CASE STUDY
Major Medical Center
For the Major Medical Center financial statements on the following pages, complete the following:
a. Read the auditor’s opinion letter. Are any flags raised?
b. Review the financial statements. Search for unusual items. What things catch your eye on the balance sheet, operating statement, and cash flow statement?
c. Review the Notes. Do any of them raise cause for concern?
d. Calculate the following ratios: common size, current, quick, days of cash on hand, receivables turnover, average collection period, fixed asset turnover, total asset turnover, debt, debt to equity, times-interest-earned, operating margin, total margin, Return on assets (ROA), and Return on net assets(RONA).
e. What do you think of Major Medical Center’s financial status?
I.N. SINCER AND OLD, CPAs
2650 East 38th Street
New York, New York 10089
Report of the Independent Auditors
Board of Trustees
Major Medical Center
We have audited the accompanying statements of financial position of Major Medical Center (the “Medical Center”) as of December 31, 2012 and 2011, and the related state of operation, changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the Medical Centers management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Major Medical Center at December 31, 2012 and 2011, and the results of its operations, changes in net assets, and cash flows for the years then ended, in conformity with generally accepted accounting principles.
April 30, 2013
I.N. SINGER AND OLD, CPAs
Major Medical Center
Statements of Financial Position
December 31
____________________
2012 2011
(In Thousands) ____________________________________________________________________________________
Assets
Current Assets
Cash and cash equivalents 8,065 $9,065
Assets limited as to use -compensating balance
for letters of credit 1,000 ____
Short-term investments 1,387 1,283
Receivables for patient care, net of allowance for
doubtful accounts (2012-$27,232; 2011-$31,934) 49,719 47,614
Pledges receivable 1,814 2,205
Inventories, at average cost 1,690 2,326
Due from third-party reimbursement programs 6,539 ____
Receivables for government grants ___ 467
Other 2,234 3,415
Total Current Assets 72,448 66,315
Assets limited as to use:
Sinking fund 14,487 13,410
Compensating balance for standby letters of credit 923 ____
15,410 13,410
Long-term investments 1,132 618
Due from affiliates, net 3,417 3,543
Pledges receivable, net of allowance for uncollectible pledges
(2012 – $2,218; 2011 – $4,453) 1,889 1,468
Property, plant, and equipment net 98,555 89,777
Deferred financing costs 1,323 ____
Other 2,065 1,043
$196,239 $176,174
Liabilities and Net Assets
Current Liabilities
Current portion of long-term debt $11,608 $11,488
Accounts payable and accrued expenses 29,489 25,311 Accrued salaries and related liabilities 25,572 20,096
Due to third-party reimbursement programs, net ____ 1,874
Advances on government grants 1,587 ___
Total Current liabilities 68,256 58,769
Long term debt, less current portion 55,539 47,709
Accrued post-retirement benefits 6,023 6,017
Other noncurrent liabilities 16,445 17,014
Total Liabilities 146,263 129,509
Commitments and contingencies
Net Assets
Unrestricted 40,582 38,014 Temporarily restricted 8,262 7,519 Permanently restricted 1,132 1,132 Total Net Assets 49,976 46,665
$196,239 $176,174 __________________________________________________________________________________
See accompanying notes.
Major Medical Center
Statements of Operations
_______________________________________________________________________________
Year ended December 31 _______________________
2012 2011
_______________________
(In Thousands)
______________________________________________________________________________
Operating Revenue
Net patient service revenue $402,921 369,512
Other revenue 13,356 13,850
Net assets released from restrictions __ 4,708 2,863
Total Operating Revenue 420,985 386,225
Operating Expenses
Salaries and wages 207,141 196,453
Employee benefits 44,456 44,860
Supplies and expenses 137,505 117,838 Depreciation and amortization 22,541 18,856 Research 2,457 2,214
Interest 4,456 5,253
Total Operating Expenses 418,556 385,474
Operating Income 2,429 751
Net assets released from restrictions used for capital acquisitions 139 146
Increases in unrestricted net assets $2,568 $897
________________________________________________________________________________
See accompanying notes.
Major Medical Center
Statements of Changes in Net Assets
____________________________________________________________________________________
Net Assets
_____________________________________
Temporarily Permanently Unrestricted Restricted Restricted
_____________________________________
(In Thousands)
___________________________________________________________________________________
Net Assets as December 31, 2010 $37,117 $3,023 $1,132
Increase in unrestricted net assets 897 ___ ___
Restricted contributions, grants, another receipts ___ 7,253 ___
Investment income restricted for specific purposes ___ 252 ___
Net assets released from restrictions for:
Operating expenses ___ (2,863) ___
Capital asset acquisitions ___ (146) ___
Change in net assets 897 4,496 ___
Net Assets at December 31, 2011 38,014 7,519 1,132
Increase in unrestricted net assets 2,568 ___ ___
Restricted contributions, grants, and other receipts ___ 5,421 ___
Investment income restricted for specific purposes ___ 169 ___
Net assets released from restrictions for:
Operating expenses ___ (4,708) ___
Capital asset acquisitions ______ (139) ___
Change in net assets 2,568_ __743_ ___
Net Assets on December 21, 2012 $40,582 $8,262 $1,132
__________________________________________________________________________________
See accompanying notes.
Major Medical Center
Statements of Cash Flows
______________________________________________________________________________________
Year Ended December 31
________________________
2012 2011
_______________________
(In thousands)
_____________________________________________________________________________________
Operating Activities
Operating income $2,429 $751
Change in temporarily restricted net assets 743 4,496
3,172 5,247
Adjustments to reconcile change in net assets to cash provided by operations:
Depreciation and amortization 22,541 18,856
Investment income earned on assets limited as to use (774) (698)
Changes in operating assets and liabilities:
(Increase) decrease in receivables for patient care (2,105) 7,589
(Increase) decrease in due from third-party reimbursement programs (8,413) 4,500
Increase in accounts payable and accrued expenses
and accrued salaries and related liabilities 9,654 1,412
Net effect of increases and decreases in other assets and liabilities 2,286 (8,707)
Cash provided by operations 26,361 28,199
Investing Activities
Acquisitions of property, plant, and equipment, net (10,043) (12,998)
Less amounts provided by restricted funds 139 146
Increase in investments (618) (70)
Cash used in investing activities (10,552) (12,922)
Financing Activities
Net payment from (to) affiliates 126 (1,773) Increase in deferred financing costs (1,323)
Repayments of long-term debt (13,326) (9,510)
Deposits into sinking fund, as required by mortgage loan agreement (303)
Increase in compensating balances for standby letters of credit (1,923)
(Increase) decrease in pledges receivable (30) (3,190)
Cash used in financing activities (16,779) (14,473)
Net (decrease) increase in cash and cash equivalents (940) 804
Cash and cash equivalents at beginning of year 9,005 8,201
Cash and cash equivalents at end of year $8,065 $9,005
_____________________________________________________________________________________
See accompanying notes.
Accompanying Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization
Major Medical Center (the “Medical Center”) is a not-for-profit corporation. The Medical Center provides health care and related services. The accompanying financial statements do not include the accounts of the Research Foundation, a not-for-profit corporation that solicits funds and awards grants to the Medical Center for research purposes, nor for Hospital Support, Inc., which provides certain support services.
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by the Medical Center has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Medical Center in perpetuity. When a donor restriction expires (i.e., when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of operations as net assets released from restrictions. Donor restricted contributions whose restrictions are met within the same year as received are reflected as temporarily restricted contributions and net assets released from restrictions in the accompanying financial statements.
Receivables for Patient Care
Patient accounts receivable from third-party programs for which the Medical Center receives payment under reimbursement formulas or negotiated rates are stated at the estimated net amounts receivable from such payors, which are generally less than the established charges of the Medical Center.
Investments
Investments consist of U.S. Treasury bonds and notes, certificates of deposit, and money market funds. Investments are carried at fair value. Amounts classified as long-term investments, consisting primarily of money market funds, represent permanently restricted net assets.
Investment Gains, Losses, and Income
Investment income, which includes real gains and losses, earned on permanently restricted and temporarily restricted funds upon which restrictions have been placed by donors, is added to temporarily restricted funds. All other investment income is reflected in the accompanying statements of operations.
Property, Plant, and Equipment
Property, plant, and equipment purchased are carried at cost, and those acquired by gifts and bequests are carried at appraised or fair market value established at the date of acquisition. Capitalized leases are recorded at the fair market value at the inception of the leases. The carrying amounts of assets and the related accumulated depreciation are removed from the accounts when such assets are disposed of, and any resulting gain or loss is included in operations. Depreciation of assets used in operations is recorded on the straight-line method over the estimated useful lives of the assets. Capitalized leases are amortized over the lease term.
Pledges
Unconditional promises to give cash and other assets are reported at their net present value at the date the promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. Pledges receivables, discounted at 10 percent, are expected to be paid as follows (in thousands):
Less than one year $ 1,814
One year to five years 3,145
In excess of five years ___962___
5,921
Less allowance for
uncollectible pledges receivable (2,218)
$ 3,703
__________________________________________________________
Assets Limited as to Use
Assets classified as limited as to use represent assets whose use is restricted for specific purposes under terms of agreements.
Accrued Post-Retirement Benefits
The Medical Center accounts for post-retirement health care and life insurance benefits on the accrual basis of accounting.
Uncompensated Care
As a matter of policy, the Medical Center provides significant amounts of partially or totally uncompensated patient care. For accounting purposes, such uncompensated care is treated either as charity care or bad debt expense. The Medical Center has defined charity care for accounting and disclosure purposes as the difference between its customary charges and the sliding scale rates given to patients in need of financial Helpance. Since payment of this difference is not sought, charity care allowances are not reported as revenue. Patients who do not qualify for sliding scale fees and all uninsured inpatients who do not qualify for Medicaid Helpance are billed at the Medical Center’s full rates. Uncollected balances for these patients are categorized as bad debts. Total uncompensated care for all patient services approximated $22 million and $20 million in 2012 and 2011, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Management believes that the amounts recorded based on estimates and assumptions are reasonable, and any differences between estimates and actual should not have a material impact on the Medical Center’s financial position.
Operating Income
Transactions deemed by management to be ongoing, major, or central to the provision of health care services are reported as operating revenue and expenses, and are included in operating income. Operating income also includes investment income and realized gains and losses from the sale of investments.
Tax Status
The Medical Center is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. The Medical Center has been classified as an organization that is not a private foundation under Section 509(a)(1). Contributions received by the Medical Center qualify as tax-deductible charitable contributions.
2. Third-Party Reimbursement Programs
The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established charges. Payment arrangements include prospectively determined rates per discharge, reimbursement of costs, discounted charges, and per diem payments. Patient service revenue is recorded at the Medical Center’s established charges when patient services are performed. Adjustments for differences between established charges and payment amounts are deducted directly from receivables for patient care and patient service revenue in the year incurred.
Federal and state regulations provide for certain retrospective adjustments to current and prior years’ payment rates based on industry wide and hospital-specific data. The Medical Center has estimated the potential impact of such retrospective adjustments based on information presently available, and adjustments are accrued on an estimated basis in the period the services are rendered and are adjusted in future periods as final settlements are determined. Management believes that amounts recorded in the accompanying financial statements will not be materially affected upon the final settlement of such retrospective adjustments.
Hospitals are reimbursed for Medicare inpatient services under the national prospective payment system (“PPS”) and other methodologies of the Medicare program for patient services. Such Medicare payments are based on a blend of national industry and hospital specific data. The Medicaid program pays rates determined by the state, primarily on a basis of prospectively determined rates per discharge. The Medical Center is paid by non-Medicare/Medicaid payers based on negotiated contract amounts or, if such contracts do not exist, at the Medical Center’s established charges. In addition, the state has requested a waiver from the federal government that will allow it to enroll substantially all of its Medicaid participants into Medicaid managed care programs. The ultimate outcome and effect of these changes and proposals on the Medical Center’s future operations cannot presently be determined. In 2012, net revenue from the Medicare and Medicaid programs accounted for 44 percent and 23 percent, respectively, of total net patient service revenue.
3. Assets Limited as to Use
A summary of assets limited as to use is as follows at December 31:
________________________________________________________________
2012 2011
_____________________________
(In Thousands)
________________________________________________________________
Sinking Funds:
Cash and cash equivalents $276 $249
U.S. government and
agency obligations 14,211 13,161
Total Sinking Funds 14,487 13,410
Collateral for Standby Letters of Credit:
Cash and cash equivalents 582 _____
Corporate bonds 1,341 _____
Total Collateral for Standby
Letters of Credit 1,923 _____
Total Assets Limited as to Use $16,410 $13,410
__________________________________________________________________
4. Property, Plant, and Equipment
A summary of property, plant, and equipment is as follows at December 31:
__________________________________________________________________
2012 2011
_______________________________
(In Thousands)
__________________________________________________________________
Land $ 4,980 $ 4,980
Buildings 58,827 58,827
Equipment 164,592 140,707
228,399 204,514
Less accumulated depreciation 141,502 125,148 86,897 79,366
Projects in progress 11,658 10,411
$98,555 $89,777
___________________________________________________________________
Approximately $45,673,000 and $45,706,000 of fully depreciated assets are included in buildings and equipment at December 31, 2012 and 2011, respectively. Substantially all property, plant, and equipment is pledged as collateral under various loan agreements.
Capitalized equipment leases, included in property, plant, and equipment, areas follows at December 31:
__________________________________________________________________
2012 2011
________________________________
(In Thousands)
__________________________________________________________________
Assets recorded under capital leases $67,434 $51,695
Less accumulated amortization 35,911 27,108
$31,523 $24,587
5. Long-Term Debt
A summary of long-term debt is as follows at December 31:
_________________________________________________________________
2012 2011
__________________________________
(In Thousands)
_________________________________________________________________
FHA Section 242 insured
mortgage loan (a) $20,865 $ __
FHA Section 241
mortgage loan (a) 10,941 12,125
2005 mortgage loan (b) 2,216 2,758
1998 insured mortgage loan (a) __ 15,492
Various mortgages, having
interest rates ranging from 3.5%
to 10.0%, maturing at various
dates through 2008 2,020 2,892
Capitalized leases (c) 31,105 25,930
67,147 59,197
Less current portion 11,608 11,488
$55,539 $47,709
_________________________________________________________________
a) As a condition of these borrowings, the Medical Center is required to establish and maintain a sinking fund. Amounts deposited into the sinking fund, together with investment earnings therein, are available for principal payments and purchases of specified levels of capital assets. Assets on deposit in the sinking fund at December 31, 2012 and 2011, are in compliance with the required amounts.
b) Annual principal payments for all long-term debt, excluding capital leases and required sinking fund balances for the next five years, are as follows:
____________________________________________________________
Required
Principal Sinking Fund
Payments Balance
__________________________________
(In Thousands)
_____________________________________________________________
2013 $2,789 $15,461
2014 4,688 14,937
2015 4,157 14,162
2016 4,089 13,129
2017 3,746 11,831
______________________________________________________________
c). Future minimum payments, by year and in the aggregate, under capitalized leases consisted of the following at December 31, 2012 (in thousands):
______________________________________________________________
2013 $11,102
2014 9,852
2015 8,204
2016 4,744
2017 1,518
Thereafter 850
Total minimum lease payments 36,270
Less amounts representing interest (5,165)
Present value of lease payments $31,105
______________________________________________________________
6. Retirement and Similar Benefits
The Medical Center provides retirement and similar benefits to its union employees through several defined benefit multi-employer pension plans and to its nonunion employees through a noncontributory defined benefit pension plan and tax-deferred annuity plans. Payments to the defined benefit multi-employer union plans are made in accordance with contractual arrangements under which contributions are generally based on gross salaries and are funded on a current basis. The Medical Center contributes amounts to the nonunion plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. The Medical Center’s pension expense under all existing plans aggregated approximately $10,202,000 and $10,683,000 for the years ended December 31, 2012 and 2011, respectively.
7. Other Post-Retirement Benefits
In addition to the pension plans and the tax-sheltered annuity plans described in Note 6, the Medical Center sponsors a defined benefit health care plan that provides post-retirement medical, dental, and life insurance benefits to certain full-time employees hired prior to July 1,2004, and who have worked 10 years and attained age 65 while in service with the Medical Center. The plan contains cost-sharing features such as deductibles and coinsurance.
Effective in May 2012, the Medical Center changed the type of the plan from basic hospital plus major medical to a point-of-service plan for nonunion employees. The effects of this change have been reflected in the actuary’s calculation for the plan year ended December 31, 2012. At the end of 2012 and 2011, the accrued post-retirement benefit cost was $6,023,000 and $6,017,000, respectively. As of December 31, 2012 and 2011, the plan was unfunded.
8. Government Grants
The Medical Center receives grants from various government agencies. For the contract years ending June 30, 2013, 2014, and 2015, these grant awards are as follows:
_____________________________________________________
Contract Year Amount
Ending June 30: (In Thousands) _____________________________________________________
2013 $3,791
2014 3,513
2015 3,765
_____________________________________________________
Advances on government grants of $1,587,000 at December 31, 2012, as reflected in the accompanying statement of financial position, represent amounts received from the granting agencies in excess of claims made at that date. The receivable amount of $467,000 at December 31, 2011, represents claims made in excess of advances received from the granting agencies at that date.
9. Professional Liability Insurance
The Medical Center participates in a pooled program with certain other health care facilities (principally medical centers) for professional liability insurance. This participation is with captive insurance companies and, with the other health care facilities, in a pooled layer for additional insurance with commercial insurance companies.
During 2011, the Medical Center had an aggregate deposit of $2,000,000 with two of the captive insurance companies. During 2012, these deposits were replaced with two letters of credit of $1,000,000 each. The deposits were included in other current assets in the accompanying 2011 statement of financial position.
Malpractice claims in excess of insurance coverage have been asserted against the Medical Center by various claimants. The claims are in various stages of processing, and some may ultimately be brought to trial. Medical Center management and counsel are unable to conclude about the ultimate outcome of the actions. There are known incidents occurring through December 31, 2012, that may result in the assertion of additional claims, and other claims may be asserted arising from services provided to patients in the past. It is the opinion of Medical Center management, based on prior experience, that adequate insurance is maintained to cover all significant professional liability losses.
10. Transactions with Affiliates
The amounts due from affiliates in the accompanying statements of financial position at December 31, 2012 and 2011, include a $1,900,000 loan receivable and accrued interest thereon from Hospital Support, Inc. The loan, which does not have specified repayment terms, bears interest at the prime rate, which approximated 7.75 percent at December 31, 2012 and 2011.
11. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are available for the following purposes at December 31:
__________________________________________________________
2012 2011
_________________________
(In Thousands)
___________________________________________________________
Research and education $ 817 $2,502
Plant replacement and expansion 7,445 5,017
$8,262_ $7,519
Permanently restricted net assets at both December 31, 2012 and 2011 consist of investments to be held in perpetuity and whose income is restricted as to use.
12. Other Operating Revenue
Other operating revenue consisted of the following for the year ended December 31:
____________________________________________________________
2012 2011
___________________________
(In Thousands)
_____________________________________________________________
Government grant income $ 1,668 $ 5,053
Real estate rentals 2,838 2,651
Investment income and gains
on sale of investments 1,077 1,044
Faculty practice and research
overhead 5,703 2,079
Dining room and parking
lot income 996 958
Grants and contributions 343 499
Other 731 1,566
$13,356 $13,850
13. Concentration of Credit Risk
Significant concentrations of patients accounts receivable include 30 percent and 37 percent from government-related programs, 6 percent and 8 percent from Empire Blue Cross and Blue Shield, and 27 percent and 23 percent from Cambridge Health Plans at December 31, 2012 and 2011, respectively.
At December 31, 2012, 95 percent of the Medical Center’s cash and cash equivalents balance was held at one financial institution.
14. Fair Value of Financial Instruments
The following methods and assumptions were used by the Medical Center in estimating its fair value disclosures for financial instruments: The carrying amount reported in the statements of financial position for cash and cash equivalents approximates its fair value. Short-term investments consist primarily of government and other debt securities. Fair values are based on quoted market prices. Long-term investments consist primarily of money market funds. Fair values are based on quoted market prices. Assets limited as to use consist primarily of government securities. Fair values are based on quoted market prices. Most of the long-term debt of the Medical Center was refinanced during 2006. The carrying value of the Medical Center’s long-term debt at December 31, 2012, approximates its fair value.
15. Contingencies
The Medical Center is a defendant in various legal actions arising out of the normal course of its operations, the final outcome of which cannot presently be determined. The amounts claimed would be material to the financial position of the Medical Center. Medical Center management is of the opinion that ultimate liability, if any, with respect to all of these matters will not have a material adverse effect on the Medical Center’s financial position.
Approximately 67 percent of the Medical Center’s employees are members of various unions. Of these employees, approximately 70 percent are covered by contracts expiring during 2013.
