BRRH Corporation and Affiliates. Consolidated Financial Statements and Supplementary Information Years Ended June 30, 2016 and 2015

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1 BRRH Corporation and Affiliates Consolidated Financial Statements and Supplementary Information Years Ended June 30, 2016 and 2015

2 Contents Independent Auditor s Report 1 2 Consolidated Financial Statements Consolidated Balance Sheets 3 4 Consolidated Statements of Operations and Changes in Net Assets 5 6 Consolidated Statements of Cash Flows Supplementary Information Supplemental Consolidating Balance Sheet Supplemental Consolidating Statement of Operations and Changes in Net Assets 36 37

3 Independent Auditor s Report The Board of Trustees BRRH Corporation and Affiliates Boca Raton, Florida Report on the Financial Statements We have audited the accompanying consolidated financial statements of BRRH Corporation and Affiliates (the Corporation), which comprise the consolidated balance sheets as of June 30, 2016 and 2015 and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BRRH Corporation and Affiliates as of June 30, 2016 and 2015 and the results of their operations, changes in net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The consolidating information is presented for purposes of additional analysis rather than to present the financial position, results of operations, and cash flows of the individual companies and is not a required part of the 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 financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 financial statements as a whole. Miami, Florida September 29,

5 Consolidated Balance Sheets June 30, 2016 and 2015 Assets Current assets: Cash and cash equivalents $ 42,580,652 $ 46,346,470 Restricted cash 1,163,337 1,503,869 Assets whose use is limited, current 7,522,713 10,031,343 Investments, current 28,200,488 32,304,174 Accounts receivable from patients, less allowance for doubtful accounts of approximately $13,003,000 and $11,106,000 in 2016 and 2015, respectively 54,151,463 46,030,699 Pledges receivable, current 7,248,922 7,855,932 Other receivables 2,667,027 2,223,521 Inventories 8,208,354 7,272,214 Prepaid expenses and other current assets 5,880,034 5,668,280 Total current assets 157,622, ,236,502 Assets whose use is limited, net of current portion: Under trust for professional and general liability claims, held by trustee 2,721,256 2,600,227 Donor-designated assets 48,163,342 35,902,505 Total assets whose use is limited, net of current portion 50,884,598 38,502,732 Investments, net of current portion 69,693,968 63,558,316 Pledges receivable, net of current portion 20,632,171 23,089,847 Property and equipment, net 219,163, ,703,966 Other assets 2,622,762 3,006,244 Total assets $ 520,619,522 $ 502,097,607 (Continued) 3

6 Consolidated Balance Sheets (Continued) June 30, 2016 and 2015 Liabilities and Net Assets Current liabilities: Accounts payable $ 23,535,641 $ 18,977,089 Accrued expenses 30,570,452 28,745,989 Current portion of long-term debt and capital lease obligations 5,829,131 5,803,964 Estimated third-party settlements 252,735 1,435,524 Reserve for professional liability claims, current 4,698,000 4,687,400 Other current liabilities 1,885,857 1,853,954 Total current liabilities 66,771,816 61,503,920 Long-term liabilities: Reserve for professional liability claims, net of current 9,642,325 10,288,686 Long-term debt and capital lease obligations, net of current 83,796,713 89,757,323 Pension liability 68,387,505 44,921,712 Other long-term liabilities 1,673,109 6,765,522 Total liabilities 230,271, ,237,163 Net assets: Unrestricted 211,033, ,028,750 Temporarily restricted 79,314,529 67,831,694 Total net assets 290,348, ,860,444 Total liabilities and net assets $ 520,619,522 $ 502,097,607 See. 4

7 Consolidated Statements of Operations and Changes in Net Assets Years Ended June 30, 2016 and 2015 Unrestricted revenue: Net patient service revenue $ 460,454,564 $ 419,845,748 Provision for bad debts (15,925,104) (15,991,860) Net patient service revenue less provision for bad debts 444,529, ,853,888 Other revenue 6,942,822 6,919,701 Net assets released from restrictions 10,831,652 3,697,625 Total unrestricted revenue 462,303, ,471,214 Expenses: Salaries and wages 184,533, ,482,966 Employee benefits 29,948,821 24,237,193 Physician fees 4,396,859 4,978,801 Professional fees 3,186,194 2,183,279 Supplies 127,195, ,698,107 Purchased services 42,345,134 35,890,774 Insurance 7,824,707 3,613,254 Depreciation 27,235,540 27,132,305 Interest 3,435,965 4,459,701 Other 28,949,801 26,712,926 Total expenses 459,052, ,389,306 Income from operations 3,251,275 6,081,908 Nonoperating gains (losses): Investment income, net 1,121,084 1,124,506 Net realized gains on sale of investments 2,400,013 5,243,560 Contributions, net of related expenses (2,251,528) 226,591 Community support (741,136) (536,351) Loss on debt extinguishment - (1,514,931) Other, net 125,784 1,528,843 Total nonoperating gains 654,217 6,072,218 Excess of unrestricted revenue and nonoperating gains over expenses $ 3,905,492 $ 12,154,126 (Continued) 5

8 Consolidated Statements of Operations and Changes in Net Assets (Continued) Years Ended June 30, 2016 and 2015 Unrestricted net assets (continued): Excess of unrestricted revenue and nonoperating gains over expenses $ 3,905,492 $ 12,154,126 Net assets released from restriction for capital purposes 17,318,745 22,072,485 Changes in net unrealized gains and losses on investments classified as other than trading securities (5,613,702) (5,214,331) Pension-related changes other than net periodic pension cost (25,580,759) (18,349,061) Other (25,001) - (Decrease) increase in unrestricted net assets (9,995,225) 10,663,219 Temporarily restricted net assets: Contributions, net of related expenses 39,633,232 29,006,650 Net assets released from restrictions (28,150,397) (25,770,110) Increase in temporarily restricted net assets 11,482,835 3,236,540 Increase in net assets 1,487,610 13,899,759 Net assets, beginning of year 288,860, ,960,685 Net assets, end of year $ 290,348,054 $ 288,860,444 See. 6

9 Consolidated Statements of Cash Flows Years Ended June 30, 2016 and 2015 Operating Activities Increase in net assets $ 1,487,610 $ 13,899,759 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 26,847,823 26,804,878 Gain on sale of equipment (18,603) (327,388) Gain on sale of investments (2,400,013) (5,243,560) Loss on debt extinguishment - 1,514,931 Provision for bad debts 15,925,104 15,991,860 Change in net unrealized losses on investments 5,613,702 5,214,331 Change in pension liability 25,580,759 18,349,061 Restricted contributions (39,633,232) (29,006,650) Changes in operating assets and liabilities (23,288,785) (20,007,645) Net cash provided by operating activities 10,114,365 27,189,577 Investing Activities Proceeds from sales and maturities of investments 32,981,183 23,262,190 Purchases of investments (45,990,780) (22,658,817) Net (increase) decrease in assets whose use is limited and donor-designated assets (1,772,784) 5,657,004 Purchases of property and equipment, net (31,111,338) (34,650,344) Receipts on gift annuities 50,000 - Payments on gift annuities (7,968) (7,798) Proceeds from the sale of property and equipment 34, ,932 Change in restricted cash 340,532 2,072,822 Net cash used in investing activities (45,477,057) (25,866,011) Financing Activities Repayments of long-term debt (4,568,311) (103,317,048) Issuance of long-term debt - 97,972,633 Deferred financing costs - (1,559,663) Payments on capital leases (1,196,224) (1,203,805) Proceeds from restricted contributions 37,361,409 19,410,821 Net cash provided by financing activities 31,596,874 11,302,938 (Decrease) increase in cash and cash equivalents (3,765,818) 12,626,504 Cash and cash equivalents, beginning of year 46,346,470 33,719,966 Cash and cash equivalents, end of year $ 42,580,652 $ 46,346,470 (Continued) 7

10 Consolidated Statements of Cash Flows (Continued) Years Ended June 30, 2016 and 2015 Supplemental Disclosure of Noncash Financing and Investing Activities Acquisition of equipment under capital lease obligation $ 216,809 $ 171,193 Acquisition of equipment through accounts payable $ 1,685,834 $ 1,348,449 Change in other long-term liability related to restricted contributions $ (5,000,000) $ - Change in pledges receivable $ 3,064,686 $ (9,745,514) Supplemental Disclosures of Cash Flow Information Cash paid for interest $ 3,829,031 $ 4,278,473 Changes in operating assets and liabilities: Accounts receivable from patients $ (24,045,868) $ (19,108,861) Other receivables (443,506) 2,066,332 Inventories (936,140) (753,790) Prepaid expenses and other current assets (219,525) (94,989) Other 346,682 1,172,441 Accounts payable 4,221,167 (2,627,419) Accrued expenses 1,824, ,700 Estimated third-party settlements (1,182,789) (284,840) Other current liabilities 31,903 1,606,580 Reserve for professional liability claims (635,761) (837,253) Other long-term liabilities (134,445) 812,952 Pension liability (2,114,966) (2,393,498) $ (23,288,785) $ (20,007,645) See. 8

11 Note 1. Organization and Mission The consolidated financial statements of BRRH Corporation and its controlled affiliates (the Corporation) include the following operations: BRRH Corporation, a parent holding company (the Parent), is a not-for-profit organization that was formed exclusively for charitable, benevolent, educational, and scientific purposes, to support and encourage health care services through the promotion of the services, activities, and objectives of its controlled affiliates. Boca Raton Regional Hospital, Inc. (the Hospital) is a not-for-profit corporation that was formed to provide health care services. The Hospital is incorporated under the laws of the state of Florida to operate a 400-bed, not-for-profit health care facility. This entity is a subsidiary of the Parent. Boca Raton Regional Hospital Foundation, Inc. (the Foundation) is a not-for-profit corporation that was formed to raise funds to support the Hospital and other related organizations. This entity is a subsidiary of the Parent. BRRH Home Health Services, Inc. (Home Health) is a not-for-profit corporation that was formed to assist the Hospital in the furtherance of specialized care in the area of home health medicine. Home Health operates a full-service home health agency. This entity is a subsidiary of the Parent. BRRH Oaks Plaza, LLC (Oaks Plaza) is a limited liability company that is a developer and owner of medical office buildings. Its sole member is the Parent. Eugene M. and Christine E. Lynn Clinical Research Institute, LLC (Lynn Clinical Research) is a Florida not-for-profit limited liability company that was formed for the purpose of charitable, educational, health care, and medical-related research activities. Its sole member is the Foundation. BRRH Oncology, LLC is a limited liability company that was formed to support cancer care treatment. Its sole member is the Hospital. Boca Thoracic & Cardiovascular Surgery, LLC is a limited liability company that was formed to support specialized thoracic and cardiovascular surgery, care, and treatment. Its sole member is the Hospital. BRRH Women s Institute for Health and Wellness, Inc. (Women s Institute) is a taxable not-forprofit corporation that was formed to support women s diagnostic services. This entity is a subsidiary of the Parent. Boca Care, Inc. is a taxable not-for-profit corporation that was formed exclusively for charitable and educational purposes, and provides primary and specialty care services to the residents of the community. This entity is a subsidiary of the Parent. BRRH Medical Group, LLC is a limited liability company that was formed during the year ended June 30, 2015 to primarily support physician practice purposes and other purposes deemed necessary by the Hospital. Its sole member is the Hospital. 9

12 Note 1. Organization and Mission (Continued) Palm Accountable Care Organization, LLC is a limited liability company that was formed to perform, advance, and support the charitable, educational, and scientific missions of the Hospital, its affiliated entities, and the communities they serve. Its sole member is the Hospital. The Corporation s primary mission is to provide a broad range of primary and specialized care services to the citizens of Boca Raton, Florida, and the surrounding region. Note 2. Summary of Significant Accounting Policies A summary of the Corporation s significant accounting policies follows: Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash and cash equivalents include highly liquid investments with maturities of three months or less when purchased and consist primarily of amounts held as bank deposits and government money market funds. Bank deposits are federally insured in limited amounts. Restricted Cash: Restricted cash includes cash reserved for a deferred compensation plan and for the irrevocable letter of credit. Assets Whose Use is Limited: Assets whose use is limited include assets held by trustee for professional and general liability claims as well as donor-designated assets. Amounts expected to meet the current portion of professional claims liabilities of the Corporation and the portion of donor-designated assets expected to be utilized within the next 12 months have been classified as current assets in the accompanying consolidated balance sheets. The Foundation s policy is to protect the basis of the underlying donor-designated assets. The Foundation may invest donor-designated assets when received, until the Corporation utilizes the assets in accordance with the designated purposes. The Foundation s policy is that all risk of loss that may be experienced by donor-designated assets generally remains with the Foundation s unrestricted assets. Accordingly, the Foundation generally allocates all investment returns to the Foundation s unrestricted assets. Investments: Investments include marketable securities, limited partnerships and investment funds. The limited partnerships and investment funds (collectively referred to as Funds) invest in other funds and securities. Marketable securities are recorded at fair value and consist primarily of mutual funds. Management has designated all marketable securities with readily determinable fair values as other than trading. This classification reflects the characteristics of the portfolio, since the securities are not actively traded for the purposes of realizing short-term gains. The Funds are not readily marketable as defined by Accounting Standards Codification (ASC) 958, Accounting for Certain Investments Held by Not-for-Profit Organizations, as there are conditions and restrictions on the redemption of these investments. Certain redeemable investments are subject to lockup restrictions of up to one year and are subject to additional fees for early withdrawal. Currently, there are no redemptions which have been requested and not satisfied. The Corporation also holds investments in certain private equity partnerships. These investments are non-redeemable and returns are distributed by the respective partnership in accordance with the offering agreements. 10

13 Note 2. Summary of Significant Accounting Policies (Continued) Investments (Continued): These investments are recorded at fair value. In accordance with U.S. generally accepted accounting principles, the Corporation is required to review its holdings in investments for indicators of other-than-temporary declines in fair value. An other-than-temporary decline in fair value below the carrying value is recognized at the point in time that the determination is made. There were no other-than-temporary declines recorded in fiscal years 2016 or The change in net unrealized gains and losses on investments is recorded directly as a change in net assets to the extent losses are considered temporary. Investment income or loss (including interest and dividends), net gains or losses on the sales of investments and other-than-temporary declines in the market value of investments are included in excess of unrestricted revenue and nonoperating gains over expenses. Investments that are available for current operations are recorded as current assets. Investments that are not available for current operations as a result of contractual obligations or for other reasons are not included in current assets. Accounts Receivable from Patients: The Corporation receives payment for services rendered to patients from: (i) the federal and state governments under the Medicare and Medicaid programs; (ii) private-pay payors, including third-party insurers and workers compensation plans, for which payments are net of negotiated discounts; and (iii) other sources. The following table summarizes the percentage of gross accounts receivable from payors as of June 30: Government (Medicare and Medicaid) 46% 45% Managed care Self-pay Commercial insurance 6 2 Other third-party payors % 100% Management does not believe that there is any significant credit risk associated with receivables from governmental agencies. Commercial insurance and self-pay receivables consist of receivables from various payors subject to differing economic conditions, and do not represent any significant concentrated credit risks to the Corporation. The Corporation grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The Corporation does not charge interest on accounts receivable. Furthermore, management continually monitors and makes adjustments to the allowance for doubtful accounts when evidence indicates that collectability of accounts is at risk. Accounts are charged off after management has exhausted the standard collection procedures without success. Inventories: Inventories, consisting principally of medical and pharmaceutical supplies, are stated at the lower of cost or market. Cost is determined on the basis of the most recent purchase price, which approximates the first-in, first-out method, as of June 30: Medical supplies $ 4,301,516 $ 3,976,738 Pharmaceutical supplies 3,906,838 3,295,476 Total supplies $ 8,208,354 $ 7,272,214 11

14 Note 2. Summary of Significant Accounting Policies (Continued) Property and Equipment, Net: Property and equipment are recorded at cost. Donated property and equipment are recorded at fair market value at the time of the donation and are excluded from excess of unrestricted revenue and nonoperating gains over expenses on the accompanying consolidated statements of operations and changes in net assets. Depreciation is computed over the estimated useful lives of the related assets using the straight-line method ranging from 2 to 40 years. Equipment under capital leases 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 in the accompanying consolidated statements of operations and changes in net assets. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. Impairment of Long-Lived Assets: Long-lived assets are evaluated regularly for impairment. If indicators of impairment suggest that the value of long-lived assets may be impaired, an assessment of recoverability is performed prior to any write-down of assets. Assets to be disposed of are recorded at the lower of the carrying amount or fair value, less costs to sell. No impairment expense was recognized during the years ended June 30, 2016 and Goodwill and Other Identifiable Intangible Assets: Goodwill represents the excess of purchase price and related costs over the fair value assigned to the net tangible and identifiable intangible assets of the businesses acquired and is not being amortized. The Corporation reviews goodwill for impairment annually or sooner if indications of possible impairment are identified. Other identifiable intangible assets with definite lives are being amortized using the straight-line method over their estimated useful lives. Both goodwill and other identifiable intangible assets are included in other assets in the accompanying consolidated balance sheets. No impairment expense was recognized during the years ended June 30, 2016 and Legal and Other Loss Contingencies: Management regularly reviews the status of the Corporation s legal matters and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Corporation records a liability. Significant judgment is required when determining probability and whether an exposure is reasonably estimable. Predicting the final outcome of claims and lawsuits and estimating financial exposure requires consideration of substantial uncertainties and, therefore, actual costs may vary materially from management s estimates. Changes in estimates of the financial exposure for legal matters and other loss contingencies could have a material impact on the Corporation s consolidated financial position, results of operations, and liquidity. Deferred Loan Costs: Costs incurred in obtaining long-term debt are being amortized by a method approximating the effective interest method over the life of the loan and are included in the consolidated balance sheets within long-term debt and capital lease obligations. Estimated Professional Liability Costs: The Corporation is self-insured for certain professional liability claims. The provision for estimated self-insured professional liability claims is included in insurance expense in the accompanying consolidated statements of operations and changes in net assets and includes an actuarially determined estimate of the ultimate cost for both asserted and unasserted claims, including those not yet reported. Unrestricted and Temporarily Restricted Net Assets: The Corporation defines unrestricted net assets as those that are not limited by donor-imposed stipulations. Temporarily restricted net assets represent donor-designated funds to be used for specific projects or time periods. Such restrictions either expire by time or are satisfied through expenditures for the designated purpose. 12

15 Note 2. Summary of Significant Accounting Policies (Continued) Consolidated Statements of Operations and Changes in Net Assets: Transactions deemed by management to be ongoing, major, or central to the provision of health care services are reported as operating revenues and expenses. Other nonoperating gains (losses) include: investment income, various other income derived from services other than providing health care services or coverage to patients, costs of community support programs, loss on debt extinguishment, and other activities that do not relate to the Corporation s primary mission. All significant intercompany accounts and transactions have been eliminated in consolidation. Net Patient Service Revenue: Net patient service revenue is recorded when services are rendered. Net patient service revenue and accounts receivable include services provided to employees using the Corporation s health services. The Corporation has agreements with third-party payors that provide for payments to the Corporation at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. 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. Management believes these final settlements will not have a material effect on the accompanying consolidated financial statements. Electronic Health Record Payments: The American Recovery and Reinvestment Act of 2009 included provisions for implementing health information technology under the Health Information Technology for Economic and Clinical Health Act (HITECH). The provisions were designed to increase the use of electronic health record (EHR) technology and establish the requirements for a Medicare and Medicaid incentive payment program beginning in 2011 for eligible providers that adopt and meaningfully use certified EHR technology. Eligibility for annual Medicare incentive payments is dependent on providers demonstrating meaningful use of EHR technology in each period over a four-year period. The Corporation successfully completed the meaningful use attestation process, demonstrated meaningful use of the EHR technology during the years ended June 30, 2016 and 2015, and has recorded approximately $450,000 and $1,112,000 of HITECH incentive payments as grant income in other revenue for the years ended June 30, 2016 and 2015, respectively. The Corporation s attestation of compliance with the meaningful use criteria is subject to audit by the federal government or its designee. Additionally, Medicare EHR incentive payments received are subject to retrospective adjustment upon final settlement of the applicable cost report from which payments were calculated. Contributions: The Corporation records contributions, including unconditional promises to give cash and other assets (including multi-year promises), at fair value in the period made. The Corporation distinguishes between contributions received that increase temporarily restricted net assets and unrestricted net assets. The Corporation measures unconditional promises to be collected or paid in more than one year at the present value of the estimated future cash flows utilizing discount rates ranging from 0.45% to 1.68%. The discount rate is established at the time the pledge is recorded. Noncash contributions are valued at fair market value on the date of the gift. Contributions are reported as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets or if they are restricted as to time. When a donor restriction expires, that is, 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 accompanying consolidated statements of operations and changes in net assets as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected in net assets released from restrictions in the accompanying consolidated financial statements. 13

16 Note 2. Summary of Significant Accounting Policies (Continued) Fair Value Measurements: The Corporation follows ASC 820, Fair Value Measurements and Disclosures, which provides a framework for measuring the fair value of certain assets and liabilities and for disclosing the fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In developing its fair value estimates, the Corporation uses the hierarchy defined by ASC 820 which describes the following three levels of inputs that may be used to determine fair value: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs. 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. The Corporation s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer. There were no significant transfers or activity within investment levels in 2016 or As a practical expedient, the Corporation is permitted to report investments that do not have a readily available fair value, based on the net asset value (NAV), or its equivalent, such as ownership interest in the Funds as of the reporting date, without further adjustment, unless it is probable that the investment will be sold at a value significantly different than the NAV. In using the NAV as a practical expedient, certain attributes of the investment that may affect the fair value of the investment are not considered in measuring fair value. Attributes of those investments include, but are not limited to, restrictions on the investor s ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investees. The Corporation has elected to use the NAV to report the fair value of the Funds. The fair values of the Funds are based on the fair values as reported by the related Fund managers to the Corporation. For additional information, see Note 5, Investments and Assets Whose Use is Limited and Note 10, Retirement Plans. Excess of Unrestricted Revenue and Nonoperating Gains Over Expenses: The consolidated statements of operations and changes in net assets include excess of unrestricted revenue and nonoperating gains over expenses. Changes in unrestricted net assets, which are excluded from excess of unrestricted revenue and nonoperating gains over expenses, consistent with industry practice, include contributions of long-lived assets (including assets acquired using contributions by which donor restrictions were to be used for the purpose of acquisition or construction of such assets), changes in net unrealized gains and losses on other than trading securities, and pension-related changes other than net periodic pension cost. 14

17 Note 2. Summary of Significant Accounting Policies (Continued) Income Taxes: The Hospital, Foundation, Parent, and Home Health are exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code (IRC) and from state income taxes under the provisions of Chapter of the Florida Income Tax Code. There is no tax liability for Women s Institute and Boca Care, Inc. for 2016 and Certain subsidiaries are organized as limited liability companies (LLCs) for which taxable income, if any, is taxable to its members in certain instances (including Lynn Clinical Research, BRRH Oncology, Boca Thoracic & Cardiovascular Surgery, BRRH Medical Group, LLC and Palm Accountable Care Organization, LLC of which the Hospital or the Foundation is the sole member). Any income taxes related to these subsidiaries are not material to the Corporation. As defined by ASC 740, the amount of unrecognized tax benefits or liabilities that would affect the Corporation if they were recognized is not material. Tax year ended June 30, 2015 is still subject to examination by the taxing authorities. Reclassifications: Certain amounts in the 2015 consolidated financial statements have been reclassified to be consistent with the presentation in the 2016 consolidated financial statements. These reclassifications did not impact net assets or the increase in net assets previously reported. Adoption of New Accounting Pronouncements: In April 2015, the FASB issued Accounting Standards Update (ASU) No , Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which resulted in the reclassification of debt issuance costs from other assets to inclusion as a reduction of long-term debt and capital lease obligation on the consolidated balance sheets. The Corporation has adopted this guidance as of June 30, 2016 and retroactively applied to In January 2016, the FASB issued ASU No , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities, which updates certain aspects of recognition, measurement, presentation, and disclosures of financial instruments. ASU will be effective for the Corporation s fiscal year beginning July 1, The Corporation has partially adopted this guidance related to disclosures of financial instruments as of June 30, 2016 and retroactively applied to Management is currently evaluating the potential impact the adoption of the remaining portions of this update will have on the Corporation s financial reporting. In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers, which provides a robust framework for addressing revenue recognition issues and replaces most of the existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. This ASU requires revenue to be recognized in an amount that reflects the consideration to which the entity expects to be entitled in an exchange of goods or services. In August 2015, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date to the Corporation s fiscal year beginning July 1, Management is currently evaluating the potential impact the adoption of this update will have on the Corporation s financial reporting. In July 2015, the FASB issued ASU No , Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory. ASU will be effective for the Corporation s fiscal year beginning July 1, Management is currently evaluating the potential impact the adoption of this update will have on the Corporation s financial reporting. 15

18 Note 2. Summary of Significant Accounting Policies (Continued) In February 2016, the FASB issued ASU No , Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The new standard is effective for the Corporation s fiscal year beginning July 1, Management is currently evaluating the potential impact the adoption of this update will have on the Corporation s financial reporting. In August 2016, the FASB has issued ASU No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. This guidance amends the requirements for financial statements and notes presented by a not-for-profit entity to: a) present on the face of the statement of financial position (balance sheet) amounts for two classes of net assets at the end of the period, rather than for the currently required three classes; b) present on the face of the statement of activities (operations) the amount of the change in either of the two classes of net assets rather than that of the currently required three classes; c) provide enhanced disclosures in the notes to the financial statements; d) report investment return net of external and direct internal investment expenses; and e) utilize, in the absence of explicit donor stipulations, the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset. The ASU will be effective for the Corporation s fiscal year beginning July 1, Management is currently evaluating the potential impact the adoption of this update will have on the Corporation s financial reporting. Note 3. Charity Care The Corporation provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. As the Corporation does not pursue collection of amounts determined to qualify as charity care, such amounts are not reported as revenue. The Corporation maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone for services and supplies furnished under its charity care policy, and the estimated cost incurred to provide those services and supplies. The cost of care is estimated using a cost to charge ratio, which is approximately 19.8% and 19.9% for the years ended June 30, 2016 and 2015, respectively. The estimated cost of care provided to charity patients was approximately $6,598,000 and $5,247,000 for the years ended June 30, 2016 and 2015, respectively. 16

19 Note 4. Net Patient Service Revenue and Accounts Receivable The Corporation has agreements with third-party payors that provide for payments by these entities at amounts different from its established rates. A summary of payment arrangements with major third-party payors follows: Medicare: Inpatient, acute-care services and some outpatient services rendered to Medicare Program beneficiaries are paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. In 2016 and 2015, approximately 46% and 48%, respectively, of the Corporation s net patient service revenue was for services to Medicare beneficiaries. Various outpatient and home health services rendered to Medicare beneficiaries are paid on either a fee schedule or a cost reimbursement methodology. The Corporation is reimbursed for cost-reimbursable items and certain services at a tentative rate, with final settlement determined after submission of an annual cost report by the Hospital and audits thereof by the Medicare fiscal intermediary. The Corporation s classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review by a peer review organization. The Corporation s Medicare cost reports have been audited by the Medicare fiscal intermediary through June 30, Retroactive adjustments are accrued on an estimated basis in the period the related services are provided and adjusted in future periods upon final settlements. Medicaid: Approximately 1% of the Hospital s net patient service revenue was derived from services rendered under the Medicaid program during each of the years ended June 30, 2016 and Other Third-Party Payors: The Corporation has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Corporation under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. The Corporation receives more than 10% of its net revenues from two thirdparty payors, which represented 27% and 26% of net patient service revenue during the years ended June 30, 2016 and 2015, respectively. There were no material adjustments recorded to revenue in prior year estimated third-party settlements during the years ended June 30, 2016 and 2015, except for a favorable settlement with the Centers of Medicare and Medicaid Services related to the Recovery Audit Contractor appeals of approximately $1,900,000 for the year ended June 30, Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Corporation believes that it is in compliance with all applicable laws and regulations, and is not aware of any significant pending or threatened investigations involving allegations of potential wrongdoing other than those that have occurred in the ordinary course of business (see Note 11). While no other such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory review from the Medicare and Medicaid programs. 17

20 Note 4. Net Patient Service Revenue and Accounts Receivable (Continued) Net patient service revenue for the years ended June 30 is summarized below: Gross charges $ 2,004,437,456 $ 1,815,857,593 Total discounts and allowances 1,543,982,892 1,396,011,845 Net patient service revenue 460,454, ,845,748 Provision for bad debts 15,925,104 15,991,860 Net patient service revenue, less provision for bad debts $ 444,529,460 $ 403,853,888 Net patient service revenue by payor for the years ended June 30 is summarized below: Net patient service revenue by payor: Government (Medicare and Medicaid) $ 212,555,818 $ 202,616,671 Managed care 231,248, ,784,001 Other payors 16,650,746 15,445,076 Total net patient service revenue $ 460,454,564 $ 419,845,748 Patient service revenue is reduced by the provision for bad debts and accounts receivable are reduced by an allowance for doubtful accounts. These amounts are based on management s assessment of historical and expected net collections for each major payor source, considering business and economic conditions, trends in health care coverage, historical write-off and collection experience using a hindsight or look-back approach, cash collections as a percentage of net patient service revenue, and other collection indicators. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. The Corporation regularly performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of its process for estimating the allowance for doubtful accounts. Accounts receivable are written off after collection efforts have been followed in accordance with the Corporation s policies. The allowance for doubtful accounts was approximately $13,003,000 and $11,106,000 as of June 30, 2016 and 2015, respectively. These balances as a percentage of accounts receivable net of contractual adjustments were approximately 24% as of June 30, 2016 and The Corporation s self-pay discount policy is to proactively adjust self-pay accounts by 75%. This discount is reflected as allowances against gross charges, and is not considered to be part of the provision for bad debts. Any further amounts not collected after all reasonable collection efforts have been exhausted are recorded as part of the provision for bad debts. 18

21 Note 5. Investments and Assets Whose Use is Limited Investments and assets whose use is limited as of June 30, 2016 and 2015, are set forth in the following table. These assets are stated at fair value. Investments: Mutual funds $ 27,398,397 $ 32,220,846 Fixed maturity bonds 802,091 83,328 Fund of funds 6,602,620 7,332,047 Partnerships 28,922,087 29,981,831 Hedge funds 34,169,261 26,244,438 Total Investments 97,894,456 95,862,490 Less current portion of investments (28,200,488) (32,304,174) Total investments, net of current portion $ 69,693,968 $ 63,558,316 Assets whose use is limited: Under trust indenture for professional liability claims, held by trustees: Short-term investments $ 353,646 $ 461,482 U.S. government bonds and notes 2,182,264 3,288,458 U.S. government obligations 196, ,232 U.S. corporate bonds and asset-backed funds 4,669,672 3,234,430 Interest and other receivables 16,969 16,025 Total assets under trust indenture 7,419,256 7,287,627 Donor-Designated Assets: Cash and cash equivalents 2,766,119 1,584,061 Mutual funds 26,554,870 22,589,970 Fixed maturity bonds 107,409 22,172 Fund of funds 2,042,520 1,966,905 Partnerships 8,946,969 8,042,969 Hedge funds 10,570,168 7,040,371 Total donor-designated assets 50,988,055 41,246,448 Total assets whose use is limited 58,407,311 48,534,075 Less current portion of assets limited as to use (7,522,713) (10,031,343) Total assets whose use is limited, net of current portion $ 50,884,598 $ 38,502,732 19

22 Note 5. Investments and Assets Whose Use is Limited (Continued) Returns from cash and cash equivalents, investments, and assets whose use is limited include the following for the years ended June 30: Net realized gains on sales of investments $ 2,400,013 $ 5,243,560 Investment income, net 1,121,084 1,124,506 Change in net unrealized losses on investments (5,613,702) (5,214,331) Total investment return $ (2,092,605) $ 1,153,735 Included in nonoperating gains $ 3,521,097 $ 6,368,066 Included in changes in net assets (5,613,702) (5,214,331) Total investment return $ (2,092,605) $ 1,153,735 The detail of the gross unrealized losses on investments included here and within donor-designated assets at June 30, 2016, is as follows: Duration of Continuous Losses Less than 12 months Total Fair Unrealized Fair Unrealized Description Value Losses Value Losses U.S. government obligations $ 16,166 $ 145 $ 152,636 $ 2,147 U.S. corporate bonds and assetbacked funds 410,534 3, ,828 25,249 Total debt securities 426,700 4,041 1,089,464 27,396 Mutual funds 3,229, ,929 3,229, ,929 Partnerships 5,415, ,049 21,142,922 3,000,608 Hedge funds 4,870, ,537 7,654,818 1,398,245 Total temporarily impaired investments $ 13,942,147 $ 1,078,556 $ 33,116,578 $ 4,586,178 20

23 Note 5. Investments and Assets Whose Use is Limited (Continued) The detail of the gross unrealized losses at June 30, 2015, is as follows: Duration of Continuous Losses Less than 12 months Total Fair Unrealized Fair Unrealized Description Value Losses Value Losses U.S. government bonds and notes $ 61,505 $ 183 $ 63,004 $ 183 U.S. government obligations 69, ,373 4,643 U.S. corporate bonds and assetbacked funds 1,191,955 8,021 1,822,810 51,589 Total debt securities 1,323,052 8,696 2,097,187 56,415 Mutual funds 14,959, ,177 35,140, ,560 Partnerships 7,704, ,169 19,251,476 2,865,118 Hedge funds 3,799, ,352 3,799, ,352 Total temporarily impaired investments $ 27,786,825 $ 881,394 $ 60,288,365 $ 3,547,445 At June 30, 2016 and 2015, the unrealized losses included in the above tables were not deemed to be other-than-temporary impairments based on the credit quality of the issuers of the obligations and the Corporation s ability and intent to hold such investments until maturity or recovery. The table below summarizes the Corporation s significant financial investments that are measured at fair value on a recurring basis as of June 30, 2016: June 30, 2016 Total Level 1 Level 2 Level 3 Assets whose use is limited: Short-term investments $ 353,646 $ 353,646 $ - $ - U.S. government bonds and notes 2,182,264 2,182, U.S. government obligations 196, ,705 - U.S. corporate bonds and asset-backed funds 4,669,672-4,669,672 - Interest and other receivables 16,969 16, Mutual funds 26,554,870 26,554, Fixed maturity bonds 107, ,409 - Investments measured at net asset value: Fund of funds 2,042, Partnerships 8,946, Hedge funds 10,570, Investments: Mutual funds 27,398,397 27,398, Fixed maturity bonds 802, ,091 - Investments measured at net asset value: Fund of funds 6,602, Partnerships 28,922, Hedge funds 34,169, Total assets whose use is limited and investments $ 153,535,648 $ 56,506,146 $ 5,775,877 $ - 21