second quarter 2014 - municipal securities rulemaking board · management's discussion of...

~ PROMEDICA

PROMEDICA HEAL THCARE

OBLIGATED GROUP

Quarterly Financial Disclosure

Second Quarter 2014

MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Second Quarter- June 30, 2014

The following discussion and analysis of operations provides information that management believes is relevant to an assessment and understanding of the ProMedica Healthcare Obligated Group's results of operations and financial condition. The financial data relating to the Obligated Group, as defined in the Master Trust Indenture, is provided as supplementary information and is not intended to provide information in accordance with accounting principles generally accepted in the United States. This discussion should be read in conjunction with the Obligated Group financial statements for the six months ended June 30, 2014.

Organizational Overview

ProMedica Health System ("ProMedica") is the parent organization of an integrated health care

delivery system that provides health care and related services in 27 counties in northwest and

west central Ohio and southeast Michigan, with a Paramount Medicaid product that serves all of

Ohio. The nonprofit and business organizations controlled directly or indirectly by ProMedica,

own and operate 11 acute area hospitals, various integrated and continuing care providers,

insurance companies, physician organizations, and an academic health center corporation.

ProMedica also utilizes joint venture and other affiliation agreements to provide health care and

related services. Several controlled foundations support the System as fundraising entities for the

benefit of ProMedica hospitals and continuing care facilities and services.

2 ~ PROMEDJCA


Only some of the nonprofit business organizations within ProMedica are members of the

ProMedica Healthcare Obligated Group, ("Obligated Group") and are listed below:

Corporation Acute Care The Toledo Hospital

Toledo Children's Hospital Wildwood Orthopaedic and Spine Hospital

Flower Hospital Defiance Regional Medical Center Bay Park Community Hospital Fostoria Community Hospital St. Luke's Hospital Emma L. Bixby Medical Center Herrick Medical Center TOTAL ACUTE CARE BEDS

Long-Term Care/Assisted Living/Other Lake Park Nursing Care Center Goerlich Center for Alzheimer's Care Ebeid Hospice Caring Home Health Services Herrick Manor Provincial House of Adrian Charlotte Stephenson Manor Wildwood Medical Center

TOTAL LONG-TERM CARE BEDS

Licensed Beds

643(1)

151 (1)

42 30412) 51 (3)

8614)

2515) 315 (6)

101 (7)

3518)

1,753

203 60 12

n/a 25

117 50 n/a

467

Location

Toledo, Ohio Toledo, Ohio Toledo, Ohio Sylvan ia , Ohio Defiance, Oh io Oregon, Ohio Fostoria, Ohio Maumee, Ohio Adrian, Michigan Tecumseh, Michigan

Sylvania, Oh io Sylvania, Oh io Sylvan ia, Oh io Sylvania, Ohio Tecumseh, Mich igan Adrian, Michigan Adrian, Michigan Toledo, Ohio

(1) Toledo Children's Hospital is a pediatric acute care hosp~allocated within The Toledo Hospital. Includes 44 bassinets and 45 inpatient psychiatric beds (2) Includes 7 4 inpatient psychiatric beds, 45 physical rehab beds and 24 bassinets (3) Includes 25 critical access beds, 10 inpatient psychiatric beds and 16 bassinets ( 4) Includes 14 bassinets (5) Includes 25 critical access beds (6) Includes 17 bassinets (7) Includes 13 bassinets (8) Includes 25 critical access beds, 10 inpatient psychiatric beds

Non-Obligated Group Entities and Activities

In addition to the acute and continuing care providers that comprise the Obligated Group,

ProMedica owns and operates an approximately 300,000 member health plan (ProMedica

Insurance Corporation), a captive insurance corporation (ProMedica Indemnity Corporation), a

physician corporation (ProMedica Physicians Group) which employed 403 physicians as of June

30, 2014, supporting foundations, and several joint ventures. For the six months ended June 30,

2014, total net operating revenue of these non-Obligated Group entities was $492.9 million,

representing approximately 40.2% of ProMedica's total net operating revenue. The current

structure reflects the net financial performance of employed specialists in the financial statements

of the hospitals, and therefore the Obligated Group.

3 ~ PROMtDICA


Significant Developments

Leadership Changes and Other Information

After a distinguished career spanning more than three decades, ProMedica Health System

announced the retirement of Kathleen S. Hanley, Chief Financial Officer, on April 22, 2014. Kathy

began transitioning her role effective June 1, 2014 with plans to fully retire in 2015. Alan Sattler,

FACHE, MBA, who most recently served as President of the ProMedica Health System Acute

Care Division, succeeded Kathy as Chief Financial Officer. Alan has been with ProMedica for

over 29 years and has extensive expertise in operations and finance, having served in senior

leadership positions in both areas.

Other key operational leadership changes are as follows: Kevin Webb, who most recently served

as President, Acute Care Division, has been named Chief Acute Care Officer, with overall

responsibilities for acute care facilities. Lee Hammerling, M.D., was recently named Chief

Physician Executive/Chief Medical Officer. In this role Lee will have system-wide responsibilities

for service lines, including orthopaedics, heart and vascular, surgery and oncology.

On April 22, 2014, Flower Hospital received notice from CMS regarding a patient safety issue and

possible termination from the Medicare/Medicaid program. Following a May 2, 2014 resurvey by

the Ohio Department of Health, Flower's plan of correction was accepted by CMS and the notice

was rescinded.

Affiliation Updates

St. Luke's (Please see previous filings for a detailed sequence of events regarding the joinder)

On May 18, 2012, ProMedica Health System filed a petition with the Sixth Circuit Court of

Appeals to set aside the order of the Federal Trade Commission ordering divestiture of St.

Luke's Hospital. Oral arguments were held on March 7, 2013. On April 22, 2014, the Court of

Appeals denied ProMedica's petition to overturn the FTC's ruling. ProMedica Health System

subsequently filed a petition for rehearing on June 3, 2014; this request was rejected on July 24,

2014. ProMedica intends to appeal this decision, and is fully committed to exhausting all legal

options. During this appeal process, the FTC's final decision requiring ProMedica to divest St.

Luke's Hospital is stayed, and St. Luke's Hospital continues to remain a member of ProMedica

Health System.

4 ~ PROMEDICA

MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Second Quarter - June 30, 2014

Significant Developments (Cont'd.)

Affiliation Updates (Cont'd.)

Mercy Memorial

On July 3, 2014, Mercy Memorial Hospital System, located in Monroe, Michigan, signed a Letter

of Intent to join ProMedica Health System. Both organizations have a strong, patient-centered

approach to healthcare and Mission-driven cultures; the partnership is expected to provide

significant benefits to the communities each serves. Due diligence and negotiation of a definitive

agreement are underway.

Fremont Memorial

On January 1, 2014, ProMedica and Memorial Hospital in Fremont, Ohio formally closed on a

Joinder Agreement under which ProMedica became the sole corporate member of Memorial

Hospital. Located in Fremont, Ohio (approximately 41 miles southeast of Toledo), Memorial

Hospital is a 204 licensed bed facility that has provided comprehensive, inpatient and outpatient

health care services to Fremont, Ohio and its neighboring communities for nearly 100 years. The

joinder will help facilitate collaborative endeavors to better address critical health and social needs

throughout the community. At this time, Memorial Hospital is not a member of the Obligated

Group and has no obligation with respect to the Bonds or under the Master Indenture.

5 ~ PROMEDICA

I


Operating Income and Operating Cash Flow

The total operating revenue for the Obligated Group was $732.4 million for the six months ending

June 30, 2014, an increase of $23.7 million or 3.4% over the same period in 2013. The increase

in revenue was due to volume increases in med/surg, obstetrics and psych. Also contributing to

the growth in operating revenue were increased outpatient procedures and home care

admissions.

$1,000.0

$800.0

$600.0

$400.0

$200.0

$-

Net Revenue (in millions)

. YTO 6/30/2014 YTO 6/30/2013

6 ~ PROMEDICA

I

MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS 1

Second Quarter- June 30, 2014

Operating Income and Operating Cash Flow (Cont'd.)

ProMedica contracts with all major payers and no one payer represents more than 9% of the

revenue base. Paramount has doubled their Medicaid lives in the last year due to expansion of

our service region from NW Ohio to serving state wide as a contracted managed care plan for the

state of Ohio. Paramount has more extensive plan offerings in 2015 for the individual health

insurance marketplace. Also, Paramount will begin offering small group products through the

health insurance marketplace in 2015 (called SHOP products). The Medicare Advantage product

has been approved for a service area expansion in 2015 and will be offered in 16 counties in Ohio

and 2 in Michigan which supports the areas where ProMedica has facilities.

Managed Care 25%

Blue Cross 11%

Self Pay, 2%

Medicare, 45%

Medicaid, 17%

June 30, 2014

Note: Medicare and Medicaid HMOs are Included within Medicare and Medicaid. "Blue Cross" includes both Anthem BCBS {996) and BCBS of Michigan {296). These payers are contracted separately.

Charity care for the six months ended June 30, 2014 decreased from the prior year comparable

period, from 2.32% to 1.66% of gross revenue. Bad debt decreased from 1.71% to 1.22% of

gross revenue over the prior year comparable period. Key drivers for the decline in both charity

care and bad debt were more patient access to insurance coverage through the Patient Protection

and Affordable Care Act (PPACA).

7 ~ PROMEDICA

:

MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Second Quarter - June 30, 2014

Operating Income and Operating Cash Flow (Cont'd.)

Total operating expenses for the six months ended June 30, 2014 increased by $8.5 million or

1.2% over the same period in 2013. Increased expenses were associated with the employed

physicians and increased volumes. Offsetting the increase in expenses were reductions in staff

due to early retirement offering.

$100,000

$80,000

$60,000

$40,000

$20,000

$-

Profitability (OOO's omitted)

Operating Income

• YTD 6/30/2014

$83,115

Operating Cash Flow

YTD 6/30/2013

Operating income for the six months ended June 30, 2014 was $35.5 million compared to $20.3

million for the prior year comparable period with operating margins of 4.8% and 2.9% respectively.

Operating cash flow was 11.3% or $83.1 million compared to 9.5% or $67.4 million for the six

months ending June 30, 2013.

8 ~ PROMEDICA


Balance Sheet and Cash Position

Unrestricted cash and investments were $1.4 billion as of June 30, 2014, which represented

388.9 days cash on hand as of June 30, 2014, compared to 400.3 days cash on hand as of

December 31, 2013. The decrease in days cash on hand were related to fees associated with the

acquisition of Memorial Hospital in Fremont, Ohio. Approximately $110 million of investments

have liquidity provisions that may restrict their ability to be liquidated in 30 days or less.

ProMedica maintains a highly diversified investment portfolio through its pooled investment

program and utilizes an independent investment advisor to assist with the asset allocation,

performance and compliance monitoring and manager selection. Investment income for the six

months ended June 30, 2014 was a gain of $49.6 million, reflecting $3.8 million of unrealized

gains (including ($5.2) million of loss on interest rate swaps).

450.0

400.0

350.0

300.0

250.0

200.0

150.0

Days Cash on Hand

100.0 -IL------------1'

.VTD 6/?.0/2014 12/?.1/2013

9 ~ PROMEDICA


Balance Sheet and Cash Position (Cont'd.)

As of June 30, 2014, the Obligated Group had $94.9 million recorded as contingent current

portion of long-term debt. This amount represents the outstanding variable rate demand bonds

and direct bank notes that have a contractual maturity in excess of one year, but due to terms

within the applicable agreement, are recorded as contingent current in accordance with generally

accepted accounting principles.

Cash to Debt Ratios (x)

300.0

250.0

200.0

150.0

100.0

50.0

Cash to Cash to Total Demand Debt Debt

a YTD 6/30/2014 12/ 31/2013

Unrestricted net assets as of June 30, 2014 increased by $54.5 million to $1,666.7 million,

compared to $1,612.2 million as of December 31, 2013 primarily due to realized gains in the

investment markets and cash flow from operations. Total debt outstanding was $535.0 million, or

24% of capitalization.

10 ~ PROMEDICA


Calendar Year 2013 2012

Acute Discharges 62,198 63,456 Newborn Discharges 7,159 7,505 Outpatient Surgeries 36,938 30,120 Emergency Room Visits 269,606 276,718 ALOS -Acute 4.66 4.70 %of Staffed Beds (Acute Care) 59% 59% Home Health Admissions 10,914 9,670 Home Care Visits 160,517 125,915 LTC PatienUResident Days 151 ,336 151 ,508 Inpatient Hospice Days 3,195 2,939

Obligated Group Acute Care Hospital Revenue Sources

Medicare(1J

Medicaid(1J

Blue Cross Managed Care Self Pay Totals

(1) Includes Medicare and Medicaid HMOs.

Calendar Year 2013 2012

45.0% 44.1% 15.4% 15.7% 10.6% 10.7% 25.4% 26.0%

3.6% 3.5% 100.0% 100.0%

Year-To-Date 2nd Quarter 2014 2013

32,427 31 ,111 3,636 3,502

19,584 17,856 144,621 133,925

4.76 4.69 58% 59%

5,216 4,668 89,885 75,988 63,231 76,072

1,799 1,607

Year-To-Date 2nd Quarter

2014 2013

45.1% 44.9% 17.1% 15.8% 10.9% 10.5% 24.6% 25.3% 2.3% 3.5%

100.0% 100.0%

11 ~ PROMEDICA

PROMEDICA HEAL THCARE OBLIGATED GROUP Unaudited Statement of Operations

June 30, 2014 & 2013 (In thousands of dollars)

June 30 June 30 2014 2013

Unrestricted revenues, gains, and other support:

Net patient service revenue $ 747,554 $ 712,709 Provision for bad debt (35,963~ (31 ,545)

Net patient service revenue less bad debts 711 ,591 681,164

Net assets released 3,233 3,534 Other 17,548 23,931

Total revenues, gains, and other support 732,372 708,629

Expenses:

Salaries, wages, and employee benefits 267,958 272,238 Food and drugs 52,354 55,135 Contracted fees 61 '184 63,048 Supplies 91 '190 86,545 Insurance 7,374 7,453 Utilities 8,628 7,423 Depreciation and amortization 36,114 36,034 Interest 11 ,471 11 '108 Other 160,569 149,365

Total expenses 696,842 688,349

Operating income (loss) 35,530 20,280

Other income: Investment Income 45,801 39,435 Net unrealized gains (losses) 9,045 21,304 Change in fair value of interest rate swap (5,206) 6,927 Other 1,874 524

Excess (deficiency) of revenues over expenses 87,044 88,470

Contributions and other Net assets released from restrictions 1,497 803 Transfers (to) from affiliated entities (33,987) (20,285) Other non-operating income (13) Cumulative affect of change in accounting principle

Increase (decrease) in unrestricted net assets $ 54,541 $ 68,988

PROMEDICA HEAL THCARE OBLIGATED GROUP Unaudited Balance Sheet

ASSETS

CURRENT ASSETS Cash and cash equivalents Marketable securities Accounts receivable, net Assets limited as to use or restricted Inventories Securities lending collateral Other current assets

TOTAL CURRENT ASSETS

ASSETS WHOSE USE IS LIMITED Restricted funds

(in thousands of dollars)

Bond indenture agreement funds Internally designated for capital acquisition Other segregated investments

TOTAL ASSETS WHOSE USE IS LIMITED

Property, plant and equipment, net

OTHER ASSETS Deferred bond issuance costs, net Goodwill Other intangible assets Investments in affiliated companies Other assets

TOTAL OTHER ASSETS

TOTAL ASSETS

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES Accounts payable and accrued liabilities Accrued compensation and benefits Current installments of long-term debt Contingent current installments of long-term debt Estimated third-party payor settlements Professional liability and workers' compensation Accrued post retirement health care benefits Other

TOTAL CURRENT LIABILITIES

OTHER LIABILITIES Accrued professional liabilities and workers'

compensation, less current portion Deferred compensation Pension Accrued post retirement health care benefits,

less current portion Other

TOTAL OTHER LIABILITIES

Long-term debt, net of current installments TOTAL LIABILITIES

NET ASSETS Unrestricted Temporarily restricted Permanently restricted

TOTAL NET ASSETS

TOTAL LIABILITIES AND NET ASSETS

June 30 2014

$42,182 51,906

242,054 51

22,008

48, 169 406,370

1,756 13,802

1,325.474 18,182

1,359,214

692,854

4,687 11,492

738 5,812

100 22,829

$2,481,267

$110,024 49,240 12,015 94,950 53,560

434 203

72 320,498

5,313 10,091 18,568

2,455 27,805 64,232

428,044 812,774

1,666,737 1,756

0 1,668,493

$2,481 ,267

December31 2013

$76,926 38,753

211 ,881 13

21 ,806

41.404 390,783

1.441 13,752

1,321,777 16,565

1,353,535

688,769

4,881 11 ,492

783 6,929

113 24,1 98

$2,457,285

$139,569 53,097 11,708 95,890 50,073

342 312 72

351,063

5,547 9,885

23,207

2,524 22,645 63,808

428,777 843,648

1,612,196 1,441

0 1,613,637

$2,457,285

NET ASSETS AS OF DECEMBER 31,2013

Excess of revenues over expenses Investment Income Restricted contributions Transfers (to) from affiliated entities Other non-operating revenue Net assets released from restrictions

Increase (decrease) in net assets

NET ASSETS AS OF JUNE 30, 2014

PROMEDICA HEALTHCARE OBLIGATED GROUP Unaudited Statement of Changes in Net Assets

for the six months ended June 30, 2014 (in thousands of dollars)

Temporarily

Unrestricted Restricted

$ 1,612,196 $ 1,441

87,044 - 22 - 1,629

(33,987) 421 (13) -

1,497 (1,757)

54,541 315

$ 1,666,737 $ 1,756

Permanently

Restricted Total

$ - $ 1,613,637

- 87,044 - 22 - 1,629 - (33,566) - (13) - (260)

- 54,856

$ - $ 1,668,493

PROMEDICA HEALTH CARE OBLIGATED GROUP

Unaudited Consolidated Statements of Cash Flows- Obligated Group For the Period Ended June 30, 2014 (in thousands of dollars)

Cash flows from operating activities Increase (decrease) in net assets Adjustments to reconcile increase (decrease) in net assets to

net cash provided by operating activities Inherent contribution received in the acquisition of St. Lukes net assets Depreciation and amortization Provision for bad debts Net assets released from restrictions Change in net unrealized (gains) losses on investments Realized (gains) losses on investments (Increase) decrease in, net of acquistion:

Accounts receivable Supplies and other current assets Other assets

Increase (decrease) in, net of acquistion: Accounts payable and accrued liabi lities Estimated third-party payor settlements

Net cash provided (used) by operating activities

Cash flows from investing activities Acquisition of property and equipment, net of disposals Acquisition of businesses, net of cash acquired Less amounts released from restrictions

Cash outflows for property and equipment

(Increase) decrease in : Cash acquired in acquisition of St. Lukes Marketable securities and total assets limited as to use

Net cash provided (used) by investing activities

Cash flows from financing activities Proceeds of issuance of long term debt Repayment of long term debt Contributions and other

Net cash provided (used) by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Year to Date June 30, 2014

$54,856

36,114 35,963 (1 ,497) (9,045)

(38,015)

(66,136) (6,967) 1 '138

(32,995) 3,487

(23,097)

(39,968)

1,497 (38,471)

28,190 (10,281)

(1 ,366)

(1 ,366)

(34,744)

76,926

$42,182

Year to Date June 30, 2013

$68,998

36,034 31,545

(803) (21 ,304) (32,090)

(32,504) 29,880

883

(20,961) (5,733}

53,945

(46, 163)

803 (45,360)

(3,596} (48,956)

(1,475)

(1 ,475)

3,514

37,168

$40,682

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