RWJ Health Care Corp. at Hamilton Obligated Group

Transcription

1 RWJ Health Care Corp. at Hamilton Obligated Group Special-Purpose Combined Financial Statements and Supplementary Information

2 Table of Contents Independent Auditors Report 1 Special-Purpose Financial Statements Special-Purpose Combined Balance Sheet 3 Special-Purpose Combined Statement of Operations and Changes in Net Assets 4 Special-Purpose Combined Statement of Cash Flows 5 Notes to Special-Purpose Combined Financial Statements 6 Supplementary Information Year Ended December 31, 2015 Special-Purpose Combining Balance Sheet 28 Special-Purpose Combining Statement of Operations and Changes in Net Assets 30 Year Ended December 31, 2014 Special-Purpose Combining Balance Sheet 31 Special-Purpose Combining Statement of Operations and Changes in Net Assets 33 Page

3 Independent Auditors Report Baker Tilly Virchow Krause, LLP 100 Walnut Ave, Ste 200 Clark, NJ tel tel fax bakertilly.com Board of Directors RWJ Health Care Corp. at Hamilton Obligated Group Report on the Special-Purpose Combined Financial Statements We have audited the accompanying special-purpose combined financial statements of RWJ Health Care Corp. at Hamilton Obligated Group (the Obligated Group ), which comprise the specialpurpose combined balance sheet as of, and the related specialpurpose combined statements of operations and changes in net assets, and cash flows for the years then ended, and the related notes to the special-purpose combined financial statements. Management s Responsibility for the Special-Purpose Combined Financial Statements Management is responsible for the preparation and fair presentation of these special-purpose combined financial statements in accordance with the financial reporting provisions of the Loan Agreement between the New Jersey Health Care Facilities Financing Authority (the Authority ) and the Obligated Group and the Reimbursement Agreement between TD Bank and the Obligated Group dated July 1, 2015 (the Agreements ); this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of special-purpose combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these special-purpose combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the special-purpose combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special-purpose combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the special-purpose combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the special-purpose combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the special-purpose combined financial statements. 1 An Affirmative Action Equal Opportunity Employer

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the special-purpose combined financial statements referred to above present fairly, in all material respects, the financial position of RWJ Health Care Corp. at Hamilton Obligated Group as of, and the results of their operations, changes in their net assets and their cash flows for the years then ended in accordance with the financial reporting provisions of the Agreements. Basis of Accounting We draw attention to Note 1 to the special-purpose combined financial statements, which describe the basis of accounting. The special-purpose combined financial statements are prepared by the Obligated Group on the basis of accounting described in the Agreements, as disclosed in Note 1, which is a basis of accounting other than Accounting Principles Generally Accepted in the United States of America, to comply with the financial reporting provisions of the Agreements. Our opinion is not modified with respect to this matter. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the special-purpose combined financial statements as a whole. The supplementary information presented on pages 28 through 33 is presented for purposes of additional analysis rather than to present the financial position, results of operations and changes in net assets of the individual entities and is not a required part of the special-purpose combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the special-purpose combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the special-purpose combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the specialpurpose combined financial statements or to the special-purpose combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the special-purpose combined financial statements as a whole. Restriction on Use Our report is intended solely for the information and use of the Board of Directors and management of the Obligated Group, the Authority and TD Bank for filing in accordance with the financial reporting provisions of the Agreements, and is not intended to be and should not be used by anyone other than these specified parties. Clark, New Jersey May 27,

5 Special-Purpose Combined Balance Sheet Assets Current Assets Cash and cash equivalents $ 18,628,327 $ 17,030,510 Short-term investments 11,956,406 11,171,855 Assets limited as to use, current portion 3,886,927 3,123,731 Patient accounts receivable, net of allowance for doubtful accounts of $9,339,000 in 2015 and $7,372,000 in ,323,662 17,713,558 Due from affiliates 218, ,585 Prepaid expenses and other current assets 6,958,688 6,233,656 Total current assets 60,972,528 55,511,895 Long-term investments 25,106,084 25,498,061 Assets limited as to use, less current portion 13,974,285 13,262,273 Property and equipment, net 94,976,125 96,388,316 Deferred financing costs, net 2,334,018 2,550,440 Investment in MSO 1,495,831 1,089,541 Assets held by related organization 1,864,905 1,805,390 Due from affiliates 4,640,802 4,842,618 Total assets $ 205,364,578 $ 200,948,534 Liabilities and Net Assets Current Liabilities Current installments of long-term debt $ 3,914,306 $ 2,577,301 Accounts payable and accrued expenses 27,844,556 30,973,290 Estimated amounts due to third-party payors 1,816,749 3,706,046 Due to affiliates 11,339 10,787 Accrued interest payable 2,673,275 2,448,163 Total current liabilities 36,260,225 39,715,587 Estimated amounts due to third-party payors 4,223,942 1,294,650 Long-term debt, excluding current installments 96,728, ,642,472 Long-term loan from affiliate 34,263,603 25,098,816 Due to affiliates 6,867,046 6,867,046 Other liabilities 4,024,226 5,512,280 Total liabilities 182,367, ,130,851 Net Assets Unrestricted 21,132,465 20,012,293 Temporarily restricted 1,864,905 1,805,390 Total net assets 22,997,370 21,817,683 Total liabilities and net assets $ 205,364,578 $ 200,948,534 See notes to special-purpose financial statements 3

6 Special-Purpose Combined Statement of Operations and Changes in Net Assets Years Ended Revenue Patient service revenue, net of contractual allowances $ 196,948,485 $ 176,838,386 Less provision for doubtful accounts, net 7,537,733 7,277,044 Net patient service revenue 189,410, ,561,342 Other revenue 4,607,412 6,984,906 Total revenue 194,018, ,546,248 Expenses Salaries and wages 74,705,569 76,889,154 Physicians' fees 7,496,064 7,227,258 Employee benefits 16,481,220 19,513,736 Supplies and other 80,966,736 75,882,037 Interest 4,479,479 4,626,444 Depreciation and amortization 8,040,239 8,101,431 Total expenses 192,169, ,240,060 Revenue in excess of (less than) expenses 1,848,857 (15,693,812) Other Changes in Unrestricted Net Assets Change in net unrealized gains and losses on other than trading investments (6,097) 9,102 Net asset transfer from affiliate 256,005 - Net assets released from restrictions for capital purposes 301, ,673 Increase (decrease) in unrestricted net assets from continuing operations 2,400,305 (15,450,037) Loss from discontinued operations (1,280,133) (2,860,622) Increase (decrease) in unrestricted net assets 1,120,172 (18,310,659) Unrestricted net assets, beginning 20,012,293 38,322,952 Unrestricted net assets, ending $ 21,132,465 $ 20,012,293 Temporarily Restricted Net Assets Change in net assets held by related organization $ 361,055 $ 262,558 Net assets released from restrictions for capital purposes (301,540) (234,673) Total change in temporarily restricted net assets 59,515 27,885 Temporarily restricted net assets, beginning 1,805,390 1,777,505 Temporarily restricted net assets, ending $ 1,864,905 $ 1,805,390 See notes to special-purpose financial statements 4

7 Special-Purpose Combined Statement of Cash Flows Years Ended Cash Flows from Operating Activities Increase (decrease) in net assets $ 1,179,687 $ (18,282,774) Adjustments to reconcile increase (decrease) in net assets to net cash provided by (used in) operating activities: Depreciation and amortization 8,040,239 8,101,431 Amortization of deferred financing costs 216, ,751 Provision for doubtful accounts, net 7,537,733 7,277,044 Amortization of premium on long-term debt (91,921) (93,974) Net asset transfer from affiliate (256,005) - Change in net unrealized gains and losses on non-trading investments 6,097 (9,102) Change in net unrealized gains and losses on trading investments 112,514 (74,808) Realized losses on investments 164,782 59,567 Net (gain) loss on investment in MSO (406,290) 11,410 Changes in operating assets and liabilities: Patient accounts receivable (9,147,837) (72,880) Due from/to affiliates, net 478,440 3,968,799 Assets held by related organization (59,515) (27,885) Investment portfolio classified as trading (227,287) (208,725) Prepaid expenses and other current assets (725,032) (232,702) Accounts payable and accrued expenses (3,128,734) (424,076) Accrued interest payable 225, ,067 Estimated amounts due to third-party payors 1,039,995 (913,222) Other liabilities (1,488,054) 85,016 Net cash provided by (used in) operating activities 3,470,346 (358,063) Cash Flows from Investing Activities Net sale of investments and assets limited as to use (1,923,888) 231,959 Purchase of property and equipment (6,628,048) (5,352,570) Net cash used in investing activities (8,551,936) (5,120,611) Cash Flows from Financing Activities Payments on long-term debt and short-term borrowings (2,485,380) (2,259,379) Proceeds from long-term loan from affiliate 9,164,787 13,098,816 Net cash provided by financing activities 6,679,407 10,839,437 Net increase in cash and cash equivalents 1,597,817 5,360,763 Cash and Cash Equivalents, Beginning 17,030,510 11,669,747 Cash and Cash Equivalents, Ending $ 18,628,327 $ 17,030,510 Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest $ 4,037,945 $ 4,147,627 See notes to special-purpose financial statements 5

8 1. Organization and Summary of Significant Accounting Policies Organization RWJ Health Care Corp. at Hamilton Obligated Group (the Obligated Group ) prepares special-purpose combined financial statements for the purpose of complying with the Loan Agreement between the New Jersey Health Care Facilities Financing Authority (the Authority ) and the Obligated Group dated July 1, 2005 and the Reimbursement Agreement (the Agreements ) between TD Bank and the Obligated Group dated July 1, The Agreements allow for Assured Guaranty Municipal Corp. (successor to Financial Security Assurance, Inc.), Radian Asset Assurance Inc. and TD Bank to request additional information such as the preparation of special-purpose combined financial statements of the Obligated Group members; accordingly, the accompanying special-purpose combined financial statements and related disclosures include only the accounts of RWJ Health Care Corp. at Hamilton ( RWJHCCH ) and Robert Wood Johnson University Hospital at Hamilton and Subsidiaries (the Hospital ), in addition to the entities identified below. The Hospital is a not-for-profit, tax-exempt wholly-owned subsidiary of RWJHCCH. The combination of financial statements for only certain entities within a controlled organization differs from U.S. generally accepted accounting principles, which would require a consolidation of all of the related entities under common control. All intercompany balances and transactions relating to the combined entities have been eliminated in combination. RWJ Medical Associates at Hamilton, P.A. consists of a various physician practices owned and operated by an employee of the Hospital. The Hospital has a controlling financial interest over the decisions and operations of the practices and has included its financial position and operating results in the accompanying special-purpose combined financial statements. RWJHCCH s other subsidiaries, which are not included in these special-purpose combined financial statements, include: Robert Wood Johnson University Hospital at Hamilton Foundation, Inc. (the Foundation ), Lakeview Child Center, Inc. ( Lakeview ) and RWJ Medical Services Organization at Hamilton, Inc. (the RWJ MSO ). The purpose of RWJHCCH is to meet the health and social needs of its community through a vertically and horizontally integrated organization consisting of complementary, synergistic, and self-supporting corporations. RWJHCCH has been involved in the development and administration of such activities as hospital and long-term care management, marketing, fundraising, and day care facilities. The Hospital, located in Hamilton Township, New Jersey, is a 284-bed, not-for-profit, tax-exempt hospital. RWJ Health Care Corp. ( RWJHCC ), a New Jersey not-for-profit corporation, is the sole member of RWJHCCH. RWJHCC is also the sole member of Robert Wood Johnson University Hospital ( RWJ New Brunswick ), a not-for-profit, tax-exempt academic medical center located in New Brunswick, New Jersey. 6

9 The following is a summary of the Obligated Group s significant accounting policies: Cash and Cash Equivalents Cash and cash equivalents consist of cash balances, money market funds and certificates of deposit with original maturities of three months or less at the date of purchase, excluding amounts held as assets limited as to use and long-term investments. Assets Limited as to Use Assets so classified represent assets limited as to use under terms of a bond indenture agreement, or captive insurer funds. These assets, which consist of investments in cash, cash equivalents, and U.S. government obligations, are recorded at fair value determined by quoted market prices. The current portion of assets limited as to use is held by trustees under bond indenture, and will be used to satisfy current principal and interest obligations under long-term debt agreements. Investments and Investment Risk Investments include both trading and other than trading investment funds maintained by the Obligated Group. The Obligated Group has the ability to direct all trade activity on the investments classified as other than trading. Unrealized gains and losses on these investments are excluded from revenue in excess of (less than) expenses, unless an other-than-temporary impairment in value has occurred, and are recorded as an increase or decrease in net assets. Investments classified as trading represent the externally managed portion of the portfolio. Change in unrealized gains and losses on investments classified as trading of approximately $(113,000) and $75,000 are included in revenue in excess of (less than) expenses for the years ended December 31, 2015 and 2014, respectively. Investments in equity securities with readily determined fair value and all investments in debt securities are measured at fair value in the special-purpose combined balance sheet based on quoted market prices. Investment income or loss (comprised of change in unrealized gains and losses on trading investments, realized gains and losses on investments, interest and dividends) of marketable securities is included in revenue in excess of (less than) expenses, unless the income or loss is restricted by donor or law. Alternative investments are defined as nontraditional, not readily marketable asset classes. Alternative investment holdings are structured as limited partnership interests or other corporate forms. The alternative investments are recorded using the equity method of accounting. For the years ended, the Obligated Group recorded losses on alternative investments of approximately $93,000 and $68,000, respectively, which is included in other revenue in the special-purpose combined statement of operations and changes in net assets. Individual investment holdings of the Obligated Group within the alternative investments may include investments in both nonmarketable and market-traded securities. 7

10 Valuations of investments not readily marketable may be determined by the investment manager or general partner. The valuations for fund of funds investments are primarily based on financial data supplied by the underlying investee funds. Values may be based on historical cost, appraisals, or other estimates that require varying degrees of judgment. Generally, reported value reflects net contributions to the investee and an ownership share of realized and unrealized investment income and expenses. The investments may indirectly expose the Obligated Group to securities lending, short sales of securities, and trading in futures and forwards contracts, options and other derivative products. While these financial instruments may contain varying degrees of risk, the Obligated Group s risk with respect to such transactions is limited to its capital balance in each investment. The financial statements of the investees are audited annually by independent auditors. At December 31, 2015, the Obligated Group has future commitments to invest in alternative investments totaling approximately $156,601. Investments, in general, are exposed to various risks such as interest rate, credit, and overall market volatility. As such, it is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the combined balance sheet and the statements of operations and changes in net assets. Investments with maturities of twelve months or less are classified as current assets. Supplies Supplies are carried at the lower of cost (first-in, first-out method) or market. Supplies totaling approximately $3,621,000 and $3,572,000 are included in prepaid expenses and other current assets in the special-purpose combined balance sheet at December 31, 2015 and 2014, respectively. Property and Equipment Property and equipment are recorded at cost, except donated assets, which are recorded at fair value at date of donation. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future net cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the special-purpose combined balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the special-purpose combined balance sheet. 8

11 Deferred Financing Costs Deferred financing costs include the costs of obtaining financing and are amortized using the effective interest method over the life of the related debt. At December 31, 2015 and 2014, accumulated amortization for deferred financing costs was approximately $2,289,000 and $2,073,000, respectively. Amortization of deferred financing costs is recorded in interest expense. Estimated Malpractice Costs The provision for estimated medical malpractice claims, included in supplies and other expenses in the special-purpose combined statement of operations, includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. The estimated liability for medical malpractice costs is included with other liabilities in the special-purpose combined balance sheet (see Note 11). Employee Health Benefit Plan The Hospital established a self-insured employee health benefit plan. The Hospital contracts with a preferred provider organization to assist in the administration of the health plan. The liabilities of the health plan, both reported and unreported, are included in accounts payable and accrued expenses in the accompanying special-purpose combined balance sheet. Unrestricted and Temporarily Restricted Net Assets The Obligated Group separately accounts for and reports upon donor restricted and unrestricted net assets. Unrestricted net assets are not externally restricted for identified purposes by donors or grantors. Unrestricted net assets include resources that the governing board may use for any designated purpose. Temporarily restricted net assets are those whose use by the Obligated Group has been limited by donors to a specific time frame or purpose. When donor restrictions expire, that is, when a time restriction ends or a purpose restriction is accomplished, temporarily restricted net assets are recorded as net assets released from restrictions. Temporarily restricted net assets funds as of have been restricted for the following purposes: Capital projects $ 827,111 $ 1,097,656 Research 104, ,589 Hospital programs 933, ,145 Total $ 1,864,905 $ 1,805,390 The Obligated Group recognizes its interest in the net assets of the Foundation. Changes in the Obligated Group s interest in the Foundation s temporarily restricted net assets are included in the accompanying special-purpose combined statement of operations and changes in net assets. The interest is reflected in assets held by related organization in the accompanying special-purpose combined balance sheet and represents the temporarily restricted net assets recorded by the Hospital. 9

12 The Hospital completed construction on the Pediatric Emergency Room in The Foundation has raised funds for the construction which are included as capital projects in temporarily restricted net assets. A significant portion of the restricted net assets for capital purposes pertain to pledges receivable. As pledges are collected, funds will be released and amounts will be reclassified to unrestricted net assets. During 2015 and 2014, the Foundation released $301,540 and $234,673 to the Hospital for capital purposes. Patient Accounts Receivable and Net Patient Service Revenue Patient accounts receivable result from the health care services provided by the Hospital. Additions to the allowance for doubtful accounts result from the provision for bad debts. Accounts written off as uncollectible are deducted from the allowance for doubtful accounts. The amount of the allowance for doubtful accounts is based upon management s assessment of historical and expected net collections, business and economic conditions, trends in Medicare and Medicaid health care coverage and other collection indicators. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered and includes estimated retroactive adjustments due to ongoing and future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as final settlements and adjustments become known or as years are no longer subject to such audits, reviews, and investigations. The Hospital has agreements with third-party payors that provide for payments at amounts different from their established rates. A summary of the payment arrangements with major third-party payors includes, but is not limited to, the following: Medicare - Inpatient acute care services rendered to Medicare program beneficiaries are paid under the Prospective Payment System at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Outpatient services are paid under the Outpatient Prospective Payment System at prospectively determined rates per ambulatory payment classification. The Hospital is reimbursed for capital-related costs under the fully prospective payment methodology. Medicaid - Inpatient acute care services rendered to Medicaid program beneficiaries are paid under a prospective methodology which, similar to Medicare, is based on predetermined rates per discharge. Outpatient services are paid based upon a cost reimbursement methodology. The Hospital is reimbursed at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicaid fiscal intermediary. Commercial Insurance - The Hospital has entered into payment agreements with certain insurance carriers, health maintenance organizations, and preferred provider organizations which cover health benefits and workers compensation for commercial, Medicare and Medicaid members. The basis for payment to the Hospital under these agreements varies by payor, but typically includes prospectively determined rates per discharge, discounts from established charges, prospectively determined daily rates, and/or cost pass-through reimbursement for certain high cost items. 10

13 The Hospital s allowance for doubtful collections for self-pay patients was 90% of selfpay accounts receivable at, respectively. The Hospital s self-pay account write-offs (net of recoveries) decreased to $6,299,515 in 2015 from $10,769,415 in The decrease from prior year is the result of fewer uninsured patients in 2015 due to the Affordable Care Act. The Hospital has not changed its financial assistance policy in 2015 or 2014 except for financial assistance policy changes as required by the Internal Revenue Service. For uninsured patients that do not qualify for charity care, the Hospital recognizes revenues on the basis of its standard rates, discounted in accordance with the Hospital s policy. On the basis of historical experience, a significant portion of the Hospital s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Hospital records a significant provision of bad debts related to uninsured patients in the period the services are provided. Patient service revenues, net of contractual allowances, discounts, and discontinued operations (but before the provision of bad debts), recognized in 2015 and 2014 from these major payor sources, are as follows: Patient Service Revenues (Net of Contractual Allowances and Discounts) Third-Party Government Payors Third-Party Commercial Payors Self-Pay Total December 31, 2015 $ 100,240,521 $ 95,955,671 $ 1,271,114 $ 197,467,306 December 31, 2014 $ 93,818,963 $ 83,017,683 $ 8,744,286 $ 185,580,932 Income Taxes RWJHCCH and the Hospital are organizations described in Section 501(c)(3) of the Internal Revenue Code and, therefore, are exempt from Federal income taxes pursuant to Section 501(a) of the Code. In addition, RWJHCCH and the Hospital are exempt from State income taxes. RWJ Medical Associates at Hamilton P.A. is a for-profit organization subject to both federal and state income taxes and is no longer subject to examination by the Internal Revenue Service for years before No income taxes have been incurred in 2015 or 2014 due to carry forward net losses that are not material for disclosure. The Hospital accounts for uncertainty in income taxes using a recognition threshold of more-likely-than-not to be sustained upon examination by the appropriate taxing authority. Measurement of the tax uncertainty occurs if the recognition threshold is met. Management determined there were no tax uncertainties that met the recognition threshold in 2015 and The Hospital s federal tax-exempt organization business income tax returns are no longer subject to examination by the Internal Revenue Service for years before The Hospital s policy is to recognize interest related to unrecognized tax benefits in interest expense and penalties in supplies and other expenses. 11

14 Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue. Advertising Costs The Obligated Group expenses advertising costs as incurred. For the years ended, advertising costs totaled approximately $780,000 and $925,000, respectively, and are included in supplies and other expenses in the specialpurpose combined statement of operations and changes in net assets. Performance Indicator The special-purpose combined statement of operations and changes in net assets includes revenue in excess of (less than) expenses as the performance indicator. Changes in unrestricted net assets which are excluded from revenue in excess of (less than) expenses, consistent with industry practice, include changes in net unrealized gains and losses on other than trading investments, permanent transfers of assets to and from affiliates for other than goods and services, loss from discontinued operations, and contributions of long-lived assets, including net assets released from restriction for capital projects. Use of 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 disclosure of contingent assets and liabilities as of the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events The Obligated Group evaluated events for recognition or disclosure subsequent to December 31, 2015 and through May 27, 2016, the date on which the financial statements were issued. 12

15 New Accounting Pronouncements Revenue from Contracts with Customers In May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Revenue from Contracts with Customers (Topic 606). ASU No supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Under the requirements of ASU No , the core principle is that entities should recognize revenue to depict the transfer of promised goods or services to customers (patients) in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Obligated Group will be required to retrospectively adopt the guidance in ASU No for years beginning after December 15, The Obligated Group has not yet determined the impact, if any, of the adoption of ASU No on its financial statements. Services Received from Personnel of an Affiliate In April 2013, the FASB issued guidance to provide consistency in accounting for shared costs by not-for-profit organizations with multiple affiliates, including health care systems. Under this guidance, direct personnel costs (salaries and wages and payrollrelated employee benefits) will be recognized by entities that receive services from affiliates. These costs will be recognized at cost as equity transfers and will be excluded from revenues in excess of expenses. The guidance is effective for the year ended December 31, 2015 and required prospective adjustment of the statements of operations and changes in net assets and related disclosures. The impact of adoption is not deemed to be material to the Hospital s financial statements (Note 12). Leases In February 2016, the FASB issued Accounting Standards Update ( ASU ) No , Leases (Topic 842). ASU No was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the provisions of ASU No , a lessee is required to recognize a right-to-use asset and lease liability, initially measured at the present value of the lease payments, in the balance sheet. In addition, lessees are required to provide qualitative and quantitative disclosures that enable users to understand more about the nature of the Obligated Group s leasing activities. The Obligated Group will be required to retrospectively adopt the guidance in ASU No for years beginning after December 15, The Obligated Group has not yet determined the impact of adoption of ASU No on its financial statements. 13

16 2. Discontinued Operations Effective September 4, 2014, the Hospital made the decision to discontinue the operations of the obstetric department ( OB ) and will no longer provide these services. The Hospital has transferred these services through licensure amendment to other health care providers. The following amounts related to discontinued operations are included in loss from discontinued operations in the accompanying statements of operations and changes in net assets at : Total unrestricted revenues $ 518,821 $ 8,742,546 Total expenses 1,798,954 11,603,168 Net loss on discontinuance of services $ (1,280,133) $ (2,860,622) 3. Charity Care The Hospital provides care to patients who meet the strict charity care criteria of the New Jersey State Department of Health (the Department ) without charge or at amounts less than its established rates. In accordance with guidelines established by the Department, the Hospital maintains records to identify and monitor the level of charity care it provides. The costs associated with the charity care services provided are estimated by applying a cost-to-charge ratio to the amount of gross uncompensated charges for the patients receiving charity care. The level of charity care provided by the Hospital amounted to approximately $4,058,000 in 2015 and $4,917,000 in The strict state eligibility criteria and the difficulty in obtaining the required data from patients limit the number of patients who qualify for charity care in New Jersey. It is management s belief that the present charity care guidelines understate the Hospital s charity care amounts and overstate the level of bad debts reported, because of the difficulties involved with obtaining patient cooperation. The Hospital provides additional charity care to the community which includes the following: child health program, fireman pulmonary testing, hepatitis screening, breast screening, lead screening, flu vaccine program, and Special Olympics physicals. The Hospital also provides free community programs including Adult Health Education Programs, Health Education Programs for elementary and preschool children, as well as safety programs for children and various support groups. These services are not recognized by the Department as charity care. 14

17 4. Third-Party Payor Programs The Hospital provides care to patients under Medicare, Medicaid and other contractual arrangements. The Medicare and Medicaid programs pay for all inpatient and most outpatient services on a prospective basis. Certain outpatient services and specified expenses are reimbursed on a reasonable cost basis. Regulations require annual retroactive settlements for these amounts based on cost reports filed by the Hospital. These retroactive settlements are estimated and recorded in the special-purpose combined financial statements in the year in which they are estimated. The estimated settlements recorded at could differ from actual settlements based on the results of cost report audits. Medicare and Medicaid cost reports for all years through 2012 have been settled, with the exception of the Medicare cost report for 2005, which remains open, as of December, 31, In 2015 and 2014, no changes to net patient service revenue were attributable to prior year adjustments. Revenue from the Medicare and Medicaid programs accounted for approximately 51% of the Obligated Group s net patient service revenue for the years ended December 31, 2015 and There are various proposals at the federal and state levels that could, among other things, significantly reduce payment rates or modify payment methods. The ultimate outcome of these proposals and other market changes cannot presently be determined. Future changes in the Medicare and Medicaid programs and any reduction of funding could have an adverse impact on the Obligated Group. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Actions for noncompliance include fines, penalties and exclusion from the Medicare and Medicaid programs. The Obligated Group believes that it is currently in compliance with all applicable laws and regulations in all material respects and is not aware of any pending or threatened investigations involving allegations of potential wrong doing which could have a material adverse impact on the accompanying combined special-purpose financial statements. The New Jersey Health Care Subsidy Fund was established for various purposes including the distribution of charity care payments to hospitals statewide. During 2015 and 2014, the Obligated Group received approximately $2,221,000 and $1,969,000, respectively, which is included in net patient service revenue. 15

18 5. Investments and Assets Limited as to Use The composition of investments at is as follows: Cash and cash equivalents $ 1,140,276 $ 926,627 Certificates of deposit 3,747,774 3,715,409 U.S. government obligations 9,019,710 8,992,521 Investment-grade corporate bonds 9,728,912 9,912,697 Fixed income - ultrashort bond fund 5,668,410 5,653,882 Money market funds 7,068,357 6,529,819 Alternative investments 689, ,961 Total 37,062,490 36,669,916 Less short-term investments 11,956,406 11,171,855 Long-term investments $ 25,106,084 $ 25,498,061 The composition of assets limited as to use at is as follows: Under bond indenture agreements held by trustees, U.S. government obligations $ 11,552,572 $ 10,672,025 Held by captive insurer fund, Cash and cash equivalents 6,308,640 5,713,979 Total assets limited as to use 17,861,212 16,386,004 Less assets limited as to use - current portion 10,195,566 8,837,709 Noncurrent assets limited to use $ 7,665,646 $ 7,548,295 The assets held by trustees under bond indenture agreements, at fair value, are maintained for the following at : Debt service for principal and interest $ 3,886,926 $ 3,123,730 Debt service reserve fund 7,665,646 7,548,295 Total $ 11,552,572 $ 10,672,025 16

19 Investment income is included in other revenue and is comprised of the following for the years ended Investment income $ 458,968 $ 472,958 Realized losses, net (164,782) (59,567) Change in unrealized gains and losses on trading portfolio (112,514) 74,808 Alternative investments equity loss (92,687) (67,895) Total $ 88,985 $ 420,304 At, other than trading investments in an unrealized loss position were not significant to the special-purpose combined financial statements. 6. Fair Value of Financial Instruments The Hospital follows the provisions of authoritative guidance relating to fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America, and enhances disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework that this guidance establishes for measuring fair value includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The Hospital follows a valuation hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below: Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Hospital for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3 - Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In determining fair value, the Obligated Group uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers nonperformance risk in its assessment of fair value. 17

20 Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in methodologies used at December 31, Cash and cash equivalents and certificates of deposit approximate fair value because of the short maturity of those financial instruments. Assets whose use is limited and investments are valued at fair value, which are the amounts reported in the balance sheet, based on quoted market prices, if available, or estimated using quoted market process of similar securities. Long-term debt fair value is calculated based on quoted market prices, if available, or estimated using quoted market prices for similar securities. It is generally not practicable to estimate the fair value of related party transactions since terms could not be duplicated in the market, and related parties can revise terms, making assumptions supporting fair values potentially unreliable. Fair Value as of December 31, 2015 Carrying Value Fair Value Level 1 Level 2 Level 3 Reported at Fair Value Investments: Cash and cash equivalents $ 1,140,276 $ 1,140,276 $ 1,140,276 $ - $ - Certificates of deposit 3,747,774 3,747,774-3,747,774 - U.S. government obligations 9,019,710 9,019,710 9,019, Investment-grade corporate bonds 9,728,912 9,728,912-9,728,912 - Fixed income - ultrashort bond fund 5,668,410 5,668,410 5,668, Money market funds 7,068,357 7,068,357 7,068, Assets limited as to use - under bond indenture agreements held by trustees, U.S. government obligations 11,552,572 11,552,572 11,552, Assets limited as to use - held by captive insurer fund, Cash and cash equivalents 6,308,640 6,308,640 6,308, Disclosed at Fair Value Cash and cash equivalents $ 18,628,327 $ 18,628,327 $ 18,628,327 $ - $ - Long-term debt $ 100,642,472 $ 100,728,508 $ - $ 76,281,676 $ 24,446,832 18

21 Fair Value as of December 31, 2014 Carrying Value Fair Value Level 1 Level 2 Level 3 Reported at Fair Value Investments: Cash and cash equivalents $ 926,627 $ 926,627 $ 926,627 $ - $ - Certificates of deposit 3,715,409 3,715,409-3,715,409 - U.S. government obligations 8,992,521 8,992,521 8,992, Investment-grade corporate bonds 9,912,697 9,912,697-9,912,697 - Fixed income - ultrashort bond fund 5,653,882 5,653,882 5,653, Money market funds 6,529,819 6,529,819 6,529, Assets limited as to use - under bond indenture agreements held by trustees, U.S. government obligations 10,672,025 10,672,025 10,672, Assets limited as to use - held by captive insurer fund, Cash and cash equivalents 5,713,979 5,713,979 5,713, Disclosed at Fair Value Cash and cash equivalents $ 17,030,510 $ 17,030,510 $ 17,030,510 $ - $ - Long-term debt $ 103,219,773 $ 103,181,953 $ - $ 77,334,741 $ 25,847,212 The Obligated Group uses the equity method of accounting to record their alternative investments of $689,051 and $938,961 as of, respectively, which are not included in the tables above. 19

22 7. Property and Equipment Property and equipment at consists of the following: Useful Lives Land $ 87,255 $ 87,255 - Land improvements 5,171,971 5,171, Buildings 130,839, ,302, Fixed equipment 22,559,179 22,576, Major movable equipment 86,499,015 82,205, Total 245,156, ,343,573 Less accumulated depreciation 151,898, ,441,893 93,258,173 95,901,680 Construction in progress 1,717, ,636 Total $ 94,976,125 $ 96,388,316 The Obligated Group capitalized $934,526 and $1,159,736 of computer software costs in 2015 and 2014, respectively. 8. Related-Party Transactions Due from affiliated companies at consist of the following: RWJ MSO $ 4,640,802 $ 4,842,618 Foundation 218, ,585 4,859,320 5,081,203 Less current portion 218, ,585 Due from affiliates, noncurrent $ 4,640,802 $ 4,842,618 Interest is not charged and there are no fixed repayment terms on these advances. The amounts are settled monthly, or as funds become available. 20

23 Due to affiliated companies at consist of the following: RWJ New Brunswick $ 6,867,046 $ 6,867,046 Lakeview 11,339 10,787 6,878,385 6,877,833 Less current portion 11,339 10,787 Due to affiliates $ 6,867,046 $ 6,867,046 The Hospital provided management services to the Foundation, Lakeview and RWJ MSO of approximately $438,000 and $409,000 in 2015 and 2014, respectively, which is recorded in other revenue in the special-purpose combined statement of operations and changes in net assets. Due to RWJ New Brunswick at represents amounts due for management services provided to the Obligated Group. RWJ New Brunswick periodically advances funds for shared operating costs. Interest is not charged and there are no fixed repayment terms on these advances. The amounts are settled monthly, or as funds become available. Lakeview rents space from the Hospital. Total annual rent expense was $75,000 in 2015 and 2014 and is included in other revenue in the special-purpose combined statement of operations and changes in net assets. Long-Term Affiliate Loan Payable On November 11, 2014, the Hospital entered into a subordinated loan agreement with RWJ New Brunswick for an amount not to exceed $44,000,000 to be advance in principal amounts not to exceed $21,000,000 in 2014, $12,000,000 in 2015 and $11,000,000 in Payments of interest, equal to the 3-year constant maturity treasury rate in effect on the closing date (.95%), and principal are to commence April 30, 2017 if the Hospital meets certain financial ratios as defined by the loan agreement. The ratios will be reevaluated as of April 30 of each year and to the extent the Hospital cannot make payments on the loan, the outstanding balance will continue to accrue interest until the maturity date of December 31, 2036 at which point the full remaining balance will be due plus any unpaid interest. As of, the amount drawn on the loan was $22,263,603 and $13,098,816, respectively. The loan is reflected as long-term loan from affiliate on the accompanying special-purpose combined balance sheet. On July 8, 2010 the Hospital entered into a subordinated loan agreement with RWJ New Brunswick for $12,000,000. Payments of interest (1.01% at December 31, 2015) and principal will commence April 30, 2014 if there are surplus funds as defined by the loan agreement. The use of the proceeds is restricted to payment of prior year DSH settlements, payment of the OIG settlement, capitalization of the captive insurance company in accordance with a payment plan or to maintain minimum statutory requirements, or other permitted uses as authorized by the President and CEO of RWJ New Brunswick. 21