Attached files
file | filename |
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8-K/A - FORM 8-K/A - VANGUARD HEALTH SYSTEMS INC | g26183e8vkza.htm |
EX-99.3 - EX-99.3 - VANGUARD HEALTH SYSTEMS INC | g26183exv99w3.htm |
EX-99.1 - EX-99.1 - VANGUARD HEALTH SYSTEMS INC | g26183exv99w1.htm |
Exhibit
99.2
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
September 30, |
||||
2010
|
||||
(Unaudited) |
||||
(In thousands) | ||||
Assets
|
||||
Current assets:
|
||||
Cash and cash equivalents
|
$ | 31,811 | ||
Net patient accounts receivable
|
181,137 | |||
Estimated third-party payor settlements
|
24,404 | |||
Other accounts receivable
|
36,677 | |||
Current portion of assets whose use is limited or restricted
|
3,056 | |||
Securities lending collateral
|
14,835 | |||
Other current assets
|
34,698 | |||
Total current assets
|
326,618 | |||
Assets whose use is limited or restricted:
|
||||
Board-designated funds for capital improvements
|
38,119 | |||
Board-designated funds for specific purposes
|
62,311 | |||
Professional liability funds
|
166,132 | |||
Funds held in trust under bond agreements
|
32,419 | |||
Endowment funds
|
66,565 | |||
Donor restricted funds
|
82,028 | |||
447,574 | ||||
Property and equipment, net
|
442,790 | |||
Other noncurrent assets
|
38,007 | |||
Total assets
|
$ | 1,254,989 | ||
Liabilities and net assets
|
||||
Current liabilities:
|
||||
Accounts payable and accrued expenses
|
$ | 198,772 | ||
Accrued compensation and related amounts
|
62,613 | |||
Estimated third-party payor settlements
|
47,732 | |||
Payable under securities lending program
|
14,835 | |||
Current portion of long-term debt
|
24,494 | |||
Current portion of accrued professional liability losses
|
12,200 | |||
Total current liabilities
|
360,646 | |||
Other liabilities:
|
||||
Long-term debt, less current portion
|
468,140 | |||
Accrued retirement liability
|
184,766 | |||
Accrued professional liability losses, less current portion
|
182,428 | |||
Other noncurrent liabilities
|
50,563 | |||
Total other liabilities
|
885,897 | |||
Total liabilities
|
1,246,543 | |||
Net assets (deficit):
|
||||
Unrestricted
|
(140,150 | ) | ||
Temporarily restricted
|
82,030 | |||
Permanently restricted
|
66,566 | |||
Total net assets
|
8,446 | |||
Total liabilities and net assets
|
$ | 1,254,989 | ||
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited) |
||||||||||||||||
(In thousands) | ||||||||||||||||
Unrestricted revenue and other support
|
||||||||||||||||
Net patient service revenue
|
$ | 504,812 | $ | 502,652 | $ | 1,502,975 | $ | 1,476,340 | ||||||||
Other revenue
|
37,437 | 33,666 | 117,231 | 101,227 | ||||||||||||
Total unrestricted revenue and other support
|
542,249 | 536,318 | 1,620,206 | 1,577,567 | ||||||||||||
Expenses
|
||||||||||||||||
Salaries, wages, and benefits
|
227,130 | 223,975 | 671,572 | 660,179 | ||||||||||||
Services, supplies, and other
|
198,622 | 202,832 | 601,593 | 589,099 | ||||||||||||
Provision for uncollectible accounts
|
67,360 | 72,362 | 195,043 | 198,837 | ||||||||||||
Professional liability insurance
|
319 | 5,548 | 11,924 | 23,688 | ||||||||||||
Interest
|
7,242 | 8,137 | 22,141 | 24,252 | ||||||||||||
Regulatory settlement expense
|
30,000 | | 30,000 | | ||||||||||||
Depreciation and amortization
|
20,015 | 20,449 | 58,866 | 60,735 | ||||||||||||
Total expenses
|
550,688 | 533,303 | 1,591,139 | 1,556,790 | ||||||||||||
Income (loss) from operations before unrealized gains (losses)
on investments
|
(8,439 | ) | 3,015 | 29,067 | 20,777 | |||||||||||
Unrealized gains on investments
|
11,275 | 13,606 | 4,423 | 32,186 | ||||||||||||
Income from operations
|
2,836 | 16,621 | 33,490 | 52,963 | ||||||||||||
Other nonoperating income;
|
||||||||||||||||
Investment income and other
|
1,997 | 3,426 | 1,720 | 3,045 | ||||||||||||
Excess of revenue over expenses
|
$ | 4,833 | $ | 20,047 | $ | 35,210 | $ | 56,008 | ||||||||
Unrestricted net assets
|
||||||||||||||||
Excess of revenues over expenses
|
$ | 4,833 | $ | 20,047 | $ | 35,210 | $ | 56,008 | ||||||||
Net assets released from restrictions for long-lived assets
|
1,558 | 1,155 | 4,172 | 3,418 | ||||||||||||
Other changes
|
(1,527 | ) | 455 | (1,584 | ) | 610 | ||||||||||
Increase in unrestricted assets
|
4,864 | 21,202 | 37,798 | 60,036 | ||||||||||||
Temporarily restricted net assets
|
||||||||||||||||
Contributions
|
(806 | ) | 2,971 | 3,315 | 9,037 | |||||||||||
Investment income
|
803 | 1,634 | 5,461 | (6,809 | ) | |||||||||||
Unrealized gain in fair value of investments
|
9,305 | 8,653 | 3,669 | 21,666 | ||||||||||||
Net assets released from restrictions for long-lived assets
|
(1,545 | ) | (1,155 | ) | (4,139 | ) | (3,414 | ) | ||||||||
Net assets released from restrictions for operations
|
(2,763 | ) | (2,533 | ) | (7,734 | ) | (7,542 | ) | ||||||||
Other changes
|
1,508 | 9 | 4,108 | (1,064 | ) | |||||||||||
Increase in temporarily restricted net assets
|
6,502 | 9,579 | 4,680 | 11,874 | ||||||||||||
Permanently restricted net assets
|
||||||||||||||||
Contributions
|
38 | 101 | 190 | 106 | ||||||||||||
Other changes
|
| (10 | ) | 500 | (10 | ) | ||||||||||
Increase in permanently restricted net assets
|
38 | 91 | 690 | 96 | ||||||||||||
Increase in net assets
|
11,404 | 30,872 | 43,168 | 72,006 | ||||||||||||
Net deficit at beginning of period
|
(2,958 | ) | (160,742 | ) | (34,722 | ) | (201,876 | ) | ||||||||
Net assets (deficit) at end of period
|
$ | 8,446 | $ | (129,870 | ) | $ | 8,446 | $ | (129,870 | ) | ||||||
2
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
(UNAUDITED)
Nine Months Ended |
||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Operating activities
|
||||||||
Increase in net assets
|
$ | 43,168 | $ | 72,006 | ||||
Adjustments to reconcile increase in net assets to cash provided
by operating activities:
|
||||||||
Depreciation and amortization
|
58,866 | 60,735 | ||||||
Provision for uncollectible accounts
|
195,043 | 198,837 | ||||||
Change in unrealized gain (loss) (see Note 1)
|
(9,913 | ) | (53,852 | ) | ||||
Restricted contributions and investment income (see Note 1)
|
(8,966 | ) | (2,334 | ) | ||||
Changes in operating assets and liabilities:
|
||||||||
Net patient accounts receivable
|
(253,399 | ) | (232,816 | ) | ||||
Other current assets
|
10,883 | 15,352 | ||||||
Accounts payable and accrued expenses
|
46,369 | 18,715 | ||||||
Other current liabilities
|
(39,383 | ) | (78,891 | ) | ||||
Accrued retirement obligation
|
686 | 23,276 | ||||||
Accrued professional liability
|
(394 | ) | (5,129 | ) | ||||
Other operating activities
|
(4,089 | ) | (2,224 | ) | ||||
Cash provided by operating activities
|
38,871 | 13,675 | ||||||
Investing activities
|
||||||||
Purchase of property and equipment
|
(63,589 | ) | (50,597 | ) | ||||
Decrease in assets whose use is limited or restricted (see
Note 1)
|
5,829 | 28,302 | ||||||
Other investing activities (see Note 1)
|
6,515 | (2,073 | ) | |||||
Cash used in investing activities
|
(51,245 | ) | (24,368 | ) | ||||
Financing activities
|
||||||||
Restricted contributions and investment income
|
8,966 | 2,334 | ||||||
Repayment of revolving line of credit notes
|
(20,753 | ) | | |||||
Proceeds on revolving line of credit notes
|
| 10,278 | ||||||
Repayment of long-term debt
|
(19,324 | ) | (12,441 | ) | ||||
Cash (used in) provided by financing activities
|
(31,111 | ) | 171 | |||||
Decrease in cash and cash equivalents
|
(43,485 | ) | (10,522 | ) | ||||
Cash and cash equivalents at beginning of year
|
75,296 | 38,430 | ||||||
Cash and cash equivalents at end of year
|
$ | 31,811 | $ | 27,908 | ||||
See accompanying notes.
3
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
SEPTEMBER 30,
2010 AND 2009 (UNAUDITED)
1. | Organization and Significant Accounting Policies |
Organization
The Detroit Medical Center, a parent holding company, and its
subsidiaries jointly, The DMC) are major providers of
health care services to residents of the Detroit metropolitan
area. The DMC constitutes the academic health center of Wayne
State University and works with the University to integrate
clinical services, education, and research.
The condensed consolidated financial statements include the
accounts of The Detroit Medical Center and all majority-owned
subsidiaries. All significant intercompany account balances and
transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements as of
September 30, 2010, and for the nine month periods ended
September 30, 2010 and 2009, have been prepared in
conformity with accounting principles generally accepted in the
United States for interim reporting. Accordingly, they do not
include all of the information and notes required by accounting
principles generally accepted in the United States for complete
financial statements. In the opinion of management, the
unaudited condensed consolidated financial statements reflect
all the adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and
the results of operations for the periods presented. The results
of operations for the periods presented are not necessarily
indicative of the expected results for the fiscal year ending
December 31, 2010. The interim unaudited consolidated
financial statements should be read in conjunction with The
Detroit Medical Center and Subsidiaries consolidated financial
statements as of and for the year ended December 31, 2009,
included in Appendix F.
Effective January 1, 2011, certain subsidiaries of Vanguard
Health Systems, Inc. (Vanguard) purchased substantially all of
the assets and assumed substantially all of the liabilities of
The DMC (see Note 11).
Mission
The DMC is committed to improving the health of the population
served by providing the highest-quality health care services in
a caring and efficient manner without invidious discrimination,
regardless of the persons religion, race, gender, ethnic
identification, or economic status. Together with Wayne State
University, The DMC strives to be the regions premier
health care resource through a broad range of clinical services;
the discovery and application of new knowledge; and the
education of practitioners, teachers, and scientists.
As part of its public mission as the safety net health care
provider in Southeast Michigan, The DMC writes off forgone
charges associated with providing services to uninsured
patients. This public mission support is determined by isolating
the amount of bad debts originating from care to uninsured
patients less any monies received by The DMC from third parties
(Medicare, Medicaid, and Blue Cross) as a qualified
disproportionate share hospital (DSH). The DMC also considers
payments remitted to Wayne State University faculty physicians
as recognition of care provided by such physicians to the
uninsured population.
4
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Cash and
Cash Equivalents
The DMC considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Investments
Investments in equity securities and debt securities are
measured at fair value in the consolidated balance sheets.
Donated securities are stated at fair value at the date of
contribution. Investment income (including realized and
unrealized gains and losses on investments, interest, and
dividends) are included in excess of revenue over expenses
(expenses over revenue) unless the income is restricted by donor
or law.
Investments in limited partnerships, such as private equity
investments and hedge funds (alternative investments), are
reported using the equity method of accounting based on
information provided by management of the respective
partnership. The investment information provided by managers of
the partnerships is based on current market value, appraisals,
or other estimates of fair value of investment holdings of the
partnership that require varying degree of judgments. Some of
the individual investments within these funds are not readily
marketable; therefore, their estimated value is subject to
uncertainty and may differ from the value that would have been
determined had a ready market for the investments existed. If no
public market exists for the investments held by the
partnership, the fair value is determined by the general partner
taking into consideration, among other things, the cost of the
securities, prices of significant placements of securities of
the same issuer, and subsequent developments concerning the
companies to which the securities relate. Generally, The
DMCs holdings in alternative investments reflect net
contributions to the partnership and an ownership share of
realized and unrealized investment income and expenses.
Alternative investments have liquidity restrictions. Amounts can
be divested only at specified times based on the terms of the
partnership agreement.
Securities
Lending Program
The DMC participates in securities lending transactions with
their investment trustee, whereby a portion of its investments
are loaned to selected established brokerage firms in return for
cash and securities from the brokers as collateral for the
investments loaned, usually on a short-term basis of 30 to
60 days. Collateral provided by brokers is maintained at
levels approximating 102% of the fair value of the securities on
loan and is adjusted for daily market fluctuations. The market
value of collateral held for loaned securities is reported as
securities lending collateral in the consolidated balance sheet.
At September 30, 2010, investment securities with an
aggregate market value of $14,461,000 were loaned to various
brokers. In exchange, The DMC received cash collateral of
$14,835,000.
Patient
Service Revenue and Receivables
The majority of The DMCs services are reimbursed under
fixed price provisions of third-party payment programs
(primarily Medicare, Medicaid, and Blue Cross and Blue Shield of
Michigan). Under these provisions, payment rates for patient
care are determined prospectively on various bases, and The
DMCs revenues are limited to such amounts. Payments are
also received from third parties for The DMCs capital and
medical education costs, subject to certain limits.
Additionally, The DMC has entered into agreements with certain
commercial insurance carriers, health maintenance organizations,
and preferred provider
5
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
organizations. The basis for payment under these agreements
includes prospectively determined per diem rates, capitation,
and discounts from established charges.
Net patient service revenue is reported at the estimated net
realizable amounts to be received from patients, third-party
payors, and others for services rendered, including estimated
retroactive adjustments under reimbursement agreements with
third-party payors. Retroactive adjustments are accrued on an
estimated basis in the period related services are rendered and
adjusted in future periods as final settlements are determined.
As a result, there is at least a reasonable possibility that
recorded estimates will change by a material amount in the near
term. Management believes that adequate provision has been made
in the consolidated financial statements for any adjustments
that may result from final settlements.
The DMC receives payments from the state Medicaid program
related to support of The DMCs indigent patient volume.
The payments are recognized ratably as revenue over the period
of support determined by the State.
Revenue from the Medicare and Medicaid programs accounted for
approximately 52% of net patient service revenues during the
nine months ended September 30, 2010 and 2009, respectively.
Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. Management
believes that it is in compliance with all applicable laws and
regulations. Compliance with such laws and regulations is
subject to government review and interpretation as well as
significant regulatory action, including fines, penalties, and
exclusion from the Medicare and Medicaid programs. In the normal
course of business, The DMC has received requests for
information from governmental agencies covering services
provided. Management intends to fully cooperate with the
governmental agencies in its request for information and
believes that adequate provision has been made for any
adjustments that may result from settlements.
The provision for bad debts is based upon managements
assessment of expected net collections and considers business
and economic conditions, trends in health care coverage, and
other collection indicators, including historical write-off
experience by payor category. The results of this review are
then used to make any modifications to the provision for bad
debts to establish an appropriate allowance for uncollectible
receivables. After receipt of amounts due from third parties,
The DMC follows established guidelines for placing certain past
due patient balances with collection agencies.
Supplies
Supplies represent medical supplies, which are stated at the
lower of cost or market. Cost is determined based on the
first-in,
first-out method.
Property
and Equipment
Property and equipment, including amounts under capital leases,
are stated at cost or estimated fair value at the date of
donation and are depreciated using the straight-line method over
their estimated useful lives. The estimated useful lives for
assets range from three to forty years.
An entity is required to recognize a liability for the fair
value of an unconditional asset retirement obligation if the
fair value of the liability can be estimated. Because there are
no current plans requiring
6
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
remediation giving rise to an asset retirement obligation and a
settlement date has not been specified by others, management
believes that sufficient information is not available to record
an asset retirement obligation.
Other
Noncurrent Assets
Other noncurrent assets include deferred debt issuance costs,
which are amortized ratably over the terms of the related debt
issues using a method that approximates the interest method.
Goodwill and other intangible assets are amortized by the
straight-line method over a ten-year period (see Note 2).
Temporarily
and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use has been
limited by donors to a specific purpose, such as capital
additions or research. When a donor restriction is satisfied,
such as through expenditure for the restricted purpose,
temporarily restricted net assets are reclassified as net assets
released from restrictions for either operating purposes or for
long-lived assets and are included in either unrestricted
revenue and other support or as an increase in unrestricted net
assets, respectively. Pledges are recorded as increases in
temporarily restricted net assets when the pledge is made.
Permanently restricted net assets have been restricted by the
donors to be maintained by The DMC in perpetuity, the income
therefrom to be used in accordance with any restrictions by the
donor.
Excess of
Revenue Over Expenses
The consolidated statement of operations and changes in net
assets (deficit) include the excess of revenue over expenses
(expenses over revenue). Changes in unrestricted net assets,
which are excluded from the excess of revenue over expenses
(expenses over revenue), consistent with industry practice,
include changes in the pension and postretirement benefit
liability and net assets released from restrictions for the
purchase of long-lived assets.
Charity
Care
The DMC provides health care services free of charge or at
reduced rates to individuals who meet certain eligibility
criteria, based on published Income Poverty Guidelines. Charity
care provided by The DMC of approximately $52,405,000 and
$57,131,000 for the nine months ended September 30, 2010
and 2009, respectively, has been included in the provision for
uncollectible accounts on the consolidated statements of
operations and changes in net assets (deficit), as these amounts
were initially billed at the time of service.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated
7
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
Income
Taxes
The Detroit Medical Center, each of its hospital subsidiaries,
and certain of its other subsidiaries are nonprofit
corporations, exempt from federal income tax under
Section 501(c)(3) of the Internal Revenue Code. Radius
Health Care System, Inc. is a for-profit corporation, which has
net operating loss carryforwards that are available to offset
its future taxable income. The DMC uses the liability method of
accounting for income taxes under which deferred taxes are
determined based on the differences between financial statement
and tax bases of assets and liabilities, using current tax
rates. The DMC has recorded a valuation allowance equal to the
deferred tax asset associated with the net operating loss
carryforwards, as such amounts are not considered recoverable.
New
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51
(codified in Accounting Standards Codification (ASC) 810,
Consolidation), which requires enhanced reporting of the
portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. SFAS No. 160 is effective for
fiscal years beginning on or after September 15, 2009. The
effect of adoption of SFAS No. 160 by The DMC did not
have on a significant effect on the consolidated financial
statements.
In April 2009, the FASB issued SFAS No. 164,
Not-for-Profit
Entities: Mergers and Acquisitions (codified in Accounting
Standards Update (ASU)
2010-07,
Not-for-Profit
Entities Mergers and Acquisitions), which provides
accounting and financial disclosures for mergers or acquisitions
by
not-for-profit
entities. It also amends SFAS No. 142, Goodwill and
Other Intangibles (codified in ASC 350,
Intangibles Goodwill and Other), to make it
fully applicable to
not-for-profit
entities. SFAS No. 164 is effective for mergers or
acquisitions that occur on or after December 15, 2009.
SFAS No. 164 did not have a material effect on The
DMCs consolidated financial statements.
In January 2010, the FASB issued ASU
No. 2010-06,
which clarifies certain existing fair value measurement
disclosure requirements and requires additional fair value
measurement disclosures. Specifically, asset and liabilities
must be leveled by major class of asset or liability. Additional
disclosures are required about valuation techniques and the
inputs to those techniques, for those assets or liabilities
designated as a Level 2 or Level 3 instrument.
Disclosures regarding transfers between Level 1 and
Level 2 assets and liabilities are also required, as well
as certain disaggregation of activity in the reconciliation of
fair value measurements using significant unobservable inputs
(Level 3 assets and liabilities). The adoption of the ASU
has been reflected in the footnotes disclosures included in the
consolidated financial statements, except for the additional
disclosure requirements related to the reconciliation of fair
value measurements using significant unobservable inputs
(Level 3), which is not required to adopted until the year
ended December 31, 2011, for The DMC.
In August 2010, the FASB issued ASU
2010-23,
Measuring Charity Care for Disclosure, which establishes
standards for the disclosure of charity care in the financial
statements of health care organizations.
8
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
ASU 2010-23
is effective for fiscal years beginning after December 15,
2010. The ASU will not affect the amounts reported in the
consolidated financial statements.
The FASB also issued ASU
2010-24,
Presentation of Insurance-Related Claims and Insurance
Recoveries, which applies to professional liability claims
and similar contingent liabilities. ASU
2010-24
required that claims liabilities not be reported net of expected
recoveries in the consolidated balance sheet. The DMC has not
determined the effect of ASU
2010-24;
however, management does not expect the balance sheet amounts to
be materially affected.
Restatement
The consolidated statements of cash flows for the nine months
ended September 30, 2010 and 2009, reflect a
reclassification of $18,877,000 and $55,018,000, respectively,
which resulted in a reduction in the cash flows from operations
from the amounts previously reported. The consolidated
statements of cash flows also reflect a corresponding decrease
in cash used in investing activities of $9,911,000 and
$52,684,000 for the nine months ended September 30, 2010
and 2009, respectively, and a decrease in cash used in financing
activities of $8,966,000 and $2,334,000 for the nine months
ended September 30, 2010 and 2009, respectively. There was
no change in the total decrease in cash and cash equivalents for
the nine months ended September 30,2010 and 2009.
9
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
2. | Additional Balance Sheet Information |
September 30 |
||||
2010 | ||||
(In thousands) | ||||
Property and equipment:
|
||||
Land and land improvements
|
$ | 14,097 | ||
Buildings and improvements
|
865,410 | |||
Equipment
|
1,210,782 | |||
Construction-in-progress
|
22,728 | |||
2,113,017 | ||||
Accumulated depreciation
|
(1,670,227 | ) | ||
$ | 442,790 | |||
Other noncurrent assets:
|
||||
Goodwill and other intangible assets
|
$ | 10,888 | ||
Accumulated amortization
|
(10,766 | ) | ||
122 | ||||
Deferred debt issuance costs, net of accumulated amortization
|
8,178 | |||
Investment held for deferred compensation
|
1,383 | |||
Recoverable for excess insurance
|
13,247 | |||
Other
|
15,077 | |||
$ | 38,007 | |||
Other noncurrent liabilities:
|
||||
Postretirement obligation
|
$ | 12,754 | ||
Deferred compensation liability
|
1,498 | |||
Minority interest in joint ventures (receivable)
|
(48 | ) | ||
Due to third party
|
3,132 | |||
Other
|
33,227 | |||
$ | 50,563 | |||
10
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
3. | Net Patient Service Revenue and Accounts Receivable |
Net patient service revenue consists of the following:
Nine Months Ended |
||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Gross revenue from services to patients
|
$ | 3,235,601 | $ | 3,145,417 | ||||
Contractual adjustments
|
(1,769,400 | ) | (1,670,436 | ) | ||||
Changes in estimate related to favorable prior year third-party
payor settlements
|
36,774 | 1,359 | ||||||
Net patient service revenue
|
$ | 1,502,975 | $ | 1,476,340 | ||||
Net patient accounts receivable consist of the following:
September 30 |
||||
2010 | ||||
(In thousands) | ||||
Gross patient accounts receivable
|
$ | 592,888 | ||
Allowances and advances under contractual arrangements
|
(347,122 | ) | ||
Allowance for uncollectible accounts
|
(64,629 | ) | ||
$ | 181,137 | |||
The DMC grants credit without collateral to its patients, most
of whom are local residents and are insured under third-party
payor agreements. Significant concentrations of accounts
receivable at September 30, 2010, include net amounts due
from Medicare (20%), Medicaid (17%), Blue Cross (10%), and other
payors (53%).
4. | Cash, Cash Equivalents, and Investments |
The components of cash, cash equivalents, and investments are
summarized as follows:
September 30 |
||||
2010 | ||||
(In thousands) | ||||
Cash and cash equivalents
|
$ | 115,058 | ||
United States government obligations
|
25,999 | |||
Foreign obligations
|
15,979 | |||
Asset and mortgage-backed securities
|
62,402 | |||
Corporate bonds
|
55,227 | |||
Common stock
|
160,629 | |||
Limited partnerships
|
37,076 | |||
$ | 472,370 | |||
11
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Investment return is summarized as follows:
Nine Months Ended |
||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Interest and dividends
|
$ | 10,722 | $ | 1,601 | ||||
Net realized gains (losses)
|
351 | (4,096 | ) | |||||
Net unrealized gains
|
9,913 | 53,852 | ||||||
Total investment income
|
S 20,986 | $ | 51,357 | |||||
Included in other revenue
|
$ | 5,484 | $ | 1,206 | ||||
Included in change in unrealized gains
|
||||||||
on investments
|
4,423 | 32,186 | ||||||
Included in other nonoperating income
|
1,949 | 3,108 | ||||||
11,856 | 36,500 | |||||||
Included in temporarily restricted net assets
|
9,130 | 14,857 | ||||||
Total investment income
|
$ | 20,986 | $ | 51,357 | ||||
The DMC invests in various financial instruments that are
publicly traded. Financial instruments are exposed to various
risks such as interest rate, market, and credit risks. Due to
the level of risk associated with certain investment securities,
it is at least reasonably possible that changes in the value of
investments will occur in the near term and that such changes
could materially affect the amounts reported in the consolidated
statements of operations and changes in net assets (deficit).
5. | Fair Value of Financial Instruments |
The carrying value of cash and cash equivalents, accounts
receivable, and accounts payable are reasonable estimates of
fair value due to the short-term nature of these financial
instruments. Investments, other than alternative investments,
are recorded at fair value. At September 30, 2010, the
carrying value and fair value of The DMCs long-term debt
(excluding capital leases), as estimated by discounted cash flow
analyses using the current borrowing rate for similar types of
borrowing arrangements and adjusted for credit risk of The DMC,
was $478,577,000 and $467,025,000, respectively (see
Note 7). Other noncurrent assets and liabilities have
carrying values that approximate fair value.
ASC 820, Fair Value Measurements and Disclosures,
emphasizes that fair value is a market-based measurement,
not an entity-specific measurement. Therefore, a fair value
measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability.
As a basis for considering market participant assumptions in
fair value measurements, ASC 820 establishes a fair value
hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are
classified within Levels 1 and 2 of the hierarchy) and the
reporting entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3
of the hierarchy).
12
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The DMC follows the three-level fair value hierarchy to
categorize these assets and liabilities recognized at fair value
at each reporting period, which prioritizes the inputs used to
measure such fair values. Level inputs are defined as follows:
Level 1Quoted prices (unadjusted) in active markets
for identical assets or liabilities on the reporting date.
Investments classified in this level generally include
exchange-traded equity securities, futures, real estate
investment trusts, pooled short-term investment funds, and
exchange-traded mutual funds.
Level 2Inputs other than quoted market prices
included in Level 1 that are observable for the asset or
liability, either directly or indirectly. If the asset or
liability has a specified (contractual) term, a Level 2
input must be observable for substantially the full term of the
asset or liability. Investments classified in this level
generally include fixed income securities, including income
government obligations, asset-backed securities, and
certificates of deposit.
Level 3Inputs that are unobservable for the asset or
liability. Investments classified in this level generally
include alternative investments, limited partnerships, and
certain fixed income securities, including fixed income
government obligations.
In instances where the determination of the fair value
measurement is based upon inputs from different levels of the
fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value
measurement in its entirety. Managements assessment of the
significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific
to the asset or liability.
As of September 30, 2010, the Level 2 and Level 3
assets and liabilities listed in the fair value hierarchy tables
below use the following valuation techniques and inputs:
Cash and cash equivalentsShort-term investments designated
as Level 2 investments primarily comprise commercial paper,
whose fair value is based on amortized cost. Significant
unobservable inputs include security cost, maturity, and credit
rating.
U.S. government obligationsThe fair value of
investments in U.S. government, state, and municipal
obligations is primarily determined using techniques consistent
with the income approach. Significant observable inputs to the
income approach include data points for benchmark constant
maturity curves and spreads.
Asset and mortgage backed securitiesThe fair value of
U.S. agency and corporate asset-backed securities is
primarily determined using techniques consistent with the income
approach, such as a discounted cash flow model. Significant
unobservable inputs include prepayment speeds and spreads,
benchmark yield curves, volatility measures, and quotes.
Corporate bonds and foreign obligationsThe fair value of
investments in U.S. and international corporate bonds,
including commingled funds that invest primarily in such bonds,
and foreign government bonds is primarily determined using
techniques that are consistent with the market approach.
Significant observable inputs include benchmark yields, reported
trades, observable broker/dealer quotes, issuer spreads, and
security-specific characteristics, such as redemption options.
Common stocksThe fair value of investments in
U.S. and international equity securities is primarily
determined using the calculated net asset value. The values for
underlying investments are fair
13
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
value estimates determined by external fund managers based on
operating results, balance sheet stability, growth, and other
business and market sector fundamentals.
Securities lending collateralThe fair value of collateral
received under the securities lending program is determined
using the calculated net asset value for the equity securities
that are held.
The types of instruments valued based on quoted prices that are
not active, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
most municipal and provincial obligations, investment-grade and
high yield corporate bonds, and mortgage securities. Such
instruments are generally classified within Level 2 of the
fair market hierarchy.
The following tables summarize The DMCs assets and
liabilities measured at fair value on a recurring basis as of
September 30, 2010, aggregated by the level in the fair
value hierarchy defined above:
Fair Value Measurement Using | ||||||||||||||||
Quoted Prices in |
||||||||||||||||
Active Markets |
Significant |
|||||||||||||||
for Identical |
Other |
Significant |
||||||||||||||
Fair Value at |
Assets and |
Observable |
Unobservable |
|||||||||||||
September 30, |
Liabilities |
Inputs |
Inputs |
|||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents
|
$ | 115,058 | $ | 100,737 | $ | 14,321 | $ | | ||||||||
U.S. government obligations
|
25,999 | | 25,999 | | ||||||||||||
Foreign obligations
|
15,979 | | 15,979 | | ||||||||||||
Asset and mortgage-backed securities
|
62,402 | | 62,402 | | ||||||||||||
Corporate bonds
|
55,227 | | 55,227 | | ||||||||||||
Common stock
|
160,629 | 73,919 | 86,710 | | ||||||||||||
Total
|
$ | 435,294 | $ | 174,656 | $ | 260,638 | $ | | ||||||||
Securities lending collateral
|
$ | 14,835 | $ | 14,835 | $ | | $ | | ||||||||
6. | Credit Agreement |
On June 25, 2010, The DMC and GE Capital executed an
amendment to the amended and restated credit agreement. Under
the amended terms of the credit agreement, The DMC has liquidity
available of up to $40,000,000 based on eligible accounts
receivable, which is determined based on net accounts receivable
that are less than 120 days old, reduced by third-party
advances and allowances for doubtful accounts. The credit
agreement, which expires the earlier of June 30, 2011, or
the date on which The DMC terminates the agreement, is secured
by eligible accounts receivable. Under the terms of the credit
agreement, The DMC is required to have days in accounts
receivable less than 97 days for the preceding three-month
period, maintain liquidity of $50,000,000 at all times and
average liquidity of $65,000,000 for the preceding three-month
period, and maintain a rolling fixed charge coverage ratio of no
less than 1.10 any time the month-end liquidity is less than
$120,000,000. Interest on borrowings can either be fixed or
floating subject to monthly adjustments (the interest rate at
September 30, 2010, was 6.25%). In addition, The DMC is
charged an unused facility fee equal to .50% of the unused
liquidity facility. At September 30, 2010, there was no
balance outstanding on the line of credit. The available balance
on the line of credit at September 30, 2010, was
$40,000,000.
14
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
7. | Long-Term Debt and Leases |
Long-term debt consists of the following:
September 30 |
||||
2010 | ||||
Michigan State Hospital Finance Authority (MSHFA) bonds:
|
||||
Series 1993A, interest at 6.25% to 6.5%, due 2018
|
$ | 100,280 | ||
Series 1993B, interest at 5.50% to 5.75%, due 2023
|
93,175 | |||
Series 1995, interest at 6.0% to 6.7%, due 2025
|
28,400 | |||
Series 1997A, interest at 5.0% to 5.5%, due 2027
|
142,690 | |||
Series 1998A, interest at 5.0% to 5.25%, due 2028
|
108,650 | |||
Obligations under capital leases
|
14,057 | |||
Notes payable and other obligations
|
5,382 | |||
492,634 | ||||
Less current portion
|
24,494 | |||
$ | 468,140 | |||
The Detroit Medical Center and its hospital subsidiaries are
members of The Detroit Medical Center Obligated Group, which was
created under a Master Indenture and Security Agreement. In
addition, The Detroit Medical Center and its hospital
subsidiaries became part of Sinai Hospital Obligated Group,
which was created under a separate Master Indenture, which also
became known as The Detroit Medical Center Obligated Group (the
Obligated Group) subsequent to the 1997 acquisition of Sinai
Hospital by The DMC. Collectively, these Master Indentures are
referred to as Master Indentures. The Master
Indentures provide that each member of the Obligated Group is
jointly and severally liable for obligations issued thereunder.
The Detroit Medical Center serves as the Obligated Group agent.
The MSHFA bonds are tax-exempt revenue bonds secured by
obligations issued under the Master Indenture, which the
Obligated Group must repay under loan agreements with MSHFA. The
bonds mature in annual amounts through 2028, ranging in the
aggregate from $13,155,000 in 2010 to $37,585,000 in 2028.
During the term of the agreements with MSHFA, The DMC is
required to maintain debt service reserve funds and make
specified deposits with trustees to fund principal and interest
payments when due. Also, unexpended bond proceeds are held by
the trustee and released to The DMC for approved capital
projects. At September 30, 2010, unexpended bond proceeds
were $3,805,000.
Interest paid was for the nine months ended September 30,
2010 and 2009, was $26,664,000 and $27,857,000, respectively.
In connection with the transaction with Vanguard discussed in
Note 11, substantially all of the long-term debt and
capital leases outstanding at September 30, 2010, were
repaid.
15
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The DMC has noncancellable lease commitments at
September 30, 2010, as follows (in thousands):
2010 (for the period from October 1 through December 31)
|
$ | 3,589 | ||
2011
|
13,157 | |||
2012
|
8,456 | |||
2013
|
5,720 | |||
2014
|
4,549 |
8. | Retirement Benefits |
A summary of the components of net retirement expense is as
follows:
Nine Months Ended |
||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Interest cost on projected benefit obligation
|
$ | 38,242 | $ | 38,379 | ||||
Expected return on assets
|
(40,120 | ) | (36,319 | ) | ||||
Amortization of net loss
|
13,817 | 21,216 | ||||||
Net retirement cost for defined benefit plan
|
11,939 | 23,276 | ||||||
Defined contribution plan expense
|
17,327 | 16,877 | ||||||
Total retirement expense
|
$ | 29,266 | $ | 40,153 | ||||
The assumptions used to determine the net periodic benefit cost
are as follows:
Year Ended December 31 | ||||||||
2010 | 2009 | |||||||
Discount rate
|
6.06 | % | 6.46 | % | ||||
Expected long-term rate of return on assets
|
8.50 | % | 8.50 | % |
9. | Other Postretirement Employee Benefits |
Net periodic postretirement benefit cost includes the following
components:
Nine Months Ended |
||||||||
September 30 | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Service cost
|
$ | | $ | | ||||
Interest cost
|
617 | 711 | ||||||
Expected return on assets
|
(125 | ) | (121 | ) | ||||
Amortization of prior service cost
|
32 | 44 | ||||||
Net periodic postretirement benefit cost
|
$ | 524 | $ | 634 | ||||
16
THE
DETROIT MEDICAL CENTER AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
10. | Commitments and Contingencies |
The DMC and its affiliates are parties to certain legal actions
in addition to professional liability claims. Management
believes the resolution of these matters will not materially
affect the results of operations or the financial position of
The DMC.
Effective December 31, 2010, The DMC entered into a
Settlement Agreement with the Department of Justice and the
Department of Health and Human Services Office of Inspector
General (the OIG), releasing The DMC from liability under the
False Claims Act, the Civil Monetary Penalties Law, and the
civil monetary penalties provisions of the Stark Law for certain
disclosed conduct by The DMC that may have violated the
Anti-Kickback Statute or the Stark Law or failed to comply with
governmental reimbursement rules. The DMC paid $30 million
to the government in connection with such settlement based upon
the governments analysis of The DMCs net worth an
ability to pay. The Settlement Agreement is subject to the
governments rescission in the event of The DMCs
nondisclosure or assets or any misrepresentation in The
DMCs financial statements disclosed to the government.
At September 30, 2010, The DMC had commitments of
approximately $35,648,000 for the purchase of property and
equipment.
11. | Subsequent Events |
Effective January 1, 2011, certain subsidiaries of Vanguard
Health Systems, Inc. (Vanguard), a Nashville Tennessee based
investor owned entity, purchased substantially all of the assets
and assumed substantially all of the liabilities of the DMC.
Under the terms of the agreement, assets excluded from
acquisition consisted of certain donor-restricted assets and
certain other assets. Liabilities excluded were the DMCs
outstanding bonds and similar debt and certain other
liabilities, the DMC will remain in existence to manage the
philanthropic and charitable funds which are currently held by
the DMC. The cash purchase price for the DMC assets was
$368.1 million plus an additional $4.5 million to fund
the operations of the new DMC Foundation.
As part of the transaction, Vanguard has committed to spend
$350 million during the years subsequent to closing for the
routine capital needs of the DMC facilities and an additional
$500 million in capital expenditures during this same five
year period, which amount relates to a specific list agreed to
between the DMC and Vanguard.
The assets not acquired by Vanguard will remain with the DMC,
and will be used for philanthropic purposes. These assets will
be overseen by a Board of Directors appointed by the Attorney
General - State of Michigan, the Wayne County Executive and the
City of Detroit.
17