Iosco Medical Care Facility. Financial Report with Additional Information December 31, 2013

Financial Report with Additional Information December 31, 2013

Contents Report Letter 1-2 Management's Discussion and Analysis 3-7 Basic Financial Statements Statement of Net Position 8 Statement of Revenue, Expenses, and Changes in Net Position 9 Statement of Cash Flows 10-11 Notes to Financial Statements 12-21 Other Additional Information 22 Schedule of Net Service Revenue 23 Schedule of Operating Expenses 24

Independent Auditor's Report To the Board of Directors Iosco Medical Care Facility Report on the Financial Statements We have audited the accompanying basic financial statements of Iosco Medical Care Facility (the "Facility"), a component unit of Iosco County, Michigan, as of and for the years ended December 31, 2013 and 2012, and the related notes to the financial statements, which collectively comprise the Iosco Medical Care Facility's basic financial statements as listed in the table of contents. 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 basic 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 audits 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 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 Facility 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 Facility 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. Opinion In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of Iosco Medical Care Facility, a component unit of Iosco County, as of December 31, 2013 and 2012 and the changes in its financial position and its cash flows thereof for the years then ended, in accordance with accounting principles generally accepted in the United States of America. 1

To the Board of Directors Iosco Medical Care Facility Emphasis of Matter As described in Note 1 to the financial statements, the Facility adopted the provisions of GASB No. 65, Items Previously Reported as Assets and Liabilities, as of December 31, 2013. Our opinion is not modified with respect to this matter. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, as identified in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplemental information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise Iosco Medical Care Facility's basic financial statements. The other additional information, as identified in the table of contents, is presented for the purpose of additional analysis and is not a required part of the basic 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 basic financial statements. The information has been subjected to the auditing procedures applied in the audits of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic 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 basic financial statements as a whole. April 3, 2014 2

Management's Discussion and Analysis Our discussion and analysis of Iosco Medical Care Facility's (the "Facility") financial performance provides an overview of the Facility's financial activities for the fiscal years ended December 31, 2013, 2012, and 2011. Please read it in conjunction with the Facility's financial statements, which begin below. Financial Highlights The Facility's net position decreased by approximately $149,000 in 2013, decreased by approximately $11,400 in 2012, and increased by approximately $334,000 in 2011. The Facility reported operating losses of approximately $645,000 in 2013, $518,000 in 2012, and $179,000 in 2011. Other income decreased by approximately $11,300 in 2013 compared to 2012, $5,200 in 2012 compared to 2011, and $10,800 in 2011 compared to 2010. Using this Annual Report The Facility's financial statements consist of three statements - a statement of net position, a statement of revenue, expenses, and changes in net position, and a statement of cash flows. These financial statements and related notes provide information about activities of the Facility, including resources held by the Facility but restricted for specific purposes by contributor. The Statement of Net Position and Statement of Revenue, Expenses, and Changes in Net Position One of the most important questions asked about the Facility's finances is, "Is the Facility as a whole better or worse off as a result of the year's activities?" The statement of net position and the statement of revenue, expenses, and changes in net position report information about the Facility's resources and its activities in a way that helps answer this question. These statements include all restricted and unrestricted assets, deferred outflows, liabilities, and deferred inflows using the accrual basis of accounting. All of the current year's revenue and expenses are taken into account regardless of when cash is received or paid. These two statements report the Facility's net position and the changes in them. One can think of the Facility's net position - the difference between assets and deferred outflows and liabilities and deferred inflows - as one way to measure the Facility's financial health, or financial position. Over time, increases or decreases in the Facility's net position are one indicator of whether its financial health is improving or deteriorating. You will need to consider other nonfinancial factors, however, such as changes in the Facility's occupancy and resident mix, as well as local economic factors, to assess the overall health of the Facility. 3

Management's Discussion and Analysis (Continued) The Statement of Cash Flows The final required statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing, and financing activities. It provides answers to such questions as "Where did cash come from?", "What was cash used for?", and "What was the change in cash balance during the reporting period?" The Facility's Net Position The Facility's net position is the difference between its assets and its liabilities and deferred inflows reported in the statement of net position on page 8. The Facility's net position decreased in 2013 by approximately $149,000, decreased in 2012 by approximately $11,400, and increased in 2011 by approximately $334,000 as you can see from Table 1. Table 1 - Assets, Liabilities, and Net Position 2013 2012 2011 Assets Current assets $ 3,264,522 $ 3,085,530 $ 2,782,527 Noncurrent assets 8,235,719 8,516,071 9,122,257 Total assets 11,500,241 11,601,601 11,904,784 Liabilities - Current liabilities 615,769 560,856 857,474 Deferred Inflow - Tax revenue 503,892 510,768 505,942 Net Position Net investment in capital assets 7,135,174 7,515,626 7,126,285 Unrestricted 3,245,406 3,014,351 3,415,083 Total net position $ 10,380,580 $ 10,529,977 $ 10,541,368 The long-term care industry as a whole has been experiencing a decrease in census as compared to years past. This is partly attributable to more stringent Medicare and Medicaid admission guidelines for skilled nursing care. The recent economic recession has led to an increase in the extended family concept. More children are electing to keep their aging parents at home longer and pooling resources together, to better meet the various demands of living. Despite industry trends and two other skilled nursing facilities within two miles of this Facility, the Facility was still able to end 2013 with a 90 percent year-to-date census. This respectable census, as well as participation in Michigan s Quality Assurance Assessment Program and county millage support, proved invaluable for the Facility's change in net position. 4

Management's Discussion and Analysis (Continued) Operating Results and Changes in the Facility's Net Position In 2013, the Facility's net position decreased by approximately $149,000, as shown in Table 2. Net position decreased by approximately $11,400 for 2012, compared with the previous year. Net position increased by approximately $334,000 for 2011, compared with the previous year. Table 2 - Operating Results and Changes in Net Position 2013 2012 2011 Operating Revenue Net service revenue $ 6,043,652 $ 6,055,240 $ 5,958,756 Other operating revenue 29,528 34,397 25,263 Quality assurance supplement 729,776 778,226 808,343 Total operating revenue 6,802,956 6,867,863 6,792,362 Operating Expenses Salaries 3,586,638 3,537,665 3,371,263 Other expenses 3,861,260 3,848,419 3,599,632 Total operating expenses 7,447,898 7,386,084 6,970,895 Operating Loss (644,942) (518,221) (178,533) Other Income Interest income 176 221 305 Contributions - 2,200 2,900 Property tax proceeds 495,369 504,409 508,864 Total other income 495,545 506,830 512,069 Change in Net Position (149,397) (11,391) 333,536 Net Position - Beginning of year 10,529,977 10,541,368 10,207,832 Net Position - End of year $ 10,380,580 $ 10,529,977 $ 10,541,368 Operating Results and Changes in Net Position Operating loss increased by approximately $127,000 from 2012 to 2013 and increased by approximately $340,000 from 2011 to 2012. The 2012 to 2013 change is attributable to a 0.9 percent decrease in operating revenue and a 0.8 percent increase in operating expenses in 2013. With a less than budgeted census, the Facility experienced a slight decrease in its net position, which is attributable to excess expenses over current year operating revenues. 5

Management's Discussion and Analysis (Continued) Capital Asset Administration The prior years investment in bricks and mortar and emphasis to get to all private rooms appears to have paid off during 2013 as indicated by census. The ability to maintain a strong census in 2014 and beyond will begin to get tougher, as the novelty of the new building and all private rooms wears off. As the ability to maintain future census becomes challenging, cost control will become ever so important. Salary and benefits account for over 60 percent of the Facility s costs. Reductions in salary are an unlikely option for cost control. However, changes to the benefits offered to employees, including the employer sponsored health insurance and retirement program, will have to be considered in the near future in order for the Facility to remain competitive. It is also important to note that the Medical Care Facility still serves as the State s long-term care safety net in Iosco County by caring for mostly those individuals with Medicaid Insurance. In fact, over 70 percent of the Facility s patient days were paid for by Medicaid dollars for fiscal year 2013. Medicaid is considered the payor of last resort, and does not cover the true costs of providing patient cares. This too supports the importance of future cost control. Other Economic Factors The Facility remains a valuable resource to a local economy which has been, and continues to be, plagued by high unemployment. The Facility provides stable employment for more than 140 individuals with a gross payroll of over $3.5 million annually. Though not a requirement for employment, the majority of the Facility's staff do reside, shop, and spend those hard-earned payroll dollars in Iosco County. In addition to the payroll dollars funneled back into the local economy in 2013, the Facility also purchased more than $1 million of goods and services from various local vendors and professionals. It is the philosophy of management to continue to support the local economy whenever possible. The Facility is a local business, supported by local citizens, and therefore invests in the local economy. During 2012, the Facility experienced several staff changes in administration (Administrator, Director of Nurses, Controller, and In-service Director). During fiscal year 2013, the only change in administrative staff was in the Assistant Director of Nurses position. The administrative team spent much of 2013 settling into their new leadership roles as well as learning each other s strengths and weaknesses. Together the administrative team is striving to carry forward the Facility s tradition of providing quality resident care. The Facility has historically been a leader in utilizing technology to aid in the delivery of quality resident care. This philosophy hasn t changed. The Facility is moving forward with the new electronic charting and billing software implementation which started in 2012. In 2013, an electronic therapy software component was added that integrates with the prior software. In 2014, the Facility plans on implementing an electronic pharmacy component which will also integrate with the charting and billing software. These investments in technology allow for greater and quicker sharing of clinical information among providers, ultimately leading to better resident care. 6

Management's Discussion and Analysis (Continued) Reimbursement funding for the Facility remains a constant challenge as well. Medicare, Medicaid, and other payment sources are becoming more stringent with their respective reimbursement dollars and paying less for skilled nursing services. Cash flow is becoming more and more crucial to all healthcare facilities. The implementation of the aforementioned integrated electronic charting and billing software programs helps to streamline the billing process and offers the Facility a greater opportunity of receiving payments sooner for services rendered. The Facility administrator continues his membership with Health Care Association of Michigan and is the appointed treasurer of the Michigan County Medical Care Facility Council. Through this involvement, he regularly networks with peers, attends various meetings throughout the year, and stays engaged with the ever-changing regulatory and reimbursement environment in which the Facility operates. This involvement is crucial to the management of the Facility. As always, the federal and state regulatory processes pose the biggest risk to the Facility. Michigan remains one of the most heavily regulated states in the nation for nursing homes. Heightened reporting requirements lead to increased visits by surveyors, which in turn lead to increased possible citation due to increased regulatory noncompliance. Regulatory issues can be directly related to financial reimbursement exclusions which could be devastating to a facility s financial position. It is important to note that the management team of this Facility is committed to providing quality resident care. The team actively participates in a quality assurance program that includes evaluating and revising its policies and procedures, providing on-going training to staff, staying engaged in the day-to-day care provided to residents, and hiring the proper professionals to help ensure quality care is being delivered. Contacting the Facility's Financial Management This financial report is designed to provide our residents, suppliers, taxpayers, and creditors with a general overview of the Facility's finances and to show the Facility's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Facility's administrator's office at Iosco Medical Care Facility, 1201 Harris, Tawas City, MI 48763. 7

Statement of Net Position Assets December 31, 2013 December 31, 2012 Current Assets Cash and cash equivalents (Note 2) $ 1,752,610 $ 1,478,337 Resident accounts receivable (Note 3) 835,781 939,423 Taxes receivable 503,892 510,768 Other current assets 172,239 157,002 Total current assets 3,264,522 3,085,530 Assets Limited as to Use (Note 2) 1,100,545 1,000,445 Property and Equipment - Net (Note 4) 7,135,174 7,515,626 Total assets $ 11,500,241 $ 11,601,601 Liabilities, Deferred Inflow, and Net Position Current Liabilities Accounts payable $ 127,222 $ 97,226 Third-party settlements payable 25,000 33,520 Funds held for residents 5,988 5,303 Accrued liabilities and other: Accrued compensation and related liabilities 181,733 184,014 Accrued compensated absences 259,396 233,504 Other accrued liabilities 16,430 7,289 Total current liabilities 615,769 560,856 Deferred Inflow - Tax revenue 503,892 510,768 Net Position Net investment in capital assets 7,135,174 7,515,626 Unrestricted 3,245,406 3,014,351 Total net position 10,380,580 10,529,977 Total liabilities, deferred inflow, and net position $ 11,500,241 $ 11,601,601 See Notes to Financial Statements. 8

Statement of Revenue, Expenses, and Changes in Net Position December 31, 2013 Year Ended December 31, 2012 Operating Revenue Net resident service revenue $ 6,043,652 $ 6,055,240 Other operating revenue 29,528 34,397 Quality assurance supplement 729,776 778,226 Total operating revenue 6,802,956 6,867,863 Operating Expenses Salaries 3,586,638 3,537,665 Other expenses 3,861,260 3,848,419 Total operating expenses 7,447,898 7,386,084 Operating Loss (644,942) (518,221) Nonoperating Income Interest income 176 221 Contributions - 2,200 Tax revenue 495,369 504,409 Total nonoperating income 495,545 506,830 Decrease in Net Position (149,397) (11,391) Net Position - Beginning of year 10,529,977 10,541,368 Net Position - End of year $ 10,380,580 $ 10,529,977 See Notes to Financial Statements. 9

Statement of Cash Flows December 31, 2013 Year Ended December 31, 2012 Cash Flows from Operating Activities Cash received from residents and third-party payors $ 6,139,459 $ 6,043,825 Cash paid to employees and suppliers (6,456,041) (6,764,157) Cash received from quality assurance supplement 729,776 778,226 Cash paid for provider tax (551,756) (547,318) Other operating receipts 29,528 34,397 Resident trust deposits (685) (741) Net cash used in operating activities (109,719) (455,768) Cash Flows from Noncapital Financing Activities Property taxes 495,369 504,409 Contributions and noncapital grants - 2,200 Net cash provided by noncapital financing activities 495,369 506,609 Cash Flows from Investing Activities - Interest received 176 221 Cash Flows from Capital and Related Financing Activities - Purchases of property and equipment (11,453) (460,812) Net Increase (Decrease) in Cash and Cash Equivalents 374,373 (409,750) Cash and Cash Equivalents - Beginning of year 2,478,782 2,888,532 Cash and Cash Equivalents - End of year $ 2,853,155 $ 2,478,782 Statement of Net Position Classification of Cash and Cash Equivalents Cash and cash equivalents $ 1,752,610 $ 1,478,337 Assets limited as to use 1,100,545 1,000,445 Total cash and cash equivalents $ 2,853,155 $ 2,478,782 See Notes to Financial Statements. 10

Statement of Cash Flows (Continued) December 31, 2013 Year Ended December 31, 2012 Reconciliation of Operating Loss to Net Cash from Operating Activities Operating loss $ (644,942) $ (518,221) Adjustments to reconcile operating loss to net cash from operating activities: Depreciation 391,905 387,128 Provision for bad debts 330,058 - Changes in assets and liabilities: Resident accounts receivable (226,416) (250,088) Other current assets (15,237) 17,619 Accounts payable 29,996 7,105 Construction payable - (315,657) Accrued compensation and other 33,437 (21,586) Third-party settlements (8,520) 237,932 Net cash used in operating activities $ (109,719) $ (455,768) See Notes to Financial Statements. 11

Notes to Financial Statements December 31, 2013 and 2012 Note 1 - Nature of Business and Significant Accounting Policies Iosco Medical Care Facility (the "Facility") is a blended component unit of Iosco County (the "County"). The financial statements for the County may be obtained by contacting the County. The Facility is a 78-bed, long-term medical care unit owned and operated by Iosco County. It is governed by the Iosco County Department of Human Services Board. This board consists of three members, two of whom are appointed by the County Board of Commissioners and one who is appointed by the Michigan governor. Further, the County Board of Commissioners approves the Facility's revenue and expenses as a line item in the County's budget. Basis for Presentation - The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB) in Statement No. 34, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments, issued in June 1999. The Facility follows the business-type activities reporting requirements of GASB Statement No. 34, which provides a comprehensive look at the Facility s financial activities. No component units are required to be reported in the Facility's financial statements. Proprietary Fund Accounting - Because the Facility provides a service to citizens that is financed primarily by a user charge, the Facility uses proprietary fund accounting whereby accounting revenue and expenses are recognized on the full accrual basis. Cash and Cash Equivalents - Cash and cash equivalents includes investments in highly liquid debt instruments with original maturities of three months or less. A portion of these funds is held by Iosco County as detailed in Note 2. Accounts Receivable - Accounts receivable for residents, insurance companies, and governmental agencies are based on net charges. An allowance for uncollectible accounts is established on the Facility's assessment of the current status of individual accounts. Uncollectible amounts are written off against the allowance for doubtful accounts in the period they are determined to be uncollectible. The allowance for doubtful accounts was $208,737 at December 31, 2013 and $58,738 at December 31, 2012. Assets Limited as to Use - Assets limited as to use primarily include assets set aside by the board of trustees for future capital improvement, over which the board retains control and may, at its discretion, subsequently use for other purposes. 12

Notes to Financial Statements December 31, 2013 and 2012 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Property and Equipment - Property and equipment amounts are recorded at historical cost. Depreciation is computed on the straight-line method. Costs of maintenance and repairs are charged to expense when incurred. Taxes Receivable - Taxes are levied on December 1 and are payable on February 15. The cities and townships within the County bill and collect the property taxes for the County. County property tax revenue is recognized when levied. Receivables for property taxes are amounts levied at December 1 of the current year but applied to future operations. In 2006, the voters of Iosco County approved an annual levy of up to $0.4557 ($0.4395 rolled back for Headlee) per $1,000 of assessed valuation for the purpose of general operations of the Facility for 10 years through 2015. The 2013 taxable valuation of properties totaled approximately $1.1 billion (a portion of which is abated and a portion of which is captured by other jurisdictions). This resulted in recognized revenue of $495,369 and $504,409, which is reported within nonoperating revenue for the years ended December 31, 2013 and 2012, respectively. Deferred Inflow - Tax Revenue - In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position which applies to a future periods and so will not be recognized as an inflow of resources (revenue) until that time. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. This resulted in $503,892 and $510,768 in a deferred inflow of tax revenue for the years ended December 31, 2013 and 2012, respectively. Compensated Absences - Sick and vacation pay is charged to operations when earned. Unused benefits are recorded as a current liability in the financial statements. Resident Trust Liability - The State Department of Treasury requires facilities to administer and account for monies of patients. The liability for funds held for residents on the statement of net position represents resident trust fund deposits. 13

Notes to Financial Statements December 31, 2013 and 2012 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Service Revenue - The Facility's principal activity is operating a long-term healthcare facility for the elderly. Revenue is derived from participation in the Medicaid and Medicare programs, as well as from private-pay residents. Revenue is recorded at standard billing rates, and differences between billing rates and amounts paid under these programs are recorded as contractual adjustments. Amounts earned under the Medicaid and Medicare programs are subject to review and audit by the third-party payors and make up a significant portion of revenue earned during each year as follows: Percent 2013 2012 Medicaid 73 75 Medicare 17 15 The payment methodology related to these programs is based on cost and clinical assessments that are subject to review and final approval by Medicaid and Medicare. Any adjustment that is a result of this final review and approval will be recorded in the period in which the adjustment is made. In the opinion of management, adequate provision has been made for any adjustments that may result from such third-party review. Medicaid reimburses the Facility for routine service costs on a per diem basis, prospectively determined. Services rendered to Medicare program beneficiaries are paid at prospectively determined rates based upon clinical assessments completed by the Facility that are subject to review and final approval by Medicare. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoings. While no 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 action including fines, penalties, and exclusion from the Medicare and Medicaid programs. 14

Notes to Financial Statements December 31, 2013 and 2012 Note 1 - Nature of Business and Significant Accounting Policies (Continued) The Medicare program has initiated a recovery audit contractor (RAC) initiative, whereby claims subsequent to October 1, 2007 will be reviewed by contractors for validity, accuracy, and proper documentation. A demonstration project completed in several other states resulted in the identification of potential significant overpayments. The Facility is unable to determine if it will be audited and if so, the extent of liability for overpayments. The RAC program began for Michigan in 2009. During 2012, Medicaid was required to create a similar RAC program, which creates a similar need for supporting documentation for each Medicaid resident and similar risk of lost reimbursement. The Facility is unable to determine if it will be audited, or the extent of liability for overpayments, if any. If selected for audit, the potential exists for significant overpayment of claims liability for the Facility at a future date. Maintenance of Effort - Maintenance of effort (M.O.E.) is a County obligation to the State of Michigan. Every month, the County receives a bill from the State of Michigan for each Medicaid patient day that was approved by the State during that month. M.O.E. expense amounted to $50,162 and $52,016 for the years ended December 31, 2013 and 2012, respectively, was paid by the Facility, and is included in operating expenses. Net Position - Net position is classified into two components. Net position invested in capital assets consists of capital assets net of accumulated depreciation. Unrestricted net position is the remaining net position that does not meet the definition of invested in capital assets. Certified Public Expenditures - The State of Michigan received approval to allow county-owned medical care facilities to receive reimbursement through the Certified Public Expenditures program (the "Program"). The purpose of the Program is to assure funding for unreimbursed costs incurred for services to Medicaid beneficiaries. The State of Michigan approval is retroactive back to January 1, 2009. During the years ended December 31, 2013 and 2012, the Facility estimated no settlement revenue and $17,000, respectively, included in net service revenue. As of December 31, 2013 and 2012, the Facility had an estimated third-party payor settlement payable of approximately $25,000 and $33,500, respectively. Operating Revenue and Expenses - The Facility's statement of revenue, expenses, and changes in net position distinguishes between operating and nonoperating revenue and expenses. Operating revenue results from exchange transactions associated with providing long-term care services - the Facility's principal activity. Nonoperating activity, including interest income, tax revenue, and contributions received for purposes other than capital asset acquisition, are reported as nonoperating revenue. Operating expenses are all expenses incurred to provide long-term care services, other than financing costs. 15

Notes to Financial Statements December 31, 2013 and 2012 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Quality Assurance Program - The Facility's Medicaid revenue has been partially funded by a program called the quality assurance assessment program (QAAP). During the years ended December 31, 2013 and 2012, the Facility received Medicaid revenue related to the QAAP totaling $729,776 and $778,226, respectively. The Facility was assessed a provider tax during the years ended December 31, 2013 and 2012 totaling $551,756 and $547,318, respectively. This provider tax is based on the number of resident days of service, excluding Medicare and Medicare advantage, as reported in the previous year's cost report. The State billed for the tax on a monthly basis. As of December 31, 2013 and 2012, there was no provider tax due. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Retirement Plan - The Facility maintains a defined benefit noncontributory retirement plan covering substantially all full-time employees. The Facility's policy is to fund the defined benefit retirement plan at actuarially determined amounts, as described in Note 5. New Accounting Prouncements - The Facility has adopted GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, which establishes accounting and financial reporting standards which reclassify, as deferred outflows and inflows of resources, certain items that were previously reported as assets and liabilities. GASB Statement No. 65 was effective for the Facility's fiscal year ended December 31, 2013 and certain items have been restated as of December 31, 2012 as the statement was retrospectively applied. This statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources. 16

Notes to Financial Statements December 31, 2013 and 2012 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Upcoming Accounting Prouncements - In June 2012, the GASB issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. Statement No. 68 requires governments providing defined benefit pensions to recognize their unfunded pension benefit obligation as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. This net pension liability will be recorded on the government-wide, proprietary, and discretely presented component units statements and will be computed differently than the current unfunded actuarial accrued liability, using specific parameters set forth by the GASB. The statement also enhances accountability and transparency through revised note disclosures and required supplemental information (RSI). The Facility is currently evaluating the impact this standard will have on the financial statements when adopted. The provisions of this statement are effective for financial statements for the year ending December 31, 2015. Note 2 - Deposits and Investments The Facility's deposits and investments, all considered cash and cash equivalents, are composed of the following: Cash and Cash Equivalents 2013 2012 Assets Limited Cash and Cash as to Use Equivalents Assets Limited as to Use Deposits: County treasurer $ 1,739,772 $ 1,100,545 $ 1,466,184 $ 1,000,445 Bank 12,838-12,153 - Total $ 1,752,610 $ 1,100,545 $ 1,478,337 $ 1,000,445 These funds reported by the Facility were under the control of the County treasurer, who deposited these funds with a bank. Michigan Compiled Laws Section 129.91 (Public Act 20 of 1943, as amended) authorizes local governmental units to make deposits and invest in the accounts of federally insured banks, credit unions, and savings and loan associations that have offices in Michigan. The local unit is allowed to invest in bonds, securities, and other direct obligations of the United States or any agency or instrumentality of the United States; repurchase agreements; bankers' acceptances of United States banks; commercial paper rated within the two highest classifications, which matures not more than 270 days after the date of purchase; obligations of the State of Michigan or its political subdivisions, which are rated as investment grade; and mutual funds composed of investment vehicles that are legal for direct investment by local units of government in Michigan. 17

Notes to Financial Statements December 31, 2013 and 2012 Note 2 - Deposits and Investments (Continued) The Facility's deposits and investments are subject to several types of risks, including custodial credit risk of bank deposits and investments, interest rate risk, credit risk, and concentration of credit risk. Custodial credit risk is the risk that in the event of a bank failure, the Facility's deposits may not be returned to it. The Facility does not have a deposit policy for custodial credit risk. It is impractical to determine the amount of risk associated with the Facility's funds held by the County treasurer as these funds are only a portion of the total County deposits. As of December 31, 2013 and 2012, all of the Facility's bank deposits (checking and savings accounts) were insured and collateralized. Note 3 - Accounts Receivable The details of resident accounts receivable are as follows: 2013 2012 Resident accounts receivable $ 1,044,518 $ 998,161 Allowance for uncollectible accounts (208,737) (58,738) Net resident accounts receivable $ 835,781 $ 939,423 The Facility provides services without collateral to its residents, most of whom are local residents and insured under third-party payor agreements. The mix of receivables from residents and third-party payors is as follows: Percent 2013 2012 Medicare 13 9 Medicaid 52 62 Other payors 35 29 Total 100 100 18

Notes to Financial Statements December 31, 2013 and 2012 Note 4 - Property and Equipment Cost of property and equipment and related depreciable lives for December 31, 2013 are summarized below: January 1, 2013 Additions Transfers Disposals December 31, 2013 Depreciable Life - Years Building $ 10,128,810 $ 11,453 $ - $ - $ 10,140,263 10-40 Equipment 1,807,004 - - - 1,807,004 5-20 Total 11,935,814 11,453 - - 11,947,267 Less accumulated depreciation: Building 3,086,544 391,905 - - 3,478,449 Equipment 1,333,644 - - - 1,333,644 Total 4,420,188 391,905 - - 4,812,093 Net carrying amount $ 7,515,626 $ (380,452) $ - $ - $ 7,135,174 Cost of property and equipment and related depreciable lives for December 31, 2012 are summarized below: January 1, 2012 Additions Transfers Disposals December 31, 2012 Depreciable Life - Years Building $ 8,845,360 $ - $ 1,283,450 $ - $ 10,128,810 10-40 Equipment 1,733,863 103,971 - (30,830) 1,807,004 5-20 Construction in progress 926,609 356,841 (1,283,450) - - Total 11,505,832 460,812 - (30,830) 11,935,814 Less accumulated depreciation: Building 2,730,246 387,128 - (30,830) 3,086,544 Equipment 1,333,644 - - - 1,333,644 Total 4,063,890 387,128 - (30,830) 4,420,188 Net carrying amount $ 7,441,942 $ 73,684 $ - $ - $ 7,515,626 Depreciation expense on property and equipment totaled $391,905 and $387,128 for the years ended December 31, 2013 and 2012, respectively. Note 5 - Retirement Benefits Plan Description - The Facility participates in the Michigan Municipal Employees Retirement System (MMERS), an agent multiple-employer defined benefit pension plan that covers all employees of the Facility through the County of Iosco. The Facility provides retirement, disability, and death benefits to plan members and their beneficiaries. MMERS issues a publicly available financial report that includes financial statements and required supplemental information for MMERS. That report may be obtained by writing to MMERS at 447 North Canal Road, Lansing, Michigan 48917. 19

Notes to Financial Statements December 31, 2013 and 2012 Note 5 - Retirement Benefits (Continued) Funding Policy - Benefit provisions of MMERS, as well as employer and employee obligations to contribute, are outlined in Act No. 427 of the Public Acts of 1984, as amended. The Facility's contribution requirement is actuarially determined. Annual Pension Cost - The Facility s annual pension cost and contributions to the plan amounted to $221,017, $221,111, and $199,876 in 2013, 2012, and 2011, respectively. The actuarially determined contribution requirements have been met based on actuarial valuations performed at December 31, 2012, 2011, and 2010. To show the progress of the Facility s status regarding certain key indicators, three-year trend information based on the December 31 actuarial reports is presented below: 2012 2011 2010 Actuarial value of assets $ 4,369,799 $ 4,650,289 $ 4,408,152 Market value of assets $ 3,821,214 $ 3,856,552 $ 3,784,727 Actuarial accrued liability (entry age) $ 5,451,896 $ 5,141,819 $ 4,728,467 Unfunded actuarial accrued liability (UAAL) $ 1,082,097 $ 491,530 $ 320,315 Funded ratio 80 % 90 % 93 % Covered payroll $ 3,380,163 $ 3,350,640 $ 3,193,620 UAAL as a percent of covered payroll 32 % 15 % 10 % Actuarial Methods and Assumptions - In the December 31, 2012 actuarial valuation (the most recent actuarial valuation), the entry age actuarial cost method was used. Significant actuarial assumptions used include (a) an 8 percent investment rate of return, (b) projected salary increases of 4.5 percent (1 percent, 1 percent, 2 percent, and 3 percent for calendar years, 2013, 2014, 2015, and 2016, respectively) plus a percentage based on an age-related scale to reflect merit, longevity, and promotional pay increases, and (c) no cost of living adjustments. Both (a) and (b) include an inflation component of 3 percent to 4 percent. The assumptions did not include postretirement benefit increases. The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility over a 10-year period. The unfunded actuarial liability is being amortized as a level percentage of payroll on a closed basis. The remaining amortization period is 26 years. It should be noted the actuarial value of assets is currently 14 percent higher than the market value. Meeting the actuarial assumption in the next few years will require average annual market returns that exceed the 8 percent investment return assumption. 20

Notes to Financial Statements December 31, 2013 and 2012 Note 6 - Risk Management The Facility is exposed to various risks of loss related to property loss, torts, errors and omissions, and employee injuries (workers' compensation), as well as medical benefits provided to employees. The Facility has purchased commercial insurance for malpractice and general liability claims, workers' compensation, and employee medical benefit claims. Settled claims relating to the commercial insurance have not exceeded the amount of insurance coverage in any of the past three fiscal years. The Facility is insured against potential professional liability claims under an occurrencebasis policy, whereby all claims resulting from incidents that occur during the policy period are covered up to insured limits, regardless of when the claims are reported to the insurance carrier. There were no known outstanding or pending claims at December 31, 2013 and 2012 which the Facility expected to be greater than their insurance coverage. 21

Other Additional Information 22

Schedule of Net Service Revenue Year Ended December 31 2013 2012 Skilled Nursing Services Daily net room revenue: Medicaid $ 4,845,154 $ 4,763,215 Medicare 719,810 643,890 Private pay and other 703,152 609,828 Total daily net room revenue 6,268,116 6,016,933 Ancillary revenue: Pharmacy 127,763 121,743 Therapy services 423,392 312,891 Other ancillary services 34,829 26,910 Total ancillary revenue 585,984 461,544 Net skilled nursing services revenue 6,854,100 6,478,477 Revenue deductions: Provision for contractual discounts (480,390) (423,237) Bad debt expense (330,058) - Total revenue deductions (810,448) (423,237) Net service revenue $ 6,043,652 $ 6,055,240 23

Schedule of Operating Expenses Year Ended December 31 2013 2012 Salaries Other Total Total Fringe benefits $ - $ 1,321,502 $ 1,321,502 $ 1,327,199 Administration 379,252 421,633 800,885 790,949 Plant operations 99,646 65,097 164,743 158,448 Utilities - 216,523 216,523 207,260 Laundry 72,876 15,012 87,888 111,422 Housekeeping 237,170 48,992 286,162 290,897 Dietary 285,589 317,435 603,024 625,768 Diversional therapy 131,104 4,796 135,900 127,535 Other ancillary services - 55,397 55,397 67,917 Therapy services 146,265 89,006 235,271 195,564 Pharmacy - 134,209 134,209 146,700 Nursing 2,234,736 177,835 2,412,571 2,349,963 Provider tax - 551,756 551,756 547,318 Depreciation - 391,905 391,905 387,128 Maintenance of effort - 50,162 50,162 52,016 2013 totals $ 3,586,638 $ 3,861,260 $ 7,447,898 2012 totals $ 3,537,665 $ 3,848,419 $ 7,386,084 24

{Auditor Communications} Iosco Medical Care Facility 12/31/13 A higher return on experience

{Get There.} Iosco Medical Care Facility A higher return on experience

April 3, 2014 To the Board of Directors Iosco Medical Care Facility Tawas City, MI 48763 We have audited the financial statements of Iosco Medical Care Facility (the "Facility") as of and for the year ended December 31, 2013 and have issued our report thereon dated April 3, 2014. Professional standards require that we provide you with the following information related to our audit which is divided into the following sections: Section I - Communications Required Under AU 260 Section II - Other Recommendations and Related Information Section I includes information that current auditing standards require independent auditors to communicate to those individuals charged with governance. We will report this information annually to the board of directors of Iosco Medical Care Facility. Section II presents recommendations related to internal control, procedures, and other matters noted during our current year audit. These comments are offered in the interest of helping the Facility in its efforts toward continuous improvement, not just in the areas of internal control and accounting procedures, but also in operational or administrative efficiency and effectiveness. We would like to take this opportunity to thank the Facility s staff for the cooperation and courtesy extended to us during our audit. Their assistance and professionalism are invaluable. This report is intended solely for the use of those charged with governance and management of Iosco Medical Care Facility and is not intended to be and should not be used by anyone other than these specified parties. We welcome any questions you may have regarding the following communications and we would be willing to discuss any of these or other questions that you might have at your convenience. Very truly yours, Plante & Moran, PLLC 1 J. Eric Conway, CPA, FHFMA Partner

To the Board of Directors April 3, 2014 Iosco Medical Care Facility Section I - Communications Required Under AU 260 Our Responsibility Under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated October 30, 2013, our responsibility, as described by professional standards, is to express an opinion about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. As part of our audit, we considered the internal control of Iosco Medical Care Facility. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on January 9, 2014. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by Iosco Medical Care Facility are described in Note 1 to the financial statements. As described in Note 1, the Facility changed accounting policies related to GASB No. 65, Items Previously Reported as Assets and Liabilities. Accordingly, the accounting change has been retrospectively applied to prior periods presented as if the policy had always been used. We noted no transactions entered into by the Facility during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. 2