ases - pr - ases... · estados financieros auditados periodo terminado 30 de junio 2018 honorable...

4 de febrero de 2019

Hon. Thomas Rivera Schatz Presidente Senado de Puerto Rico PO Box 9023431 San Juan, Puerto Rico 00902-3431

.. ~C/02.5 Hon. Ricardo A. Rosselló Neváres Gobemador

Sra. Angela M. Ávila Marrero Directora Elecutlv•

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ESTADOS FINANCIEROS AUDITADOS PERIODO TERMINADO 30 DE JUNIO 2018

Honorable Senador Rivera Schatz:

Conforme con lo dispuesto en el Artículo VII, Sección 1 de la Ley Núm. 72 de 7 de septiembre de 1993, presentamos ante su consideración los Estados Financieros Auditados para el periodo terminado el 30 de junio de 2018 de la Administración de Seguros de Salud de PR.

Para información adicional, se puede c;omunicar con esta servidora al 787-474-3300, extensión 1002.

Cordialmente,

Anejo

c Maria N. Hadad Orta Directora de Oficina de Legal

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• PO Box 195661, San Juan, PR 00919-5661 • Tel: 787.474.3300 • www.asespr.org

DPTO. DE FINANZAS • Hopde liá tlle

Fecha: 11 de febrero de 2019

Hon. Thomas Rivera Schatz De:

Sra. Carmen Leticia Rodríguez Para: Presidente Directora de Finanzas y

Senado de Puerto Rico Administración

Opto: Senado Dpto: Dpto. Rnanzas-ASES

Re: Estados Financieros Auditados Enmendado Tel / Fax: (787) 47 4-3300 / ext. 1002 30 junio 2018

ACCIÓN A TOMAR:

D Para Aprobación

D Para Contestar

D Acusar Recibo

COMENTARIOS:

D Para Acción Pertinente

D Para Sacar Copia

1 Para su Información

D Rehacer con Enmiendas señaladas

DPara su Conocimiento y Archivo

D Para Retener

Se incluye Estados Financieros Auditados para el periodo terminado 30 de junio de 2018.

Recibido por: _______________ _

::~ASES •¡ __ .. _ ..... _.. ...... ...................................................... ········································································································-······

, PO Box 195661, San Juan, PR 00919-5661 , Tel: 787.474.3300 www.asespr.org

Advertencia Sobre Confidencialidad: Esta comunicación, los escritos y demás documentos que le acompañan, son para uso exclusivo del destinatario. Si el lector no es el destinatario, ni ha sido autorizado por este para leerla, se le advierte que el contenido es confidencial y propiedad de la Administración de Seguros de Salud de PR (ASES) y puede contener información de naturaleza privilegiada protegida por Ley.

L ADMINISTRACIÓN DE SEGUROS DE SALUD DE P.R.

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PO BOX 1955661, San Juan, Puerto Rico, 00919-5661/ Tel: (787) 474-3300/ (787) 474-3349

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Financia/ Statements

Pu.erto Rico Health Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Financial Statements arul Compliance Audit of Federal Financial Assistancefor the Fiscal Years Ended June 30, 2018 and 2017

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) For the Fiscal Years Ended June 30, 2018 and 2017

TABLE OF CONTENTS

Independent Auditor's Report ...................................................................................................... 1-3

Management's Discussion and Analysis (Unaudited) ............................................................... 4-13

Statements of Net Position (Deficit) ......................................................................................... 14-15

Statements ofRevenues, Expenses and Changes in Net Position (Deficit) .................................. .16

Statements of Cash Flows ........................................................................................................ 1 7-19

Notes to the Finan.cial Statements ............................................................................................ 20-41

Schedule ofExpenditures ofFederal Awards .......................................................................... 42-43

Independent Auditor's Report on Interna! Control over Financia! Reporting and on Compliance and Other Matters based on an Audit of the Financia! Statements Performed in Accordance with Govemment Auditing Standards ..................................................................................... 44-45

Independent Auditor's Report on Compliance with Requirements Applicable to each Major Program; on Interna! Control over Compliance; and on the Schedule ofExpenditures ofFederal Awards Required by the Uniform Guidance ......................................................................................................... 46-48

Schedule of Findings and Questioned Costs ............................................................................ 49-51

Schedule of Prior Year Findings .................................................................................................... 52

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1,-~-ER-T-IF-·IE-~-:-~-B-L-IC-C:-~-~-O-~-N-TA-'N-~-S-&_B_U_S_:-E-~-S-A-:V-~-SO_R_S

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors of Puerto Rico Hea.lth Insurance Administration San Juan, Puerto Rico

Report on the Financial Statements

Jorge Aqu;no Barreto, CPA, CVA ferry De C6rdova, CPA, JD Eduardo Gon:zá/e:z Green, CPA, CFE

We have audited the accompanying financia} statements of the Puerto Rico Health Insurance Administration (the Administration), a component unit of the Commonwealth of Puerto Rico (the Commonwea.lth), as of and for the years ended June 30, 2018 and 2017, and the related notes to the financial statements, which collectively comprise the Administration's basic financial statements, as listed in the table of contents.

Management's Responsibility forthe Financia} Statements

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

Auditor' s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards genera.lly accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. 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. Toe procedures selected depend on the auditor' s judgment, including the assessment of the risks of material misstatement of the financia} statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity' s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe entity's intemal 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 qualified audit opinion.

CORRESPONDENT of • • •

P.O. Box 70262, San Juan, Puerto Rico 00936-8262 • Cecilia's Place Suite C-1, #7 Rosa Street .... Isla Verde, P.R. 00979 • Phone (787) 253-9595 • Fax (787) 253-9511

Praxitx·: GLOBAL ALLIANCE OF• • INDEPENDENT FIRMS

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Basis for Qualified Opinion and Note Disclosure Regarding Pensions

As discussed in note 16 to the basic financia! statements, the Administration has not im.plemented the requirements of Statement No. 68 of the Govemmental Accounting Stanclards Board, Accounting and Financial Reportingjor.Pensions, an amendment of GASB Sttitement No. 27 (GASB 68) as of and for the year ended June 30, 20.18. Accord.ingly, the Administration has not been able to determine and account for its proportionate share of net pension liability, deferred outflow of resomces and deferred inflow of resources relared to pension cost and has not recogniz.ed the effect of current ¡,eriod changes in net ~ion Iiability, deferred outflow of resources and deferred inflow of resources as thesé relate to pension cost. Accounting principies genera.lly accepted in the United States of America require that pension related Iiability, deferred outtl.ow of resources and deferred inflow of resources, as applicable, be recognized in accordance with the parameters established by Statement No. 68, as well as the effect of current period changes of the afotementioned amounts that must be recogniz.ed in pension expense during the cmrent period. The amounts by which this departure would affect liabilities, deferred outtl.ow of resources, deferred inflow of resources, net position, and pension expense have not been determined.

.- . The accompanying notes to tbe financial statements do not disclose the information required by GASB 68 -for the year ended June 30, 2018. In our opinion, disclosure of tbis information is required by accounting principies generally accepted in tbe United States of America.

Qualified Opinion

In our opinion, _except for tbe effects on the financial sta.tements as of .and for the year ended June 30, 2018, of the matters described above in the Basis for Quali:fied Opinion para.graph, the :financial statements referred to above present fairly, in ali material respects, the fin.ancial position of the Puerto Rico Healih Jnsurance Administra/ion as of June 30, 2018 and 2017, and the respective ch.anges in financial position and its cash flows thereof for the years then ended in accordance with accounting principies generally accepted in the United States of America.

_ Emphasis of Matters

As c:liscu$ed in note 16 to the basic financial sta1rJDen1s, the financial statrmeots as of June 30, 2017 and for the year 1hen eoded bave been IJSatm to accouot for 1he adoption of GASB S1aremeDt No. 68. Our opinion on_ these financia1 smternmts is not modified with respectto this matrer.

As discussed in Note 1 to the basic financial statements, the Administrati.on is a c.omponent llllit of the Commonwe.alth. As of June 30, 2018, the financia! condition and liquidity of th.e Commonwealth has deteriorated. ~dering that the Administration depends significantly on appropriations from the Commonwealth, the financia! condition and liquidity _of the Administration could be similarly affected. Our opinion is not modified with respect to this matter.

Other Matters

Required Supplementary Information Omitted

The Administration has omitted the Schedule of the Administration's Proportionate Share of the Net Pension Liability, and the Schedule of the Administration's Con1n"butions to the Em.ployees' Pension Plan, information tbat accounting principies generally accepted in the United States of America require to be presented to supplement the basic financia! statements. Such missing information, although not a part of the basic financial statements, is required by the Govemmental Accounting Standards Board who considers it to be an essential pa.rt of the financia! reporting for placing the basic financia! statements in an appropriate operational,

..... ~=o~~ historical co~xt. Our opini~n on the basio fin.ancial·statements is not affected by this missing

· Aquino, Deüírdova,_Alfaro & e.o., LLP - . .

CERTlF!ED PUBLIC A.C-C(H_JNTANTS & BUSINESS ADVIS{)RS.

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Required Supplementary Information

Accounting principies generally accepted in the United States of America require that the management's discussion and analysis on pages 4 through 13 be presen~ to supplement the basic financia! 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 financia} 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, wbich consisted of inquiries of management a.bout 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 th.e information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Restatement

In our report dated A¡ril 27, 2018 vve expressed a qualified opinion on the June 30, 2017 :financial statements because the same were not in compliance with GASB Statement No. 68. As descnbed in note 16, 1he Administration has adopted GASB Starement No. 68 and has restated its June 30, 2017 :6nancial statements to oonform with accounting principies genera.lly accepted in the United States of America. Accordmgly, our present opinion on the restated Jtme 30, 2017 financia} statements as presen1oo herein, is different from that expressed in our previous report.

Other Reporting Required by Government Auditing Standards

In accordance with Govemment Auditing Standards, we have also issued our report dated January 17, 2019 on our consideration of the Administration's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants agreements and other matters. Toe purpose of that report is to descnoo the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an· opinion on the internal control over

- financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Governmental Auditing Standards and should be considered in assessing th~ results of our audit.

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Carolina, Puerto Rico January 17, 2019

Stamp number E363048 of Puerto Rico CPA Society has been affixed to the original report

.. Aquino, DeQ>rdova, Alfaro & Co., LLP -v CERTI F1 ED PUBLIC A.CCOJ;JNT.t.i.NTS & BUSINESS A.DVIS.ORS

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Puerto Rico Heal.th Insurance Administration (A Component Unit o/die Commonwealth of Puerto Rico) Management's Discussion and Analysis (Unaudited) For the Fiscal Years En.ded June 30, 2018 and 2017

This section of the :financia! statements is classified by the Govemmental Accounting Standards Board (GASB) as requjred supplementary information. Management of the Puerto Rico Health Jnsmance Administration (the Administration or PRIIlA) provides tbis Management Discussion and Analysis for the benefit of readers of the Administration's :financial statements. Along with the financia! statements and related notes, management' s discussion and analysis should provide the most relevant infonnation regarding the financia! condition of the Administration for the fiscal years ended June 30, 2018 and 2017.

Overview of the Financial Statements

This report includes the management's discussion and analysis, the independent auditors report, and the basic financia! statements and related Notes to the Financia! Statements. Toe management's discussion and analysis focus on major components of the financial statements. Toe financia! statem.ents are designed to provide users with a broad overview ofthe Administra.tion's finance with the intention to help answer the question whether the Administration is better off or worse off financially as a result of-tbis year' s activities. These financia! statements are prepared under the accrua1 basis of accounting.

The Statements ofNet Position present information ofthe Administra.tion's assets, liabilities, and deferred inflows/outflows of resources with the difference reported as net position. Over time, increases or decreases in net position, along with other :financial information, serve as a use:ful indicator of the Administration's financia! position and whetlier it is improving or deteriorating.

The Statements of Revenues, Expenses and Changes in Net Position present information showing how the Administration's net position changed d.uring the fiscal years ended June 30, 2018 and 2017. A11 changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the cash flows. Therefore, revenues and expenses are reported in tbis statement for certain items that wil1 result in cash flows in future fiscal periods.

The Statements of Cash Flows shows how the Administration' s cash and cash equivalents increased or decreased during the fiscal years reported. It also shows how cash and cash equivalents were provided by and used in the Administration's operating, non-capital financing, capital and related financing, and investing activities. Toe net increase or decrease in the Administration's cash and cash equivalents is add.ed. to the balance at the beginning of year to arrive at cash and cash equivalents balance at end of year. This statement is presented on a cash basis and only presents cash receipts and cash disbursement information. Toé Administration uses the direct method of presenting cash flows, which includes a reconciliation of operating income to net cash provided by operating activities.

The notes to the financia! statements provide additional information that is essential for a thorough understanding of the financia! data presented in the financia! statements.

These statements and information represent the actual financia! condition of the Admi.nistration. Below, you will find a cóndensed discussion of these statements and notes.

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Puerto Rico Health Insurance Administration ~ Component Unit of the Commonwealth o/ Puerto Rico) Management's Discussion and Analysis (Unaudited) For the Fiscal Years Ended June 30, 2018 and 2017

Financial Bigblights

For the fiscal year ended June 30, 2018, the Administration reported a net position of approximately $203.9 million, from -$7.3 million in prior year. Toe increase in net position was primarily driven by ~creases in the effective reimbursement rate from federal govemment contnbutions through the Puerto Rico Department of Health related to the Medicaid' s Medica! Assistance Program (MAP).

The condensed Statements of Net Position (Deficit) of the Administration at June 30, 2018 and 2017 was:

Jane 30, June30, Change

2018 2017 lndollan Percentage

Current assets $ 633,026,217 $ 321,855,298 $ 311,170,919 97%

Non-current assets 20,461,959 17,064,028 3,397,931 20%

Deferred outflows related to pension plan 6,795,332 6,795,332 0%

Total assets and deferred outflows of resources $ 660,283,508 $ 345,714,658 $ 314,568,850 91%

Current liabilities $ 285,991,107 $ 193,227,604 $ 92,763,503 48%

Non-current liabilities 169,899,964 159,309,917 10,590,047 7%

Deferred inflows related to pension plan 467,926 467,926 O"/o

Total liabilities and deferred inflows ofresources $ 456,358,997 $ 353,005,447 $ 103,353,530 29%

Net position: (deficit):

Net investment in capital assets $ 2,378,174 $ 2,286,630 $ 91,544 4% Restrict.ed for o1her pmpose 1,321,142 (1,321,142) -100%

Net deficit 201,546,337 (10,898,561) 212,444,898 1949%

Total netposition (deficit) $ 203,924,511 $ (7,290,789) $ 211,215,300 1853%

Total liabilities, deferred inflows of resources and net position ( deficit) $ 660,283,508 $ 345,714,658 $ 314,568,850 91%

As of June 30, 2018, the Administration reported total assets and deferred outflows of resources of approximately $660.3 million, an increase of $314.6 million from prior year. Increase in total assets was mainly due to increment of contributions and receivables from the Puerto Rico Department of Health. For the same period, total Iiabilities and deferred intlows of resources were $456.4 million, an increase of $103.4 million from prior year. Increase in total liabilities was primarily due to increase in premiums and claims payable.

Toe Administration's net investment in capital assets as of June 30, 2018 and 2017 amounted to $2,378,174 and $2,286,630, respectively, net of accumulated depreciation. Capital assets include equipment, furniture, leasehold improvements, and vehicles. During the fiscal years ended June 30, 2018 and 2017, the Administration invested approximately $893,000 and $1.9 million in capital assets, respectively. Depreciation and amortiz.a.tion expense for the years endedJune 30, 2018 and 2017 amounted to $777,761 and $192,018, respectively.

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Puerto Rico Health Insurance Administration (A Component Unit o/ the Commonwealth o/ Puerto Rico) Management 's Discussion and Analysis (Unaudited) For the Fiscal Years Ended June 30, 2018 and 2017

Beginning on April l, 2015, under the managed care organiz.ation model (MCO), health care contractors assume 100 percent of healthcare claims risk in exchange for a Per Member Per Month (PMPM) premium, which is paid during the current service month. Previously, the Administration contracted health insurance organiz.a.tion under the TP A model which liabilities related to medical claims expense were accrued. Therefore, the Administration is no longer required to accrue a liability for healthcare claims. As of June 30, 2017, the balance ofthe Administration's reserve for legacy claims incurred but not reported under TPA model was $3.9 million.

Toe condensed Statements ofNet Position (Deficit) ofthe Administration at June 2017 and 2016 was:

June30, June 30, Cbange 2017 2016 lndollars Percentage

Current assets $ 321,855,298 $ 203,533,649 $ 118,321,649 58% Non-current assets 17,064,028 82,929,780 (65,865,752) -79% Deferred outflows related to pension plan 6,795,332 6,795,332 100%

Total assets and deferred outflows ofresources $ 345,714,658 $ 286,463,429 $ 59,251,229 21%

Current liabilities $ 193,227,604 $ 271,804,841 $ (78,577,237) -29"/o Non-current liabilities 159,309,917 144,744,713 14,565,204 10% Deferred inflóws related to pension plan 467,926 467,926 100%

Total liabilities and deferred inflows of resources $ 353,005,447 $ 416,549,554 $ (63,544,107) -15%

Net deficit: Net investment in capital assets $ 2,286,630 $ 574,789 $ 1,711,841 298% Restricted for other purpose 1,321,142 1,321,142 100% Unrestricted (10,898,561) (131,982,056) 121,083,495 -92%

Total net de:ficit $ (7,290,7892 $ (130,086,125) $ 122,795,336 -94%

Total liabilities, deferred inflows of resources and net de:ficit $ 345,714,658 $ 286,463,429 $ 59,251,229 21%

For the fiscal year ended June 30, 2017, the Administration reported a net deficit of approximately-$7.3 million, a reduction of $122.8 million from prior year. Toe reduction of the net deficit was primarily driven by increases in the effective reimbursement rate from federal government contributions through the Puerto Rico Depai1ment of Health related to the Medicaid's Medical Assistance Program (MAP) and the Children's Health Insurance Program (CIDP) and increases in revenues from pharmacy rebate program, when compared to prior year.

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-Puerto Rico Health Insurance Administration

1 1.. (A Component Unit of the Comnwnwealth of Puerto Rico)

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Management 's Discussion anti Analysis (Unaudited) For the Fiscal Years Ended June 30, 2018 and 2017

As of June 30, 2017, the Aclministration reported total assets and deferred outflows of resources of approximately $345.7 million, an increase of $59.3 million from prior year. Increase in total assets was mainly dueto increment of revenues. For the same period, total liabilities and deferred inflows of resources were $353 million, a decrease of $63.5 million from prior year. Decrease in total li~ilities was primarily dueto the termination of the Third-Party Administrator (TP A) model, under which liabilities related to medical claims were accrued and the Health Insurance Tax (lilT) recognized in 2016.

Toe condensed Statements of Revenues, Expenses and Changes in Net Position (Deficit) for the fiscal years ended June 30, 2018 and 2017 are summariz.ed as follows:

June30, June 30, Cbange 2018 2017 lndollars Pe~n!!,ge ·

Operating revenues: Contributions from: Puerto Rico Department of Health $ 2,177,047,045 $ 1,701,090,302 $ 475,956,743 28% Commonwealth of Puerto Rico 556,041,667 885,000,000 (328,958,333) -37% Mwñcipalities 161,615,820 165,492,755 (3,876,935) -2% Employers 28,043,251 35,890,292 (7,847,041) -22% Pharmacy rebate program-net 225,487,701 216,599,085 8,888,616 4% Bad debts expense (38,488,308} !94,757,02Q 56,268,713 -59%

3,109,747,176 2,909,315,413 200,431,763 7%

Operating expenses: Medical premiums and claims 2,858,306,266 2,756,139,372 102,166,894 4% General and aclministrative 35,795,012 24,179,588 11,615,424 48% Depreciation and amortization 777,761 192,018 585,743 305%

Total operating expenses 2,894,879,039 2,780,510,978 114,368,061 4%

Non-operating revenues and ( expenses): (3,652,837} 3,591,404 (7,244,241) -202%

Change in net position 211,215,300 132,395,839 78,819,461 60%

Net deficit, beginning of year as restated (7,290, 789) {139,686,628} 132,395,839 95% Net deficit, end of year as restated $ 203,924,511 $ (7,290,789) $ 211,215,300 2897%

F or the year ended June 30, 2018, the Administration reported operating revenues of approximately $3 .1 billion, an increase of approximately $200.4 million from prior year. The increase in revenues was mainly dueto a temporary increase in the effective reimbursement rate from federal government contributions through the Puerto Rico Department of Health related to the Medicaid's Medical Assistance Program (MAP). Opera.ting expenses were approximately $2.9 billion, an increase of approximately $114.4 million. The increase in operating expenses was mainly as a result of the increase of medical premiums and claims expense during the year ended June 30, 2018. Non-operating revenues hada combined decrease of approximately $7.2 million primarily dueto a decrease in legislative appropriations and other contributions from the Commonwealth.

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Puerto Rico Hea/,th Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Management 's Discussion and Analysis (Unaudited) For theFiscal Years EndedJune 30, 2018 and 2017

The condensed Statements of Revenues, Expenses and Changes in Net Position (deficit) for the fiscal years ended June 30, 2017 and 2016 are summarized as follows:

June 30, June 30, Change

2017 2016 Indollars Percen3e Operating revenues:

Contributions from:

Puerto Rico Department of Heahh $ 1,701,090,302 $ 1,706,685,539 $ (5,595,237) Commonwealth of Puerto Rico 885,000,000 885,000,000 Municjpa.lities 165,492,755 214,494,151 (49,001,396) -23% Employers 35,890,292 41,864,647 (5,974,355) -14% Pbarmacy rebate program-net 216,599,085 184,094,181 32,504,904 18% Bad debts expense {94,757,021} {91,684,328) {3,072,693) 3%

2,909,315,413 2,940,454,190 (31,138,777) -1%

Operating expenses: Medical premimm and claims 2,756,139,372 2,829,171,745 (73,032,373) -3% General and admiaimative 24,179,588 26,481,483 (2,301,895) -91'/o Depreciation and amortization 192,018 214,415 (22,397) -10%

Total operatiog expenses 2,780,510,978 2,855,867,643 (75,356,665) -3%

Non-operating revenues and (expenses): 3,591,404 · 119,233 3,472,171 2912%

Change in net position 132,395,839 84,705,780 47,690,059 56%

Net deficit, beginning ofyear as restated {139,686,628) {214,791,90~ 67,866,173 -32%

Net deficit, end ofyear as restated $ (7,290,789) $ {130,086,12~ $ 115,556,232 891'/o

For the year ended June 30, 2017, the Administration reported operating revenues of approximately $2.9 billion, a decrease of approximately $31.1 million from prior year. Toe decrease in revenues was mainly d.ue to the reduction of revenues from municipalities and employers. Operating expenses were approximately $2.8 billion, a decrease of approximately $75.4 million. The decrease in operating expenses was mainly as a result ofthe decrease of med.ical premiums and claims-expense during the year ended Jllll.e 30, 2017. Non-operating revenues and expenses hada combined increase of approximately $3.5 million primarily due to an increase in Other Contribution from the Com.monwealth.

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-Puerto Rico Health lnsurance Administration

- (A Component Unit of the Commonwealth of Puerto Rico) Management's Discussion and Analysis (Unaudited)

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For the Fiscal Years Erul.edJune 30, 2018 and 2017

Administration Overview

Toe Puerto Rico Health Insurance Ad.ministration is a public corporation of the Commonwealth of Puerto Rico, created by Act No. 72 on September 7, 1993, as amended. Toe Ad.ministration began operations on February 1, 1994 and is responsible for implementing, administering and negotiating a health insurance program, through contracts with health insurers, mental behavioral health organiz.ations, pharma.cy benefit managers, third party administrators and Medicare Advantage organiz.ations, among others. Toe purpose of the Administration is to provide access to quality medical and hospital care to eligible Puerto Rico residents.

Toe Administration is the sub-grantee of federal funds provided by the Medicaid Program under Title XIX of the Social Security Act and Title XXI of the State Children's Health Insurance Program (CHIP). Toe Single State Medicaid Agency is the Puerto Rico Department ofHealth (the Department of Health).

Toe Medicaid Program is responsible for ad.ministering to the Government Health Insurance Program of federal (those federally eligible for Medicaid) and Commonwealth beneficiaries (those non-eligible for federal. Medicaid but who fall within the criteria set forth by Government of Puerto Rico for inclusion witbin the Government Health Insurance 'Program).

Toe Administration and the Medicaid Program have a Memorandum of Understanding in which Medicaid Program delegates full responsibility to the Administration for implementing and administering the Government Health Insurance Program. Among the responsibilities, the Adntinistration is responsible for establishing health coverage for qu:alified Puerto Rico residents in accordance with the Puerto Rico Medicaid State Plan and negotiating with health insurance organizations for the provision of such covered services, among other.

Toe executive o:ffices of the Administration are located at 1571 Alda Street, Urb. Caribe, Rio Piedras, Puerto Rico 00926-2712. Toe Administration's telephone number is (787) 474-3300. Mrs. Angela Avila Marrero is the Executive Director of the Administration.

Economic Factors

Medicaid Program Financing

Un~ March 31, 2015, the Administration paid Medicare Program cost (federal and state cost share), and then, it requested reimburserrient of the corresponding federal cost share to the Centers for Medicaid and Medicare Services (CMS) through the Puerto Rico Department of Health. Until then, the Administration used a line of credit facility to ensure having the required cash available to mak.e timely Medicaid Program payments to contracted healthcare organizations. Once the federal cost share reimbursement was received, it paid back the line of credit.

Toe line of credit agreement was terminated and not renewed creating a cash shortfall on Medicare Program obligations. As part of the contingencies set forth by the Aclministration, starting on April 1, 2015, the Aclministration successfully negotiated a new reimbursement protocol with CMS in which the funds of the federal cost share were available upon request of the federal cost share reimbursement with the condition of presenting a certification of funds availability of Commonwealth cost share to complete Medicare Program payments.

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Puerto Rico Hea/.th Insurance Administration (A Component Unit of 'the Commonwealth of Puerto Rico) Management's Discussion and Analysis (Unaudited) For the Fiscal Y ears Ended Jime 30, 2018 and 2017

In add.ition, the Administration and the contracted health organizations mutually agreed to allow the Administration to spread the monthly PMPM premium payment into four ( 4) weekly payments in exchange for afee of 7% simple interest on unpaid monthly balances. This agreement was terminated by the Administration e:ffective on January 1, 2017 by written notice to ali contracted health organizations.

Background oí Tenninated Credit Agreements

0n March 14, 2011, the Administration entered into a Cred.it Agreement with the Govemment Development Bank (GDB) in order to meet its obligations incurred prior to fiscal year 2009-2010 with healthcare contractors. As of June 30, 2017, and 2016, the principal outstanding balances amounted to $183,251,298 in both years and the accrued interest amounted to $30,708,266 and $19,713,188, respectively. Toe Administration is required to pay the principal and interest with the appropriations from Puerto Rico legislature. During the fiscal year ended June 30, 2017 and 2016, the Puerto Rico Office ofManagement and Budget (0MB) did not paid the corresponding principal and interest on behalf of the Administration.

0n October 18, 2011, the Puerto Rico Legislature approved Law Num.ber 205. This Law authorized the Aclministration to open a revolving line of credit either with the GDB or with a comm.ercial bank for the sole purpose of paying health insurance premiums and health services providers. Accordingly, the GDB or afterwards, the commercial bank made credit advances to the Administration to :fund premiums expenses and were reimbursed with federal funds. Toe amount of the line of credit was limited to and guaranteed by the amount of federal funds received by the Commonwealth of Puerto Rico from the Federal Govemment's Medicaid Programas certified by the Administration's Board of Directors and by the Puerto Rico Medicaid Program. Toe Administration was obliged to use any federal :funds reimbursement received to pay the line of credit. Toe Government of Puerto Rico guaranteed any uncovered balance of the line of credit in excess of federal :funds received by making the necessary appropriations.

0n July 20, 2016, the Governor of Puerto Rico signed the Law 74 which authorized the GDB to consolidate ali financing agreements made to governmental entities which are payable with appropriations from the Puerto Rico legislature. Article 4 of such law lists ali the governmental entities with financia! agreements along with their outstanding principal balance and accrued interest as ofDecember 31, 2015. Toe Administration was listed with an outstanding principal balance of$183,251,298 and accrued interest of$14,215,650 as ofDecember 31, 2015.

Toe Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF, by its Spanish acronym) was established pursuant to Chapter 6 of the Puerto Rico Emergency Moratorium. and Financia} Rehabilitation Act, as an independent public corporation and govemmental instrum.entality with separate legal existence, fiscal and administrative autonomy, and independence from the Commonwealth. AAF AF was created for acting as fiscal agent, financial advisor and reporting agent of the Government of Puerto Rico, its agencies, instrumentalities, among other and to assist such entities in confronting the economic crisis that the Govemment of Puerto Rico is currently experiencing. AAF AF has assumed most of the fiscal agency and financial advisory responsibilities that were previously held by the GDB. . As of the date of this report, the consolidation of such financing agreements has not been performed.

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth o/ Puerto Rico) Management 's Discussion and Analysis (Unaudited) Por the Fiscal Years EndedJune 30, 2018 and 2017

Background of Past and Cnrrent Healthcare Models

0n October 1, 2010, the Commonwealth implemented •'Mi Salud" plan, which replaced the "Health Reform" program.

0n October 14, 2014, the Board ofDirectors of the PRillA awarded new contracts for the GHP, which replaced the former "Mi Salud" plan, to five private insurance · providers pursuant to a bidd.ing process. Toe new contracts became effective on April 1, 2015. Under the new contracts, the Commonwealth public health insurance model changed from a Third-Party Ad.ministrator (TP A) model, in which the Commonwealth was ultimately responsible for the cost of the health services provided, to a managed care. organiza.tion (MCO) model, in which the Administration will pay the MCOs a fixed Per Member Per Month (PMPM) premium for each insured beneficiary and the insurers will be responsible for the cost of such services.

0n January 3, 2018, the United States Congress enacted the Bipartisan Budget Act of2018 and its Act's DivisionSupplemental Appropriations, Tax Relief, and Medicaid Changes Relati.ng to Certain Disasters and Further Extension of Continuing Appropriations, ( collectively, the "Act''), that was signed into law by President Donald Trump on February 9, 2018. Toe passage of the Act, through its Titles 111, section 20301, Hurricane Maria Relief for Puerto Rico and the Virgin Islands Medicaid Programs, has resulted in health care expanded funding by providing increased caps for the period béginning January 1, 2018, and ending September 30, 2019. The amount of the increase for Puerto Rico was $3.6 billion.

The Act a1so included a :further increase of $1.2 billion if the Secretary certifies that Puerto Rico has taken reasonable appropriate steps during su.ch period, in accordance with a timeline established by the U.S. Secretary of Health (Secretary) · to implement m.ethods, satisfactory to the Secretary, for the collection and reporting of reliable data to the Transformed Medicaid Statistical Information System ( or a successor system); and demonstrate progress in establishing a State Medicaid Fraud Control Unit (MFCU) as described in section 1903(q).

The changes by the Act esta.blished that notwithstand.ing any other provision of title XIX, during the period in which the additional funds provided are available for Puerto Rico, with respect to payments from su.ch additional funds for amounts expended by Puerto Rico, the Secretary shall increase the Federal Medicaid Assistance Program reimbursable share to 100 percent.

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth o/ Puerto Rico) Management's Discussion and Analysis (Unaudited) For the Fiscal Years EndedJune 30, 2018 and 2017

Long-Term. Debt

The Administration entered into a Credit Agreement with the Government Development Bank for Puerto Rico on March 14, 2011 in order to pay its obligations to healthcare insurers incurred prior to fiscal year 2009-2010. Toe aggregate principal amount of the non-revolving line of credit was $186,000,000 and is payable in nine payments of $20,666,667 from 2015 through 2023. Interests are accrued ata fluctuating annual rate of interest equa1 to the greater of (i) 1.5% over prime rate, and (ii) 6%.

As of June 30, 2018, and 2017, the accrued interest amounted to $41,703,344 and $30,708,266, respectively. Toe Administration wil1 pay the principal and interest with appropriations to be received from the Legislature of Puerto Rico through the Puerto Rico O:ffice of Management and Budget (0MB) pursuant to Act No. 173 of 2010. Notwithstanding during the fiscal years ended June 30, 2018, 2017 and 2016, the 0MB failed to malee principal and interest payments on behalf of the Ad.ministration.

Currently Known Facts

Financia/ Deterioraúon of the Commonwealth o/ Puerto Rico

As disclosed in Note 2, the Administration relies significantly on appropriations from the Commonwealth as well as recurring and non-recurring federal funding. Although the financia! cond.ition and liquid.ity of the Commonwealth has deteriorated, the Administration's has reflected a de:ficit reduction and surplus due to management cost

.. reductions implemen,tations and improvements on.payment eligibility process. Because ofthe MCOModel Plan, the Administration must focus on the e:fficiency of the payment eligibility process, for example, adjustments to · avoid double payments and deceased members. Furthermore, the Administration works with Cost of Benefit (COB) concept to improve reporting collecting data and reconciliation providing a better future Per Member Per Month (PMPM) payments negotiations.

Add.itionally, as disclosed in Note 17, on January 3, 2018, U.S. Congress Bipartisan Budget Act expanded add.itional federal funds and increase caps beginning January 1, 2018 and ending September 30, 2019. Toe U.S. Secretary of Health shall increase the Federal Medicaid assistance percentage or other rate that would otherwise apply to such :funds to 100 percent.

Coordination of Benefits Cost Control Plan

Some beneficiaries of the Government Health Plan, which tbrives on federal funds under certain circumstances, :may be eligible to receive benefits for a private plan or other health insurance funded by the Government of Puerto Rico. In accordance with applicable Iaws and federal guidelines, Medicaid i~ the payer of last resort and the rest of the remedies must be exhausted before resorting to the services under the Medicaid funds provided. This effort is called Coordination of Benefits (COB).

By provisions of the Federal Public Law 109-171, approved on February 8, 2006, known as The Deficit R.eduction Act of 2005 (DRA), require from tb.e Federal Govemment to the governments of the states and territories beneficiaries of Med.icaid funds, authorizing to health insurers to share certain information with the State Agency responsible for administering the program Medicaid. Toe collection of this infonnation facilitates coord.ination of services and the administration of the funds received and ensures that Medicaid is not paying for care to be covered by another payer.

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Puerto Rico Health lnsurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Management's Discussion and Analysis (Unáudited) For the Fiscal Years Ended June 30, 2018 and 2017

The Social Security Act generally requires health insurers and otber third parties that are legally liable to pay for health care services received by Medicaid beneficiaries to pay for the services that are primary to Medicaid. However, state Medicaid agencies might mista.k.enly pay claims for which a third party may be liable, because they are not aware of the erjstence of other coverage. The DRA made severa! changes to title XIX of the Social Security Act intended to strengthen state Medicaid programs' ability to identify and collect from third party payers that are legally responsible to pay claims primary to Medicaid.

As part of the cost containment plan,. the Administration established a process in which all private health insurers doing business in Puerto Rico were :tequired to send via FTP protocol a monthly COB file with the roster of their insured membership, including coverage and other required information. 0n December 20, 2016, the Administration started sharing certain information from the COB file with contracted MCO for purposes of performing a more thorough COB process, which will result in cost reduction over time, will improve the MCO utiliza.tion and control the GHP PMPM rates.

Contacting the Administration Financial Management

This financia! report is designed to provide our customers and creditors with a general overview of the Administration's finances and to demonstrate the Administration's accountability for the federal and commonwealth, among others, :funds it receives. If you have questions about this report or need additional information, contact the Puerto Rico Health Jnsurance Administration, PO Box 195661, San Juan, PR 00926-2706.

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- Puerto Rico Health Insurance Administration (A Component Unit o/ the Commonwealth of Puerto Rico) Statements ofNet Position (Deficit) - June 30, 2018 and 2017

ASSETS 2017

2018 As restated

Current assets: Cash and cash equivalents $ 54,922,769 $ 199,076,546 Restricted cash 1,321,142

- Total cash and restricted cash 54,922,769 200,397,688

Accounts receivable: - Puerto Rico Department of Health 496,191,776 37,645,769 Pharmacy rebates program 59,702,776 61,646,682

Advance premium 21,335,623 21,305,140 Interest receivable 873,273 860,019

Total current assets 633,026,217 321,855,298 -Non-current assets:

Accounts receivable: Municipalities - net of allowance for doubtful accounts of $101,430,752 in 2018 and $74,814,801 in 2017 7,960,449 12,143,936

Legislature appropriations and other - net of allowance for - doubtful accounts of$744,520 and $744,520 in2017 8,644,715 1,930,694 Due from employers - net of allowance for doubtful accounts of $91,147,730 and $79,275,373 in 2017 671,058 - Other receivables 149,853 327,118

Capital assets - net 2,378,174 2,286,630 Due from MCO's-net of allowance of$11,l33,271 in 2018 and - $16,673,691 in 20.IT 657,710 375,650

Total non-current assets 20,461,959 17,064,028

Total assets 653,488,176 338,919,326

- Deferred outflows oí resources: Deferred outflows related to pension plan 6,795,332 6,795,332

Total assets and deferred outflows of resources $ 660,283,508 $ 345,714,658

-See accompanying notes to financial statements.

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-- Puerto Rico Health Insurance Administration

(A Componen/ Unit of the Commonwealth of Puerto Rico) Statements of Net Position (Deficit) - June 30, 2018 and 2017

LIABILITIFS AND NET POSIDON (DEFICI'I) 2017

.mi A! restattc) Cumnt liabilities:

Premiums and claims payable $ 123,405,951 $ 36,238,090 TPA administration fees payable 67,141,346 67,778,989 Estimated liability for claims incurred but not reported 3,899,000 - Obligation payable Governmental Development Bank 82,666,668 62,000,001 Accounts payable and accrued expenses 11,209,744 1,145,108 Accrued tennination benefits 960,905 833,682

~ Accrued compensated absences 606,493 666,067

Total current liabilities 2852991,107 172,560,937 lo.

Non-current liabilities: Obligation payable Govemmental Development Bank 100,584,630 121,251,297 - Interest payable 41,703,344 30,708,266 Accrued tennination benefits 2,783,932 3,142,671 Accrued compensated absences 379,554 425,846 Net pension liability 24,448,504 24,448,504

Total non-current liabilities · 169,899,964 179,976,584

- Total liabilities 455,891,071 352,537,521

Defen-ed inflows of resources: - Deferred inflows related to pension plan 467,926 467,926

Total liabilities and deferred inftows of resources 456,358,997 353,005,447 - Net position (deficit): Net investment in capital assets 2,378,174 2,286,630 - Restricted for other purpose 1,321,142 Unrestricted 201,546,337 (10,898,561)

- Total net position (deficit) 203,924,511 (7,290,789)

Total liabilities, deferred inflows of resources and net position (deficit) $ 660,283,508 $ 345,714,658 -

-See accompanying notes to financia! statements.

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(A Component Unit of the Commonwealth of Puerto Rico) Statements of Revenues, Expenses and Changes in Net Position (Deficit) - For the Fiscal Years EndedJune 30, 2018 and 2017

2017 - 2018 As restated

Operating revenues: Contributions from: Puerto Rico Department of HeaJth $ 2,177,047,045 $ 1,701,090,302 Commonwealth of Puerto Rico 556,041,667 885,000,000 - Municipalities 161,615,820 165,492,755 Employers 28,043,251 35,890,292 Pbarmacy rebate program - net 225,487,701 216,599,085

- Bad debts expense (38,488,308) (94,757,021)

Total operating revenues 3,109,747,176 2,909,315,413

Operating expenses: Medical premiums and claims 2,858,306,266 2,756,139,372 - General and a.dmmistrative 35,795,012 24,179,588 Depreciation 777,761 192,018

Total operating expenses 2,894,879,039 2, 780,510,978 - Operating in.come 214,868,137 128,804,435 .

- Non-operating revenues and expenses: LegisJative appropriations from the Commonwealth of Puerto Rico 4,301,750 6,941,591 Interest expense (11,009,495) (10,996,760) - Other contribution from Commonwealth of Puerto Rico 5,614,074 Interest in.come 3,054,908 2,032,499

- Total non-operating revenues, net of expenses (3,652,837) 3,591,404

Increase in net position 211,215,300 132,395,839 -Net deficit at beginning ofyear as previosly reported (130,086,125) Restatement adjustment - GASB Statement No. 68 adoption (16,839,605) - Restatement adjustment - Overstatement of accounts payable 7J39,102 Net deficit at beginning ofyear, as restated (7,290,789) (139,686,628)

- Net position (deficit) at end of year $ 203,924,511 $ (7,290, 789)

-See accompanying notes to financia! sta.tements. -

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-Puerto Rico Health Insurance Administration - (A Component Unit of the Commonwealth o/ Puerto Rico) Statements o/ Cash Flows For the Fiscal Years Ended June 30, 2018 and 2017 -

2017 2018 As restated - Cash flows from operating activities:

Cash receipts from contributions $ 2,429,125,772 $ 2,781,670,624 Cash receipts from pharmacy rebate program 227,431,607 207,977,914 Cash payments of premiums, heahb care organizations

and third party administrators (2,775,705,531) (2,849,707,723) Cash payments to employees (3,925,742) (4,207,713) - Cash payments to vendors for goods and services (2221422018) (11 2466,435)

Net cash (used in) provided by operating activities (145,215,912) 124,2662667

Cash flows from non-operating and :financing activities: Legis1ative appropriations from the Commonweab:h of Puerto Rico (1,080,961) 6,941,591

~ Purchase of capital assets (893,234) (1,905,566) Retirement of capital assets 9,093 1,707 Interest paid (14,41Z) (1,682) - Net cash (used in) provided by non-operating and

related financing activities 02979,519) 5,036,050 - _ :Cash flows from invé&ting activities: Interest collected 3,041,654 1,479,641

-Net cash provided by investing activities 3,041,654 lz479,641

- Net (decrease) increase in cash and cash equivalents (1442153,777) 130,782,358

Cash and cash equivalents, at beginning of year 199.076,546 68,294,188 -Cash and cash equivalents, at end of year $ 54,922,769 $ 199,076,546

---- See accompanying notes to financial statements.

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.... (A Component Unitofthe Commonwealth o/ Puerto Rico) Statements of Cash Flows For the Fiscal Years Ended June 30, 2018 and 2017 -

2017 - 2018 As restated

Reconciliation of operating income to net cash provided by

- operating activities:

Operating Income $ 214,868,137 $ 128,804,435 - Adjustments to reconcile operating income to net cash provided by operating activities:

Depreciation and amorti7.8.tion 777,761 192,018

-- Loss on disposition of assets 4,670 Changes in operating assets and liabilities and deferred flows: Decrease (increase) in:

"""" Accounts receivable: Puerto Rico Department of Health (458,546,007) 21,376,701 Municipalities 4,183,486 45,430,480 - Pharmacy rebate program 1,943,906 (8,621,171) Advance premium (30,483)

- Other receivables 177,265 2,346,676 Due from employers (671,058) 8,008,394 Prepaid expenses 258,035

- Due from MCO's (282,060) 11,792,043 Deferred outflows (1,479,600)

Increase ( decrease) in: - TP A administration fees payable (637,643) (17,693,039) Liability for claims incurred but not reported (3,899,000) Premiums and claims payable 87,167,861 (75,824,167) - Accounts payable and accrued expenses 10,064,636 6,846,878 Accrued termination benefits (231,518) (204,129)

- Accrued compensated absences (105,865) 272,020 Net pension liability 2,670,926 Deferred inflows 90,167

- Net cash (used in) provided by operating activities $ (14512151912} $ 124J661667

- See accompanying notes to financia! statements.

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth o/ Puerto Rico) Statements of Cash Flows For the Fiscal Years EndedJune 30, 2018 and 2017

SUPPLEMENTAL CASH FLOWS INFORMATION

Non-cash transaction:

During the year ended June 30, 2018, the Administration retired certain furniture with a canying amount of $4,670, wbich represents the loss charged to operations in 2018.

0n July 16, 2016 a Legislative Joint Resolution ordered to transfer a building to the Administration from the Department of Transportation and Public Works of Puerto Rico. Toe Administration transferred the real estate in

- exchange for an account payable to Hospital Menonita Caguas, Inc. Toe non-cash transaction provided · the Administration an additional non-cash contribution arid equa1 reduction of accounts payable of $5,614,074.

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-Puerto Rico Heolth Insurance Administration

- (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia/ Statements

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Far the Fiscal Years Ended June 30; 2018 and 2017

1. REPORTING ENTITY

Toe Puerto Rico Health lnsurance Administration (the Administration or PRIIlA) is a governmental entity anda component unit ofthe Commonwealth of Puerto Rico (the Commonwealth), created on September 7, 1993 by Act No. 72 (the Act), as amended. The Administra.tion commenced operations on February 1, 1994 and is considered a public coiporation with fu.11 autonomy.

The Administration is responsible for implementing, administering and negotiating a health insurance system, through contracts with health insurers, mental health organizations, pharmacy benefit managers, third party administrators and Medicare Advantage organizations among others. The Administration thrives to provide a11 qualifying Puerto Rico residents access to quality healthcare services, including mental health, through a Managed Care Organiz.ation (MCO) model.

Toe Administration relies significantly on appropriations from the Commonwealth as well recurring and nonrecurring federal funding. Toe Admínistration is the sub-grantee of federal funds provided by the Medicaid Program under Title XIX of the Social Security Act and Title XXI of the State Children's Health Insurance Program (CHIP). The Puerto Rico Depar1ment of Health (Department of Health) is the single state agency, and it has a cooperative agreement with the PRHIA which is responsible for implementing and adroinistering the island-wide government health insurance program. Within the Department of Health, the Pu~o Rico Medicaid Program (Medicaid Program) is the primary grantee of federal :fimds and is responsible for administering the eligibility to the government health insurance program of federal and Commonwealth beneficiaries.

A regionali:zation system was implemented to establish a network of participating providers throughout Puerto Rico and ensure the closest possible service to beneficiaries. The Administration pays a monthly premium to such insurance underwriters based on a contracted premium and the number of members subscribed in the health plan. Funds to pay for such premiums are requested from the Commonwealth net of funds available for such purposes from a11 other sources.

Under the provisions of Act No. 105 of July 19, _ _2002, which amended Act No. 72 of 1993, the Administration was authorized to negotiate directly with health providers under a pilot program. The Administration has, since then, entered into clifferent direct contracts to cover the insured population of different regions and municipalities. Since November 1, 2006 through September 1, 2010, the Administration directly contracted providers that served approximately 190,000 lives from the metro-north region. Since June 30, 2011, the Admínistration has ~ect contracting projects with the Mtm.i.cipalities of Vieques and Guaynabo.

Effective October 1, 2010, a new integrated health care model named "Mi Salud" was developed with the following changes:

1) Set up a standard premium per region as established by the Administration.

2) Eliminate the referrals when the beneficiacy needs the service of a specialist

- 3) Better access to prescnbed medicines without the authoriz.ation of the primary health care provider.

4) Extended hours for health care providers of basic services. - 20

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Puerto Rico Health lnsurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia! Statements For the Fiscal Years EndedJune 30, 2018 and 2017

l. REPORTING ENTITY (CONTINUED)

5) Tele-emergency services available 24 hours.

6) Integration of the physical and mental health care in one place.

7) The risk of the primary health provider in relation to medicines, emergency and preventive health care test was decreased and was transferred to the health care insurance companies.

8) Increase the coverage to include the middle-class work:ing force.

9) Set up a ceiling in relation to administrative expenses and gains of the health care insurance companies.

0n October 14, 2014, the Board of Directors of the PRHIA awarded new contracts for the Government Public Health Insurance Plan (the "GHP"), which replaced the former ''Mi Salud" plan, to five private insurance providers pursuant to a bidding process. Toe new contracts became e:ffective on April l, 2015. Under the new contracts, the Commonwealth of Puerto Rico's public health insurance model changed from a Third-Party Ad.ministrator (fP A) model, in which the Comm.onwealth was ulti.mately responsible for the cost of the health services provided, to a MCO model, in which the Administration will pay the insurers a fixed premium for each insured beneficiary and the insurers wil1 be responsible for the cost of such services.

2. GENERAL MATI'ERS

For the current fiscal year ended on June 30, 2018, andas disclosed in Note 1, the Administration relies significantly on appropriations from the Commonwealth as well as recurring and non-recurring federal funding. As of June 30, 2018, the Commonwealth faces significant budgetary risks and uncertainties, including liquidity risk, which is the risk of not having sufficient liquid financia! resources to meet their obligations when they become due. Because of budgetary constraints, the financia! support that the Commonwealth has provided to the Administration may be affected in the near :fu.tme.

0n the other hand, as reflected in the accompanying basic financia! statements, the Administration closed its fiscal year 2018 with a ~lus of approximately of $211million, its second consecutive year operating without a deficit. Furthermore, additional ~ral funding has been approved providing increased caps for the period beginning January 1, 2018 and ending September 30, 2019.

0n March 14, 2011, the Administration requested a $186 million non-revolving line of credit :from the Government Development Bank of Puerto Rico (GDB). 0n the same date, a Fiscal Oversight Agreement (FOA) was subscribed between the Administration and GDB in order to provide assistance and monitoring of the Adroioistration's finances. Toe FOA authorizes GDB to assist the Administration to adopt a fiscal sta.bilization plan and to take measures it deems necessary to ensure the Administration's financia! selfsufficiency. Toe FOA was terminated by GDB as of June 30, 2018.

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia[ Statements For the Fiscal Years Ended June 30, 2018 and 2017

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNflNG POLICIES

a. Basis of Accounti.ng

The accompanying financia! statements have been presented on the accrual basis of accounting in confonnity with accounting principles generally accepted in the United States of America Under this method, revenues are recognized when eamed, regardless of when received, and expenses when incurred, regardless of when paid.

b. Basis of presentation

These financia! statements are presented as an enterprise fund and conform to the provisions of Governmental Accounting Standards Board Státement No. 34 (GASB No. 34), Basic Financia! Statements - and Management's Discussion and Analysis - for Sta.te and Local Govemments. GASB No. 34, as amended, establishes standards for external financia! reporting for all state and local governmental entities, which includes a Statement of Net Position, a Statement of Revenues, Expenses and Changes in Net Position and a Statement of Cash Flows.

As further explained on Note 12, the Employees Retirement System of the Commonwealth of Puerto Rico did not provide the Ad.ministration the information needed for the year ended June 30, 2018, to comply with the GASB Statement No. 68, Accounting and Financia! Reporting for Pensions - an amendment of GASB Statement No. 27 (GASB No. 68). Accordingly, the financia! statements, for the year ended June 30, 2018, do not contain any adjustments, disclosures or required supplementary information established by GASB No. 68.

c. Cash, cash equivalents and restricted cash

The Ad.ministration considers all highly liquid investments with maturities of three months or less to be cash equivalents.

d. AUowance for doubiful accounts ·

The allowance for doubtful accounts is an amount that management believes will be adequate to absorb possible losses on existing accounts receivable that may become uncollectible based on evaluations of collectability of accounts receivable and prior credit loss experience.

e. Capital, assets

Capital assets are sta.ted at cost. Donated property is reported at their estimated fair value at the date received. When assets are retired or otherwise disposed of, the cost and accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recorded for the period. Expenditures for repairs and maintenance that do not extend the useful lives of the assets are charged to operations in the year incurred.

f. lmpai.rment of Capital Assets

A capital asset generally should be considered impaired if both (a) the decline in service utility of the capital asset is large in magnitud.e and (b) the event or change in circumstance is outside the normal life

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- (A Component Unit ofthe Commonwealth o/Puerto Rico) Notes to the Financia/ Statements

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For the Fiscal Years EndedJune 30, 2018 and 2017

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

cycle of the capital asset The Administration reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an asset may not be recoverable, a write-down to fair value is recorded. Long-lived assets are reviewed for impairment at the individual asset or the asset group level for which the lowest level of independent cash tl.ows can be identified. No impairment charges were recorded during the years ended June 30, 2018 and2017.

g. Depreciati.on and amortization

Depreciation is provided over the estimated usefu.1 life of each class of depreciable asset which range from four to ten years and is computed using the straight-line method.

h. Compensated absences

The employees of the Administration earn thirty (30) days of vacation and eighteen (18) days of sick leave annually. Since May 2017, the employees accumulate 1.25 days per month of vacation, which is equivalent to 15 days of vacati.on annually. Vacation time accumulated is fu.lly vested to the employees from the first day of work but cannot be used during the first three months of work. In the event of resignati.on, an employee is reim.bursed for accumulated vacati.on days up to sixty (60) days. Separation of employmentprior to the use of all or part ofthe sick leave terminates all rights-for compensation except that, in the event of reti.rement, an employee is reimbursed for accumulated sick leave days up to the nia.ximum allowed of ninety (90) days after 1 O years of services.

i. Estimated liability for claims incu"ed but not reported

The esti.mated liability for claims incurred but not reported (IBNR) represents the estimated dollar amount of medical claims incurred but unpaid to provideis based on experience and accumulated statistical data under the GHP. The estimate of IBNR is developed by an independent actuary using assumptions based upon payment patterns for medical, pharmacy and dental claims, inflati.on of medical costs, historical developments and other relevant factors. The ulti.mate liability may be in excess of or less than the amounts provided. ·

j. Deferred outflowsñnjlows o/ resources

In additi.on to assets, the statement of net positi.on will sometimes report a separate secti.on for deferred outflows of resources. This separa.te financial statement element, deferred outtl.ows of resources, represents a consumption of net positi.on that applies to a future period and so wil1 not be recognized as an outflow of resources (expenses/expenditure) until then. Net differences between projected and actual earnings on pension plan investments is deferred and recognized over a five-year period. Pension contributions made subsequent to the measurement date wil1 be recognized as a reduction of the net pension liability after the next measurement date. Changes in proporti.onal share of contributions, differences between the expected and actual experience and changes in actuarial assumptions, are capitalized and recognized over a period of ti.me equal to the expected remaining working lifeti.me of active and inacti.ve participants.

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Puerto Rico Health Insurance Administration (A Component Unitofthe Commonwealth o/ Puerto Rico) Notes to the Financia[ Statements For the Fiscal Years Ended June 30, 2018 and 2017

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINlJED)

In addition to liabilities, the statement of net position wil1 sometimes report a separate section for deferred inflows of resources. This separate financia! statement element, deferred inflows of resources, represents an acquisition of net positiop. that applies to :future periods and so wil1 not be recognized as inflows of resources (revenues) until that time. Net differences betw~ projected and actual earnings on pension plan investments is deferred and recognized over a five-year period. Pension contributions made subsequent to the measurement date wil1 be recognized as a reduction of the net pension liability after the next measurement date. Changes in proportional share of contributions, differences between the expected and actual experience and changes in actuaria! assumptions, are deferred and recognized. over a period of time equal to the expected remaining working lifetime of active and inactive participants.

k. Accounting for pension cost

Toe Administration accounts for pension costs under the provisions of GASB Statement No. 68, Accounting and Financia! Reporting for Pensions, an amendment of GASB Statement No. 27, and GASB Statement No. 71, Pension Transitions for Contributions Made Subsequent to the Measurement Date, an amendment to GASB Statement No. 68. GASB Statement No. 68 requires the Administration to report a net pension liability and related pension accounts, such as pension expense and deferred outflows/inflows of resources as determined by the Employee Retirement Systems of the Commonwealth of Puerto Rico (ERS), as applicable, under the requirements contained in GASB Statement No. 67, Financia! Reporting for Pension Plans- an amendment to GASB Statement No. 25.

Toe Ad.ministration's funding policy is to contnbute the amount :r:equired to fully fu.nd the plan's current liability or the amount necessary to meet the applicable regulations. 0n June 27, 2017, the Secretary of the Treasury of the Commonwealth of Puerto Rico issued its Circular Letter 1300-46-17, implementing the PayGo System, wbich consists of a monthly charge as disclosed in Note 12 to the basic financia! statements.

l. Revenue recognition

Toe Ad.ministration distinguishes operating revenue from non-operating revenue. Revenue from sources from the Puerto Rico Department of Health, the Commonwealth of Puerto Rico, Municipalities, Em.ployers and Pharmacy Rebate Program are recorded as operating revenue. Revenue from legislative appropriations and interest are recorded as non-operating revenue.

m. Contributions from the Commonwealth of Puerto meo

Contributions received from the Commonwealth represent appropriatiqns to cover the local share to meet federal funds matching requirements and funds for the payment of health insurance premiums and administrative expenses.

n. Contributions from the Puerto Rico Department o/ Health

Contributions received from the Department of Health represent payments to the Administration by the Medicaid Program wbich consist of a determined monthly amount of the funds allocated to Puerto Rico under Title XIX of the Social Security Act and State Plan.

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia/ Statements For the Fiscal Years EndedJune 30, 2018 an<¿l 2017


To comply with the federal :funds matching requirements, the Administration is assigned funds from the Commonwealth. Toe Medicaid Program is the recipient of CHIPS and Prescription Drugs funds which are in whole transferred to the Administration for health care services for the eligible population.

o. Contribudons from Municipalities

Contributions from Municipalities represent the budgetary appropriations of the municipal governments for direct health services in areas covered by the govemment health plan. Toe charges made by the Administration are based on established percentages applied to the corresponding Municipalities' operational budget for the lesser of current fiscal year or fiscal year 2004-2005 as set forth in Act No. 72 of September 7, 1993, as amended. These contributions are withheld by the Center for Municipal Revenue Collection from money assigned to the municipalities and remitted to the Administration on a monthly basis.

p. Pharmacy rebate program

The Administration established a governmental pharmacy rebate program which consists of agreements negotiated for obtaining pharmaceutical rebates and discounts with regards to the u.tiliz.ation of -prescription branded drugs dispensed to beneficiaries. Toe Administration has continued engaging service· organization for the pharmacy rebate program implementation and administration. Toe Administration retains 100 percent of the income derived from this program.

q. F air V alue Measurement and Applicati.on

The GASB issued the GASB Statement No. 72, Fair Value Measurement and Application (GASB No. 72) with effectiveness for fiscal year 2016. GASB No. 72 addresses accounting and financial reporting issues related to fair value measurements, provides guidance determining a fair value measurement for financial reporting purposes and for applying fair value to certain investments and disclosures related to fair value measurements. GASB No. 72 requires a government to use valuation techniques that are appropriate under the circumstances and for which su:fficient data are available to measure fair value. This Statement establishes a hierarchy of inputs to valuation techniques used to measure fair value.

Adoption of GASB No. 72 did not have a significant impact on the Administration's financia! statements.

r. Use of ~ates

The process of preparing financia! statements in conformity with accounting principies generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estima.tes primarily related to unsettled transactions and events as of the date of the financia! statements. Accordingly, upon settlement, actual results may differ from those estimates.

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia/ Statements For the Fiscal Years EndedJune 30, 2018 and 2017


The employees have the right to accumulate the excess of sixty (60) days in vacation and ninety (90) days in sick leave until December 31 of each year. The excess should be used by the employee before the end of the following natural calendar year. Toe excess not used is forfeited.

Compensated absences are accrued when incurred using the pay or salary rates in e:ffect at the date of the statement of net position.

s. Risk management

The Administration is exposed to various risks of loss from torts, theft of, damage to, and destruction of assets, errors and omissions, employee injuries and illnesses, natural disasters, and other losses. Commercial insurance coverage is obtained for potential claims arising from such matters.

The commercial insurance coverage is negotiated by the Department ofTreasury ofthe Commonwealth of Puerto Rico and the cost is billed to the Administration. '

t. Adoption ofrecently issued accounting standards

For the years ended June 30, 2018 and 2017, the Administration adopted the following statements issued by the Governmental Accounting Standards Board (GASB):

GASB Statement No. 68, Accounting and Financia[ Reporting for Pensions- An Amendment of GASB Statement No. 27

GASB Statement No. 68 addresses accounting and financia! reporting for pensions that are provided to the employees of state and local governmental employers through pension plans that are administered through trusts that have the following characteristics: (1) Contributions from employers and non-employer contributing entities to the pension plan and earnings on those contnbutions are irrevocable; (2) Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms; and (3) Pension plan assets are legally protected from the creditors of employers, non-employer contributing entities, and the pension plan ad.ministrator.

GASB Statement No. 71, Pension Transitions for Contributions Made Subsequent to the Measurement Date, an amendment of GASB Statement No. 68

GASB Statement No. 71 amends paragraph 137 of GASB No. 68 to require that, at transition, a govemment recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. GASB No. 68, as amended, continues to require that beginning balances for other deferred outflows of resources and deferred intlows of resources related to pensions be reported at transition only if it is practica! to determine all such amounts.

The provisions of this Statement are required to be applied simultaneously with the provisions of GASB No.68.

26

-Puerto Rico Health Insurance Administration ·

- (A Component Unit of the Commonwealth o/ Puerto Rico) Notes to the Financia[ Statements

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For the Fiscal Years Ended June 30, 2018 and 2017


Adoption of GASB Statement No. 68 and No. 71

Toe impact of adopting GASB Statement No. 68 and No. 71 consisted of restating the June 30, 2017 :financia! statements by recognizing the beginning net pension liability, d.eferred outflows/inflows of resources for pension contributions and related charge to the beginning balance of the Administrati.on net position.

GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principies for State and Local Governments

GASB Statement No. 76 identifies the hierarchy of generally accepted accounting principles (GAAP) for state and local governments and reduces from four to two the categories of authoritative GAAP within the GAAP hierarchy for state and local governments.

This Statement a1so addresses the use of authoritative and nonauthoritati.ve literature for situati.ons when GAAP. does m.:>t specify the accounti.ng treatment for a transaction or other event. Toe adopti.on of GASB Statement No. 76 did not impact the Administration financia! statements.

u. Accounting Pronouncements issued but not yet effective

GASB Statement No. 83, Certain Asset Retirement Obligations

This statement addresses accounti.ng and :financial reporting for certain asset reti.rement obligati.ons. A government that has legal obligations to perform future asset retirement acti.viti.es related to its capital assets should recognize a liability based on the guidance of this statement. Toe requirements of this statement are effecti.ve for reporting periods beginning after June 15, 2018.

GASB Statement No. 87, Leases

Toe objective of this statement is to better meet the information needs of financia! statement users by improving accounting and financia! reporting for leases by governments. Toe requirements of this statement are effective for reporting periods beginning afl:er Decem.ber 15, 2019.

GASB Statement No. 88, Certain Disclosures Related to Debt

Toe primary objecti.ve of this statement is to improve the information that is disclosed in notes to government financia! statements related to debt. Toe requirements of this statement are effecti.ve for reporti.ng periods beginning afl:er December 15, 2019 .

GASB Statement No. 89, Accountingfor Interest Cost Incurred Before the End of a Construction Period.

This statement requires that interest cos:t incurred before the end of a constructi.on be recognized as an expense in the period in which the cost is incurred for financia! statements prepared using the economic resources measurement focus. The requirements of this statement are effecti.ve for reporting periods beginning after December 15, 2019.

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Puerto Rico Health lnsurance Administrati.on (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia[ Statements For the Fiscal Years Ended June 30, 2018 and 2017

3. BASIS OF PRESJ¡Nf ATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Toe Administration is evaluating the impact of these pronouncements.

4. CASH AND CASH EQUIV ALENTS

Toe Administration's cash and cash equivalent as of June 30, 2018 and 2017 consisted of the following:

2018 2017

Cash deposited in commercial banks $ 54,920,277 $ 199,075,022 Deposit account with the Govemment

Development Bank for Puerto Rico 2,492 1,524

Total Cash and Cash Equivalents $ 54,922,769 $ 199,076,546

5. CUSTODIAL CREDIT RISK- DEPOSITS

Custodia! credit risk is the risk that, in an event of a bank failure, the Administration d.eposits might not be recovered. Toe Commonwealth requires that public :funds deposited in commercial banks must be fully collateralized for the am.ount deposited in excess of federal depository insurance coverage. All securities pledged as collateral are held by the Secretary of the Treasmy of the .Commonwealth. Deposits at the GDB and the Economic Development Bank of Puerto Rico are uninsured and uncollateralized as these entities, which are component units of the Comm.onwealth, are exempt from compliance with the collateraliza.tion requirement.

At June 30, 2018 and 2017, the custodia! risk of the Administration am.ounted to approximately $56 million and $230. 7 million, respectively, which is the bank balance of cash and cash equivalents d.eposited in a financia! institution and at the GDB. Toe balances are insured by the Federal Deposit Insurance Corporation up to $250,000. Deposits at the GDB are exempt from the collateral requirement established by the Commonwealth.

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-Puerto Rico Health Insurance Administraüon

- (A Component Unitofthe Commonwealth o/Puerto Rico) Notes to the Financia[ Statements

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For the Fiscal Years EndedJune 30, 2018 and 2017

6. ACCOUNTS RECEIV ABLE

Gross accounts receivable and the allowance for doubtful accounts as of June 30, 2018 and 2017 consist of the following:

Puerto Rico Department of Health Municipalities Legislature appropriations a.t?,d other Pharmacy rebates program Other receivables

Due from employers

Allowance for doubtful accounts - Municipalities Allowance for doubtful accounts - Legislature appropriations andother Allowance for doubtful accounts - Due from employers

Accounts receivable, net

·$

$

2018

496,191,776 109,391,201

9,389,235 59,702,776

149,853 91,818,788

766,643,629

(101,430,752)

(744,520) (91,147,730)

(193,323,002)

573,320,627

2017

$ 37,645,769 86,958,737 2,675,214

61,646,682 327,118

79,275,373

268,528,893

(74,814,801)

(744,520) (79,275,373)

(154,834,694)

$ 113,694,199

Accounts receivable consist of :financial assistance from the federal Medicaid Program and the corresponding state contributions and legislature appropriations. In addition, the administration has receivables from its pharmacy rebates program, employers' contributions, and other contributions. Accounts receivable are stated net of an allowance for doubtful accounts. Toe Ad.m.inistration estimated the allowance based on its historical experience of the relationship between actual collection and billings.

7. DUE FROM MCO's

The Administration contracted the services of a public accounting firm to carry out an interna! aud.it of the claims payment system under the previous TP A model. Toe sample selected. for testing revealed that the Administration made duplicated payments and paid premiums for deceased members to the contracted health insurance entities under such model.

Toe overpayment amount was estimated by first, matching the certified deceased records to the Administration active enrollment file. Toen, for each matching record, the Administration computed the number of months after the date of death for wbich a premium was paid by the corresponding PMPM payment.

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- (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financial Statements

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Far theFiscal Years EndedJune 30, 2018 and 2017

7. DUE FROM MCO's (CONTINUED)

As a result of the audit, the Administration filed a claim to one of the health insurance entities representing 37% of the total overpayment As of the date of this report various validation procedures have been satisfactorily performed over the underlying data, but other allegations brought by the counterparty challenging certain contractual aspects of the GHP contract remain unresolved. The Admimstration believes that it has conclusive evidence to overcome counterparty allegations and recover a part of the amount claimed. AP. of June 30, 2018 and 2017, the allowance for doubtful accounts of the above-mentioned overpayment was established for approximately $11.1 million and $16. 7 million, respectively.

8. ADV ANCE PREMIUM

Amount is mainly related to the balance of $21,335,623 and $21,305,140, as of June 30, 2018 and 2017, respectively, for advance payments made by the Administration to the parent company of one private insmance provider under the MCO model from April to July 2015, consisting of 45% of the first month PMPM payment, with interest payable to the Administration at a prime rate, with a 3% floor.

9. CAPITAL ASSETS

Toe activities of the capital assets accounts for the fiscal years ended June 30, 2018 and 2017 were as follows:

June 30, 2018

Beginning Additions Retirements Ending

Balance

Equipment, computer and software $ 2,183,627 $ 873,974 $ (1,169) $ 3,056,432 Leasehold improvements 179,829 179,829 Furniture and others 1,156,168 (7,924) 1,148,244

3,519,624 873,974 (9,093) 4,384,505 Accumulated depreciation (1,232,994) (777,761) 4,424 (2,006,331)

Capital assets, net $ 2,286,630 $ 96,213 $ (4,669) $ 2,378,174

June 30, 2017

Beginning Adctitions Retirements

Ending Balance Balance

Equipm.ent, computer and software $ 1,301,321 $ 1,874,581 $ (45,040) $ 3,130,862 Vehicles 95,502 95,502 Leasehold improvements 33,123 33,123 Furniture and others 2651629 302985 {362471) 260,137

1,695,575 1,905,566 (81,517) 3,519,624 Accumulated depreciation (1,120,786) (192,018) 79,810 (1,232,994)

Capital assets, net $ 574,789 $ 1,697,231 $ (1,707) $ 2,286,630

30

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Puerto Rico Health lnsurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia/ Statements For the Fiscal Years Ended June 30, 2018 and 2017

10. OBLIGATION PAYABLE GOVERNMENT DEVELOPMENT BANK

0n March 14, 2011, the Administration entered into a Credit Agreement with the Government Development Bank for Puerto Rico in order to pay its obligations to healthcare insurers· incurred prior to fiscal year 2009-2010. Toe aggregate principal amount ofthe non-revolving line of credit was $186,000,000, payable in nine payments of $20,666,667, and each due on March 14 of the years 2015 through 2023. Interest is accrued at a fluctuating annual rate equal to the greater of (i) 1.5% over prime rate, and (ii) 6%.

As of June 30, 2018, and 2017, the outstanding principal balance amounted to $183,251,298 and the accrued interest amounted. to $41,703,344 and $30,708,266, respectively. Toe Administration wi11 pay the principal and interest with appropriations to be received from the Legislature of Puerto Rico through the Puerto Rico Office of Management and Budget (0MB) pursuant to Act No. 173. Notwithstanding, during the fiscal year ended June 30, 2018 and 2017, the 0MB failed to make principal and interest payments on behalf of the Administration. . 0MB did not appropriate any funds to pay the principal and interest of this Credit Agreement

0n July 20, 2016, the Govemor of Puerto Rico signed the Law 74 which authorized the GDB to consolidate all financing agreemeÍlts made to govemmental entities which are payable with appropriations from the legislature. Article 4 of such law lists ali the govemmental entities with financia! agreements and the outstanding principal balance and accrued interest as of December 31, 2015. Toe Administration is listed with an outstanding principal balance of $183,251,298 and accrued interest of $14,215,650 as ofDecember 31, 2015.

11. · ESTIMATED LIABILITY FOR CLAIMS INCURRED BUT NOT REPORTED

Toe liability for claims incurred but not reported is based on historical claims experience data, assumptions, and projections as to future events, including claims frequency, persistency and in:flationary trends determined by an independent actuaria! study. Toe assumptions used in estimating and establishing the liability are reviewed annually based on current circumstances and trends. Toe actuaria! study considered the experience of the Administration from the date Triple-S began administering Mi Salud Program on November 1, 2011 to March 31, 2016, date in which the Administration change to the MCO model.

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- (A Component Unit ofthe Commonwea.lth o/Puerto Rico) Notes to the Financia/ Statements

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FortheFiscal Years EndedJune 30, 2018 and 2017

12. RETIREMENT SYSTEM

Plan description

Toe Employees' Retirement System of the Government of the Commonwealth of Puerto Rico (the ERS), created pursuant to Act No. 447 of May 15, 1951, as amended, is a cost-sharing multiple-employer defined benefit pension plan sponsored by, and reported as a com.ponent unit of the Commonwealth. Toe ERS is a pension trust fund of the Commonwealth. All regular employees of the Administration hired befare January 1, 2000 and less than fifty-five (55) years of age at the date of emp~oyment became members of the ERS as a condition to their employment. No benefits are payable if the participant receives a refund of bis/her accumulated contributions.

Toe ERS. administers different benefit stru.ctures pursuant to Act No. 447, as amended, including a cost-sharing, multi-employer, Defined Benefit Program, a Defined Contribution Program (System 2000 program) anda Contributory Hybrid Program. Benefit provisions vary depending on a member' s date of hire. Substantially all full-time employees of the Commonwealth and its instrumentalities (73 Commonwealth agencies, 78 municipalities, and 55 public corpora.tions) are covered by the ERS. Membership is mandatory far all regular, appointed, and temporary employees ofthe Commonwealth and the Commonwealth's public corporation at the date of employment. Membership is optional far the Govemor of the Commonwealth, Commonwealth secretaries, head of public agencies and instrumentalities,. among others.

Toe benefits provided to members of the ERS are established by Commonwealth law and may be amended only by the Legislature with the Govemor's approval. Act No. 3 of April 4, 2013 (Act No. 3), in conjunction with other recent funding and design changes, provided far a com.prehensive reform of the ERS. Certain provisions are different far the three groups of members who entered the ERS prior to July 1, 2013 as described below:

• Members of Act No. 447 are generally those members hired befare April 1, 1990. • Members of Act No. 1 of February 16, 1990 (Act No. 1) are generally those members hired on or

after April 1, 1990 and on or befare December 31, 1999. • Members of Act No. 305 of September 24, 1999 (Act No. 305 or System 2000) are generally those

members hired on or after January 1, 2000 and on or befare June 30, 2013.

All regular employees hired far the first time on or after July 1, 2013, and farmer employees who participated in the de:fined benefit program and the System 2000 program, and were rehired on or after July 1, 2013, become members of the Contributory Hybrid Program as a condition to their employment. In addition, employees who at June 30, 2013, were participants of previous programs became part of the Contributory Hybrid Program on July 1, 2013.

Each member has a nonforfeitable right to the va1ue of his/her account Members have three options to invest their contributions. Investment income is credited to the member's account semi-annually. Toe Commonwealth does not guarantee benefits at retirement age.

The assets of the De:fined Benefit Program, the Defined Contribution Program and the Contributory Hybrid - Program are pooled and invested by ERS. Future benefit payments wi11 be paid from the same pool of assets.

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In addition, employers' contributions far members hired on or after January 1, 2000 wi11 be used by ERS to reduce the unfunded status of the Defined Benefit Program.

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- (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia/ Statements

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12. RETIREMENT SYSTEM (CONTINUED)

This summary of ERS plan provisions is intended to describe the essential features of the plan. Ali eligibility requirements and benefit amounts should be determined in strict accordance with the plan document itself.

Service retirement eligibility requirements

a) Eligibility for Act No. 447 Members: Act No. 447 members who were eligible to retire as of June 30, 2013 would continue to be eligible to retire at any time. Prior to July l, 2013, Act No. 447 members could retire upon (1) attainment of age 55 with 25 years of credited service, (2) attainment of age 58 with 10 years of credited service, (3) any age with 30 years of credited service, ( 4) for Public Officers in High Risk

Date of birth July 1, 1957 or later July 1, 1956 to June 30, 1957 Before July 1, 1956

Attained age as of Jnne 30, 2013

55 orless 56

57 andup

Retirement eligibility age

61 60 59

In addition to the requirements in the table above, Act No. 447 Public 0:ffi.cers in High Risk Positions who were not eligible to retire as of June 30, 2013 and did not attain 30 years of credited service by December 31, 2013 are e_ligible to retire directly from active service upon the atta:inment of age 55 with · 30 years of credited service.

b) Eligibility for Act No. 1 Mem.bers: Act No. 1 members who were eligible to retire as of June 30, 2013 continue to be eligible to retire at any time. Prior to July 1, 2013, Act No. 1 members could retire upon (1) attainment of age 55 with 25 years of credited service, (2) a.ttáimnent of age 65 with 10 years of credited service, (3) for Public Officers in High Risk Positions, any age with 30 years of credited service, and (4) for Mayors, attainment of age 50 with 8 years of credited service as a Mayor.

Act No. 1 members who were not eligible to retire. as of June 30, 2013 are eligible to retire upon attainment of age 65 with 10 years of credited service. In additi.on, Act No. 1 Public Officers in High Risk Positions who were not eligible to retire as of June 30, 2013 are eligible to retire directly :from active service upon the attainment of age 55 with 30 years of credited service.

e) Eligibility for System 2000 Mem.bers: System 2000 members who were eligible to retire as of June 30, 2013 continue to be eligible to retire at any time. Prior to July 1, 2013, System 2000 members could retire upon attainment of age 55 for Pu.blic Officers in High Risk Positions and attainment of age 60 otherwise.

System 2000 members who were not eligible to retire as of June 30, 2013 are eligible to retire upon attainment of age 55 for Public Officers in High Risk Positi.ons and upon attainment of the retirement eligibility age shown in the table below otherwise.

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- (:4 Component Unit of the Commonwealth o/ Puerto Rico) Notes to the Financia[ Statements

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Date of birth

July 1, 1957 orlater July 1, 1956 to June 30, 1957 July 1, 1955 to June 30, 1956 July 1, 1954 to June 30, 1955 Before July 1, 1954

Attained age as of June 30, 2013

55 orless 56 57 58

59 andup

Retirement eligibility age

65 64 63 62 61

d) Eligibility for Members Hired after June 30, 2013: Attainment of age 58 if a Public Officer in a HighRisk Position and attainment of age 67 otherwise.

Service Retirement Annuity Benefits:

An annuity payable for the lifetime of the member equal to the annuitized value of the balance in the hybrid contribution account at the time of retirement, plus, for Act No. 44 7 and Act No. 1 members, the accrued benefit determined as of June 30, 2013. If the balance in the hybrid contribution account is $10,000 or less, it shall be paid as a lump sum instead of as an annuity.

1) Accrued Benefit as of June 30, 2013 for Act No. 447 Members -Toe accrued beilefit as of June 30, 2013 shall be determined based on the average compensation, as defined, for Act No. 447 members, the years of credited service, and the attained age of the member all as ofJune 30, 2013. For Act No. 447 Mayors, the highest compensation, as defined, as a Mayor is determined as of June 30, 2013.

If the Act No. 447 member had at least 30 years of credited service as of June 30, 2013, the accrued benefit equals 65% of average compensation if the member was under age 55 as of June 30, 2013 or 75% of average compensation if the member was at least age 55 as of June 30, 2013. For participants selecting to coord.inate with social security (the· Coordination Plan), the benefit is re-calculated at the Social Security Retirement Age (SSRA), as defined, as 1.5% of average compensation up to $6,600 multiplied by years of credited service, up to 30 years, plus 65% (7 5% if member was at least age 55 as of June 30, 2013) of average compensation in excess of $6,600.

If the Act No. 447 member had less than 30 years of credited service as of June 30, 2013, and attains 30 years of credited service by December 31, 2013, the accrued benefit equals 55% of average compensation if the mem.ber was under age 55 as of June 30, 2013 or 60%, of average compensation if the member was at least age 55 as of June 30, 2013. For participants selecting the Coordination Plan, the benefit is re-calculated at SSRA as 1.5% of average compensation up to $6,600 multiplied by years of credited service, up to 30 years, plus 55% (60% if member was at least age 55 as of June 30, 2013) of average compensation in excess of $6,600. Mem.ber contributions received from Act No. 447 members eligible for this transitory benefit during the period beginning July 1, 2013 . and ending upon the attainment of 30 years of credited service are considered pre-July 1, 2013 contributions; the contributions to the hybrid contribution account begin after the member attains 30 years of credited service.

If the Act No. 447 member had less than 30 years of credited service as of December 31, 2013, the accrued benefit equals 1.5% of average compensation multiplied by years of credited service up to 20 years, plus 2% of average compensation multiplied by years of credited service in excess of 20 years.

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- (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia[ Statements

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Forthe Fiscal Years EndedJune 30, 2018 and 2017


Maximum benefit is 75% of average compensation. Except for Commonwealth Police and Commonwealth Fire:fighters, the benefit is actuarially reduced for each year payment commences prior to age 58. For participants selecting the Coordination Plan, the basic benefit is re-calculated at SSRA as 1 % of average compensation up to $6,600 multiplied by years of credited service up to 20 years, plus 1.5% of average compensation up to $6,600 multiplied by years of credited service in excess of 20 years, plus 1.5% of average compensation in excess of $6,600 multiplied by years of credited service up to 20 years, plus 2.0% of average compensa.tion in excess of $6,600 multiplied by years of credited service in excess of 20 years. Except for Police and Firefighters, the benefit is actuarially reduced for each year payment commences prior to age 58.

For Act No. 447 Mayors with at least 8 years of credited service as a mayor, the accrued benefit will not be less than 5% of highest compensation, as defined, as a Mayor for each year of credited ~ce as a Mayor up to 10 years, plus 1.5% of highest compensation as Mayor for each year of non-Mayoral credited service up to 20 years, plus 2.0% of highest compensation as Mayor for each year of non-Mayoral credited service in excess of 20 years. Non-Mayoral credited service includes service eamed as a Mayor in excess of 10 years. Maximum benefit is 90%, of highest compensation as a Mayor.

2) Accrued Benefit as of June 30, 2013 for Act No. 1 Members - Toe accrued bene:fit as of June 30, 2013 shall be determined based on the average compensation for Act No. 1 members, the years of credited service, and the attained age of the member ali as of June 30, 2013. For Act No. 1 Mayors, the highest compensation as a Mayor is determined as of June 30, 2013.

1f the Act No. 1 member is a police officer or firefighter with at least 30 years of credited service as of June 30, 2013, the accrued benefit equals 65% of average compensation if the member was under age 55 as of June 30, 2013 or 75% of average compensation if the member was at least age 55 as of June 30, 2013.

For ali other Act No. 1 members, the accrued benefit egua.Is 1.5% of average compensation multiplied by years of credited service. The bene:fit is actuarially reduced for each year payment commences prior to age 65. ·

For Act No. 1 Mayors with at least 8 years of creclited service as a Mayor, the accrued benefit will not be less than 5% of highest compensation as a Mayor for each year of credited service as a Mayor up to 10 years, plus 1.5% ofhighest compensation as Mayor for each year ofnon-Mayoral credited service up to 20 years, plus 2.00/o of highest compensation as Mayor for each year of non-Mayoral credited service in excess of 20 years. Non-Mayoral credited service includes service eamed as a Mayor in excess of 10 years. Maximum benefit is 900/o ofhighest compensation as a Mayor.

CoID1)ulsory Retirement

Ali Act No. 447 and Act No. 1 Public Otñcers in High Risk Positions must retire upon attainment of age 58 and 30 years of credited service. A two-year extension may be requested by the member :from the Superinteµ.dent of the Puerto Rico Police, the Chief of the Firefighter Corps, or supervising authority as applicable.

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- (A Component Unit of the Commonwealth o/ Puerto Rico) Notes to the Financia[ Statements

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For the Fiscal Years E1J..ded June 30, 2018 and 2017


Contributions

1) Member Contributions

E:ffective July 1, 2013, contributions by members are 10% of compensation. However, for Act No. 447 members who selected the Coordination Plan, the member contn"butions are 8.5% of com.pensation up to $6,600 plus 10% of compensation in excess of $6,600 during the 2013-2014 fiscal year and 8.5% of compensation up to $6,600 plus 10% of compensation in excess of $6,600 during the 2013-2014 fiscal

year. Members may voluntarily make additional contn"butions to their hybrid contribution account.

2) Employer Contributions (Article 2-116, as Amended by Law No. 116 of 201 O and Act No. 3)

E:ffective July 1, 2011, employer contributions are 9.275% of compensation. For the next four fiscal years effective July 1, employer contributions wil1 increase annually by 1 % of compensation. For the five fiscal years thereafter, employer contributions will increase annually by 1.25% of compensation, reaching an employer contribution rate of 20.525% of compensation e:ffective July 1, 2020.

3) Supplemental Contributionsfrom the Commonwealth's General Fund, Certain Public Corporations, and Municipalities (Act No. 3)

Effective July 1, 2013, the ERS will receive a supplemental contribution of $2,000 (of which $800 corresponds to the pension plan and $1,200 corresponds to the post em.ployment healthcare benefits plan) each fiscal year for each pensioner (including bene:ficiaries receiving survivor bene:fits) who was previously benefitting as an Act No. 447 or Act No. 1 member while an active em.ployee. This supplemental contribution wil1 be paid by the Commonwealth's General Flllld for former government and certam public corporations without own treasuries employees or by certam public corporations with own treasuries or municipalities for their former employees. ·

4) Afiditional Uniform Contribution (Act No. 32, as amended)

The additional uniform contribution will be certi:fied by the external actuary of the ERS each fiscal year from 2014-2015 through 2032-2033 as necessary to avoid having the projected gross assets ofthe ERS, during any subsequent fiscal year, to fall below $1 billion. Toe additional uniform contribution is to be paid by the Commonwealth's General Fund, public corporations with own treasuries, and municipalities.

Actuaria! assumptions

Toe total pension liability as of June 30, 2016 (the measurement date) was determined by an actuaria! valuation as of July 1, 2015 that was roll forwarded to JW1e 30, 2016 and assuming no gains and losses.

36


- (A Component Unitofthe Commonwealth of Puerto Rico) Notes to the Financial Statements

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Toe actuaria! valuation assumptions employed as of June 30, 2016 were as. follows:

Actuaria! cost method Asset-valuation method Actuaria! assumptions:

Inflation ra.te Salary increases:

Entry age normal Market value of assets

2.5% 3.0% per year. No compensation in.creases are assumed until July 1, 2021 as a result of Act no. 66 and the current general economy.

Toe mortality tables used in the June 30, 2016 actuaria! valuation were as foll~ws:

Pre-retirement Mortality - For general employees not covered under Act no. 127, RP-2014 Employee Mortality Rates formales and females adjusted to reflect Mortality Improvement Scale MP-2016 from the 2006 base year and projected forward using MP-2016 on generational basis. For members covered under Act No. 127, RP-2014 Employee MortalityRates are assumed with blue collar adjustments formales andfemales adjusted to reflect Mortality Improvement Scale MP-2016 from the 2006 base year and projected forward using MP-2016 on genera.tional basis. As generational tables, they reflect mortality improvements both before and after the measurement date. 100% of deaths while in active service are assumed to be occupational only for members covered under Act No. 127.

Post-retirement Healthy Mortality - Rates which vary by gender are assumed for healthy retirees and beneficiaries based on a study of the Plan's experience from 2007 to 2012 and updated expectations regarding future mortality improvement Toe 2010 base rates are equal to 92% ofthe rates from the UP-1994 Mortality Table for Males and 95% of the rates from the UP-1994 Mortality Table for Females, both projected :from 1994 to 2010 using Scale AA. Toe base rates are projected using Mortality Improvement Scale MP-2016 on a generational basis. As a generational table, it reflects mortality improvements both before and after the measurement date.

Post-retirement Disabled Mortality - Rates which vacy by gender are assumed for disabled retirees based on a study of the Plan's experience from 2007 to 2012 and updated expectations regarding fu.ture mortality improvement Toe 2010 base rates are equal to 105% of the rates from the UP-1994 Mortality Table for Males and 115% of the rates from the UP-1994 Mortality Table for Females. Toe base rates are projectéd using Mortality Improvement Scale MP-2016 on a generational basis. As a generational table, it reflects mortality improvements both before and after the measurement date. Most other demographic assumptions used in the July 1, 2014 valuation were based on the results of an actuaria1 experience study using data as of June 30, 2003, June 30, 2005 andJune 30, 2007.

Toe long-term expected rate of return on pension benefits investments was determined in accordance with the asset allocation of the portfolio that was adopted by the ERS's Board during December 2013 and the actuary' s capital market assumptions as of June 30, 2016. In addition, the assumption reflects that loans to members comprise approximately ~0% of the portfolio and, liave an approximate retum of % with no volatility. Toe long-term expected rate of retum on pension benefits investments of 6.55% as of June 30, 2016 is equal to the highest debt service of the senior pension :funding bonds payable which range :from 5.85% to 6.55% per year.

37

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia[ Statements For theFiscal Years EndedJune 30, 2018 and 2017


Toe pension plan's policy regard.ing allocation of invested assets is established and may be amended by the ER.S's Board. Plan assets are managed on a total retum basis with a long-term objective of achieving and maintaining a positive impact on the ERS' s financial condition for the benefits provided through the pension programs.

Additional information on the ERS is provided in its stand-alone basic financial statements, a copy of which can be obtained from the ERS Administration, PO Box 42003, San Juan, PR 00949.

0n October 30, 2016, the Fiscal Oversight Board for Puerto Rico designated the Government of Puerto Rico, the ER.S for Govemment Employees, the Judicial ERS, and the Teacher ERS (together the "ERSs"), the

- University of Puerto Rico and 21 other public corporations of Puerto Rico as covered entities, subject to fiscal supervision in accordance with the federal legislation Puerto Rico Oversight, Management, and Economic Stability Act, better known as PROMESA -

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-

Due to the lack of projected liquidity of the ERSs, the Government of Puerto Rico will protect payments to pensioners. Effective July 1, 2017, the Government of Puerto Rico adopted the "PayGo" system. Under this new system, the Government will be responsible for paying the deficiency of the ERSs to provide retirement benefits for the pensioners.

Also, as of July 1, 2017, employer contributions, contributions under special laws and the Uniform Additional Contribution (Law no. 32-2013) will be e1iminated and replaced with the ''PayGo". Currently, the Government of Puerto Rico is work:ing on reforming the ERSs :from its current form to a New Defined Contribution Plan managed by a private entity.

Accord.ingly, the Puerto Rico Department ofthe Treasury will bill govemment agencies, public corporations, municipalities, the executive branch, the legislative branch and the judicial branch (together the "Government Agencies") a month1y charge to cover the retirement benefits to their pensioners. The ERSs will determine and administer the amount of the payment by pensioner that will correspond to each of the Government ~gencies. This charge is known as the "PayGo".

Total employer contributions for the years ended June 30, 2018 and 2017, am.ounted to approxima.tely $264,000 and $640,000, respectively.

As of the date of the release of this report, the ERS has not provided the Administration with the required information to implement the requirements of GASB Statement no. 68 for the year ended June 30, 2018. Therefore, the accompanying financial statements do not have any adjustments that will be necessary for the Administration to account for its proportionate share of the net pension liability, deferred inflow of resources and deferred outflow of resources in the statements of net position as of June 30, 2018, as well as the effect in the recorded· pension expense in the statements revenue, expenses and changes in net position for the year ended June 30, 2018. Also, additional disclosures required by GASB Statement no. 68 as well as required supplementary information have been omitted from these basic financial statements.

13. EARLYTERMINATIONBENEFITS

0n July 2, 2010, the Commonwealth Enacted Act No. 70 to establish a program that provides benefits for - early retirement or economic incentives for voluntary employment termination to eligible employees, as

38

-


- (A Component Unit of the Commonwealth of Puerto Rico) Notes to the Financia[ Statements

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13. EARL Y TERMINATION BENEFITS (CONTINUED)

14.

defined, including employees of the Administration. Act No. 70 established that early retirement benefits will be provided to eligible employees that have completed between 15 to 29 years of creditable services and will consist ofbiweekly benefits ranging from 37.5% to 50% of each employee's salary, as defined. In this early retirement bene:fit program, the Administration wil1 pay the employer contnbutions to the Retirement System and the corresponding pension until the employee complies with the age requirements and 30 years of creditable services applicable to the Retirement System. Economic incentives are available to eligible employees that qualify for retirement benefits. Economic incentives consist of a payment ranging from one to six months of salary. Additionally, eligible employees that choose to participate in this program, other than those qualifying for retirement bene:fits, are eligible to receive health plan coverage for up to 12 months in a health plan selected by management of the Comm.onwealth of Puerto Rico.

At June 30, 2018 and 2017, unpaid long-term benefits granted on this program were discounted 3%. Total accrued terminations benefit as of June 30, 2018 and 2017 amounted to approximately $3,745,000 and $3,976,000, respectively.

COMMITMENT AND CONTINGENCIES

Commitments

0n July 1, 2014, the Administration signed alease agreement for five years commencing on July 1, 2014 through June 30, 2019 with an automatic extension for another five years from July 1, 2019 through J~~JO, 2024. Toe lease agreement has a cancellation penalty of$950,000 if the lea.se is not renewed at the end ofthe five-year term. Rent expense was $388,799 for fiscal years ended June 30, 2018 and 2017, respectively.

Total future roinimnm lease payments on this operating lease as of June 30, 2018, are as follows:

Y ear end.ing June 30, Amount

2019 $ 388,799

2020 400,375 2021 412,454 2022 412,454 2023 412,454

Thereafter 412,454

$ 2,438,990

Contingencies

Toe Administration is defendant and/or co-defendant in legal proceed.ings pertaining to matters incidental to the performance of its operations. With respect to the pend.ing and threatened litigations, the Administration, in consultation with legal counsel, has advised that at this stage of the proceedings they cannot offer an opinion as to the probable outcome. Accordingly, management does not consider necessary making any provision in its books for these cases and intends to contest them vigorously.

39

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth o/ Puerto Rico) Notes to the Financial Statements For the Fiscal Years Ended June 30, 2018 and 2017

14.

15.

COMMITMENT AND CONTINGENCIES (CONTINUED)

Federal grants

Toe Administration receives as a sub-grantee financia! assistance from the federal govemment corresponding to Medicaid Program passed through the Puerto Rico Department of Health, the grantee. Federal grants are subject to financia! and compliance audits by grantor agencies to determine the Administration's compliance with the regulations and conditions of such grants. It is management' s opinion that no additional material unrecorded liabilities will arise from audits previously performed orto be performed.

RECLASSIFICATIONS

Certain amounts in the 2017 financia! statements have been reclassified to conform to the current year's presentation.

- 16. RESTATEMENT

Toe Administration is restating its financia! statements for the year ended June 30, 2017 to correct various - account balances related to the adoption of GASB Statement No. 68 as summariz.ed below:

Pension expense - Deferr~d outflows related to pension plan

Deferred inflows related to pénsion plan Net pension Jiability -

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17.

Net deficit at beginning of year as previous reported

Restatement adjustment -Understatement ofDeferred outflows related to pension plan Understatement ofDeferred inflows related to pension plan Understatement ofnet pension Jiability Overstatement of accounts payable

Net deficit at beginning of year, as restated

SUBSEQUENT EVENTS

$ l 2281z489

$ 124792600

·$ 90¡167

$ 22670¡926

Total Net Deficit

$

$

(130,086,125)

5,315,732

(377,759) (21,777,578)

7,239,102

(139,686,628)

.... Toe Administration has evaluated all subsequent events through January 17, 2019, which is the date the financial statements were available to be issued. The subsequent events disclosed are principally those which management believes are of su:fficient public interest for disclosure .

.... 40

-

-

-....

...

...

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Puerto Rico Health Insurance Administration (A Component Unit ofthe Commonwealth of Puerto Rico) Notes to the Financia/ Statements Far the Fiscal Years EndedJune 30, 2018 arul 2017

17. SUBSEQUENT EVENTS (CONTINUED)

0n July 3, 2018, the Board of Directors of the Administration awarded new contracts for the new Government Healthcare Program to five private managed care organiz.ations pursuant to a bidding process. Under the new model, beneficiaries will have the option to select the MCO and the network of providers of their choice. In addition, it will offer an enhanced care model for patients with certain chronic and high-cost, high-need (HCHN) conditions such as canéer, diabetes, end-stage renal disease, chronic obstructive pulmonary disease with asthma, hypertension, severe cardiac insu:ffi.ciency, serious mental illness, and serious emotional disorder. Furthermore, the new model will sttengthen oversight and the audit process with the creation of the Medicaid Fraud Control Unit and wi11 also comply with the measures and cost-control objectives established in the Commonwealth's fiscal plan.

41

-- Puerto Rico Heal.th lnsurance Administration

(A Component Unit of the Commonwealth of Puerto Rico)

- Schedule of Expenditures of Federal Awards For the Fiscal Year ended June 30, 2018

- Federal Grantor/Pass-througb/ Federal Program or auster Title CFDANumber Expenditures

- U.S. Department ofHealth and Human Services

Major Programs: - Passed-through the Puerto Rico Department ofHealth

Medica! Assistance Program 93.778 $ 1,986,071,353 - 93.778 ARRA-Medical Assistance Program 16,206,314

ARRA-Medical Assistance Program 93.778 2,016,825

Total Medical Assistance Program Cluster 2,004,294,492

Cbildren's Health Insurance Program 93.767 173,693,057 - Total Expenditures ofFederal Awards $ 2,177,987,549

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Toe accompanying notes are an integral part of this schedule. -

42

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Puerto Rico Health Insurance Administration (A Component Unit ofthe Commonwealth of Puerto Rico) Schedule of Expenditures of Federal Awards For the Fiscal Year ended June 30, 2018

l. BASISOFPRESENTATION

Toe accompanying schedule of expenditures of federal awards (the Schedule) includes the federal grant activity of the Puerto Rico Health lnsurance Administration under programs of the federal government for the year ended June 30, 2017. Toe information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principies, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations · of the Puerto Rico Health Insurance Administration (the Administration), it is not intended to and does not present the financial position, changes in net assets, or cash flows of the Administration.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Expenditures reported on the Schedule are reported on the accrua1 basis of accounting. Such expenditures are recognized following the cost principies contained in the Uniform Guidance, 2 CFR Part 200, wherein certain types of expenditures are not allowable or are limited as to reimbursement

3. PASS-THOUGH ENTITY IDENTIFYING NUMBER

State or Local government redistribution of federal awards to 1]ie Administration, known as ''pass-through awards", should be treated by the Administration as though they were received directly from the federal government Uniform Guidance requires the schedule to ii;lclude the name of the pass-through entity for the federal awards received.

4. INDIRECT COST RATE

Toe Puerto Rico Health Insurance Administration has elected not to use the 10% de minimis indirect cost rate allowed under the Uniform Guidance.

43

- •• Aquino, De Córdova, A1faro & U>., llP ,., CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS

Jorge Aquino Barreto, CPA, CVA ferry De Córdova, CPA, JD

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Eduardo González Green, CPA, CFE

INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED

ON AN AUDIT OF THE FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Board of Directors of Puerto Rico Health Insurance Administration San Juan, Puerto Rico

We bave audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to :financia! audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the :financia! statements of the govemmental activities of Puerto Ri.co Health Jnsurance Administration (the Administration), as of and for the year ended June 30, 2018, and the related notes to the :financia! statements, which collectively comprise the Administration's basic financia! statements and bave issued our report thereon dated January 17, 2019. Our report was qualified because the administration does not have the information available to implement the requirements of Statement No. 68 of the Governmental Accounting Standards Board, "Accounting and Financia! Reporting for Pensions", an amendment of GASB Statement No. 27. In addition, our report includes and emphasis of matter disclosure because the Administration is reported as part of the Commonwealth of Puerto Rico ("Commonwealth") and the financia! condition and liquidity of the Commonwealth has deteriorated which could result in an adverse effect on the Administration's financia! position.

Interna/ Control Over Financia/ Reporti.ng

In planning and performing our audit on the financia! statements, we considered the Administration's interna! control over financia! reporting (interna! control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the :financia! statements, but not for the purpose of expressing an opinion on the effectiveness of the Administration's internal control. Accordingly, we do· not express an opinion on the effectiveness of the Administration's internal control.

A deficiency in interna[ control exists when the design of operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatement on a timely basis A material weakness is a deficiency, or a combination of deficiencies, in interna! control, such that there is a reasonable possibility that a material misstatement of the entity's financia! statements will not be prevented, or detected and corrected on a timely basis.

44 CORRESPONOENT of. • • •

P.O. Box 70262, San Juan, Puerto Rico 00936-8262 • Cecilia's Place Suite C-1, #7 Rosa Street

- Isla Verde, P.R. 00979 • Phone (787) 253-9595 • Fax (787) 253-9511

Praxitx·: GLOBAL ALLIANCE OF• • INDEPENDENT FIRMS

-- A sigrzificant deficiency is a deficiency, or a combination of deficiencies, in internal control that is

less severe than a material weakness, yet important enough to merit attention by those charged with governance. -

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Our consideration of interna! control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in interna! control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we identified a deficiency in interna! control that we consider to be a significant deficiency, described in the accompanying schedule of findings and questioned costs as item 2018-001.

Compliance and Other Matt.ers

As part of obtaining reasonable assurance about whether the Administration's financia! statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financia! statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. Toe results of our tests disclosed an instance of noncompliance that is required to be reported under Government Auditing Standards, and wbich is described in the schedule of findings and questioned costs as item 2018-001.

Purpose of this Report

Toe purpose of this report is solely to describe the scope of our testing of intemal control and éompliance and the result of that testing, and not to provide an opinion on the effectiveliess of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Administration's interna! control and compliance. Accordingly, this communication is not suitable for any other purpose.

l ¡J~ ,-{;j, JJf Carolina,PuertoRico /J ~O)~ bfrl.~,v-0 January 17, 2019 • ~

Stamp number E364049 of Puerto Rico CP A Society has been affixed to the original report

~• Aquino, DeCórdova, Alfaro & Co., LLP · ; . · C ERTi FlED Pl.JSLIC A.CCO{_JNT ANTS & BUS1NESá5c..DV1$0RS

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- •• Aquino, De Córdova, Alfaro & C.O., LLP ,, CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS

Jorge A.quino Barreto, CPA, CVA ferry De C6rdova, CPA, JD Eduardo González Green, CPA, CFE

--

INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH REQUIREMENTS - APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER

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COMPLIANCE; AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL A W ARDS REQUIRED BY THE UNIFORM GUIDANCE

To the Board ofDirectors of Puerto Rico Health Insurance Administration San Juan, Puerto Rico

Report on Compliance for Each Major Federal Program

We have audited the Puerto Rico Health Jnsurance Administration 's (the Administration) compliance with the types of compliance requirements described in the 0MB Compliance Supplement that could have a direct and material e:ffect on each of the Administration's major federal programs for the year ended June 30, 2018. Toe Administration's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs.

. Manqge,nent's Responsibüity

Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs

Auditor's Responsibüity

Our responsibility is to express an opinion on compliance for each of the Administration's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financia! audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principies, and Audit Requirements far Federal Awards (Uniform Guidance) Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material e:ffect on a major federal program occurred. An audit includes examining on a test basis, evidence about the Adm.inistration's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances.

46 CORRESPONDENT of • • • •

P.O. Box 70262, San Juan, Puerto Rico 00936-8262 • Cecilia's Place Suite C-1, #7 Rosa Street

- Isla Verde, P.R. 00979 • Phone (787) 253-9595 • Fax (787) 253-9511

Praxitx:: GLOBAL ALLIANCE OF•" INDEPENDENT FIRMS

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We believe that our audit provides a reasonable basis for our opinions on compliance for each major federal program. However, oui audit does not provide a legal determination of the Administration's compliance.

Opinion on Each Major Federal Program

In our opinion, Puerto Rico Health Tnsurance Administration complied, in all material respects, with the types of compliance requirements r~ferred to a.hove that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2018.

Other Matter

Toe results. of our auditing protedures disclosed an instance of noncompliance which is required to be reported in accórdance with the Uniform Guidance and which · is described in . . the accompanying schedule of findings and questioned costs as ítem 2018:-001. Otrr opinion on each major federal program is not modified with respect to this matter.

The Administration's response to the noncompliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. Toe Administration's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response.

Report on Internal Control over Complümce

Management of the Administration is responsible for establishing and maintaining effective internal control over oompliance with the types of compliance requirements referred to above.

··In plaruring and perfÓrming our audit of compliance, we considered the Administration's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of interna! control over compliance. Accordingly, we do not express an opinion on the effectiveness ofthe Administration's intemal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow m~gement or eniployees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a tiniely basis. A material weakness in internal control over compliance is a deficiency, or a combination of de:ficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in intemal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less

_ severe than a material weakness in internal contrql over cempliance, yet.important enough to

•

erit attention by those charged with. govemance.

_ Aquino, Dec.ónlow,.Alfaro & ~~ LLP C ER. t I Fl ED PUBLIC AC·COtJNT ANTS & BUSINESS ADVIS{)RS

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Our consideration of interna! control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify ali deficiencies in interna! control over compliance that might be material wea.knesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not been identified. We did not identify any deficiencies in interna! control over compliance that we consider to be material weaknesses. However, we identified a deficiency in interna! control over compliance, as described in the accompanying schedule of findings and questioned costs as ítem 2018-001, which we consider to be a significant deficiency.

The Administration' s response to the interna! control o ver compliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. Toe Administration's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response.

Toe purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.

Report on Schedule o/ Expenditures o/ Federal Awards Required by the Uniform Guidance

We have audited the financia! statements of the Puerto Rico Health Insurance Administration as of and for the year ended June 30, 2018 and have issued our report thereon dated January 17, 2019, which contained a qualified opinion on those financia! statements. Our audit was conducted for the purpose of forming an opinion on the .financia! statements as a whole. Toe.· accompanying ·schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the financia! statements. Such information is the responsibility of ma.Iiagement and was derived :from and relates directly to the underlying accounting and other records used to prepare the financia! statements.

Toe information has been subjected to the auditing procedures applied in the audit of the financia! statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financia! statements or to the financia! statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financia! statements as a whole. J ¡ U

• º1 b., &,-,J-r;-, ~ r 4,. Carolina, Puerto Rico - '0 January 17, 2019

Stamp number E363050 of Puerto Rico CPA Society has been a:ffixed to the

tlli~üiñi, DeCórdova, Alfuro & Co~ LLP -w CERTlFlED PUBLIC ACCC!{JNT/i;NTS & BlJS.INE~8,._c,v1SORS

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Puerto Rico Health Insurance Administration (A Component Unit of the Commonwealth o/ Puerto Rico) Schedule of Findings and Questioned Costs For the Fiscal Year ended June 30, 2018

Section 1 -Sunn:muy of Auditor's Results

Financial Statements Type ofaurutor's report issued lntemal control over financial reporting

1. Material weaknesses identi:fied 2. Significant deüncies tbat are not conmered to be material weakness 3. N oncorq:>Jiance mterial to fiaa.ncial st.a.teUEnts noted

Federal awards

Intema1 control over mjor progra.ms: 1. Material weakness ideIJtified 2. Significant deüncies tbat are not considered to be múerial weamss 3. Type ofauditor's report :issued on compliance :fbr ma.jorprogram 4. Any audit :findings cmchsed tbat are required to be reported in accordance witb.

FR § 200.516Ja)

Identification of major pro~:

N ame. of Federal Program or Ouster

Medical Assmance Program (Medica.ii; Ti& XIX) ARRA - lilT Incentive Paymmts ARRA - lilT .Admiamative In:pbrentation Paymmts Children's Hea1th Imurance Program (CHIP)

CFDA Numbers

93.778 93.778 93.778 93.767

Do llar thresmli used to dmiagum between Type A mi Type B progra.ms:

Aud.itee qua]ified as hw-risk auditee

49

Qua.Jified

No Yes

No

No Yes·

Ummd.ified Yes

$ 6,5.33,963

No

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Puerto Rico Health lnsurance Administration (A Component Unit o/ the Commonwealth o/ Puerto Rico) Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2018

Section 2 - Financia! Statements Findings

Significant deficiency for the year ended June 30, 2018, see finding number 2018-001.

50

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Puerto Rico Health lnsurance Administration (A Component Unitofthe Commonwealth o/Puerto Rico) Schedule of Findings and Questioned Costs For the Fiscal Year ended June 30, 2018

Section 3 - Federal Award Findings

Finding Refererice Number 2018-001

Federal Program Medical Assistance Program (CFDA 93. 778)

Federal Grantor U.S. Department of Health and Human Services

Compliance Requirement ADP Risk Analysis and System Security Review

Condition Toe security plan for ADP (Automatic Data Processing) system, including policies and procedures to address contingency plans in the event óf Uil:foreseen interruptions has not been implemented and tested.

Criteria State agencies shall review the ADP system security installations involved in the administration of U.S. Department of Health & Human Services (HHS) programs on a biennial basis. At a minimum, the reviews shall include an evaluation of physical and data security operating procedures, and personnel practices. Toe Sta.te agency shall maintain reports on its biennial ADP system security reviews, together with pertinent supporting documentation, for HHS on-site reviews (45 CFR section 95.621).

Effect Critical business :functions may not be resumed on time in case an emergency or disaster causes the ADP system resources to become unable to meet critical processing needs in the event of a short or long-term interruption of service.

Questioned costs None

Recommendation Toe Ad.ministration shoul.d establish and maintain a program for conducting periodic risk analysis to ensure appropriate, cost effective safeguards are incorporated into new and existing systems.

Management Response Toe Ad.ministration is in the process of obtaining qualified bidders from a request for proposal (RFP) process for testing its Business Continuity Plan (Plan) with .the pmpose to establish the ADP Risk Analysis and System Security Review.

51


(A Component Unit o/ the Commonwealth o/ Puerto Rico) - Summary Schedule of Prior Year Findings and Questioned Costs

For the Fiscal Year ended June 30, 2018

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--. -

Finding Reference Number

2017-01 and 2016-01

Finding Description

Business Continuity

52

Questioned Cost

None

Finding Current Status

Uncorrected

ases - pr - ases... · estados financieros auditados periodo terminado 30 de junio 2018 honorable...

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