company agreed to rent
certain property to the Joint Venture. At September 30, 2012 and 2011, the Company recorded a
receivable in the amount of $156,975 and $93,255, respectively, from the Joint Venture related to
these services and rent. This receivable is included as part of other assets in the statements of
financial position.
The carrying value of the investment in the Joint Venture at September 30, 2012 and 2011 was
approximately $940,000 and $908,000, respectively, and is recorded as part of other assets in the
statements of financial position.
The unaudited condensed financial statement information for the Joint Venture as of and for the
years ended September 30, 2012 and 2011, respectively, was:
2012
Condensed financial statement information (unaudited):
Total assets
Total liabilities
Net income
$
$
$
3,989,483
1,460,931
1,224,858
2011
$
$
$
4,618,652
2,150,808
1,141,226
12. Commitments and Contingencies
Leases
The Hospital leases various facilities and equipment under operating and capital leases.
The Hospital’s most significant capital lease obligation is for the ambulatory care facility and
office, which was amended on December 1, 2007. The lease requires monthly minimum payments
of approximately $150,000, subject to an annual consumer price index adjustment with a
minimum/maximum range through to April 2020. The lease agreement does not have an option
28
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
for renewal. The facility houses an outpatient surgery program and therapy services. Portions of
the facility are sublet to third parties.
Leases that do not meet the criteria for capitalization are classified as operating leases with
related rentals charged to operations as incurred. Operating leases consist primarily of medical
office space and equipment leases. Total rental expense, including month-to-month rentals, for
the years ended September 30, 2012 and 2011, were approximately $2,619,000 and $2,706,000,
respectively.
The Hospital has entered into various sublease agreements. The lease termination dates range
through to 2015. Rental sublease income generated from these leases totaled approximately
$934,000 and $930,000 for the years ended September 30, 2012 and 2011, respectively.
The future minimum lease payments required under capital leases and noncancelable operating
lease agreements with terms of one year or more are as follows:
Capital
Leases
Years ending September 30,
2013
2014
2015
2016
2017
2018 and thereafter
$
Operating
Leases
1,952,535
2,001,348
2,051,382
2,102,666
2,155,233
5,619,603
$
1,198,994
942,857
588,079
444,219
168,799
-
Total lease obligation
15,882,767
$
3,342,948
Less amount representing interest at 10.6% per annum
(4,913,500 )
Present value of future minimum lease payments
10,969,267
Less current portion
(881,449 )
Noncurrent portion
$
10,087,818
The future minimum expected sublease income for these agreements is as follows:
Years ending September 30,
Sublease Income
2013
2014
2015
$
863,361
837,055
863,107
Total
$
2,563,523
29
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Litigation
The Hospital is a defendant in various legal actions alleging malpractice and other grievances.
Further, the Hospital is a named defendant in employment-related matters, such as alleged
discrimination complaints and certain wage-related claims. It is the management's opinion that
these actions are covered by insurance, existing accruals, or otherwise will be resolved without a
material adverse effect on the financial position or results of operations of the Hospital.
In the normal course of the Hospital’s ongoing compliance and review process, the Hospital
routinely investigates all allegations of non compliance or violation of Medicare and Medi-Cal
(Medicaid) laws and regulations, including any potential Stark or Anti-Kickback issues. As the
result of allegations of non-compliance made by certain members of the medical staff, the
Hospital conducted an investigation of issues relating to possible Stark violations in connection
with certain physician contracts and is currently evaluating the nature and extent of any resulting
financial liability. The Hospital anticipates disclosing the results of this investigation in the
appropriate manner as required by Federal law. At this time, it is probable that a settlement will
ultimately be entered into with the Federal government with respect to these issues, but it is not
possible to estimate the amount of such settlement and accordingly, no liability has been
recorded as of September 30, 2012. This settlement may be material to the financial statements.
Golden Valley Pledged Lease Asset
On September 10, 2008, the Hospital entered into a lease Agreement with GMS Golden Valley
Ranch, LLC for 50 years at a minimum annual rent of $1.00 plus common area costs, taxes and
insurance (the “Golden Valley Lease”) for 2,000 sq. ft. of space in a new shopping center nearby
to the Hospital, for the purpose of operating a physical therapy facility. The lease of the space is
contingent on the continued use by the Hospital for public benefit. Accordingly, the Golden Valley
Lease was recorded as a conditional pledge for the present value of the fair value of lease
payments and an underlying pledged lease asset was recorded in the amount of $2,742,543. Due
to the contingent nature of the lease, a liability for $2,742,543 was recorded as deferred
contribution revenue on the statements of financial position. As of September 30, 2012, the
pledged lease asset and deferred contribution revenue was $2,590,680 for each account. As of
September 30, 2011, the pledged lease asset and deferred contribution revenue was $2,629,504
for each account. The pledged asset and corresponding liability are being amortized using the
straight-line method over the life of the lease.
Construction Commitment
At September 30, 2012 and 2011 the Hospital has outstanding construction commitments of
approximately $0 and $520,000, respectively.
Management Incentive Plan
The Hospital has a Management Incentive Plan which provides incentive compensation when
certain financial goals are met. For the years ended September 30, 2012 and 2011, the Hospital
incurred incentive compensation of $630,000 and $800,000, respectively.
30
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Physician Guarantee
The Hospital has entered into Practitioner Recruitment Agreements (the “Recruitment
Agreements”) with six physicians. Pursuant to the Recruitment Agreements, the Hospital is to
provide financial assistance in the form of an income guarantee or relocation loan, for the
physician to establish a specialty practice in the area. The remaining agreements expire through
May 2014, with monthly payments ranging from approximately $8,000 to $19,167 or in incremental
amounts not to exceed an aggregate amount ranging from $100,000 to $460,000. As of September
2011, the Company had advanced approximately $190,000 to the physicians pursuant to these
Recruitment Agreements. As of September 30, 2012 and 2011, $383,336 and $174,171,
respectively, was recorded as a liability in accrued expenses in the statements of financial
position in accordance with ASC 460-10 “Guarantees.”
Legislation
The healthcare industry is subject to numerous laws and regulations of federal, state and local
governments. These laws and regulations include, but are not necessarily limited to, matters such
as licensure, accreditation, government healthcare program participation requirements,
reimbursement for patient services, and Medicare and Medi-Cal fraud and abuse. Government
activity has continued with respect to investigations and allegations concerning possible violations
of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and
regulations could result in expulsion from government healthcare programs together with the
imposition of significant fines and penalties, as well as significant repayments for patient services
previously billed. The Company believes that it is in compliance with fraud and abuse as well as
other applicable government laws and regulations. Compliance with such laws and regulations can
be subject to future government review and interpretation as well as regulatory actions unknown
or unasserted at this time.
HIPAA
The Health Insurance Portability and Accountability Act (“HIPAA”) was enacted on August 21,
1996, to assure health insurance portability, reduce healthcare fraud and abuse, guarantee
security and privacy of health information, and enforce standards for health information.
Organizations are required to be in compliance with HIPAA provisions by April 2005. Effective
August 2009, the Health Information Technology for Economic and Clinical Health Act (“HITECH
Act”) was introduced imposing notification requirements in the event of certain security breaches
relating to protected health information. Organizations are subject to significant fines and
penalties if found not to be compliant with the provisions outlined in the regulations.
Earthquake Grant Recovery
The Federal Emergency Management Administration (“FEMA”) had approved a $15 million grant to
the Hospital to assist the Hospital in repairs to the facilities after the January 1994 Northridge
earthquake. Under the terms of the grant, the Hospital was reimbursed for eligible costs of
repairing the acute care facilities.
During fiscal year 2006, FEMA commenced an audit as provided for in the original grants.
Approximately $2,300,000 of payments are being reviewed for appropriateness as it related to
specific projects. The Hospital believes that all payments were appropriate; accordingly, no
specific reserve for repayment has been made.
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Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Malpractice Insurance
The Hospital maintains medical malpractice insurance under a claims-made policy. A claims-made
policy covers only claims net of the Hospital deductible of $500,000 per claim that occurs and are
filed in the period during which the policy is in force. As of September 30, 2012 and 2011, the
Hospital has made provisions for estimated medical malpractice claims including estimates of the
ultimate costs for both reported claims and claims incurred but not reported. Management
believes that its estimates are sufficient and will not result in any materially adverse adjustments.
In June and November 2005, the Company invested a total of $217,840 for the purchase of 27,230
shares (1.36% ownership in December 31, 2011) of capital stock in California Healthcare
Insurance Company, Inc. (“CHI”), a risk retention group domiciled in Hawaii. CHI insures its
owners and their affiliated entities for general and professional liability risks. The Company
accounts for its investment in CHI under the cost method of accounting. During the years ended
September 30, 2012 and 2011, the Company paid approximately $753,000 and $740,000,
respectively, in premiums to CHI.
The Company has self-insured retention of $500,000 per claim for medical malpractice claims. CHI
covers claims through a combination of risk layers that include, assuming the risk, reinsurance
treaties with four A+ rated reinsurers and conventional type insurance with an A+ rated
commercial carrier. CHI adjusts risk layers periodically in response to market conditions. The
Company believes that CHI will provide the Company with efficient and cost effective
management of its medical malpractice and other risks. As of September 30, 2012 and 2011, AM
Best, the worldwide insurance rating and information agency, reported CHI’s rating at A-. There is
no guarantee that CHI will remain a viable insurance company. Excessive claims could have a
material adverse effect on CHI’s ability to pay claims.
Self-Insurance Program for Employee Healthcare
The Hospital has a self-insured program for employee healthcare for the years ended September
30, 2012 and 2011. An accrual has been made for the estimated liabilities arising from outstanding
healthcare claims incurred but not yet reported, as of September 30, 2012 and 2011. Management
believes that its estimates are sufficient, however, actual amounts may materially differ from
those estimates. For the years ended September 30, 2012 and 2011, these liabilities were
approximately $2,369,000 and $1,981,000, respectively, and are recorded in accrued payroll and
benefits in the statements of financial position.
Worker’s Compensation
The Hospital changed its worker’s compensation insurance carrier for the year ended September
30, 2010 from a loss-sensitive premium policy with retrospective adjustments to a guaranteed cost
premium policy. An accrual has been made for the liability arising from an audit of the policy for
the plan year ended September 30, 2012 and 2011 for approximately $20,000 and $220,000,
respectively and is included in accrued payroll and benefits in the statements of financial position.
An estimated accrual has been made for the liability arising from the previous policy for the plan
years ended September 30, 2009 and prior for approximately $1,074,000 and $995,000 is included
in accrued payroll and benefits in the statements of financial position for the years ended
September 30, 2012 and 2011, respectively. Actual amounts may materially differ from those
estimates.
32
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
Union Contract
The Hospital has contracts with the California Nurses Association and the United Electrical, Radio
& Machine Workers of America for the period January 2012 through January 2015 and February
2011 through January 2014, respectively. Employee benefits provided by the contracts include
paid time off and health and retirement benefits. The contracts also specify compensation rates
and hours of work and overtime. These compensation rates and benefits could change materially
subject to the outcome of collective bargaining agreements.
United WestLab Agreement
In September 2006, the Company entered into an Administrative and Management Services
Agreement (the “United WestLab Agreement”) with NTI WestLab, Inc. (“UWL”) whereby UWL
would provide an outreach testing program to perform clinical laboratory testing services for nonregistered patients of the Hospital and other patients referred by physicians, medical clinics, and
other third parties in the geographic areas as defined. Further, the United WestLab Agreement
specifies that UWL is to manage the day-to-day operations of the program as defined. The
original term of the United WestLab Agreement expired on September 30, 2012 and was renewed
for an additional three years through 2015.
In consideration of UWL performing the aforementioned services, the Hospital pays UWL a
management fee equal to a fixed amount each month, plus reimbursement of all costs borne by
UWL in providing the services. The fixed management fee is $10,000 per month in year one of the
agreement, and $20,000 per month in years two and three of the agreement. For the years ended
September 30, 2012 and 2011, the Company paid approximately $1,888,000 and $1,868,000,
respectively, in management fees and reimbursement of expenses to UWL.
13. Fair Value of Financial Instruments
The following methods and assumptions were used by the Hospital in estimating the fair value of
its financial instruments:
Cash and cash equivalents: The carrying amount reported on the statements of financial position
for cash approximates its fair value.
Short term investments: The carrying amount reported on the statements of financial position for
short term investments approximates its fair value.
Assets limited as to Use: The carrying amount reported on the statements of financial position for
assets limited as to use approximates its fair value.
Long-term debt: Fair values of the Hospital’s 2001 Bonds and 2007 Bonds are based on current
traded value.
33
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
The carrying amounts and fair values of the Hospital’s financial instruments at September 30,
2012 and 2011, are as follows (in thousands):
2012
Carrying
Amount
Cash and cash equivalents
Short term investments
Asset limited as to Use
Long-term debt
$
30,911
9,872
16,674
116,665
2011
Fair
Value
$ 30,911
9,872
16,674
120,540 *
Carrying
Amount
$
18,305
14,669
16,442
119,563
Fair Value
$
18,305
14,669
16,442
121,641
* Level 1 measurement was used to determine the fair value of the 2001 Bonds and 2007 Series A
and B Bonds.
14. Functional Expenses
The Hospital provides general healthcare services to residents within its geographic location.
Expenses related to providing these services for the years ended September 30, 2012 and 2011,
were as follows:
Healthcare services
General and administrative
2012
2011
$ 186,343,062
37,715,537
$ 176,141,707
33,877,304
$ 224,058,599
$ 210,019,011
15. Concentration of Credit Risk
The Hospital maintains cash deposits in financial institutions that exceed the amount insured by
the United States government. Nonperformance by these institutions could expose the Hospital to
losses for amounts in excess of the insured balances. The Hospital has not experienced, nor does it
anticipate, nonperformance by these institutions. The Hospital’s non-interest bearing cash
balances were fully insured at September 30, 2012 due to a temporary federal program in effect
from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the
amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to
$250,000 per depositor at each financial institution, and the non-interest bearing cash balances
may again exceed federally insured limits.
Investments are managed by a board-approved investment policy within guidelines established by
the Board of Directors, which, as a matter of policy, limit the amounts that may be invested in
any one issuer.
Concentration of credit risk with respect to patient accounts receivable, other than from
government programs, is limited due to the large numbers of payors comprising the Hospital’s
patient base.
The Company is highly dependent upon various third-party payors and government programs for
payment.
34
Henry Mayo Newhall Memorial Hospital
Notes to Financial Statements
The Company grants credit without collateral to its patients, most of whom are local residents and
are insured under third-party payor agreements. The mix of net patient revenues and patient
accounts receivable as of and for the year ended September 30, 2012 and 2011, was as follows:
Net patient revenues
Medicare
Medi-Cal
Self-Pay and Other
HMO/PPO
Patient accounts receivable
Medicare
Medi-Cal
Self-Pay and Other
HMO/PPO
2012
2011
29%
7%
6%
58%
29%
4%
5%
62%
100%
100%
2012
2011
16%
9%
32%
43%
20%
8%
31%
41%
100%
100%
16. Subsequent Event (unaudited)
In December 2012, the Company, as owner of the real property, entered into a ground lease with
an independent third party who will construct a medical office building on the premises and pay
to the Company an annual rental fee of approximately $125,000 for the ground under the medical
office building. In conjunction with the ground lease, the Company entered into a medical office
building lease agreement with the same independent third party with the following terms, once
the building is constructed: initial 20 year lease with four consecutive 10 year options to extend
the lease. The initial medical office lease rental payments are approximately $900,000 per year.
35