UNITED HEALTH SERVICES HOSPITALS, INC. Financial Statements. December 31, 2014 and 2013

Transcription

1 Financial Statements December 31, 2014 and 2013

2 l.iifust Charles Chambers LLP CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT To the Board of Directors United Health Services Hospitals, Inc.: We have audited the accompanying financial statements of United Health Services Hospitals, Inc. (whose sole member is United Health Services, Inc.), which comprise the balance sheets as of December 31, 2014 and 2013, and the related statements of operations and changes in net assets and cash flows for the years then ended, and the related notes to 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 from 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, 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 (Continued) 5784 Widewaters Parkway - Syracuse, NY P: F:

3 ~ Fust Charles Chambers LLP CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Page 2 of2 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Health Services Hospitals, Inc. as of December 31, 2014 and 2013, and the results of its 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. May 20,

4 Balance Sheets December 31, 2014 and 2013 Assets Current assets: Cash and cash equivalents $ 11,425,132 $ 20,833,321 Short-term investments 25,995,172 33,678,150 Current portion of assets limited as to use 11,962,573 14,517,250 Patient accounts receivable, net of allowance for doubtful accounts of approximately $40,200,000 in 2014 and $23,300,000 in ,791,553 63,795,242 Inventories 9,475,162 8,875,767 Prepaid expenses and other assets 12,955,173 11,231,968 Due from affiliates 3,349,154 1,229,444 Total current assets 137,953, ,161,142 Assets limited as to use: Board -designated investments: Collateral funds 11,543,889 10,778,284 Other funds 3,966,114 3,763,400 Funded depreciation 17,752,776 22,717,656 Trustee held funds - long-term obligations 11,243,847 13,970,709 44,506,626 51,230,049 Less current portion of assets limited as to use (11,962,573) (14,517,250) Noncurrent assets limited as to use 32,544,053 36,712,799 Interest in net assets ofuhs Foundation, Inc. 12,400,324 12,211,176 Long-term investments 2,149,925 2,038,180 Property and equipment, net 176,623, ,660,465 Deferred charges, net 1,473,906 1,675,226 Other assets, net 7,793,402 6,175,165 Due from affiliates 195,923 Total assets $ 370,938,967 $ 389,830,076

5 Liabilities and Net Assets Current liabilities: Current portion of long-term obligations $ 11,962,573 $ 12,046,610 Accounts payable 25,207,026 22,621,159 Accrued other liabilities 20,691,440 24,406,159 Accrued paid time-off benefits 7,713,055 7,652,931 Estimated due to third-party payors, net 9,665,289 18,757,379 Due to affiliates 1,632,235 1,708,222 Total current liabilities 76,871,618 87,192,460 Long-term obligations, net of current portion 44,829,485 51,531 '111 Accrued pension and postretirement liabilities 81,901,316 56,396,894 Estimated due to third-party payors, net 8,825,232 14,501,770 Other liabilities 23,311,007 21,334,169 Total liabilities 235,738, ,956,404 Net assets: Unrestricted 120,839, ,677,312 Temporarily restricted 10,226,001 10,044,020 Permanently restricted 4,134,842 4,152,340 Total net assets 135,200, ,873,672 Commitments and contingencies (notes 8 and 1 0) Total liabilities and net assets $ 370,938,967 $ 389,830,076 See accompanying notes to financial statements. 3

6 Statements of Operations and Changes in Net Assets Years ended December 31, 2014 and Unrestricted revenues, gains and other support: Patient service revenue (net of contractual allowances and discounts) $ 543,337,999 $ 525,521,833 Provision for bad debts ( 43,901,855) (37,477,170) Net patient service revenue less provision for bad debts 499,436, ,044,663 Other revenue, including investment income 23,960,460 28,509,160 Net assets released from restrictions used for operations 124, ,071 Total unrestricted revenues, gains and other support 523,521, ,678,894 Expenses: Salaries and wages 194,774, ,233,727 Employee benefits 61,095,193 61,267,376 Supplies, services and other 241,491, ,357,565 Interest expense 2,732,391 2,935,094 Depreciation and amortization 23,244,551 20,747,949 Total expenses 523,338, ,541,711 Excess of revenues over expenses $ 183,235 $ 8,137,183 4 (Continued)

7 Statements of Operations and Changes in Net Assets, Continued Unrestricted net assets: Excess of revenues over expenses $ 183,235 $ 8,137,183 Change in net unrealized gain (loss) on investments (216,596) 1,081,115 Retirement plan obligation changes other than net periodic benefit cost (25,075,299) 17,169,594 Net assets released from restrictions used for purchases of property and equipment 776, ,756 Donations for purchases of property and equipment 494, ,360 Increase (decrease) in unrestricted net assets (23,837,846) 27,450,008 Temporarily restricted net assets: Investment gains 100, ,519 Change in interest in temporarily restricted net assets of UHS Foundation, Inc. 983,404 1,200,162 Net assets released from restrictions used for operations (124,891) (125,071) Net assets released from restrictions used for purchases of property and equipment (776,758) (775,756) Increase in temporarily restricted net assets 181, ,854 Permanently restricted net assets: Change in interest in permanently restricted net assets of UHS Foundation, Inc. (17,498) 47,322 Increase (decrease) in permanently restricted net assets (17,498) 47,322 Increase (decrease) in net assets (23,673,363) 27,912,184 Net assets at beginning of year 158,873, ,961,488 Net assets at end of year $ 135,200,309 $ 158,873,672 See accompanying notes to financial statements. 5

8 Statements of Cash Flows Years ended December 31, 2014 and 2013 Cash flows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Provision for bad debts Loss on sale of property and equipment Change in net unrealized (gain) loss on investments Net realized gain on investments Retirement plan obligation changes other than net periodic benefit cost Change in interest in net assets of UHS Foundation, Inc. Contributions received for long-term purposes Changes in operating assets and liabilities: Patient accounts receivable Inventories Prepaid expenses and other assets Accounts payable Other liabilities Accrued pension and postretirement liabilities Accrued paid time-off benefits Estimated due to third-party payors, net Net cash provided by operating activities Cash flows from investing activities: Purchase of property and equipment Proceeds from the sale of property and equipment Decrease in assets limited as to use, net (Increase) decrease in investments, net Increase in due from/to affiliates, net (Increase) decrease in other assets Net cash used in investing activities 2014 $ (23,673,363) $ 23,244,551 43,901,855 39, ,596 (643,157) 25,075,299 (189, 148) (1,270,814) ( 42,898, 166) (599,395) (1,297,881) (765,243) (3,864,503) 429,123 60,124 (14, 768,628) 2,996,759 (14,362, 158) 60,055 6,723,423 7,997,794 (1,999,774) 40,561 (1,540,099) ,912,184 20,747,949 37,477,170 12,436 (1,081,115) (542,967) (17,169,594) (471,728) (1,062, 116) (37,585,447) (1,433,642) (1,141,951) 8,428,001 6,123,261 (1,350,307) 263, ,874 39,259,521 (22,231,512) 31,540 6,590,574 (7,555,930) (2,472,375) (121,598) (25,759,301) 6 (Continued)

9 Statements of Cash Flows, Continued Cash flows from financing activities: Principal payments on long-term obligations (12, 135,663) (11,953,916) Contributions received for long-term purposes 1,270,814 1,062,116 Net cash used in financing activities (1 0,864,849) (1 0,891,800) Net increase (decrease) in cash and cash equivalents (9,408,189) 2,608,420 Cash and cash equivalents at beginning of year 20,833,321 18,224,901 Cash and cash equivalents at end of year $ 11,425,132 $ 20,833,321 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 2,734,165 $ 2,936,741 Equipment financed with capital lease obligations $ 5,350,000 $ 7,575,594 Construction in progress and equipment purchases financed with accounts payable $ 4,272,839 $ 921,729 See accompanying notes to financial statements. 7

10 December 31,2014 and 2013 (1) Description of Organization and Summary of Significant Accounting Policies (a) Organization United Health Services Hospitals, Inc. (Hospitals or UHSH) is a not-for-profit corporation whose sole member is United Health Services, Inc. (UHSI) (a not-for-profit parent holding corporation). The Hospitals operate various facilities in the greater Binghamton, New York area providing general medical/surgical services and extensive outpatient services. The Hospitals are affiliated through a common parent corporation with various healthcare related organizations including Ideal Senior Living Center, Inc. (ISLCI), Ideal Senior Living Center Housing Corp. (ISLCHC), Professional Home Care, Inc. (PHC), Twin Tier Home Health, Inc. (TTHH), Chenango Memorial Hospital, Inc. (CMH), Delaware Valley Hospital (DVH) and Southern New York Indemnity Company, LLC (SNYICL). The Hospitals are also affiliated with United Medical Associates, P.C. (UMA) through contracted service agreements. The United Health Services Foundation, Inc. (UHSF), a separate not-for-profit corporation, is an organization which solicits and manages gifts and bequests on behalf of United Health Services, Inc. and its affiliates. (b) Use of Estimates The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by the Hospitals include, but are not limited to, estimated fair value of investment securities, allowance for doubtful accounts, reserve for third-party payers, contractual allowances, insurance reserves and assumptions used in determining pension and postretirement benefit costs and liabilities. (c) Cash and Cash Equivalents For purposes of the statements of cash flows, the Hospitals consider all highly liquid investments, generally with original maturities of three months or less to be cash equivalents, excluding amounts held as short-term investments and assets limited as to use. 8 (Continued)

11 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (c) Cash and Cash Equivalents, Continued At December 31, 2014 and 2013, the Hospitals have cash and cash equivalents in major financial institutions which exceed Federal Deposit Insurance Corporation limits. These financial institutions have strong credit ratings and management believes that credit risk related to these deposits is minimal. (d) Investments and Investment Income Short-term investments include debt securities and marketable equity securities which are intended to be used for current operations and to fund current liabilities. Long-term investments include investments in securities that are not intended to be used for current operations. Donor restricted endowment gifts are reported as long-term investments. Investments are recorded at fair value based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in excess of revenues over expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from excess of revenues over expenses, as management has classified the Hospitals' investments as available for sale. When the market value of a security has declined below cost and the decline is deemed to be other-than-temporary, an impairment has occurred which is recognized as a realized loss. The Hospitals have investments concentrated in U.S. government and agency obligations at December 31, 2014 and Management believes that credit risk related to these investments is minimal. The Hospitals also have investments in corporate obligations and marketable equity securities. Investments in these securities are not insured or guaranteed; however, management believes the credit risk related to these investments is minimal. (e) Assets Limited as to Use Assets limited as to use represent assets held by trustees under financing arrangements, and amounts held under third-party reimbursement arrangements, deferred compensation contracts and for other board-designated purposes. Amounts required to meet current liabilities for debt of the Hospitals have been reclassified in the balance sheets at December 31, 2014 and (Continued)

12 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (f) Inventories Inventories consist of drugs and other supplies and are stated at the lower of average cost (first-in, first-out) or market. (g) Property and Equipment Property and equipment acquisitions are recorded at cost. Expenditures for maintenance, repairs and renewals of minor items are charged to operations as incurred. Major renewals and improvements are capitalized. Interest costs incurred on borrowed funds during periods of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Depreciation is provided over the estimated useful life of each class of depreciable assets ranging from 2 to 40 years and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the financial statements. Gifts of long-lived assets such as land, buildings or equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long these long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. The Hospitals follow Financial Accounting Standards Board (F ASB) issued guidance regarding accounting for the impairment or disposal of long-lived assets. This guidance addresses financial accounting and reporting for the impairment of long-lived assets, excluding goodwill and intangible assets, to be held and used or disposed of. Based on the Hospitals' analysis, there were no impairments at December 31,2014 or (h) Deferred Charges Deferred charges relate principally to costs incurred in connection with obtaining long-term financing which are being amortized over the term of the related obligations using a method approximating the effective interest method. Amortization of approximately $244,000 was charged to operations in 2014 and Amortization expense will be approximately $244,000 for 2015 through 2017 and approximately $148,000 and $60,000 for 2018 and 2019, respectively. Accumulated amortization on deferred charges was approximately $1,257, 000 and $1,013,000 at December 31, 2014 and 2013, respectively. 10 (Continued)

13 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (i) Deferred Compensation Plans The Hospitals have deferred compensation agreements with certain members of their medical staff which provide for a fixed amount of their salaries or fees to be deposited under the Hospitals' control into mutual funds, certificates of deposit or insurance policies until the member elects to discontinue the agreement. These amounts have been reflected in the financial statements as board-designated fund investments and a corresponding liability to the participating member. Gains or losses in value are absorbed by the member. G) Self-Insurance The Hospitals are self insured for workers' compensation for the.period November 1, 2012 through December 31, 2014 and periods prior to September 1, The Hospitals are also self insured for employees' medical insurance. Amounts related to self-insurance are included in other liabilities (see note 8b ). (k) Asset Retirement Obligations The Hospitals accrue for asset retirement obligations in the period in which they are incurred if sufficient information is available to reasonably estimate the fair value of the obligation. Over time, the liability is accreted to its settlement value. Upon settlement of the liability, the Hospitals will recognize a gain or loss for any difference between the settlement amount and liability recorded. The asset retirement obligation approximated $4,100,000 as of December 31,2014 and 2013, and is included in other liabilities on the accompanying balance sheets. (1) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Hospitals in perpetuity. (m) Performance Indicator The statements of operations and changes in net assets include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments, permanent affiliate transfers for other than goods and services, changes in interest in net assets of the UHS Foundation, Inc., contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets) and pension and postretirement plan obligation changes other than net periodic benefit cost. 11 (Continued)

14 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (n) Net Patient Service Revenue and Patient Accounts Receivable The Hospitals have agreements with third-party payors that provide for payments at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge or visit, cost-based reimbursement, discounted charges and per diem payments. Net patient service revenue and the related receivables are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews and investigations. As a result of changes in estimates or settlements relating to third-party and other accrual adjustments, the Hospitals recognized approximately $6,300,000 of net patient service revenue in both and Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Under the New York Health Care Reform Act (NYHCRA), hospitals are authorized to negotiate reimbursement rates for inpatient acute care services with all other non-medicare payors except for Medicaid fee for service, Workers' Compensation and No-Fault, which are regulated by New York State. These negotiated rates may take the form of rates per discharge, reimbursed costs, discounted charges or as per diem payments. Reimbursement rates for non-medicare payors regulated by New York State are determined on a prospective basis. These rates also vary according to a patient classification system defined by NYHCRA that is based on clinical, diagnostic, and other factors. Outpatient services are paid under various reimbursement methodologies, including prospectively determined rates, cost reimbursement, fee schedules, charges and percentage of charges arrangements. 12 (Continued)

15 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (n) Net Patient Service Revenue and Patient Accounts Receivable, Continued A significant portion of the Hospitals' revenues are derived through arrangements with third-party payors (Medicare, Medicaid and Excellus). As such, the Hospitals are dependent on these payors to carry out its operating activities. The Hospitals recognize patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for financial assistance, the Hospitals recognize revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a significant portion of the Hospitals' uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Hospitals record a significant provision for bad debts related to uninsured patients in the period the services are provided. Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized from these major payor sources, is as follows for the years ended December 31, 2014 and 2013: Patient service revenue (net of contractual allowances and Government payors Commercial Insurance and others 2014 Self-pay discounts) $212,464,574 $299,595,179 $31,278,246 $543,337,999 Patient service revenue (net of contractual allowances and Government payors Commercial Insurance and others 2013 Self-pay discounts) $ 179,425,226 $ 305,533,059 $ 40,563,548 $ 525,521, (Continued)

16 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (n) Net Patient Service Revenue and Patient Accounts Receivable, Continued Patient accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectibility of patient accounts receivable, the Hospitals analyze past payment history and identify trends for each major payor source of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. For receivables associated with services provided to patients who have third-party coverage, the Hospitals analyze contractually due amounts and provide an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients, the Hospitals also analyze amounts due and provide an allowance for doubtful accounts and a provision for bad debts in the period of service based on past experience, including consideration of current business and economic conditions. When the Hospitals establish the allowance for doubtful accounts, they take into consideration the fact that many self-pay patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Hospitals' allowance for doubtful accounts increased from 75% of self-pay accounts receivable at December 31, 2013, to 79% of self-pay accounts receivable at December 31, This increase was the result of negative trends experienced in the collection of amounts from self-pay patients in fiscal year The Hospitals did not change its financial assistance or uninsured discount policies during fiscal year 2013 or The Hospitals also maintain an allowance for doubtful accounts from third-party payors. During 2014, the Hospitals reallocated approximately $8,700,000 of estimated third-party payor liabilities to increase the allowance for doubtful accounts based on review of payment history and identified trends in accounts receivable collection. ( o) Financial Assistance The Hospitals provide care to patients who meet certain criteria under its financial assistance policy without charge or at amounts less than established rates. Because the Hospitals do not pursue collection of amounts determined to qualify as financial assistance, they are not reported as net patient service revenue. During and 2013, costs incurred by the Hospitals in the provision of financial assistance were based on a ratio of the Hospitals costs to gross charges and approximated $1,722,000 and $2,119,000, respectively. 14 (Continued)

17 (1) Description of Organization and Summary of Significant Accounting Policies, Continued (p) Medicare and Medicaid Health Information Technology Incentive 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 to 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. Initial Medicaid payments are available to providers that adopt, implement or upgrade certified EHR technology. Providers must demonstrate meaningful use of such technology in subsequent years to qualify for additional Medicaid incentive payments. The Hospitals use a grant accounting model to recognize revenue for the Medicare and Medicaid EHR incentive payments. EHR incentive payments are recognized as revenue when it is reasonably assured that the meaningful use criteria for the required period of time have been achieved and the revenue will be received. The Hospitals recognized Medicare and Medicaid incentive payments totalling approximately $3,350,000 and $4,887,000 for the years ended December 31, 2014 and 2013, respectively, as other operating revenue in the accompanying statements of operations and changes in net assets. Income from Medicare incentive payments will be subject to retrospective adjustment upon final settlement of the applicable cost report from which payments are calculated. Additionally, the Hospitals' compliance with the meaningful use criteria is subject to audit by the federal and New York State governments. Hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to payment penalties or downward adjustments to their Medicare payments beginning in federal fiscal year ( q) Donor-Restricted Gifts Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received, which becomes the reported basis of the asset. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. 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 statements of operations and changes in net assets as net assets released from restrictions. 15 (Continued)

18 (1) Description of Organization and Summary of Significant Accounting Policies, Continued ( r) Income Taxes The Hospitals are a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code, and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. As of December 31, 2014 and 2013, the Hospitals did not have any unrecognized tax benefits or any related accrued interest or penalties. The tax years open to examination by federal and state taxing authorities are 2011 through (s) Risks and Uncertainties Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in values in the near term could materially affect the amounts reported in the accompanying balance sheets and statements of operations and changes in net assets. The Hospitals continually review investments for impairment conditions that indicate that an other-than-temporary decline in market value has occurred. In conducting this review, numerous factors are considered which, individually or in combination, indicate that a decline is other-than-temporary and that a reduction of the carrying value is required. These factors include specific information pertaining to an individual company or particular industry and general market conditions that reflect prospects for the economy as a whole. (t) Reclassifications Certain amounts from the 2013 financial statements have been reclassified to conform to the 2014 presentation. (2) Interest in Net Assets ofuhs Foundation, Inc. As a result of the Hospitals and United Health Services Foundation, Inc. (UHSF) being financially interrelated organizations, the Hospitals are required to recognize their interest in the net assets of UHSF and adjust their interest for their share of the change in net assets of UHSF in future reporting periods. At December 31, 2014 and 2013, the Hospitals' interest in the net assets ofuhsf relating to contributions held by UHSF for the benefit of the Hospitals approximated $12,400,000 and $12,211,000, respectively. 16 (Continued)

19 (2) Interest in Net Assets ofuhs Foundation, Inc., Continued UHSF contributed to the Hospitals approximately $777,000 and $776,000 during 2014 and 2013, respectively, for purchases of capital equipment. A summary of UHSF's assets, liabilities, net assets and changes in net assets are as follows as of and for the years ended December 31: Cash, investments and other assets $ 22,551,279 $ 21,646,492 Liabilities $ 682,039 $ 1,233,993 Net assets: Unrestricted 8,647,880 7,417,888 Temporarily restricted 8,710,510 8,466,398 Permanently restricted 4,510,850 4,528,213 Total net assets $ 21,869,240 $ 20,412,499 Change in unrestricted net assets 1,229,992 1,745,886 Change in temporarily restricted net assets 244, ,807 Change in permanently restricted net assets (17,363) 47,567 $ 1,456,741 $ 2,309,260 (3) Investments and Assets Limited as to Use The composition of investments and assets limited as to use is as follows at December 31: Short-term investments: Corporate obligations $ 13,061,821 $ 17,594,738 U.S. government and agency obligations 12,933,351 16,083,412 $ 25,995,172 $ 33,678,150 Assets limited as to use: Cash and cash equivalents 8,612,790 6,938,853 Marketable equity securities 9,060,001 9,202,534 Corporate obligations 8,296,462 12,493,288 U.S. government and agency obligations 18,537,373 22,595,374 $ 44,506,626 $ 51,230, (Continued)

20 (3) Investments and Assets Limited as to Use, Continued Long-term investments: Marketable equity securities Fixed income mutual funds and other $ 1,508,007 $ 641,918 1,443, ,713 $ 2,149,925 $ 2,038,180 Investment income included in the statements of operations and changes in net assets for investments and assets limited as to use was approximately $1,055,000 and $863,000 in 2014 and 2013, respectively, including net realized gains of approximately $643,000 in 2014 and $543,000 in Management evaluates securities for other-than-temporary impairment on an annual basis, and more frequently when economic or market concerns warrant such evaluation. In the evaluation of whether an impairment is other-than-temporary, the Hospitals consider the reasons for the impairment, its ability and intent to hold the investments until the market price recovers or the investment matures, compliance with its investment policy, the severity and duration of the impairment, and expected future performance. There was no other-than-temporary impairment write-down recognized during the years ended December 31, 2014 and (4) -Property and Equipment Property and equipment is comprised of the following at December 31: Land $ 11,685,097 $ 11,685,097 Land improvements 12,426,512 12,283,411 Buildings 265,714, ,862,236 Fixed equipment 12,385,606 12,385,606 Major movable equipment 223,353, ,486, ,565, ,703,033 Less accumulated depreciation (350,076,469) (328,906,943) 175,488, ,796,090 Construction in progress 1,134,474 10,864,375 $ 176,623,438 $ 176,660, (Continued)

21 (4) Property and Equipment, Continued Depreciation expense including amortization of equipment under capital lease obligations approximated $23,001,000 and $20,504,000 in 2014 and 2013, respectively. (5) Long-Term Obligations Long-term obligations are comprised of the following at December 31: Series 2009 Bonds - Mortgage note payable, Dormitory Authority of the State of New York, payable in varying monthly installments including interest at 2.05% through 2018 (a) $ 11,948,112 $ 15,207,463 Series Bonds - Mortgage note payable, Dormitory Authority of the State of New York. Principal and interest at 4.91% payable in monthly installments through 2032 (b) Mortgage notes, payable in monthly installments including interest ranging from 5.90% to 7.44%, with maturity dates ranging from , collateralized by the related property Obligation under capital equipment leases, payable in monthly installments, with interest rates ranging from 1.48% to 5.96%, with maturity dates through 2019 Less current portion 18,800,000 5,488,046 20,555,900 56,792,058 (11,962,573) 19,400,000 6,141,656 22,828,602 63,577,721 (12,046,61 0) $ 44,829,485 $ 51,531, (Continued)

22 (5) Long-Term Obligations, Continued (a) Series 2009 Bonds - Mortgage note payable represents borrowings pursuant to the issuance of $74,208,800 of Dormitory Authority of the State of New York FHA-Insured Mortgage Revenue Bonds, Series The obligation is collateralized by a first mortgage in substantially all of the Hospitals' assets. In addition, the agreements associated with the obligation require the Hospitals to, among other things, establish and maintain a mortgage reserve fund with a trustee, meet a defined debt service coverage ratio and limit capital expenditures. The agreements also specify the conditions under which the Hospitals may incur additional debt. The Hospitals were in compliance with its financial debt covenants as of December 31, 2014 and (b) Series Bonds - Mortgage note payable represents proceeds for the issuance of tax exempt bank qualified bonds for $20,000,000 by the Dormitory Authority of the State of New York. The proceeds from the bond issuance were used for the construction costs related to the Vestal Outpatient Clinic Project. The obligation is collateralized by substantially all real and personal property used in the operation of the Vestal Outpatient Clinic. In addition, the agreements associated with the obligation require the Hospitals to, among other things, meet a defined debt service coverage ratio, maintain a minimum for days cash on hand and maintain a maximum percentage of total funded debt to net assets. The Hospitals were in compliance with its financial debt covenants as of December 31, 2014 and Future minimum payments under all long-term obligations as of December 31, 2014 are as follows: Series 2009 Series 2010 Bonds- Bonds- Mortgage Mortgage Mortgage notes Capital note note (other) leases Total 2015 $ 3,326,799 $ 700,000 $ 698,274 $ 7,555,002 $ 12,280, ,395, , ,387 6,525,157 11,386, ,465, , ,610 3,686,223 8,668, ,759, , ,001 2,398,643 5,759, , ,151 1,020,731 2,769,882 Thereafter 15,070,000 1,487,623 16,557,623 11,948,112 18,800,000 5,488,046 21,185,756 57,421,914 Less amounts representing interest (629,856) (629,856) $ 11,948,112 $ 18,800,000 $ 5,488,046 $ 20,555,900 $ 56,792, (Continued)

23 (5) Long-Term Obligations, Continued The Hospitals have available a bank line of credit of $11,500,000 and $1,500,000 at December 31, 2014 and 2013, respectively. No amounts were borrowed under this line at December 31,2014 or Interest would be at the bank's prime interest rate (3.25%). (6) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are available for the following purposes: Indigent care $ 1 '1 08,108 $ 1,141,165 Purchases of equipment 695, ,728 Pediatric services 46,574 33,291 Investments held by UHSF (primarily for capital) 8,375,482 8,168,836 $ 10,226,001 $ 10,044,020 Permanently restricted net assets are held in perpetuity for the following purposes: Investments to be held in perpetuity, the income from which is expendable as authorized by the Board $ Investments to be held in perpetuity, the income from which IS expendable to be used for equipment, facilities and programs to improve the practice of pediatrics Investments held by UHSF 10,000 $ 10, , ,000 4,024,842 4,042,340 $ 4,134,842 $ 4,152, (Continued)

24 (7) Pension and Other Postretirement Benefit Plans The Hospitals participate in the Employees' Retirement Plan of United Health Services, Inc. (the Plan), a pension equity plan covering substantially all employees of the Hospitals and certain other affiliates. The benefits are based on years of service and employees' compensation during the last five years of service (referred to as pension benefits). The Hospitals' funding policy is to contribute amounts to the Plan sufficient to meet the minimum requirements set forth in the Employee Retirement Income Security Act of Effective January 1, 2012, the Plan was amended such that any employee hired or rehired on or after January 1, 2012, will not be eligible to participate in the Plan and will be eligible to participate in the United Health Services, Inc. 403(b) Retirement Plan (the 403(b) Plan). These participants are eligible to receive an employer contribution to the 403(b) Plan ranging from 2% to 6% of the participant's eligible wages based on the participant's age if they have completed 1,000 hours of service and are employed on December 31st of each year. Employees participating in the Plan before January 1, 2012 are not eligible for this employer contribution to the 403(b) Plan. The Hospitals contributed approximately $612,000 and $134,000 to the 403(b) Plan during 2014 and 2013, respectively. The Hospitals also participate in a postretirement health and life insurance plan (postretirement plan) which provides benefits to certain retirees of the Hospitals and certain other affiliates (referred to as postretirement benefits). The cost of these benefits is accounted for on an earned basis in accordance with the Compensation - Retirement Benefits Topic of the F ASB Accounting Standards Codification. The retiree life insurance plan closed December 31, 2010, so that only participants who were retired at that time will continue to receive that benefit. 22 (Continued)

25 (7) Pension and Other Postretirement Benefit Plans, Continued The following sets forth the funded status and amounts recognized before allocation to participating affiliates at December 31 (using a measurement date of December 31): Change in projected benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Medicare reimbursements Amendments Actuarial (gain) loss Benefits paid Pension Benefits $275,444,595 $ 275,238,127 $ 12,067,704 13,094,831 13,815,761 11,498, ,267 34,098,860 (18,288,543) (9,346,849) (15,039,841) Postretirement Benefits ,393,083 $ 71, , , , ,303 (1,538,046) 6,502,708 70, , , ,737 (1,083,070) (1 '146,257) Benefit obligation at end of year $ 317,523,644 $ 275,444,595 $ 6,202,611 $ 5,393,083 Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Administrative expenses $ 213,287,140 18,445,600 13,036,008 (18,288,543) (2,049,500) $ 191,546,530 $ 22,076,846 16,535,025 (15,039,841) (1,831,420) $ Fair value of plan assets at end of year $224,430,705 $ 213,287,140 $ $ ========= ========= Reconciliation of funded status: Funded status and accrued pension/postretirement liabilities at end of year $ (93,092,939) $ (62,157,455) $ (6,202,611) $ (5,393,083) Less accrued pension/ postretirement liabilities allocated to affiliates 16,945,045 10,762,779 81,084 60,220 Accrued pension/ postretirement liabilities allocated to Hospitals $ (76,147,894) $ (51,394,676) $ (6,121,527) $ (5,332,863) 23 (Continued)

26 (7) Pension and Other Postretirement Benefit Plans, Continued Items recognized in net assets not yet recognized as a component of net periodic benefit cost: Pension Benefits Postretirement Benefits Prior service cost (credit) Net actuarial loss $ 1,925,254 $ 90,538,831 1,812,328 $ (118,690) $ (244,139) 60,863,621 1,602, ,675 The estimated net actuarial loss and prior service cost for the Plan that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year is $6,665,132 and $316,022, respectively. The estimated net actuarial loss and prior service credit for the postretirement plan that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year is $122,840 and $( 118,690), respectively. Pension Benefits Postretirement Benefits Information for pension plans with an accumulated benefit obligation in excess of plan assets: Projected benefit obligation $ 317,523, ,444,595 $ N/A $ N/A Accumulated benefit obligation 272,088, ,648,807 N/A N/A Fair value of plan assets 224,430, ,287,140 N/A N/A Components of net periodic benefit cost: Service cost 12,067,704 13,094,831 71,065 70,755 Interest cost 13,815,761 11,498, , ,178 Expected return on plan assets (15,967,370) (15,347,154) Amortizations: Prior service cost (credit) 272, ,341 (125,449) (125,449) Actuarial loss 3,994,920 6,335,172 1,698 Net periodic benefit cost 14,183,356 15,853, , ,182 Allocation to participating affiliates (3,283,829) (3,617,021) (2,509) (2,307) Net periodic benefit cost after allocations $ 10,899,527 $ 12,236,496 $ 179,363 $ 162, (Continued)

27 (7) Pension and Other Postretirement Benefit Plans, Continued Assumptions: Weighted-average assumptions used to determine benefit obligations at December 31: Discount rate Increase compensation Pension Benefits % 4.00% 5.10% 3.50%-4.00% Postretirement Benefits % NIA 5.10% NIA Weighted-average assumptions used to determine net periodic benefit cost for year ended December 31: Discount rate Expected return on plan assets 5.10% 7.50% 4.20% 8.00% Increase compensation 3.50%-4.00% 3.50%-4.00% 5.10% NIA NIA 4.20% NIA NIA The discount rate is determined based on the plan's expected future benefit payments using a yield curve developed from high quality bonds that are rated as Aa or better as of the measurement date. The yield curve is fitted to yields developed from bonds at various maturity points. The present value of the plan's benefits is calculated by applying the spot/discount rates to projected benefit cash flows. The expected long-term rate of return on plan assets is based on expected returns for each asset class, taking into account historical returns for each asset class and the target allocation percentage for each asset class. The target asset allocation has been selected consistent with Hospitals' desired risk and return objectives for the Plan. For measurement purposes, an 8.00% pre-medicare and 6.00% post-medicare annual rate of increase in the per capita cost of covered health care benefits will be assumed through 2015 and 2019, respectively. The rates are assumed to decrease gradually to 4.50% by A one percentage point change in the assumed medical trend rates did not significantly increase or decrease the assumed trend on internal costs or Medicare reimbursements. 25 (Continued)

28 (7) Pension and Other Postretirement Benefit Plans, Continued Estimated future benefit payments: Pension payments $ 20,767,000 22,392,000 23,968,000 25,045,000 27,208, ,828,000 Postretirement payments $ 375, , , , ,621 2,605,993 The Hospitals' pension plan weighted-average asset allocations at December 31 by asset category are as follows: Asset category: Equity securities Debt securities Real estate Other Total December % 57.0% 39.8% 38.4% 0.0% 4.4% 0.2% 0.2% 100.0% 100.0% (a) Investment Policy The Plan's asset allocation agreement states the assets should be allocated as follows: Asset class Domestic (U.S.) equities International (non-u.s.) equities Fixed income domestic (U.S.) investment grade Total Target allocation 36% 24% 40% 100% Ordinarily, cash flows will be used to maintain the allocation percentages that are as close as practical to the target allocation percentages. If cash flows are not sufficient to maintain allocation percentages within the above ranges as of any monthly valuation date, the trustee is authorized to transfer balances between funds in order to rebalance the funds at their target allocation percentages. 26 (Continued)

29 (7) Pension and Other Postretirement Benefit Plans, Continued (b) Fair Value Measurements The following tables present Plan assets using the fair value hierarchy as of December 31, 2014 and 2013 measured on a recurring basis. See note 9 for fair value level definitions Levell Level2 Level3 Total Cash $ 439,397 $ $ $ 439,397 Total bond market fund 44,638,711 44,638,711 Long-term bond index fund 44,642,220 44,642,220 Total domestic stock index fund 80,928,408 80,928,408 Total international stock index fund 53,781,969 53,781,969 $ 439,397 $ 223,991,308 $ $ 224,430, Levell Level2 Level3 Total Long duration fixed income $ $ 82,016,194 $ $ 82,016,194 International funds 53,731,774 53,731,774 Small and large cap funds 33,678,911 33,678, Index US equity fund 25,988,089 25,988,089 Real estate 7,294,708 7,294,708 Other equity funds 10,577,464 10,577,464 $ $ 205,992,432 $ 7,294,708 $ 213,287, (Continued)

30 (7) Pension and Other Postretirement Benefit Plans, Continued (b) Fair Value Measurements, Continued Fair value measurements at December 31 using significant non-observable inputs: Beginning balance Net realized and unrealized gains and losses Proceeds from sales 2014 (Level3) real estate $ 7,294,708 $ 135,928 (7,430,636) 2013 (Level3) real estate 6,444, ,227 Ending balance $ $ 7,294, 708 =========== =========== As of December 31, 2013, the Level 3 asset listed in the fair value hierarchy tables above use the following valuation: Real Estate Mutual Fund- this fund was valued using net asset values which are based on the underlying values of the real estate assets consisting of private real estate investments including office, apartment, retail, industrial and other commercial properties and are determined by appraisal. The appraisals are conducted in accordance with accepted appraisal guidelines including consideration of projected income and expenses of the property, as well as recent sales of similar properties. We evaluated the transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total plan assets. For the years ended December 31, 2014 and 2013, there were no significant transfers in or out of levels 1, 2 or 3. (c) Cash Flows Contributions: United Health Services, Inc. expects to contribute $18,300,000 to the Plan in 2015 of which the Hospitals' portion approximates $14,600, (Continued)