John C. Fremont Healthcare District · John C. Fremont Healthcare District ... with management’s...

John C. Fremont Healthcare District Mariposa, California

FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS’ REPORT

June 30, 2015 and 2014

John C. Fremont Healthcare District TABLE OF CONTENTS June 30, 2015 and 2014

Page Number

Independent Auditors’ Report 1

MANAGEMENT’S DISCUSSION AND ANALYSIS 4

FINANCIAL SECTION

Statements of Net Position 11

Statements of Revenues, Expenses, and Changes in Net Position 12

Statements of Cash Flows 13

Notes to the Financial Statements 15

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors John C. Fremont Healthcare District Mariposa, California

We have audited the accompanying financial statements of John C. Fremont Healthcare District (the District), which comprise the statements of net position as of June 30, 2015 and 2014; the related statements of revenues, expenses, and changes in net position, and cash flows for the years then ended; and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the State Controller’s Minimum Audit Requirements for California Special Districts. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ 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 District’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 District’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.

INDEPENDENT AUDITORS’ REPORT (Continued)

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

Other Matter – Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 4 through 9 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 who 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 supplementary 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.

January 25, 2016 Chico, California

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MANAGEMENT’S DISCUSSION AND ANALYSIS

John C. Fremont Healthcare District MANAGEMENT’S DISCUSSION AND ANALYSIS

Page 4

Our discussion and analysis of the financial performance of John C. Fremont Healthcare District (the District) provides an overview of the District’s financial activities for the fiscal years ended June 30, 2015 and 2014. Please read it in conjunction with the District’s financial statements, which begin on page 11.

FINANCIAL HIGHLIGHTS

The District’s net position increased by $1,181,436 in the past year from a deficit of ($2,649,770) at June 30, 2014, to a deficit of ($1,468,334) at June 30, 2015. In the prior year the District’s net position increased by $90,803 from a deficit of ($2,740,573) at June 30, 2013, to a deficit of ($2,649,770) at June 30, 2014.

Gross patient revenue increased 12% from $29,510,113 in fiscal year 2014 to $33,130,859 in fiscal year 2015. Revenue deductions increased 25% in the past year from $13,383,062 to $16,788,524. Operating expenses increased 1% in the past year from $18,247,536 to $18,398,958 in fiscal year 2015.

USING THIS ANNUAL REPORT

The District’s financial statements consist of three statements—statements of net position; statements of revenues, expenses, and changes in net position; and statement of cash flows. These financial statements and related notes to the financial statements provide information about the activities of the District, including resources held by the District.

THE STATEMENTS OF NET POSITION AND STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

Our analysis of the District’s finances begins on page 5. One of the most important questions asked about the District’s finances is, “Is the District as a whole better or worse off as a result of the year’s activities?” The statements of net position and statements of revenues, expenses, and changes in net position report information about the District’s resources and its activities in a way that helps answer this question. These statements include all assets and liabilities using the accrual basis of accounting. All of the current year’s revenues and expenses are taken into account regardless of when cash is received or paid.

The two statements referred to above report the District’s net position and changes in them. The District’s net position—the difference between assets and liabilities—is one way to measure the District’s financial health or financial position. Over time, increases or decreases in the District’s net position are indicators of whether its financial health is improving or deteriorating. Readers should also consider other nonfinancial factors such as changes in the District’s patient base, measures of quality of service it provides to the community, as well as local economic factors to assess the overall health of the District.

John C. Fremont Healthcare District MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

Page 5

THE STATEMENT OF CASH FLOWS

The final required statement is the statement of cash flows. This 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 balances during the reporting period?”

THE DISTRICT’S NET POSITION

The District’s net position is the difference between the assets and liabilities reported in the statements of net position on page 11. The District’s net position increased from June 30, 2014, to June 30, 2015, by $1,181,436, as detailed in Table 1.

Table 1: Assets, Liabilities, and Net Position Increase

June 30 2015 2014 (Decrease)

ASSETS AND DEFERRED OUTFLOWS OF RESOURCESCurrent assets 5,048,254$ 4,480,872$ 567,382$ Capital assets ‐ net 3,583,808 3,811,605 (227,797)

Total Assets 8,632,062 8,292,477 339,585

Deferred Outflows of ResourcesDeferred loss on refunding of bonds 156,993 176,022 (19,029)

TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES 8,789,055$ 8,468,499$ 320,556$

LIABILITIES AND NET POSITIONCurrent liabilities 5,239,350$ 4,910,019$ 329,331$ Long‐term debt 5,018,039 6,208,250 (1,190,211)

Total Liabilities 10,257,389 11,118,269 (860,880)

Net PositionInvested in capital assets ‐ net investment in capital assets (621,927) (1,162,562) 540,635

Unrestricted (846,407) (1,487,208) 640,801

Total Net Position (1,468,334) (2,649,770) 1,181,436

TOTAL LIABILITIES AND NET POSITION 8,789,055$ 8,468,499$ 320,556$


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OPERATING RESULTS AND CHANGES IN THE DISTRICT’S NET POSITION

In 2015, the District’s net position increased by $1,181,436 as shown in Table 2.

Table 2: Operating Results and Changes in Net Position Increase

Years Ended June 30 2015 2014 (Decrease)

Operating RevenueGross patient service revenue 33,130,859$ 29,510,113$ 3,620,746$ Revenue deductions (16,788,524) (13,383,062) (3,405,462)

Net Patient Service Revenue 16,342,335 16,127,051 215,284

Other operating revenue 1,426,317 703,869 722,448

Total Operating Revenue 17,768,652 16,830,920 937,732

Operating ExpensesSalaries and benefits 10,788,268 10,731,209 57,059 Professional fees 3,103,248 2,881,253 221,995 Supplies 1,220,094 1,304,871 (84,777) Purchased services 938,361 658,693 279,668 Depreciation 891,882 1,050,675 (158,793) Repairs and maintenance 548,765 660,038 (111,273) Other operating expenses 908,340 960,797 (52,457)

Total Operating Expenses 18,398,958 18,247,536 151,422

Operating Loss (630,306) (1,416,616) 786,310

Nonoperating Revenues 1,811,742 1,507,419 304,323

Change in Net Position 1,181,436$ 90,803$ 1,090,633$

OPERATING INCOME

Gross patient service revenue increased $3,620,746 in 2015 compared to an increase of $3,405,462 in revenue deductions. This is largely the result of using an updated estimate of net patient accounts receivable in 2015, which significantly increased the revenue deductions.

Total operating expenses increased $151,422 from 2014. This change is due primarily to increases in professional fees of $221,995 and purchased services of $279,668; and decreases of $84,777 in supplies, $158,793 in depreciation, and $111,273 in repairs and maintenance. Professional fees increased due primarily to the addition of two physicians. Purchased services increased due primarily to increasing MRI services from bi‐weekly to weekly and incurring contract physical therapy. Supplies decreased due primarily to a full year impact of the new GPO. Depreciation decreased due to the correction in 2014 of the lives of several pieces of equipment that resulted in a temporary elevation of depreciation that year. Repairs and maintenance decreased due to a large one‐time purchase of computers at the end of 2014 that wasn’t replicated in 2015.


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NONOPERATING INCOME

For the fiscal year 2015, non‐operating revenues consisted primarily of property and sales tax revenue. The District received $726,741 in property tax revenue and $1,176,521 in sales tax revenue, for a total of $1,903,262. During 2014, property and sales tax revenue received by the District totaled $1,820,247. In addition, the District incurred interest expense of $413,846 in 2015 compared with $485,481 in 2014.

THE DISTRICT’S CASH FLOWS

Changes in the District’s cash flows are consistent with changes in operating income and non‐operating revenues and expenses discussed earlier.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets

At the end of 2015, the District invested $3,583,808 in capital assets, net of accumulated depreciation. Table 3 sets forth the historical cost and additions to capital assets, and the changes in accumulated depreciation, at June 30, 2015.

Table 3: Capital Assets and Accumulated Depreciation

Balance BalanceJune 30 2014 Additions Disposals Transfers 2015

Land and improvements 1,013,591$ ‐$ ‐$ 8,354$ 1,021,945$ Buildings and improvements 6,285,822 ‐ ‐ 279,653 6,565,475 Fixed equipment 662,404 ‐ ‐ ‐ 662,404 Moveable equipment 5,372,571 133,869 ‐ ‐ 5,506,440

Subtotal 13,334,388 133,869 ‐ 288,007 13,756,264

Less: Accumulated depreciation (9,540,296) (891,882) ‐ ‐ (10,432,178)

Subtotal 3,794,092 (758,013) ‐ 288,007 3,324,086

Construction in progress 17,513 530,216 ‐ (288,007) 259,722

Capital Assets ‐ Net 3,811,605$ (227,797)$ ‐$ ‐$ 3,583,808$

Debt

At year end, the District’s debt consisted of notes payable and capital lease obligations totaling $1,714,819, the Series 2005 Sales Tax Refunding Bonds in the amount of $2,895,000, and the Series 2010 Bonds in the amount of $1,810,000 for an aggregate outstanding total debt of $6,419,819. Of this amount, $1,401,780 is due in installments over the next 12‐month period.


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ECONOMIC FACTORS AFFECTING 2015 AND NEXT YEAR

Fiscal year 2014‐15 represented a continuation of changes and processes implemented in the previous fiscal year. The senior leadership team assembled during fiscal year 2014 remained intact through fiscal year 2015. Monthly manager meetings continued during the year to improve communication and accountability. All financial information was provided to managers through reports and a daily statistical dashboard. Managers also continued to act as CEOs of their department(s) to grow volume and control costs.

Revenues continued to grow in fiscal year 2015. During the fiscal year, gross charges increased $3,620,746 (12%). This increase was driven by volume which, again, began increasing during the second half of the fiscal year. By the end of the year med/surg patient days (41%), long‐term care (LTC) patient days (3%), ED visits (10%), and imaging procedures (20%) all increased significantly from the prior fiscal year. The event that allowed for much of the inpatient volume increase (particularly LTC) was the completion of the sprinkler replacement project in January 2015. This project brought six beds back into usage—four for LTC and two for med/surg. The LTC beds were filled by early February 2015 and the two additional med/surg beds allowed for an increase of rehab admissions.

One important area experiencing volume contractions were the clinics which saw visits slide by 7% in fiscal year 2015. In August 2014, a new clinic manager was hired but left in February 2015. Also during the fiscal year, two mid‐level providers left, only one of which was replaced during the year. This loss was countered by the addition of two physicians during the year—one in July 2014 and the other in February 2015. Unfortunately both of these physicians left in early fiscal 2016, but significant efforts have been made to stabilize the clinics. Leadership in the clinics is of absolute importance so a new clinic director has been hired and will begin in February 2016. A new physician has also been contracted and will begin work in February 2016, and an additional mid‐level provider has been hired and will begin in March 2016. Finally, a new EMR system (eClinicalWorks) has been approved and implementation began in December 2015. The new system is expected to take less provider time, thereby increasing productivity.

Expenses continued to be a focal point during fiscal year 2015. The wage freeze implemented for calendar year 2014 was lifted on January 1, 2015. Even with wages beginning to increase again, total operating expenses were held to $18,398,958, an increase of less than 1% from the prior fiscal year. The single largest cost reduction was the conversion to a self‐funded health benefit plan in January 2015. This change represented a $105,000 annual reduction to health benefit costs. In addition, all contracts coming up for renewal were aggressively renegotiated to recognize cost reductions. For example, in May the Siemens contract for lab reagents was renegotiated at an estimated savings of $200,000 over five years. Savings continued to be experienced from the conversion to the Adventist Health Group Purchasing Organization in the previous fiscal year. During fiscal 2015, supply expenses decreased an additional 6% even with continued volume growth throughout the District.

During the fiscal year ended June 30, 2015, the District continued to realize increased cash flow. The growth in charges and improvements to revenue cycle management resulted in increased cash collections of $1,633,000 in fiscal year 2015. This increase allowed the District to continue monthly payments on the $2,000,000 promissory note that began in December 2013. Payments are in excess of $50,000 each month and will conclude in November 2016. The additional cash collections allowed payment of the promissory note without negatively affecting the cash balance.


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With increases in volumes and control of costs, the District was able to continue the positive financial results initiated in the previous year. In total, the above factors resulted in a fiscal year 2014‐15 audited net income of $1,181,436 representing the first time in 11 years the District has had consecutive years with positive bottom lines. The changes implemented last year have continued into the current fiscal year. Through December 2015, the District reported net income of $116,643 compared to a budget of $85,980.

CONTACTING THE DISTRICT’S FINANCIAL MANAGEMENT

This financial report is designed to provide our patients, suppliers, creditors, and members of our community with a general overview of the District’s finances and to show the District’s accountability for the money it receives. For questions about this report or for additional financial information, please contact the Chief Executive Officer at John C. Fremont Healthcare District, 5189 Hospital Road, Mariposa, California 95338.

FINANCIAL SECTION

John C. Fremont Healthcare District STATEMENTS OF NET POSITION

Page 11

June 30 2015 2014

ASSETS AND DEFERRED OUTFLOWS OF RESOURCES

Current AssetsCash and cash equivalents 1,715,743$ 1,257,724$ Patient accounts receivable ‐ net of allowance for uncollectible accounts of $3,487,279 in 2015and $3,861,163 in 2014 2,304,176 2,144,049

Assets limited as to use ‐ held by trustees 471,622 456,534Inventories 242,841 255,692 Prepaid expenses and deposits 64,654 202,119 Other receivables 249,218 164,754

Total Current Assets 5,048,254 4,480,872

Capital Assets ‐ Net 3,583,808 3,811,605

Total Assets 8,632,062 8,292,477

Deferred Outlfows of ResourcesDeferred loss on refunding of bonds 156,993 176,022

TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES 8,789,055$ 8,468,499$

LIABILITIES AND NET POSITION

Current LiabilitiesCurrent maturities of long‐term debt 1,401,780$ 1,171,859$ Accounts payable 1,118,722 1,441,891 Patient balances payable 239,317 178,435 Accrued expenses 1,007,266 999,074 Estimated third‐party payor settlements 1,472,265 1,118,760

Total Current Liabilities 5,239,350 4,910,019

Long‐Term DebtNet of current maturities 5,018,039 6,208,250

Total Liabilities 10,257,389 11,118,269

Net PositionNet investment in capital assets (621,927) (1,162,562) Unrestricted (846,407) (1,487,208)

Total Net Position (1,468,334) (2,649,770)

TOTAL LIABILITIES AND NET POSITION 8,789,055$ 8,468,499$

The accompanying notes are an integral part of these financial statements.

John C. Fremont Healthcare District STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

Page 12

Years Ended June 30 2015 2014

Operating RevenuesNet patient service revenue ‐ net of contractual allowances and provision for bad debts of $16,788,524 in 2015and $13,383,062 in 2014 16,342,335$ 16,127,051$

Other revenue 1,426,317 703,869

Total Operating Revenues 17,768,652 16,830,920

Operating ExpensesSalaries and wages 8,166,065 8,112,900 Employee benefits 2,622,203 2,618,309 Professional fees 3,103,248 2,881,253 Supplies 1,220,094 1,304,871 Purchased services 938,361 658,693 Depreciation and amortization 891,882 1,050,675 Rents and leases 75,652 81,697 Repairs and maintenance 548,765 660,038 Utilities 284,716 295,875 Insurance 129,233 117,886 Other 418,739 465,339

Total Operating Expenses 18,398,958 18,247,536

Operating Loss (630,306) (1,416,616)

Nonoperating Revenues (Expenses)Property tax revenue 726,741 724,697 Sales tax revenue 1,176,521 1,095,550 Interest expense (413,847) (485,481) Grant revenue 175,112 107,968 Other 147,215 64,685

Total Nonoperating Revenues (Expenses) 1,811,742 1,507,419

Change in Net Position 1,181,436 90,803

Net Position ‐ Beginning of Year (2,649,770) (2,740,573)

Net Position ‐ End of Year (1,468,334)$ (2,649,770)$


John C. Fremont Healthcare District STATEMENTS OF CASH FLOWS

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CASH FLOWS FROM OPERATING ACTIVITIESReceipts from, and on behalf of, patients 16,596,595$ 15,766,532$ Payments to suppliers and contractors (6,797,764) (5,812,784) Payments to employees (10,692,843) (10,804,189) Other receipts ‐ net 1,312,204 689,782

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 418,192 (160,659)

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIESTax revenue received 1,898,995 1,812,646 Grant revenue received 175,112 107,968

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 2,074,107 1,920,614

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIESAcquisition of capital assets (408,159) (60,836) Change in assets held by trustee (15,088) (380,953) Principal payments on capital leases and long‐term debt (1,216,215) (539,009) Interest paid on capital leases and long‐term debt (394,818) (465,851) Change in lines of credit ‐ (471,847) Redemption of restricted certificates of deposit ‐ 500,000

NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (2,034,280) (1,418,496)

Net Increase in Cash and Cash Equivalents 458,019 341,459

Cash and Cash Equivalents ‐ Beginning of Year 1,257,724 916,265

Cash and Cash Equivalents ‐ End of Year 1,715,743$ 1,257,724$


John C. Fremont Healthcare District STATEMENTS OF CASH FLOWS (Continued)

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RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIESOperating loss (630,306)$ (1,416,616)$ Adjustments to reconcile operating loss to net cashprovided (used) by operating activities:Depreciation and amortization 891,882 1,050,675 Provision for bad debts 1,321,780 1,082,814 Other income 147,215 64,685 Changes in operating assets and liabilities:Patient accounts receivable (1,481,907) (1,256,418) Other receivables (80,197) (31,431) Prepaid expenses and other 137,465 55,446 Inventories 12,851 75,496 Accounts payable and accrued expenses (314,978) 401,605 Patient balances payable 60,882 (523,048) Estimated third‐party payor settlements 353,505 336,133

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 418,192$ (160,659)$

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIESCapital lease obligation incurred for use of capital assets 255,926$ ‐$


John C. Fremont Healthcare District NOTES TO THE FINANCIAL STATEMENTS

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1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity John C. Fremont Healthcare District (the District) is a California political subdivision, organized under Local Health Care District Law, as set forth in the California Health and Safety Code. The District operates a community hospital located in Mariposa, California, that provides healthcare services to residents of the surrounding communities and visitors to the area. The District derives a significant portion of revenue from third‐party payors, including Medicare, Medi‐Cal, and commercial insurance organizations.

The District maintains its financial records in conformity with guidelines set forth by the Local Health Care District Law and the Office of Statewide Health Planning and Development.

Basis of Presentation The District uses enterprise fund accounting. Revenues and expenses are recognized on the accrual basis of accounting using the economic resources measurement focus in accordance with Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre‐November 30, 1989, FASB and AICPA Pronouncements. The statement incorporates into the GASB’s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with GASB pronouncements: 1) Financial Accounting Standards Board (FASB) Statements and Interpretations; 2) Accounting Principles Board (APB) Opinions; and 3) Accounting Research Bulletins (ARB) of the American Institute of Certified Public Accountants’ (AICPA) Committee on Accounting Procedure.

The District also applies GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. These statements establish standards for reporting deferred outflows of resources, deferred inflows of resources, and net position for all state and local governments.

Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents The District considers highly liquid investments, such as money market accounts, certificates of deposit, and pooled investment funds, as “cash equivalents.” The District is authorized to deposit cash and invest excess funds by California Government Code, Section No. 53648 et seq.

Patient Accounts Receivable The District reports patient accounts receivable for services rendered at net realizable amounts from third‐party payors, patients, and others. The District provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, and existing economic conditions. The District bills third‐party payors directly and bills the patient when the patient’s liability is determined. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written‐off as bad debts based on individual credit evaluation and specific circumstances of the account.

John C. Fremont Healthcare District NOTES TO THE FINANCIAL STATEMENTS (Continued)

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Assets Limited as to Use Assets held by trustees under indenture agreements are used by the trustees to make principal, interest, and insurance payments related to bonds and notes, and to maintain reserve funds as required by the bond and note agreements.

Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first‐in, first‐out method.

Capital Assets Capital assets are recorded at historical cost or, in the case of donated items, at fair market value at the date of donation. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase values, change capacities, or extend useful lives are capitalized. Depreciation is computed using the straight‐line method over the estimated useful lives of the assets. Equipment under capital lease obligations is amortized on the straight‐line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation expense in the financial statements. Useful lives are 3 to 7 years for equipment, 15 to 20 years for land improvements and, 20 to 40 years for buildings and building improvements.

Deferred Loss on Refunding of Bonds The deferred loss on refunding of the 1994 bonds is amortized using the effective interest method over the life of the 2005 bonds. The original amount of the deferred loss on refunding was $334,599. Accumulated amortization as of June 30, 2015 and 2014, was $177,606 and $158,577, respectively. Amortization expense totaled $19,029 for the years ended June 30, 2015 and 2014, respectively. Amortization expense is estimated to be $19,029 annually for the next five years.

Net Position The District’s net position is classified into two components as follows:

1. Net Investment in Capital Assets: Consists of capital assets net of accumulated depreciation, reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets, plus assets held by trustees for debt service payments.

2. Unrestricted: Consists of the remaining net position that does not meet the other criteria.

Operating Revenue and Expenses The statements of revenues, expenses, and changes in net position distinguish between operating and nonoperating revenue and expenses. Operating revenues result from exchange transactions associated with providing healthcare services. Nonexchange revenues, including taxes, grants, and contributions received for purposes other than capital asset acquisition, are reported as nonoperating income. Operating expenses are all expenses incurred to provide healthcare services, other than financing costs.

Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third‐party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third‐party payors and net of charity care. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.


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Charity Care The District provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than established rates. The cost of charity care is calculated by multiplying the total charges foregone for services and supplies by the applicable cost to charge ratio as determined in the District’s Medicare and Medi‐Cal cost reports for the relevant fiscal years. Using this methodology, the District estimates the net cost of providing charity care services to be approximately $101,000 and $126,000 during the years ended June 30, 2015 and 2014, respectively.

Tax Revenue Property taxes are levied by Mariposa County on the District’s behalf and are intended to support operations. However, the District pledged property tax revenue for the payment of the 2010 bonds. The amount of property tax received is dependent upon the assessed real property valuations, as determined by the Mariposa County Assessor. Sales tax revenue is collected by the California State Board of Equalization on the District’s behalf and is also intended to support operations. However, the District pledged sales tax revenue for the payment of the 2005 bonds. The amount of sales tax received is dependent upon the level of retail sales subject to sales tax within Mariposa County. The District received approximately 9% and 10% of its financial support from property and sales taxes during the years ended June 30, 2015 and 2014, respectively.

Grants and Contributions The District receives grants and contributions from governmental and private entities. Revenues from grants and contributions are recognized when all eligibility requirements, including time restrictions, are met. Grants and contributions are reported as nonoperating income.

Custodial Credit Risk – Deposits Custodial credit risk is the risk that, in the event of a bank failure, the District’s deposits may not be returned. The District has a collateralization agreement with the bank which mitigates custodial credit risk. These deposits, at times, exceed the FDIC insured limits of $250,000 per financial institution.

Risk Management The District is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; medical malpractice; and employee health, dental, and accident benefits. Commercial insurance coverage is purchased for claims arising from such matters.

The District participates in a risk management authority for comprehensive liability self‐insurance on a claims‐made basis. A claims‐made insurance policy represents a transfer of risk within the policy limits to the risk management authority for asserted claims and incidents reported to the risk management authority. A claims‐made insurance policy does not represent a transfer of risk for claims and incidents not reported to the risk management authority during the policy period. Consequently, a healthcare organization insured under a claims‐made policy recognizes the estimated cost of those claims and incidents not reported to the risk management authority as of the end of the reporting period. Management estimates that the cost of any claims and incidents not reported to the risk management authority as of June 30, 2015, will not have a significant effect on the financial statements. This risk management authority is more fully described in note 7.


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The District is also self‐insured for employee health insurance up to certain stop‐loss limits. The District funds its self‐insurance obligations based on actual claims reported by the program’s third‐party administrator. A stop‐loss insurance contract executed with an insurance carrier provides a stop‐loss limit of $50,000 per claim. The overall District liability is capped at the amount of the annual contributions to the plan based on the current established rates, dependent on the number of participants. Based on premiums contributed to the plan, the maximum liability of the District for the self‐funded medical benefits plan as of June 30, 2015, is approximately $42,000.

Reclassifications Certain amounts in the prior‐year financial statements have been reclassified for comparative purposes to conform with the presentation of the current‐year financial statements.

2. NET PATIENT SERVICE REVENUE

The District has agreements with third‐party payors that provide for payments to the District at amounts different from its established rates. A summary of the payment arrangements with major third‐party payors follows.

Medicare Inpatient and outpatient services rendered to Medicare program beneficiaries are reimbursed under a cost reimbursement methodology pursuant to the District’s designation as a critical access hospital. Costs are reimbursed at tentative rates with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. The District’s classification of patients under the Medicare program, and the appropriateness of their admission, are subject to an independent review by a peer review organization under contract with the District. The District’s Medicare cost reports have been audited by the Medicare fiscal intermediary through June 30, 2013.

Medi‐Cal Inpatient services rendered to Medi‐Cal program beneficiaries are reimbursed under a cost reimbursement methodology. The District is reimbursed at tentative rates with final settlement determined after submission of annual cost reports and audits thereof by the Medi‐Cal fiscal intermediary. Outpatient Medi‐Cal services are paid at prospectively determined rates per procedure determined by the state of California. The District’s Medi‐Cal cost reports have been audited by the Medi‐Cal fiscal intermediary through June 30, 2013.


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Revenue from the Medicare and Medi‐Cal programs accounted for approximately 46% and 17%, respectively, of gross patient revenue in 2015; and 47% and 20%, respectively, of gross patient revenue in 2014. Net patient service revenue is reported at estimated realizable amounts, including estimated retroactive adjustments under reimbursement agreements with third‐party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Laws and regulations governing the Medicare and Medi‐Cal programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Net patient service revenue during the years ended June 30, 2015 and 2014, decreased, and increased, by approximately $52,000 and $46,000, respectively, due to prior‐year retroactive adjustments that were different from the amounts previously estimated. The District believes it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations. 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 actions.

Other Arrangements The District has entered into payment agreements with certain commercial insurance carriers and preferred provider organizations. The payments to the District under these agreements are based on discounts from established charges.


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3. CAPITAL ASSETS

A summary of changes in capital assets is as follows:


Land and improvements 1,013,591$ ‐$ ‐$ 8,354$ 1,021,945$ Buildings and improvements 6,285,822 ‐ ‐ 279,653 6,565,475 Fixed equipment 662,404 ‐ ‐ ‐ 662,404 Moveable equipment 5,372,571 133,869 ‐ ‐ 5,506,440

Subtotal 13,334,388 133,869 ‐ 288,007 13,756,264

Less: Accumulated depreciation (9,540,296) (891,882) ‐ ‐ (10,432,178)

Subtotal 3,794,092 (758,013) ‐ 288,007 3,324,086

Construction in progress 17,513 530,216 ‐ (288,007) 259,722



Land and improvements 1,013,591$ ‐$ ‐$ ‐$ 1,013,591$ Buildings and improvements 6,285,822 ‐ ‐ ‐ 6,285,822 Fixed equipment 662,404 ‐ ‐ ‐ 662,404 Moveable equipment 5,324,894 49,063 1,386 ‐ 5,372,571

Subtotal 13,286,711 49,063 1,386 ‐ 13,334,388

Less: Accumulated depreciation (8,491,007) (1,050,675) (1,386) ‐ (9,540,296)

Subtotal 4,795,704 (1,001,612) ‐ ‐ 3,794,092

Construction in progress 5,740 11,773 ‐ ‐ 17,513



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4. LONG‐TERM DEBT

Long‐term debt and capital lease obligations consisted of the following:

AmountsBalance Balance Due Within

June 30 2014 Additions Reductions 2015 One Year

Series 2005 sales tax refunding revenue bonds. 3,215,000$ ‐$ 320,000$ 2,895,000$ 330,000$

Series 2010 tax revenue bonds. 1,860,000 ‐ 50,000 1,810,000 55,000

Note payable to an insurance institution due in monthly

installments of $3,973, including interest at 5.00%,

maturing in February 2017. This note is unsecured. 55,152 ‐ 55,152 ‐ ‐

Notes payable to UHC of California in annual principal

payments ranging from $642,000 to $691,000 plus semi‐

annual interest payments at 3.75%, maturing in

December 2016. The notes are unsecured. The note

agreements contain various covenants. 2,000,000 ‐ 642,000 1,358,000 667,000

Capital lease payable to a vendor with monthly payments

of $11,124, including interest at 7.25%, through October

2015. The lease is secured by equipment. 169,167 ‐ 114,541 54,626 54,626


of $3,576, including interest at 12.84%, through August


Non‐interest bearing capital lease payable to a vendor

with monthly payments of $25,593 through April 2016. ‐ 255,927 ‐ 255,927 255,927

Total Long‐Term Debt and Capital Lease Obligations 7,380,109$ 255,927$ 1,216,217$ 6,419,819$ 1,401,780$


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AmountsBalance Balance Due Within

June 30 2013 Additions Reductions 2014 One Year

Series 2005 sales tax refunding revenue bonds. 3,520,000$ ‐$ 305,000$ 3,215,000$ 320,000$

Series 2010 tax revenue bonds. 1,910,000 ‐ 50,000 1,860,000 50,000

Note payable to an insurance institution due in monthly

installments of $3,973, including interest at 5.00%,

maturing in February 2017. This note is unsecured. 112,823 ‐ 57,671 55,152 ‐

Notes payable to UHC of California in annual principal

payments ranging from $642,000 to $691,000 plus semi‐

annual interest payments at 3.75%, maturing in

December 2016. The notes are unsecured. The note

agreements contain various covenants. 2,000,000 ‐ ‐ 2,000,000 642,000


of $11,124, including interest at 7.25%, through October



of $3,576, including interest at 12.84%, through August


Total Long‐Term Debt and Capital Lease Obligations 7,976,788$ ‐$ 596,679$ 7,380,109$ 1,171,859$


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Scheduled principal and interest repayments on long‐term debt are as follows:

Long‐Term Debt Capital Lease ObligationsPrincipal Interest Principal Interest

Year Ending June 30 Amount Amount Amount Amount

2016 1,052,000$ 316,928$ 349,780$ 4,679$ 2017 1,096,000 273,090 7,039 113 2018 430,000 240,673 ‐ ‐ 2019 450,000 219,758 ‐ ‐ 2020 475,000 197,633 ‐ ‐ 2021‐2025 1,600,000 638,923 ‐ ‐ 2026‐2030 765,000 290,273 ‐ ‐ 2031 195,000 16,673 ‐ ‐

Totals 6,063,000$ 2,193,951$ 356,819$ 4,792$

Following is a summary of equipment under capital lease:

June 30 2015 2014

Cost of equipment 990,945$ 731,223$ Less: Accumulated depreciation (660,700) (519,766)

Capital Lease Equipment ‐ Net 330,245$ 211,457$

Series 2005 Bonds

The District issued $5,050,000 of Sales Tax Refunding Revenue Bonds, Series 2005 (the 2005 bonds), to fully refund the District’s Insured Health Facility Revenue Bonds, Series 1994, in the then outstanding aggregate principal amount of $4,925,000, and to pay the cost of issuance of the 2005 bonds.

Interest on the 2005 bonds is payable semiannually on June 1 and December 1 at rates ranging from 3.00% to 4.65%. Principal maturities on the 2005 bonds are due annually commencing June 1, 2006, through June 1, 2023, in amounts ranging from $25,000 to $425,000.

The 2005 bonds maturing on or after June 1, 2016, may be called by the District beginning on June 1, 2015, without premium. The 2005 bonds are secured by a lien on sales tax revenues. Sales tax revenues are those funds generated from one‐half of a 1% increase in the sales tax approved by residents of the District on November 2, 2004. The sales tax increase became effective April 1, 2005, and will be effective for 20 years. If sales tax revenues are insufficient to pay debt service on the 2005 bonds when due, the District promises to pay the debt service from any other available revenues of the District. Repayment of the bonds is insured by a financial guaranty insurance company. The bond agreement contains various restrictive covenants that include requiring the District to maintain minimum financial ratios and amounts.


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Sales tax revenue is collected by Mariposa County and transferred directly to the trustee, who then makes the scheduled bond principal and interest payments. Amounts collected by Mariposa County in excess of the requirement to satisfy bond payments are remitted back to the District.

Series 2010 Bonds

The District issued $2,000,000 of Certificates of Participation (the 2010 bonds) to refinance certain obligations of the District, to establish an approximate $300,000 operating reserve, and to pay the cost of issuance of the 2010 bonds.

Interest on the 2010 bonds is payable semiannually on February 1 and August 1 at rates ranging from 7.00% to 8.55%. Principal maturities on the 2010 bonds are due annually commencing August 1, 2011, through August 1, 2030, in amounts ranging from $45,000 to $195,000.

The 2010 bonds maturing on or after August 1, 2016, may be called by the District beginning on August 1, 2016, without premium.

The 2010 bonds are secured by a lien on ad valorem property tax revenues. The bond agreement contains certain restrictive non‐financial covenants.

Note Payable to Insurance Institution

The District negotiated new terms for its note payable to an insurance institution during fiscal year 2010. Under the new terms, the District is required to make interest‐only payments at 5.00% for the remainder of the original loan term. Providing the District stays current on these interest payments, along with its normal insurance premium payments and remains a member of the ALPHA Fund joint powers agreement for the duration of the note, the insurance institution agreed to an annual principal reduction of 20% every December. On May 20, 2015, the District fulfilled its obligation of timely interest and workers’ compensation payments for the previous five years and was relieved of any further obligation under the agreement.

5. RETIREMENT PLANS

The District provides a deferred compensation plan for District employees to defer eligible compensation, up to certain limitations. The District also provides a noncontributory pension plan whereby the District may match certain employee contributions to the deferred compensation plan. The District contributed $144,283 and $80,514 to the pension plan for the years ended June 30, 2015 and 2014, respectively.


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6. COMMITMENTS AND CONTINGENCIES

Support Agreements

The District entered into support agreements with a supplier to provide support services for various equipment and software purchased. Future minimum payments under these agreements at June 30, 2015, are as follows:

Year Ending June 30

2016 116,868$ 2017 87,651

Total Minimum Payments 204,519$

Contingencies

The District is involved in claims arising in the course of business. Based on status of claims and insurance coverage available, management estimates that these claims will be resolved without material adverse effect on the District’s future financial position or results from operations.

Retroactive Rate Adjustments – Assembly Bill 97

The District is potentially liable to repay funds to the Department of Health Care Services (DHCS) related to retroactive rate adjustments to distinct‐part skilled nursing facility charges. These rate cuts were part of Assembly Bill 97, which proposed rolling rates back to rates that were in effect in 2008‐09, less a 10% reduction. While there are ongoing efforts to contest the state’s ability to do this, it is management’s opinion that it is reasonably possible these rate cuts will go into effect and the District will be forced to repay the overpayments. Management has estimated the District’s potential exposure in this matter each fiscal year. Accordingly, an accrued expense of approximately $628,000 and $394,000 has been recorded as of June 30, 2015 and 2014, respectively, and is included in estimated third‐party payor settlements on the statements of net position.

Seismic Compliance

Earthquakes affecting California hospitals have prompted California legislators to impose new hospital seismic safety standards pursuant to Senate Bill 1953 adopted in 1998. Under these new standards, California hospitals are required to meet stringent seismic safety criteria which may necessitate major renovation in certain facilities or even their partial or full replacement. The potential capital costs and negative operating effects of such replacements could be material and adverse.

The District has applied for, and received, an extension of time to comply with requirements of Senate Bill 1953 until January 1, 2030. The District has not yet determined the potential costs of compliance with Senate Bill 1953.


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7. RISK MANAGEMENT

Joint Powers Agreements

The District is exposed to the risk of loss resulting from workers’ compensation claims. To address this risk, the District participates in a joint venture under a joint powers agreement with the Association of California Healthcare Districts, Inc., ALPHA FUND (the Fund). The Fund arranges for and provides member entities with pooled workers’ compensation self‐insurance. Member entities include governmental entities, nonprofit hospital corporations, and nonprofit corporations that provide health care services similar to services provided by a healthcare district. The District pays an annual premium to the Fund for its workers’ compensation insurance coverage.

The District also participates in a joint venture under a JPA with the Program BETA Risk Management Authority (the Program). The Program was formed for the purpose of operating a comprehensive liability self‐insurance program for certain healthcare districts of the Association of California Healthcare Districts, Inc (ACHD). The Program operates as a separate JPA established as a public agency, separate and distinct from ACHD. Each member pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionate to its participation in the Program. The District maintains coverage on a claims‐made basis.

8. HITECH ACT INCENTIVE PAYMENTS

The American Recovery and Reinvestment Act of 2009 (ARRA) established incentive payments under Medicare and Medi‐Cal programs for certain health care providers that meaningfully use certified Electronic Health Records (EHR) technology by 2014. These provisions of ARRA, together with certain other provisions, are referred to as the Health Information Technology for Economic and Clinical Health (HITECH) Act. The HITECH Act’s overall public policy goal is, “to promote the adoption and meaningful use of interoperable health information technology and qualified electronic health records (EHRs).” The ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology, thereby reducing the total cost of health care for all Americans and using the savings to expand access to the healthcare system.


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As a critical access hospital, the District is eligible to receive incentive payments under both the Medicare and Medi‐Cal programs. To qualify for incentives under the HITECH Act, the District must meet designated EHR meaningful use criteria. The Centers for Medicare and Medicaid Services (CMS) chose to take a phased approach to defining meaningful use (through three stages) using criteria that becomes more stringent over time. In stage 1, the District must attest to adopting, implementing, or upgrading an EHR in the first payment year. In years after adopting, implementing, or upgrading, the District must meet 15 core objectives and an additional five objectives chosen from a “menu set” of ten options, of which at least one must address public health objectives. While the stage 1 and stage 2 criteria are well defined, stage 3 requirements are still being developed. It is anticipated that, as the technology infrastructure improves, CMS will significantly increase requirements in the next two stages with a focus on safety, efficiency, and continuous quality improvement at the point of care. The District's attestation is open to audit by the federal government, the state government, or its respective designee.

The District recognizes revenue from the EHR incentives ratably over the fiscal period once it has been determined that there is reasonable assurance that the meaningful use requirements for each stage have been met. The District received stage 1 Medicare incentives of $317,802 under the HITECH Act for the year ended June 30, 2014. The District received no Medicare incentive payments during the year ended June 30, 2015. The incentives have been included on the statements of revenues, expenses, and changes in net position as other operating revenue.

9. SUBSEQUENT EVENTS

Subsequent to June 30, 2015, the District committed to the purchase of an additional electronic medical records system. The cost of the electronic medical records system is expected to total approximately $250,000.

Subsequent to June 30, 2015, the District entered into a long‐term capital lease agreement in the amount of $606,402 for medical equipment. The lease term is for five years and provides for equal monthly lease payments of $10,155. Lease payments include interest at 0.19%.

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