community hospitals of central california and affiliated corporations dba community ... ·...
TRANSCRIPT
Report of Independent Auditorsand Consolidated Financial Statements
Community Hospitals of Central California and Affiliated Corporations
dba Community Medical Centers
August 31, 2012 and 2011
CONTENTS
PAGEREPORTOFINDEPENDENTAUDITORS 1CONSOLIDATEDFINANCIALSTATEMENTS Consolidatedbalancesheets 2 Consolidatedstatementsofoperations 3 Consolidatedstatementsofchangesinnetassets 4 Consolidatedstatementsofcashflows 5 Notestoconsolidatedfinancialstatements 631SINGLEAUDIT Scheduleofexpendituresoffederalawards 33 Notestoscheduleofexpendituresoffederalawards 34 Reportofindependentauditorsoninternalcontroloverfinancialreportingand oncomplianceandothermattersbasedonanauditoffinancialstatements performedinaccordancewithGovernmentAuditingStandards 3536 Reportofindependentauditorsoncompliancewithrequirementsthatcould haveadirectandmaterialeffectoneachmajorprogramandoninternal controlovercomplianceinaccordancewithOMBCircularA‐133 3738 Scheduleoffindingsandquestionedcosts 39 Summaryscheduleofpriorauditfindings 40
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REPORTOFINDEPENDENTAUDITORS
TotheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersWehave audited the accompanying consolidated balance sheets of CommunityHospitals of Central California andAffiliated Corporations dba Community Medical Centers (CMC) as of August 31, 2012 and 2011, and the relatedconsolidated statements of operations, changes in net assets, and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of CMC’smanagement. Our responsibility is to express anopinionontheseconsolidatedfinancialstatementsbasedonouraudits.
Weconductedouraudits inaccordancewithauditingstandardsgenerallyaccepted intheUnitedStatesofAmericaand the standards applicable to financial audits contained in Government Auditing Standards, issued by theComptroller General of the United States. Those standards require thatwe plan and perform the audits to obtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreeofmaterialmisstatement.Anauditincludesconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CMC’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anauditincludesexamining,onatestbasis, evidencesupporting theamountsanddisclosures in theconsolidated financial statements, assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallconsolidatedfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.
In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, theconsolidatedfinancialpositionofCMCasofAugust31,2012and2011,andtheresultsofitsconsolidatedoperations,changes in its net assets, and its cash flows for the years then ended in conformity with accounting principlesgenerallyacceptedintheUnitedStatesofAmerica.
InaccordancewithGovernmentAuditingStandards,wehavealso issuedareportdatedNovember21,2012,onourconsiderationofCMC’sinternalcontroloverfinancialreportingandourtestsofitscompliancewithcertainprovisionsoflaws,regulations,contractsandgrantagreements,andothermatters.Thepurposeofthatreportistodescribethescopeofourtestingofinternalcontroloverfinancialreportingandcomplianceandtheresultsofthattesting,andnottoprovideanopinionontheinternalcontroloverfinancialreportingoroncompliance.ThatreportisanintegralpartofanauditperformedinaccordancewithGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit.
Ourauditwasconductedforthepurposeofforminganopinionontheconsolidatedfinancialstatementsasawhole.The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis asrequiredbyU.S.OfficeofManagementandBudgetCircularA‐133,AuditsofStates,LocalGovernments,andNon‐ProfitOrganizations, and is not a required part of the consolidated financial statements. Such information is theresponsibility of management and was derived from and relates directly to the underlying accounting and otherrecordsused toprepare the consolidated financial statements.The informationhasbeen subjected to theauditingproceduresappliedintheauditoftheconsolidatedfinancialstatementsandcertainadditionalprocedures,includingcomparingandreconcilingsuchinformationdirectlytotheunderlyingaccountingandotherrecordsusedtopreparethe consolidated financial statements or to the consolidated financial statements themselves, and other additionalproceduresinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Inouropinion,thescheduleofexpendituresoffederalawardsisfairlystatedinallmaterialrespectsinrelationtotheconsolidatedfinancialstatementsasawhole.
Stockton,CaliforniaNovember21,2012(exceptforthescheduleofexpendituresoffederalawardswhichisdatedMay30,2013)
COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDBALANCESHEETS(Inthousands)
2 Seeaccompanyingnotes
2012 2011Currentassets:
Cashandequivalents 70,300$ 96,528$Short‐terminvestments 14,283 39,816Patientaccountsreceivable(lessallowancefordoubtful
accountsof$102,547in2012and$108,440in2011) 149,831 135,668DuefromStateofCaliforniaforsupplementalfunding 13,722 9,947Otherreceivables 79,948 3,157Inventories 11,636 11,236Prepaidexpensesandother 14,496 31,492
354,216 327,844Assetslimitedastouse:
Board‐designatedassets 267,343 219,886Assetsheldbytrusteefor:
Debtservice 35,571 40,846Self‐insuranceincaptiveinsurancecompany 12,764 13,427Projectfunds ‐ 23,413
Donor‐restrictedassets 13,110 12,443328,788 310,015
Property,plant,andequipment,net 496,967 457,859Constructioninprogress 254,182 208,781Otherassets 61,303 61,004
1,495,456$ 1,365,503$
Currentliabilities:Accountspayable 64,289$ 52,192$Accruedcompensationandemployeebenefits 61,872 67,851Estimatedthird‐partysettlements 16,005 23,985Otheraccruedliabilitiesanddeferredrevenue 50,233 52,070Currentmaturitiesoflong‐termdebt 11,542 10,951
203,941 207,049Long‐termdebt,lesscurrentmaturities 525,944 537,668Pensionbenefitobligation 78,261 63,607Otherlong‐termobligations 52,168 43,490
860,314 851,814Netassets:
Unrestricted 622,032 501,246Temporarilyandpermanentlyrestricted 13,110 12,443
635,142 513,6891,495,456$ 1,365,503$
AUGUST31,
ASSETS
LIABILITIESANDNETASSETS
COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONS
dbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFOPERATIONS(Inthousands)
Seeaccompanyingnotes 3
2012 2011Unrestrictedrevenues,gains,andothersupport:
Netpatientservicerevenues 1,246,644$ 1,175,931$Less:Provisionforbaddebts (113,946) (105,782)
1,132,698 1,070,149Premiumrevenue 1,345 1,327Investmentincome 15,970 8,659Otherrevenue 34,696 32,541
1,184,709 1,112,676Expenses:
Salaries,wages,andbenefits 527,255 503,502Supplies 183,283 177,256Outsideservices 166,868 151,893Insurance 5,187 5,472Depreciationandamortization 46,350 41,358Rentalandlease 10,257 11,537Interest 15,738 15,961Utilities 10,592 10,183Other 86,713 77,791Gainonearlyextinguishmentofdebt ‐ (1,683)
1,052,243 993,270Excessofrevenues,gainsandothersupportoverexpenses 132,466 119,406
Netchangeinunrealizedgainsandlossesoninvestments 1,013 562
Netassetsreleasedfromrestrictionsforequipmentacquisition 2,538 4,484
Changeinunfundedaccumulatedpensionbenefitobligation (15,230) 14,682
Other (1) ‐Changeinunrestrictednetassets 120,786$ 139,134$
YEARSENDEDAUGUST31,
COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFCHANGESINNETASSETS(Inthousands)
4 Seeaccompanyingnotes
Temporarilyand
permanentlyUnrestricted restricted Total
BalanceatAugust31,2010 362,112$ 14,318$ 376,430$Excessofrevenues,gains,andother
supportoverexpenses 119,406 ‐ 119,406Netchangeinunrealizedgainsand
lossesoninvestments 562 ‐ 562Donor‐restrictedcontributions ‐ 4,458 4,458Netassetsreleasedfromrestrictionsand
usedforoperations ‐ (1,849) (1,849)Netassetsreleasedfromrestrictionsfor
equipmentacquisition 4,484 (4,484) ‐Changeinunfundedaccumulatedpension
benefitobligation 14,682 ‐ 14,682139,134 (1,875) 137,259
BalanceatAugust31,2011 501,246 12,443 513,689Excessofrevenues,gains,andother
supportoverexpenses 132,466 ‐ 132,466Netchangeinunrealizedgainsand
lossesoninvestments 1,013 ‐ 1,013Donor‐restrictedcontributions ‐ 5,114 5,114Netassetsreleasedfromrestrictionsand
usedforoperations ‐ (1,909) (1,909)Netassetsreleasedfromrestrictionsfor
equipmentacquisition 2,538 (2,538) ‐Changeinunfundedaccumulatedpension
benefitobligation (15,230) ‐ (15,230)Other (1) ‐ (1)
120,786 667 121,453BalanceatAugust31,2012 622,032$ 13,110$ 635,142$
COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONS
dbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFCASHFLOWS(Inthousands)
Seeaccompanyingnotes 5
2012 2011Cashflowsfromoperatingactivities:
Changeinnetassets 121,453$ 137,259$
Adjustmentstoreconcilechangeinnetassetstonetcash
providedbyoperatingactivities:
Netunrealizedgainsoninvestments (1,013) (562)
Donor‐restrictedcontributions (4,986) (4,211)
Provisionforbaddebts 113,946 105,782
Depreciationandamortization 46,350 41,358
Amortizationofbonddiscount/premium (178) 120
Netchangesinoperatingassetsandliabilities:
Patientaccountsreceivableandotherreceivables (204,900) (121,245)
DuefromStateofCaliforniaforsupplementalfunding (3,775) (220)
Inventories,prepaidexpenses,andother 14,732 (32,682)
Accountspayableandotheraccruedliabilities 22,595 44,150
Accruedcompensationandemployeebenefits (5,979) 4
Pensionbenefitobligation 14,654 (11,183)
Estimatedthird‐partysettlements (7,980) 25,728
104,919 184,298
Cashflowsfrominvestingactivities:
Purchasesofproperty,plant,andequipment (132,952) (155,739)
Purchaseofinvestments (191,365) (219,417)
Proceedsfromsalesofinvestments 175,498 129,239
Cashandcashequivalentsmovementsinassetslimitedastouse (4,476) 81,609
Changeinassetsunderbondindentureagreements 28,116 11,003
Proceedsfromsaleofinterestinsubsidiary ‐ 2,480
Other 1 ‐
(125,178) (150,825)
Cashflowsfromfinancingactivities:
Repaymentsoflong‐termdebt (11,260) (33,752)
Proceedsfromlong‐termdebt 305 ‐
Proceedsfromrestrictedcontributions 4,986 4,211
(5,969) (29,541)
(26,228) 3,932
Cashandequivalents,beginningofyear 96,528 92,596Cashandequivalents,endofyear 70,300$ 96,528$
Supplementaldisclosureofcashflowinformation:
Interestpaid 27,153$ 26,519$
YEARSENDEDAUGUST31,
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NOTE1–ORGANIZATIONCommunityHospitalsofCentralCaliforniaandAffiliatedCorporations,dbaCommunityMedicalCenters(CMC),isanot‐for‐profitmultifacilityintegratedhealthcareorganizationlocatedinFresno,California.CMChasestablishedanObligatedGrouptoaccesscapitalmarkets.ObligatedGroupmembersarejointlyandseverallyliableforthelong‐termdebtoutstandingundertheObligatedGroup’smastertrustindenture.TheObligatedGroupmembers are denotedwith an asterisk (*). CMC includes the following consolidatedentities:Acutecareservices–Acutecareservicesconsistofasinglecorporateentity,FresnoCommunityHospitalandMedicalCenter*,whichoperatesastwogeneralacutecarehospitalsthatprovideafullrangeofmedical,surgical,intensivecare,emergencyroom,burnandtrauma,andobstetricservices.Thesefacilitiesalsoofferhomehealth,psychiatric,rehabilitation,andavarietyofotherservices.Theacutecarehospitalsare:
CommunityRegionalMedicalCenter(CRMC) ClovisCommunityMedicalCenter(CCMC)
EffectiveOctober1,2009,FresnoCommunityHospitalandMedicalCenterexchangedits80.9%interestinAdvancedMedicalImaging(AMI)andits19.1%interestinCaliforniaImagingInstitute(CII)fora50%interestinanewmedicalimagingcompanyformedfromthemergerofAMIandCII.Thenewlyformedcompany, CII LLC, operates two freestanding outpatient imaging centers that provide comprehensiveimagingservices.Itisownedinpartnershipwithcertainradiologyphysicians.FresnoCommunityHospitalandMedicalCenteraccountsforthisinvestmentusingtheequitymethod.
Corporateactivities–Corporateactivitiesconsistofcentralizedsharedservices,realestateactivities,andretailpharmacyoperations.
CommunityHospitalsofCentralCalifornia*(CHCC) CommunityHealthEnterprises(CHE)
FresnoHeartandSurgicalHospital*–TheFresnoHeartandSurgicalHospitalprovidescardiac‐relatedservicesandbariatricandotherminimallyinvasivesurgeries.
DeranKoligianAmbulatoryCareCenter–DeranKoligianAmbulatoryCareCenter,LLC(DKACC)isanonprofitsinglememberLLC,whosesolemember isFresnoCommunityHospitalandMedicalCenter.DKACCcompletedconstructionofanambulatorycareclinicbuildingontheCRMCcampusduring2010,whichisleasedtoCRMC. Community Insurance Services Company – Effective September 1, 2009, CMC formed CommunityInsuranceServicesCompany(CISC),whichisawhollyownedcaptiveinsurancecompanythatmaintainsprofessionalandgeneralliabilitycoverage.
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NOTE1–ORGANIZATION(CONTINUED)Physicianmanagementservices–PhysicianmanagementservicesconsistofSantéHealthSystem(Santé),which is amanagement service organization (MSO) providing independent physician association andphysicianpracticemanagementservices.InOctober2010,CHCCsold50%ofitsinterestinSantétotwophysiciangroupsfor$2,480,000.Priortothesale,Santédistributed$10,000,000toCHCC.Thedistributiondecreased Santé’s net assets from$15,167,000 to $5,167,000.CMC recognized a $103,000 loss in theconsolidatedfinancialstatementsfromthistransactionin2011.CMCaccountsfortheinvestmentinSantéusingtheequitymethod.Developmentactivities–Developmentactivitiesconsistofasinglecorporateentity,CommunityHospitalsofCentralCaliforniaFoundation,whichconductsfund‐raisingactivitiesforthenot‐for‐profitorganizationswithinthehealthsystem.Obligatedgroupmembers–ObligatedGroupmembersaretheparentcorporationsofcertainconsolidatedentitiesthatarenotObligatedGroupmembers.AccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(U.S.GAAP)requireconsolidationofallcontrolledsubordinatecorporations.Accordingly,theconsolidatedfinancialstatementsofCMCarethesameastheObligatedGroupfinancialstatementsunderU.S.GAAP.NOTE2–AGREEMENTWITHTHECOUNTYOFFRESNO
EffectiveOctober7, 1996,CMC, throughoneof its affiliates (FresnoCommunityHospital andMedicalCenter), entered into a series of agreements (theTransactionAgreements)with theCountyofFresno(theCounty).TheTransactionAgreementswereamendedin1998andagainin2003relatedtoaUniversityMedicalCenter(UMC)lease.TheprincipalongoingprovisionsoftheTransactionAgreementsareasfollows:
CMCisrequiredtoprovidecomprehensivemedicalcaretocertainclassesofindigentpersonsand inmates within the County for a period of 30years in return for certain payments.Paymentsreceivedunderthisagreementtotaledapproximately$20,724,000and$20,143,000fortheyearsendedAugust31,2012and2011,respectively.
AssecurityforCMC’sperformanceunderthetermsoftheTransactionAgreements,theCountywasgrantedafirst‐prioritylienonCCMCandanadjoiningmedicalofficebuilding.Inaddition,duringthe30‐yearperiodcommencingOctober7,1996,(a)theCountyisentitledtonominate27%ofthemembersofCMC’s(andcertainof itsaffiliates’)boardoftrusteesandrelatedsubcommitteesand(b)CMCanditsaffiliatesareprecluded,withcertainspecifiedexceptions,frommakinganynetassettransfersoutsideofCMC.Basisofconsolidation–TheconsolidatedfinancialstatementsincludetheaccountsofCMCandaffiliatesaslistedunderOrganization inNote1.All significant intercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.
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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIESUseofestimates–ThepreparationofconsolidatedfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.
Cash and equivalents –Cash and equivalents include all highly liquid investmentswith an originalmaturityofthreemonthsorlesswhenpurchased.CashandequivalentspurchasedbyCMC’sinvestmentmanagersaspartoftheirinvestmentstrategiesareincludedinassetslimitedastouseandshort‐terminvestments.CMCregularlymaintainsbalancesindepositoryaccountsinexcessoftheFDICinsurancelimit.
Accountsreceivable–CMC’sprimaryconcentrationofcreditriskispatientaccountsreceivableandSB855and SB1255 disproportionate share funds receivable, which consist of amounts owed by variousgovernmentagencies,insurancecompanies,andprivatepatients.CMCmanagesthereceivablesbyregularlyreviewingitsaccountsandcontractsandbyprovidingappropriateallowancesforuncollectibleamounts.CMCprovidesforestimatedlossesonpatientaccountsreceivablebasedonpriorbaddebtexperience.Uncollectiblereceivablesarecharged‐offwhendeemeduncollectible.Recoveriesfrompreviouslycharged‐offaccountsarerecordedwhenreceived.Themixofreceivablesfromthird‐partypayorsandpatientsatAugust31,2012and2011,isasfollows:
2012 2011
Medicare 17% 15%Medi‐CalandmanagedMedi‐Cal 29% 28%Contractedratepayors 44% 49%Commercialinsuranceandotherpayors 10% 8%
Total 100% 100%
Allowancefordoubtfulaccounts–Accountsreceivablearereducedbyanallowancefordoubtfulaccounts.Inevaluatingthecollectibilityofaccountsreceivable,CMCanalyzesitspasthistoryandidentifiestrendsforeachofitsmajorpayorsourcesofrevenuetoestimatetheappropriateallowancefordoubtfulaccountsandprovisionforbaddebts.Managementregularlyreviewsdataaboutthesemajorpayorsourcesofrevenueinevaluatingthesufficiencyoftheallowancefordoubtfulaccounts.Forreceivablesassociatedwithservicesprovidedtopatientswhohavethird‐partycoverage,CMCanalyzescontractuallydueamountsandprovidesanallowancefordoubtfulaccountsandaprovisionforbaddebts,ifnecessary(forexample,forexpecteduncollectibledeductiblesandcopaymentsonaccountsforwhichthethird‐partypayorhasnotyetpaid,orforpayorswhoareknowntobehaving financialdifficultiesthatmaketherealizationofamountsdueunlikely).Forreceivablesassociatedwithself‐paypatientsandnon‐contractedinsurance(whichincludesbothpatientswithoutinsuranceandpatientswithdeductibleandcopaymentbalancesdueforwhichthird‐partycoverageexistsforpartofthebill),CMCrecordsasignificantprovisionforbaddebtsintheperiodofserviceonthebasisofitspastexperience,whichindicatesthatmanypatientsareunableorunwillingtopaytheportionoftheirbillforwhichtheyarefinanciallyresponsible.Thedifferencebetweenthestandardrates(orthediscountedratesifnegotiated)andtheamountsactuallycollectedafterallreasonablecollectioneffortshavebeenexhaustedischargedoffagainsttheallowancefordoubtfulaccounts.
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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Allowance fordoubtfulaccounts (continued) – CMC’s allowance fordoubtful accounts for self‐paypatientsdecreasedfrom83.7percentofself‐payaccountsreceivableatAugust31,2011,to82.7percentofself‐payaccountsreceivableatAugust31,2012.Inaddition,CMC’sself‐paywrite‐offsincreased$8,100,000from$105,800,000forfiscalyear2011to$113,900,000forfiscalyear2012.Increasedwrite‐offsweretheresultofincreasedgrossrevenueof6.2percentinfiscalyear2012.CMChasnotchangeditscharitycareoruninsureddiscountpoliciesduringfiscalyears2011or2012.CMCmaintainedallowancesfordoubtfulaccountsfromthird‐partypayorsof$8,300,000infiscalyear2011and$9,200,000infiscalyear2012.Inventories–Inventoriesarestatedatthelowerofcost,determinedbythefirst‐in,first‐outmethod,ormarket.
Assetslimitedastouseandshort‐terminvestments–Assetslimitedastouseconsistprincipallyofcorporatedebtsecurities,equitysecurities,andU.S.governmentandagencysecurities,allofwhichareavailableforsaleandcarriedatfairmarketvalue.Thefairvaluesfortheseinvestmentsarebasedonquotedmarket prices. Investments also include repurchase agreements. Certain marketable securities aredesignatedasassetsheldintrust.Theseincludeassetsheldbytrusteesinaccordancewiththeindenturesrelatingtolong‐termdebt.Inaddition,certaininvestmentsaresetasidebytheboardoftrusteesforfuturecapitalimprovements.
Investmentincomeisincludedintheexcessofrevenues,gains,andothersupportoverexpensesunlesstheincomeisrestrictedbydonororlaw.ForinvestmentspurchasedpriortoSeptember1,2008,unrealizedgainsandlossesoninvestmentsareexcludedfromtheexcessofrevenues,gains,andothersupportoverexpensesunlesstheinvestmentsaretradingsecurities,oranunrealizedlossisdeterminedtobeotherthantemporaryforanysecuritythatisavailableforsale.Managementroutinelyevaluatesitsinvestmentsinmarketablesecuritiesforotherthantemporaryimpairment.
CMChaselectedtoreportinvestmentsindebtandequitysecuritiespurchasedonorafterSeptember1,2008underAccountingStandardsCodification(ASC)825,FinancialInstruments,suchthatunrealizedgainsandlossesonsuchsecuritiesareincludedintheexcessofrevenues,gains,andothersupportoverexpensesunlesstheincomeisrestrictedbydonororlaw.
CMChasdiscretiontoestablishpoliciesregardingwhichportionofassetslimitedastouseisclassifiedasshort‐terminvestments.Theamountclassifiedasshort‐terminvestmentsconsistsofavailablecashheldininvestmentaccounts,moneymarketsbalances,andhighlyliquidinvestmentsecuritieswithanoriginalmaturityofthreemonthsorless.
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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Property,plant,andequipment–Property,plant,andequipmentarestatedatcost,orinthecaseofdonateditems,atfairmarketvalueatthedateofdonation.Routinemaintenanceandrepairsarechargedtoexpense as incurred. Expenditures that increase values, change capacities, or extend useful lives arecapitalized, as is interest for significant construction projects. In 2012 and 2011, $11,440,000 and$10,783,000,respectively,ofnetinterestexpensewascapitalizedforconstructionprojects. Depreciationiscomputedbythestraight‐linemethodovertheestimatedusefullivesoftheassets,whichrangefrom10to25yearsforlandimprovements,5to40yearsforbuildingsandimprovementsandanaverageof8yearsforequipment.CMC’smanagementregularlyreviewslong‐livedassetsforindicationsofimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.Managementestimatesthefairvalueoflegalassetretirementobligationsthatareconditionalonafutureeventiftheamountcanbereasonablyestimated,inaccordancewithFinancialAccountingStandardsBoard(FASB).Estimatesaredevelopedthroughtheidentificationofapplicablelegalrequirements,identificationofspecificconditionsrequiringincrementalcostattimeofassetdisposal,estimationofcoststoremediateconditions,andestimationofremainingusefullivesordateofassetdisposal.Self‐insuranceandotherbenefitplans–CMC isself‐insured forworkers’compensationclaimsandmaintainsaself‐insuredmedical,dental,andvisioncareplanasanoptionforitsemployees.Claimsareaccruedundertheseplansastheincidentsthatgiverisetothemoccur.Unpaidclaimaccrualsarebasedonthe actuarially estimated ultimate cost of settlement, including claim settlement expenses. CMC hasreinsurancearrangementswithinsurancecompaniestolimititslossesonclaimsformedicalandworkers’compensationexpenses.Theportionnotexpectedtobepaidwithinoneyearisincludedwithinotherlong‐termobligations.AsofAugust31,2012,CMChasaclaimsliabilityof$55,033,000andacorrespondinginsurancerecoveryreceivableof$3,648,000formedicalandworkerscompensationclaimsthatareinsuredbyathirdpartyexcesslosspolicy.Theclaimsliabilityisclassifiedinotheraccruedliabilitiesandlong‐termobligationsandtheinsurancerecoveryreceivableisclassifiedinprepaidsandotherassets,respectively,intheaccompanyingbalancesheet.
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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED) Professionalliabilityinsurance–AsofSeptember1,2009,CMCformedawhollyownedcaptiveinsurancecompanycalledCommunityInsuranceServicesCompany(CISC).CISChasissuedclaims‐madepoliciestoinsurethemedicalandgeneralliabilityrisksofCMC’saffiliates.CISCretains$2,000,000foreachandeverylossandreinsures$118,000,000withthird‐partyreinsurers.AsofAugust31,2012and2011,CMChadrecordedestimatedliabilitiesforclaimsincurredandreportedof$7,041,000and$6,596,000,respectively.Theseamountsareincludedwithincurrentliabilitiesintheaccompanyingconsolidatedbalancesheets.Shouldthereinsurancepoliciesnotberenewedorreplacedwithequivalentinsurance,claimsrelatedtooccurrencesduringthetermoftheclaims‐madepolicybutreportedsubsequenttoitsterminationmaybeuninsured. Liabilities of $3,049,000 and $2,997,000 have been recorded for the actuarially estimatedincurredbutnotreportedliabilitythatisnotcoveredbythird‐partyinsuranceatAugust31,2012and2011,respectively. These liabilities are included within other long‐term obligations in the accompanyingconsolidatedbalancesheets.Incometaxes–MostentitiesincludedinCMCareexemptfromtaxationunderSection501(c)(3)oftheInternalRevenueCodeandSection23701doftheCaliforniaRevenueandTaxationCodeandaregenerallynotsubjecttofederalorstateincometaxes.However,theexemptorganizationsaresubjecttoincometaxesonanynetincomethatisderivedfromatradeorbusiness,regularlycarriedon,andnotinfurtheranceofthepurposesforwhichitwasgrantedexemption.Noincometaxprovisionhasbeenrecordedasthenetincome,ifany,fromanyunrelatedtradeorbusiness,intheopinionofmanagement,isnotmaterialtothebasicfinancialstatementstakenasawhole.CMCincludesentitiesthataresubjecttoincometaxes;however,suchincometaxactivitiesarenotsignificanttotheconsolidatedfinancialstatements. Donorgifts–UnconditionalpromisestogivecashandotherassetstoCMCarereportedatfairmarketvalueatthedatethepromiseisreceived.Conditionalpromisestogiveandindicationsofintentionstogivearereportedatfairmarketvalueatthedatethegiftisreceivedandanyconditionsaresubstantiallymet.Thegiftsarereportedaseithertemporarilyorpermanentlyrestrictedsupportiftheyarereceivedwithdonorstipulations that limit theuseof thedonatedassets.Whenadonorrestrictionexpires, that is,whenastipulatedtimerestrictionendsorpurposerestrictionisaccomplished,restrictednetassetsarereclassifiedasunrestrictednetassets. Fairvalueoffinancialinstruments–Unlessotherwiseindicated,thefairvalueofallreportedassetsandliabilities,whichrepresent financial instruments,approximatetheircarryingvalues.CMC’spolicy istorecognizetransfersinandtransfersoutofLevels1and2asoftheendofthereportingperiod. Excessofrevenues,gainsandothersupportoverexpenses–Excessofrevenues,gains,andothersupportoverexpensesreflectedintheaccompanyingconsolidatedstatementsofoperationsincludesallchangesinunrestrictednetassetsotherthanchangesinunrealizedgainsoncertainmarketablesecurities,netassetsreleasedfromrestrictionsforequipmentacquisition,andchangesinpensionbenefitobligation.
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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Newaccountingpronouncements–InApril2009,theFASBissuedSFASNo.164,Not‐for‐ProfitEntities:MergersandAcquisitions,includinganamendmentofFASBStatementNo.142,ascodifiedbyAccountingStandardsUpdate(ASU)2010‐07.Thisstatementprovidesguidanceonaccountingforacombinationofnot‐for‐profitentitiesandappliestoacombinationthatmeetsthedefinitionofeitheramergerofnot‐for‐profitentitiesoranacquisitionbyanot‐for‐profitentity.Theprovisionestablishesprinciplesandrequirementsforhowanot‐for‐profitentity(a)determineswhetheracombinationisamergeroranacquisition,(b)appliesthecarryovermethodinaccountingforamerger,(c)appliestheacquisitionmethodinaccountingforanacquisition,and(d)determineswhatinformationtodisclosewithrespecttothenatureandfinancialeffectsofamergeroracquisition.
ThisstatementalsoamendsbothASC350,Intangibles‐GoodwillandOther,andASC810,NoncontrollingInterest.TheprovisionsofASU2010‐07aretobeappliedprospectivelyandareeffectiveforCMCinthefiscal year ended August 31, 2011 formergers and acquisitions. Pursuant to ASU 2010‐07, CMC hasdiscontinuedtheamortizationofgoodwillduringthefiscalyearendedAugust31,2011.
InJanuary2010,theFASBissuedASU2010‐06,ImprovingDisclosuresaboutFairValueMeasurements(ASU2010‐06),whichamendedASC820,FairValueMeasurementsandDisclosures(ASC820),torequirenewdisclosuresrelatedtotransfersinandoutofLevel1andLevel2fairvaluemeasurements,includingthereasons for the transfers and to require new disclosures related to activity in Level 3 fair valuemeasurements.Inaddition,ASU2010‐06clarifiesexistingdisclosurerelatedtothelevelofdisaggregationofclassesofassetsandliabilitiesandprovidesfurtherdetailaboutinputsandvaluationtechniquesusedforfairvaluemeasurement.CMCadoptedASU2010‐06inthefiscalyearendedAugust31,2011(Note5).
InAugust2010,theFASBissuedASU2010‐23,HealthCareEntities(Topic954),MeasuringCharityCareforDisclosure(ASU2010‐23),whichrequiresthatcostbeusedasameasurementforcharitycaredisclosurepurposesandthatcostbeidentifiedasthedirectandindirectcostsofprovidingcharitycare.Italsorequiresdisclosureofthemethodusedtoidentifyordeterminesuchcosts.CMCisrequiredtoadoptASU2010‐23inthefiscalyearendedAugust31,2012.TheadoptionofASU2010‐23didnothaveamaterialimpactonitsconsolidatedfinancialstatements.
InAugust2010,theFASBissuedASU2010‐24,HealthCareEntities(Topic954),PresentationofInsuranceClaimsandRelatedInsuranceRecoveries(ASU2010‐24),whichclarifiesthatahealthcareentityshouldnotnetinsurancerecoveriesagainstarelatedclaimliability.Additionally,theamountoftheclaimliabilityshouldbedeterminedwithoutconsiderationofinsurancerecoveries.CMChasadoptedASU2010‐24inthefiscalyearendedAugust31,2012.
InJuly2011,theFASBissued2011‐07,HealthCareEntities(Topic954),PresentationandDisclosureofPatientServiceRevenue,ProvisionforBadDebts,andtheAllowanceforDoubtfulAccountsforCertainHealthCareEntities(ASU2011‐07),whichrequireshealthcareentities that recognizesignificantamountsofpatientservicerevenueatthetimetheservicesarerenderedeventhoughtheydonotassessthepatient’sabilitytopaytopresenttheprovisionforbaddebtsrelatedtopatientservicerevenueasadeductionfrompatientservicerevenue(netofcontractualallowancesanddiscounts)ontheirstatementofoperations.CMCadoptedASU2011‐07inthefiscalyearendedAugust31,2012.
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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Reclassifications–Certainamountsinthe2011financialstatementshavebeenreclassifiedtoconformtothe2012presentation.Subsequentevents–Subsequenteventsareeventsortransactionsthatoccurafterthebalancesheetdatebutbeforefinancialstatementsareissued.CMCrecognizesintheconsolidatedfinancialstatementstheeffectsofallsubsequenteventsthatprovideadditionalevidenceaboutconditionsthatexistedatthedateoftheconsolidatedbalancesheet,includingtheestimatesinherentintheprocessofpreparingtheconsolidatedfinancialstatements.CMC’sconsolidatedfinancialstatementsdonotrecognizesubsequenteventsthatprovideevidenceaboutconditionsthatdidnotexistatthedateoftheconsolidatedbalancesheetbutaroseafterthebalancesheetdateandbeforetheconsolidatedfinancialstatementsareissued.CMChasevaluatedsubsequenteventsthroughNovember21,2012,whichisthedatetheconsolidatedfinancialstatementsareissued.NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUESNetpatientservicerevenues–Netpatientservicerevenuesarereportedattheestimatednetrealizableamountsfrompatients,third‐partypayors,andothersforservicesrendered,includingestimatedretroactiveadjustmentsunderreimbursementagreementswiththird‐partypayors.Estimatedsettlementsunderthird‐partyreimbursementagreementsareaccruedintheperiodinwhichtherelatedservicesarerenderedandadjustedinfutureperiods,basedonupdatedinformationandasaresultoffinalsettlements.Grosspatientchargescompriseusualandcustomarychargesforservicesprovidedtoallpatients.ThecompositionofconsolidatedgrosspatientchargesbymajorpayorgroupasoftheyearsendedAugust31,2012and2011,isasfollows:
2012 2011
Medicare 29% 26%Medi‐CalandmanagedMedi‐Cal 33% 33%Contractedratepayors 26% 30%Commercialinsuranceandotherpayors 5% 5%MedicallyIndigentServicesProgram(MISP) 7% 6%
Total 100% 100%
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NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUES(CONTINUED)CMChasagreementswiththird‐partypayorsthatprovideforpaymentstoCMCatamountsdifferentfromitsestablishedrates.Asummaryofthepaymentarrangementswithmajorthird‐partypayorsisasfollows:Medicare– Inpatient acute care services, skillednursing services, rehabilitation services, and certainoutpatientservicesrenderedtoMedicareprogrambeneficiariesarepaidatprospectivelydeterminedratesper diagnosis. These rates vary according to a patient classification system that is based on clinical,diagnostic,andotherfactors.CertaininpatientnonacuteservicesandmedicaleducationcostsrelatedtoMedicarebeneficiariesarepaidbasedonacost‐basedreimbursementmethodology.Professionalservicesarereimbursedbasedonafeeschedule.Medi‐Cal–InpatientandoutpatientservicesrenderedtoMedi‐Calprogrambeneficiariesarereimbursedprimarilyundercontractedrates.Additionally,CMCisallocatedcertainfundsavailablefromapoolofStateofCalifornia funds fordisproportionate sharehospital servicesunder the SB855andSB1255/PrivateHospitalFundprogramsbaseduponanannualdeterminationforeligibility.RevenuesundertheSB855programandSB1255/PrivateHospitalFundtotaled$32,357,000and$10,667,000,respectively,fortheyearendedAugust31,2012and$37,085,000and$9,333,000,respectively,fortheyearendedAugust31,2011.AsofAugust31,2012and2011,CMCrecordedreceivablesof$13,722,000and$9,947,000,respectively,foramountsduefromtheStateofCaliforniaforSB855,SB1255,andotherprograms.
CostreportsfiledundertheMedicareandMedi‐Calprogramsforservicesbasedoncostreimbursementaresubjecttoaudit.Theestimatedamountsduetoorfromtheprogramsarereviewedandadjustedannuallybasedonthestatusofsuchauditsandanysubsequentappeals.Differencesbetweenfinalsettlementsandamountsaccruedinpreviousyearsarereportedasadjustmentstonetrevenueintheyearinwhichtheexaminationiscompleted.Netpatientservicerevenueincreased$3,365,000anddecreased$3,039,000in2012and2011, respectively, related toupdatesofprioryears’ cost report reservesand increasedby$14,082,000 and $3,202,000, respectively, related to successful appeals of prior years’ cost reportsettlements.Other–CMChasenteredintopaymentagreementswithcertaincommercialinsurancecarriers,healthmaintenanceorganizations(HMOs),andpreferredproviderorganizations.ThebasisforpaymenttoCMCundertheseagreementsincludesprospectivelydeterminedratesperdiagnosis,discountsfromestablishedcharges,andprospectivelydetermineddailyrates.CMCalsoreceivesStateofCaliforniafundspursuanttoProposition99.Premiumrevenue–CMChasanagreementwithanindependentphysicianassociation(IPA)toprovidemedicalservicestocertainIPAmembers.Underthisagreement,CMCreceivesmonthlycapitationpaymentsandrecognizesasrevenueduringtheperiodregardlessofservicesactuallyperformedbyCMC.Charitycare–HealthcareservicesareprovidedtopatientswhomeetcertaincriteriaunderCMC’scharitycarepolicieswithoutchargeoratamounts less thanestablishedrates.Traditionalcharitycarecoversservicesprovidedtopersonswhomeetcertaincriteriaandcannotaffordtopay.Unpaidcostsofcharityaretheestimatedcostsofservicesprovidedtosuchpatients.Theestimatedcostofprovidingtheseserviceswas$9,198,000and$12,550,000fortheyearsendedAugust31,2012and2011,respectively,calculatedbymultiplyingtheratioofcosttogrosschargesforCMCbythegrossuncompensatedchargesassociatedwithprovidingcharitycaretoitspatients.
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NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUES(CONTINUED)Hospitalfeeprogram–InNovember2009,theCaliforniaHospitalFeeProgram(theProgram)wassignedintoCaliforniastate law.TheProgramprovidessupplementalMedi‐Calpayments tocertainCaliforniahospitals.TheProgramisfundedbyaqualityassurancefee(theFee)paidbyparticipatinghospitalsandbymatchingfederalfunds.HospitalsreceivesupplementalpaymentsfromeithertheCaliforniaDepartmentofHealthCareServices(DHCS),managedcareplansoracombinationofboth.TheProgramwasadministeredintwoparts.Thefirstpart(PartOne),createdbyAssemblyBill1653(signedintolawinSeptember2010),coverstheperiodbeginningApril1,2009throughDecember31,2010.Thesecondpart(PartTwo),createdbySenateBill90(signedintolawinMarch2011),coverstheperiodbeginningJanuary1,2011throughJune30,2011.PartOnebecameeffectiveinfiscalyear2011afterapprovalfromtheCentersforMedicareandMedicaidServices(CMS).CMCrecognized$117,598,000innetpatientservicerevenueand$62,286,000inexpensefortheyearendedAugust31,2011.Additionally,theCaliforniaHospitalAssociationcreatedaprivateprogram,theCaliforniaHealthFoundationandTrust(CHFT),establishedforseveralpurposes,includingaggregatinganddistributingfinancialresourcestosupportcharitableactivitiesatvarioushospitalandhealthsystemsinCalifornia.ApledgeagreementwasexecutedduringthefiscalyearendedAugust31,2010betweenCMCandCHFTwherebyCMCpaid$4,263,000priortoAugust31,2011intoagrantfundestablishedbyCHFT,pendingapprovalofthelegislationnotedabove.PartTwoof theProgramhadnot received final approval fromCMSasofAugust31, 2011.CMCpaid$22,178,000in2011forPartTwooftheProgram,andrecordedthisasaprepaidexpenseatAugust31,2011.CMCreceivedsupplementalpaymentsforPartTwoof$38,394,000in2011.Astheprogramwasnotyetlegallyeffectivein2011,theserevenuesweredeferredandrecordedasapartofothercurrentliabilitiesatAugust31,2011.FinalapprovalbyCMSoccurredonDecember29,2011.CMCrecognized$48,187,000innetpatientservicerevenueand$22,351,000inexpensefortheyearendedAugust31,2012relatingtoPartTwooftheProgram.Californiasubsequentlyenactedathirty‐monthqualityassurancefeeprogram(30monthProgram)fortheperiodJuly1,2011throughDecember31,2013.FinalapprovalbyCMSforthefeeforserviceportionofthisprogramoccurredonJune22,2012.ForthefeeforserviceportionfortheyearendedAugust31,2012,estimatedsupplementalpaymentsfortheperiodJuly1,2011throughAugust31,2012of$90,878,000areincluded in net patient service revenue, and estimated fees and pledges for this same timeperiod of$52,607,000areincludedinotherexpenses.AtAugust31,2012,CMChasareceivableof$72,747,000andaliabilityof$36,364,000relatingtothe30monthProgram.ThemanagedcareportionofthisprogramhasnotreceivedfinalapprovalfromCMSandisnotyeteffectiveasofAugust31,2012.Asthemanagedcareportionofthe30monthProgramhasnotbeenfinalapproved,CMChasnotrecordedanyactivityrelatingtothemanagedcareportionatAugust31,2012.
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NOTE5–ASSETSLIMITEDASTOUSEAssetslimitedastouseincludemarketablesecuritiesthatarecarriedatfairvalue,basedonquotedmarketprices.Pledgesreceivablearecarriedatnetrealizablevalue.ThecompositionofassetslimitedastouseatAugust31,2012and2011,isasfollows(inthousands):
Fairvalue Fairvalueand and
carrying carryingCost value Cost value
Cashandequivalents 48,906$ 48,906$ 112,597$ 112,597$U.S.Treasurybillsandnotes 20,945 20,945 27,410 27,554U.S.governmentagencydebt 48,900 49,321 43,824 44,426Corporatedebtsecurities 119,244 119,536 92,340 93,198Equitysecurities 46,229 51,035 26,828 29,334Mutualfunds 28,120 28,311 17,563 17,841Repurchaseagreements 19,394 19,394 19,393 19,393
Totalcashandmarketablesecurities 331,738 337,448 339,955 344,343
Lessamountsclassifiedasshort‐terminvestments (14,283) (14,283) (39,816) (39,816)
Pledgesreceivable,net 5,623 5,623 5,488 5,488
Totalassetslimitedastouse 323,078$ 328,788$ 305,627$ 310,015$
2012 2011
During 2012 and 2011, CMC incurred impairment charges of $63,000 and $400,000, respectively, torecognizeunrealizedlossesthatweredeemedtobeother‐than‐temporary.CMC adopted ASC 820,FairValueMeasurementsandDisclosure, on September 1, 2008 for fair valuemeasurementsoffinancialassetsandliabilities.ASC820establishedafairvaluehierarchythatprioritizestheinputstovaluationtechniquesusedtomeasurefairvalue.Thehierarchygivesthehighestprioritytounadjustedquotedpricesinactivemarketsforidenticalassetsorliabilities(Level1measurements)andthelowestprioritytomeasurementsinvolvingsignificantunobservableinputs(Level3measurements).Thethreelevelsoffairvaluehierarchyareasfollows:
Level1inputsarequotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilitiesthatCMChastheabilitytoaccessatthemeasurementdate.
Level2inputsareinputsotherthanquotedpricesincludedwithinLevel1thatareobservablefortheassetorliability,eitherdirectlyorindirectly.
Level3inputsareinputsthatareunobservableinputsfortheassetorliability.Thelevelinthefairvaluehierarchywithinwhichafairvaluemeasuremententirelyfallsisbasedonthelowestlevelinputthatissignificanttothefairvaluemeasurementinitsentirety.
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NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThefollowingtablepresentsfinancialassetsmeasuredatfairvalueasofAugust31,2012(inthousands):
Quotedprices Significantinactive other Significant
marketsfor observable unobservableidenticalassets inputs inputs Fairvalue
Investments Level1 Level2 Level3 total
Cashandequivalents 14,283$ ‐$ ‐$ 14,283$
U.S.TreasuryandU.S.agencyfixedincome:U.S.Treasurybillsandnotes 20,945 ‐ ‐ 20,945U.S.governmentagencydebt ‐ 49,321 ‐ 49,321
20,945 49,321 ‐ 70,266
Corporatedebtsecurities:Healthcare ‐ 7,087 ‐ 7,087Energy ‐ 14,019 ‐ 14,019Financials ‐ 56,130 ‐ 56,130Industrials ‐ 7,200 ‐ 7,200Informationtechnology ‐ 5,877 ‐ 5,877Telecommunications ‐ 7,497 ‐ 7,497Consumerstaples ‐ 1,553 ‐ 1,553Consumerdiscretionary ‐ 9,066 ‐ 9,066Other ‐ 11,107 ‐ 11,107
‐ 119,536 ‐ 119,536
Equitysecurities:Healthcare 8,928 ‐ ‐ 8,928Utilities 1,981 ‐ ‐ 1,981Financials 4,676 ‐ ‐ 4,676Consumerstaples 5,439 ‐ ‐ 5,439Consumerdiscretionary 3,968 ‐ ‐ 3,968Materials 2,282 ‐ ‐ 2,282Energy 5,581 ‐ ‐ 5,581Informationtechnology 10,449 ‐ ‐ 10,449Industrials 5,793 ‐ ‐ 5,793Telecommunications 1,938 ‐ ‐ 1,938
51,035 ‐ ‐ 51,035
Mutualfunds:Midcapcore 8,078 ‐ ‐ 8,078Smallcapcore 7,797 ‐ ‐ 7,797Internationalcore 4,068 ‐ ‐ 4,068Emergingmarkets 4,174 ‐ ‐ 4,174Specialty‐realestate 4,194 ‐ ‐ 4,194
28,311 ‐ ‐ 28,311114,574 168,857 ‐ 283,431
Fundsheldbytrustees
Repurchaseagreements ‐ 19,394 ‐ 19,394Cashandequivalents 34,623 ‐ ‐ 34,623
34,623 19,394 ‐ 54,017Total 149,197$ 188,251$ ‐$ 337,448$
2012
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NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThefollowingtablepresentsfinancialassetsmeasuredatfairvalueasofAugust31,2011(inthousands):
Quotedprices Significantinactive other Significant
marketsfor observable unobservableidenticalassets inputs inputs Fairvalue
Investments Level1 Level2 Level3 total
Cashandequivalents 39,817$ ‐$ ‐$ 39,817$
U.S.TreasuryandU.S.agencyfixedincome:U.S.Treasurybillsandnotes 27,554 ‐ ‐ 27,554U.S.governmentagencydebt ‐ 44,426 ‐ 44,426
27,554 44,426 ‐ 71,980
Corporatedebtsecurities:Healthcare ‐ 1,425 ‐ 1,425Energy ‐ 12,370 ‐ 12,370Financials ‐ 42,510 ‐ 42,510Industrials ‐ 4,825 ‐ 4,825Informationtechnology ‐ 3,959 ‐ 3,959Telecommunications ‐ 7,024 ‐ 7,024Consumerstaples ‐ 10,858 ‐ 10,858Consumerdiscretionary ‐ 6,015 ‐ 6,015Other ‐ 4,212 ‐ 4,212
‐ 93,198 ‐ 93,198
Equitysecurities:Healthcare 3,830 ‐ ‐ 3,830Utilities 958 ‐ ‐ 958Financials 3,054 ‐ ‐ 3,054Consumerstaples 4,380 ‐ ‐ 4,380Consumerdiscretionary 2,435 ‐ ‐ 2,435Materials 1,508 ‐ ‐ 1,508Energy 3,588 ‐ ‐ 3,588Informationtechnology 5,426 ‐ ‐ 5,426Industrials 3,391 ‐ ‐ 3,391Telecommunications 764 ‐ ‐ 764
29,334 ‐ ‐ 29,334
Mutualfunds:Midcapcore 4,820 ‐ ‐ 4,820Smallcapcore 5,019 ‐ ‐ 5,019Internationalcore 4,031 ‐ ‐ 4,031Emergingmarkets 1,754 ‐ ‐ 1,754Specialty‐realestate 2,217 ‐ ‐ 2,217
17,841 ‐ ‐ 17,841114,546 137,624 ‐ 252,170
Fundsheldbytrustees
Repurchaseagreements ‐ 19,393 ‐ 19,393Cashandequivalents 72,780 ‐ ‐ 72,780
72,780 19,393 ‐ 92,173
Total 187,326$ 157,017$ ‐$ 344,343$
2011
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NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThescheduledmaturitiesofthedebtsecuritiesasofAugust31,2012,areasfollows:
Amortized Estimatedcostbasis fairvalue
Duewithin1yearorless 16,261$ 16,369$Dueafter1yearthrough5years 100,444 100,466Dueafter5years 22,483 22,644
139,188 139,479Mortgage‐backedsecuritiesaccruedinterest
andother 34,635 35,056
173,823$ 174,535$
ThescheduledmaturitiesofthedebtsecuritiesasofAugust31,2011,areasfollows:
Amortized Estimatedcostbasis fairvalue
Duewithin1yearorless 14,940$ 14,964$Dueafter1yearthrough5years 85,447 85,979Dueafter5years 21,699 22,090
122,086 123,033
Mortgage‐backedsecuritiesaccruedinterestandother 41,488 42,145
163,574$ 165,178$
Investment income is composed of the following for the years ended August 31, 2012 and 2011 (inthousands):
2012 2011
Interestincome 4,392$ 6,011$Netrealizedgains/lossesonsalesofsecuritiesand
other‐than‐temporaryimpairment 10,398 2,157Dividends 1,180 491
15,970$ 8,659$
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NOTE6–PROPERTY,PLANT,ANDEQUIPMENTProperty,plant,andequipmentconsistofthefollowingasofAugust31,2012and2011(inthousands):
2012 2011
Landandlandimprovements 32,226$ 29,995$Buildingsandimprovements 468,059 492,176Equipment 440,247 336,805
940,532 858,976
Accumulateddepreciation (443,565) (401,117)
496,967$ 457,859$
NOTE7–OTHERASSETSOtherassetsconsistofthefollowingasofAugust31,2012and2011(inthousands):
2012 2011
LoanreceivablefromDKACCLenders(Note9) 18,844$ 18,844$Investmentinrentalproperties 12,662 13,624Realestateheldfordevelopment 6,037 6,037Intangibleassets,net 3,543 3,119Unamortizedfinancingcosts,net 8,009 8,325Investmentinjointventures 10,453 8,487Other 1,755 2,568
61,303$ 61,004$
CMCowns rental properties, recordedat cost, net of accumulateddepreciation. Investments in rentalpropertiesconsistofthefollowingasofAugust31,2012and2011andareincludedinotherassetsintheaccompanyingconsolidatedbalancesheets(inthousands):
2012 2011
Land 4,085$ 4,085$Buildingsandlandimprovements 24,843 25,023Equipment 2,957 2,883
31,885 31,991Accumulateddepreciation (19,223) (18,367)
12,662$ 13,624$
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NOTE8–LONG‐TERMDEBTLong‐termdebtconsistsofthefollowingasofAugust31,2012and2011(inthousands):
2012 2011
CaliforniaMunicipalFinanceAuthority
193,800$ 197,146$Unamortizedbonddiscount (3,177) (3,371)
Totalcertificatesofparticipation 190,623 193,775
CaliforniaMunicipalFinanceAuthority
303,455 306,690Unamortizedbondpremium 8,127 8,499
Totalcertificatesofparticipation 311,582 315,189
CaliforniaMunicipalFinanceAuthority
7,291 11,372
25,589 25,589
Otherlong‐termdebt 2,401 2,694
537,486 548,619
Currentmaturities (11,542) (10,951)
525,944$ 537,668$
Building Loan Agreement (DKACC), interest at 0.90% to 1.97%payable quarterly, principal due December 2038, collateralized byaguaranteebytheCMCObligatedGroup
NotepayabletoanLLCanditsowners,payableinmonthlyinstallmentsthrough2021,interestat4.25%
Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2009, interest ranging from 3% to5.5% payable semiannually; principal payable in installmentsranging from $3,510,000 in 2013 to $13,850,000 in 2039,collateralized by gross revenues. Interest payments werefundedthroughFebruary1,2012
Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2007, interest ranging from 5% to5.25% payable semi‐annually; principal payable in installmentsranging from $3,400,000 in 2013 to $18,775,000 in 2046,collateralizedbygrossrevenues
Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2009, interest at 5.19% payablemonthly; principal payable in installments ranging from$4,299,000 in 2013 to $2,992,000 in 2014, collateralized byequipment.
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NOTE8–LONG‐TERMDEBT(CONTINUED)Underthetermsof themaster trust indentureassociatedwiththecertificatesofparticipation,certainmembers of CMCaredesignated asmembers of theObligatedGroup. There are restrictive covenantsrequiringcompliancebytheObligatedGroup.Theseinclude,amongotherthings,limitationsontheissuanceofadditionaldebtandthemaintenanceofcertainfinancialratios. In2009,DKACCborrowed$25,589,000tofinancetheacquisitionandconstructionofcertainfacilitiesandequipmentunderafinancingstructuredtoqualifyforNewMarketsTaxCredits.TheNewMarketsTaxCreditsprogramisadministeredbytheFederalgovernmentandprovidestaxincentivesforthebenefitoflow‐incomecommunities.Inordertocomplywiththisprogram,affiliatesofCMC’sunderwriterformedagroupofentities(theLenders),whichwerecapitalizedby$7,500,000fromanaffiliateoftheunderwriterand by an $18,844,000 loan from CMC. This resulted in the Lenders accumulating funds totaling$25,589,000,whichwerethenloanedtoDKACC.TheObligatedGrouphasguaranteedDKACC’srepaymentobligationsunderthisborrowing,whichhasafinalmaturityofJanuary20,2038,butsuchguarantyisnotsecuredbyanObligationissuedundertheMasterIndenture.Additionally,theObligatedGrouphasalimitedguaranty,upto$10,000,000over7years,relatedtotheLenders’realizationoftaxcreditsavailableundertheNewMarketsTaxCreditprogram.TheObligatedGroupdoesnotcurrentlyexpecttomakeanypaymentsundertheseguarantees. Scheduledprincipalrepaymentsonlong‐termdebtandpaymentsoncapitalleaseobligationsbyfiscalyearareasfollows(inthousands):
Long‐termdebt
2013 11,726$2014 10,7592015 7,8612016 8,2532017 8,635Thereafter 485,302
532,536Addnetunamortizedbondpremium 4,950
537,486$
The aggregate estimated fair value of CMC’s long‐term obligations at August 31, 2012 and 2011, of$485,473,000and$458,551,000,respectively,wereestimatedusingdiscountedcashflowanalysesbasedonCMC’scurrentincrementalborrowingratesforsimilardebtinstruments.
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NOTE9–LINEOFCREDITCMC has a credit agreement with a bank that allows CMC to borrow up to $40,000,000. Under thisagreement,creditcardborrowingsareinterest‐freeandduemonthly.AllotherborrowingsbearinterestonaLIBORbase.Amountsappliedforletterofcreditagreementstotaled$4,800,000onAugust31,2012and2011.Outstandingcreditcardborrowingswere$3,489,000and$2,806,000onAugust31,2012and2011,respectively.TherewerenoLIBOR‐basedborrowingsasofthesedates.Anotesecuringthelineofcredithasbeenissuedunderthemastertrustindenture.TheagreementexpiresonApril30,2013.NOTE10–PENSIONPLAN CMCmaintains a contributory defined benefit cash balance pension plan that covers substantially allemployees upon their retirement. Benefit payments for participants in the plan are determined byapplication of a benefit formula to the average base earnings of participants. In addition to normalretirementbenefits,undercertaincircumstances,theplanalsoprovidesearlyretirement,disability,death,andspousalbenefits.EmployeesofCMCbecomeeligibletoparticipateintheplanonJanuary1orJuly1followingthecompletionof1,000hoursandoneyearofservice.Thevestingperiodisthreeyears.Mandatorycontributionsaremadetotheplanbytheemployeesasspecifiedintheplandocuments.TotalemployeecontributionstotheplanfortheyearsendingAugust31,2012and2011,were$4,711,000and$4,357,000,respectively.TotalemployercontributionstotheplanfortheyearsendingAugust31,2012and2011were$14,000,000and$13,000,000,respectively.TotalbenefitspaidfortheyearsendingAugust31,2012and2011,were$10,012,000and$8,375,000,respectively.Theunfundedstatusispresentedasanoncurrentliabilityintheaccompanyingconsolidatedbalancesheets.
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NOTE10–PENSIONPLAN(CONTINUED)Thefollowingtablesetsforththeplan’sbenefitobligation,fairvalueofplanassets,andfundedstatusasofAugust31,2012and2011(inthousands):
2012 2011
Changeinprojectedbenefitobligation(PBO):PBOatbeginningofyear 193,426$ 183,733$Employerservicecost 12,177 13,401Interestcost 8,886 8,019Actuarialloss(gain) 22,076 (7,653)Planparticipants’contributions 4,711 4,357Benefitspaidfromplanassets (10,012) (8,374)Administrativeexpensespaid (56) (57)
PBOatendofyear 231,208$ 193,426$
2012 2011Changeinplanassets:
Fairvalueofassetsatbeginningofyear 129,818$ 108,943$Actualreturnonassets 14,485 11,950Employercontributions 14,000 13,000Planparticipants’contributions 4,711 4,357Benefitspaid (10,012) (8,375)Administrativeexpensespaid (56) (57)
Fairvalueofassetsatendofyear 152,946$ 129,818$
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NOTE10–PENSIONPLAN(CONTINUED)
2012 2011
Fundedstatusatendofyear (78,261)$ (63,607)$Unrecognizedactuarialloss 70,196 54,911Unrecognizedpriorservicecost 350 404Unfundedaccumulatedpensionbenefitobligation (70,546) (55,315)
Pensionbenefitobligationrecognizedinconsolidatedbalancesheets (78,261)$ (63,607)$
Accumulatedbenefitobligationatendofyear 205,794$ 173,995$
WeightedaverageassumptionsasofAugust31areasfollows:
2012 2011
Discountrate 3.90% 4.70%Expectedlong‐termrateofreturnonassets 7.50% 7.50%Rateofcompensationincrease 4.00% 4.00%
Netperiodicpensioncostfortheplanfor2012and2011isincludedinsalaries,wages,andbenefitsintheaccompanyingconsolidatedfinancialstatementsofoperations.Componentsofnetperiodicpensioncostincludethefollowing(inthousands):
2012 2011
Servicecost 12,177$ 13,401$Interestcost 8,886 8,019Expectedreturnonplanassets (10,151) (8,628)Amortizationofpriorservicecost 55 55Recognizednetactuariallosses 2,457 3,652
Netperiodicpensioncost 13,424$ 16,499$
2012 2011
Amountsrecognizedinnetassets:Netactuarialloss 70,196$ 54,911$Netpriorservicecost 350 404
70,546$ 55,315$
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NOTE10–PENSIONPLAN(CONTINUED)
2012 2011
Amountsrecognizedaschangesinnetassets:Netloss(gain) 17,742$ (10,975)$Amortizationofpriorservicecost (55) (55)Amortizationofnetloss (2,457) (3,652)
15,230$ (14,682)$
Theestimatednetlossandpriorservicecostthatwillbeamortizedintonetperiodpensioncostduringthe2013fiscalyearare$3,175,000and$55,000,respectively.CMC’spensionplanassetallocationsatAugust31,2012and2011,byassetcategoryareasfollows:
2012 2011
Cashandequivalents 6% 9%Debtsecurities 35% 32%Equitysecurities 59% 59%
100% 100%
Theassetallocationpolicyforthepensionplanisasfollows:fixedincomesecurities30%to60%(whichmayincludeU.S.governmentsecuritiesandU.S.governmentagencybonds,corporatenotesandbonds,mortgage‐backed bonds, preferred stock and the fixed income securities of foreign governments andcorporations);equitysecurities30%to60%(whichmayincludedomesticcommonstock,convertiblenotesandbonds,convertiblepreferredstocks,foreignequitysecurities);andmutualfundsandlimitedliabilitycompaniesorpartnershipsthatinvestinallowedsecuritiesasdefinedabove.CMC’sinvestmentstrategyforpensionplanassetsisdesignedtoemphasizelong‐termgrowthofprincipalwhileavoidingexcessiverisk.Theinvestmentperformanceofthetotalportfolio,aswellasassetclasscomponents,ismeasuredagainstcommonlyacceptedperformancebenchmarks.Theexpectedlong‐termrateofreturnonplanassetsistheexpectedaveragerateofreturnonthefundsinvestedcurrentlyandonfundstobeinvestedinthefutureinordertoprovideforthebenefitsincludedintheprojectedbenefitobligation.TheCMCpensionplanused7.5%incalculatingthe2012and2011expenseamounts.Thisassumptionisbasedoncapitalmarketassumptionsandtheplan’stargetassetallocation.CMCcontinuestomonitortheexpectedlong‐termrateofreturnifchangesinthoseparameterscause7.5%tobeoutsideofareasonablerangeofexpectedreturns,orifactualplanreturnsoveranextendedperiodoftimesuggestgeneralmarketassumptionsarenotrepresentativeofexpectedplanresults.
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NOTE10–PENSIONPLAN(CONTINUED)ThefollowingtablepresentstheplanassetsmeasuredatfairvalueatAugust31,2012:
Quotedprices Significantinactive other Significant
marketsfor observable unobservableidenticalassets inputs inputs Fairvalue
Investments Level1 Level2 Level3 total
Cashandequivalents 9,776$ ‐$ ‐$ 9,776$
U.S.TreasuryandU.S.agencyfixedincome:U.S.Treasurybillsandnotes 11,108 ‐ ‐ 11,108U.S.governmentagencydebt ‐ 10,721 ‐ 10,721
11,108 10,721 ‐ 21,829
Corporatefixedincome:Stripandzerocoupon ‐ 600 ‐ 600Asset‐backedsecurities ‐ 6,575 ‐ 6,575Financials ‐ 7,887 ‐ 7,887Industrials ‐ 13,483 ‐ 13,483Otherglobalcorporatebonds ‐ 3,172 ‐ 3,172
‐ 31,717 ‐ 31,717
Commonstocks:Healthcare 2,558 ‐ ‐ 2,558Utilities 938 ‐ ‐ 938Financials 3,930 ‐ ‐ 3,930Consumerstaples 3,887 ‐ ‐ 3,887Consumerdiscretionary 6,614 ‐ ‐ 6,614Materials 5,111 ‐ ‐ 5,111Energy 4,671 ‐ ‐ 4,671Informationtechnology 10,209 ‐ ‐ 10,209Industrials 6,713 ‐ ‐ 6,713Americandepositoryreceipts 5,355 ‐ ‐ 5,355
49,986 ‐ ‐ 49,986
Mutualfunds:Largecapcore 4,281 ‐ ‐ 4,281Midcapcore 7,752 ‐ ‐ 7,752Smallcapcore 6,692 ‐ ‐ 6,692Internationalcore 6,912 ‐ ‐ 6,912Emergingmarkets 6,011 ‐ ‐ 6,011Specialty‐realestate 7,990 ‐ ‐ 7,990
39,638 ‐ ‐ 39,638110,508$ 42,438$ ‐$ 152,946$
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NOTE10–PENSIONPLAN(CONTINUED)ThefollowingtablepresentstheplanassetsmeasuredatfairvalueatAugust31,2011:
Quotedprices Significantinactive other Significant
marketsfor observable unobservableidenticalassets inputs inputs Fairvalue
Investments Level1 Level2 Level3 total
Cashandequivalents 11,092$ ‐$ ‐$ 11,092$
U.S.TreasuryandU.S.agencyfixedincome:U.S.Treasurybillsandnotes 5,660 ‐ ‐ 5,660U.S.governmentagencydebt ‐ 11,525 ‐ 11,525
5,660 11,525 ‐ 17,185
Corporatefixedincome:Stripandzerocoupon ‐ 588 ‐ 588Asset‐backedsecurities ‐ 4,521 ‐ 4,521Financials ‐ 5,186 ‐ 5,186Industrials ‐ 9,785 ‐ 9,785Otherglobalcorporatebonds ‐ 4,865 ‐ 4,865
‐ 24,945 ‐ 24,945
Commonstocks:Healthcare 3,140 ‐ ‐ 3,140Utilities 625 ‐ ‐ 625Financials 2,469 ‐ ‐ 2,469Consumerstaples 3,410 ‐ ‐ 3,410Consumerdiscretionary 4,048 ‐ ‐ 4,048Materials 3,732 ‐ ‐ 3,732Energy 3,670 ‐ ‐ 3,670Informationtechnology 6,811 ‐ ‐ 6,811Industrials 6,624 ‐ ‐ 6,624Americandepositoryreceipts 3,808 ‐ ‐ 3,808
38,337 ‐ ‐ 38,337
Mutualfunds:Largecapcore 11,415 ‐ ‐ 11,415Midcapcore 6,471 ‐ ‐ 6,471Smallcapcore 1,734 ‐ ‐ 1,734Internationalcore 7,787 ‐ ‐ 7,787Emergingmarkets 4,721 ‐ ‐ 4,721Specialty‐realestate 6,131 ‐ ‐ 6,131
38,259 ‐ ‐ 38,25993,348$ 36,470$ ‐$ 129,818$
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dbaCOMMUNITYMEDICALCENTERSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS
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NOTE10–PENSIONPLAN(CONTINUED)Forinformationaboutthevaluationtechniquesandinputstomeasurefairvalueoftheplanassets,seediscussionincludedinthefairvaluemeasurementdiscussionatNote5.Thefollowingpensionbenefitpaymentsreflectexpectedfutureservice.Paymentsexpectedtobepaidoverthenexttenyearsareasfollows(inthousands):
Fiscalyear:2013 9,745$2014 9,0412015 18,4372016 15,7502017 14,7752018‐2022 97,230
CMCexpectstocontributeapproximately$79,000,000tothepensionplanduringthe2013fiscalyear.NOTE11–RESTRICTEDNETASSETSTemporarilyandpermanentlyrestrictednetassetsareavailableforthefollowingpurposesasofAugust31,2012and2011(inthousands):
2012 2011
Temporarilyrestrictednetassets:Patientcare 4,146$ 3,596$Purchaseofequipment 758 2,549Scholarshipsandothereducation 4,202 2,032Other 3,620 3,882
12,726 12,059
Permanentlyrestrictednetassets 384 384
Totaltemporaryandpermanentlyrestrictednetassets 13,110$ 12,443$
COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS
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NOTE12–FUNCTIONALCLASSIFICATIONOFOPERATINGEXPENSESThefollowingisasummaryofmanagement’sestimatedfunctionalclassificationofoperatingexpensesasofAugust31,2012and2011(inthousands):
2012 2011
Programservices 950,183$ 905,194$Managementandgeneral 100,606 86,869Fund‐raising 1,454 1,207
1,052,243$ 993,270$
NOTE13–OPERATINGLEASESCMCleasescertainpropertyandequipmentundernoncancelableoperatingleasesthatexpireinvariousyearsthrough2017.FutureminimumpaymentsatAugust31,2012,byfiscalyearandintheaggregate,undernoncancelableoperatingleaseswithinitialtermsofoneyearormoreconsistofthefollowing(inthousands):
Fiscalyear:2013 3,604$2014 4,4302015 2,6282016 1,6222017 1,453Thereafter 12,047
25,784$
Totaloperatingleaseexpensein2012and2011was$10,373,000and$12,466,000,respectively.NOTE14–COMMITMENTSANDCONTINGENCIESClovisCommunityMedicalCenterexpansion–AsofAugust31,2012,approximately$217,100,000isrecordedinconstructioninprogressfortheCCMCexpansionproject.InNovember2012,CMCexpectstoplacealargeportionoftheprojectinservice.TheGrossMaximumPrice(GMP)fortheconstructionportionoftheprojectis$203,900,000.Atotalof$164,100,000hasbeenpaidtothegeneralcontractorasof August31,2012,withtheremaining$39,800,000expectedtobepaidinfullshortlyafterthecompletiondateoftheprojectinDecember2013.
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NOTE14–COMMITMENTSANDCONTINGENCIES(CONTINUED)Claimsandregulatoryenvironment–CMCisinvolvedinvariousclaimsandlitigation,asbothplaintiffanddefendant,arisingintheordinarycourseofbusiness.Thehealthcareindustryissubjectedtonumerouslawsandregulationsoffederal,state,andlocalgovernments.Theselawsandregulationsinclude,butarenotnecessarily limited to, matters such as licensure, accreditation, government healthcare programparticipationrequirements,reimbursementforpatientservices,andMedicarefraudandabuse.Governmentactivityremainsatahighlevelwithrespecttoinvestigationsandallegationsacrossthenationconcerningpossibleviolationsoffraudandabusestatutesandregulationsbyhealthcareproviders.Violationsoftheselaws and regulations could result in expulsion from government healthcare programs together withimpositionofsignificantfinesandpenalties,aswellassignificantrepaymentsforpatientservicespreviouslybilled.InJuly2012,CRMCreceivedaletterfromtheDepartmentofHealthandHumanServices/OfficeofInspectorGeneral/OfficeofAuditServicestobeginahospitalcompliancereview.Thereviewisgoingonathospitalsnationwide,andfocusesonknownareasofnoncomplianceidentifiedinpastOfficeoftheInspectorGeneral(OIG)reviewsnationally.TheOIGconductedanonsitereviewinSeptember/Octoberof2012,thefinalresultsofwhichhavenotbeenreceived by CMC. Based on preliminary findings, CMC estimates that approximately $1,100,000 inoverpayments has occurred and has recorded a corresponding liability at August 2012 to reflect arepaymentobligation.TheindividualrepaymentshavebeensubmittedtoCMSthroughthere‐billprocess.Thistotalrepaymentwasrecordedasareductionofnetpatientservicerevenue.CMCmanagementbelievesthattherepaymentestimateisreasonableandthatanyfurtheradjustmentsbasedontheconclusionoftheOIGreviewwouldnothaveamaterialeffectonthefinancialpositionorresultsofoperationsofCMC.CCMChasbegunaself‐audittoidentifypotentialnoncomplianceintheareasidentifiedintheCRMCreviewbyOIG.ManagementestimatesapaymentreturntoCMSofapproximately$242,000.TheserepaymentsareintheprocessofbeingsubmittedtoCMSthroughthere‐billprocess.ItemswhicharenotinthetimelyfillingperiodswillhaveacheckissuedtoCMSwithaletterandappropriatedocumentation.InMarch2010,PresidentObamasignedtheHealthCareReformLegislationintolaw.Thenewlawwillresultinsweepingchangesacrossthehealthcareindustry.Theprimarygoalofthiscomprehensivelegislationistoextendcoveragetoapproximately32millionuninsuredlegalU.S.residentsthroughacombinationofpublicprogramexpansionandprivatesectorhealthinsurancereforms.Tofundtheexpansionofinsurancecoverage,thelegislationcontainsmeasuresdesignedtopromotequalityandcostefficiencyinhealthcaredeliveryandtogeneratebudgetarysavingsintheMedicareandMedicaidprograms.CMCisunabletopredictthefullimpactoftheHealthCareReformLegislationatthistimeduetothelaw’scomplexityandcurrentlackofimplementingregulations or interpretive guidance. However, CMC expects that provisions of the Health Care ReformLegislation,shoulditremainineffectinsubstantiallyitscurrentform,willhaveamaterialeffectonitsbusiness.PledgestoMedicalFoundation–CMChasmadesignificantpledgestotheSantéMedicalFoundationtosupportitseffortstorecruitneededspecialistsandprimarycarephysicianstotheFresnoareaaswellasitsefforts to install electronic health record systems in local physician offices. Pledges of $8,815,000 and$1,900,000,andpledgepaymentsof$1,909,000and$0weremadein2012and2011,respectively.
COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONS
dbaCOMMUNITYMEDICALCENTERSSCHEDULEOFEXPENDITURESOFFEDERALAWARDS
YEARENDEDAUGUST31,2012
Seeaccompanyingnotes 33
FederalCFDA/ContractNumber
Pass‐ThroughEntity
IdentifyingNumber
FederalExpenditures
U.S.DepartmentofHealthandHumanServices
GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children, 93.153 406,435$andYouth(RyanWhiteProgram)
HIVCareFormulaGrants 93.917 521,503
GrantstoProvideOutpatientEarlyInterventionServiceswithRespecttoHIVDisease(RyanWhiteHIV/AIDSProgramPartC) 93.918 612,316
TotalExpenditureofFederalAwards 1,540,254$
FederalGrantorProgramTitle
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YEARENDEDAUGUST31,2012
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1. GENERAL The accompanying schedule of expenditures of federal awards (the Schedule) includes the
federalgrantactivityofCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC)underprogramsofthefederalgovernmentfortheyearendedAugust31,2012.The information in this schedule ispresented inaccordancewith therequirementsof theOfficeofManagementandBudget (OMB)CircularA‐133,AuditsofStates,LocalGovernments,andNon‐ProfitOrganizations.BecausetheSchedulepresentsonlyaselectedportion of the operations of CMC, it is not intended to and does not present the financialposition,changesinnetassets,orcashflowsofCMC.
2. BASISOFACCOUNTING Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such
expendituresarerecognizedfollowingthecostprinciplescontainedinOMBCircularA‐122,CostPrinciplesforNon‐profitOrganizations,whereincertaintypesofexpendituresarenotallowableor are limited as to reimbursement. Negative amounts shown on the Schedule representadjustments or credits made in the normal course of business to amounts reported asexpenditures in prior years. Pass‐through entity identifying numbers are presented whereavailable.
3. RELATIONSHIPTOFINANCIALSTATEMENTS FederalawardsarereportedasotherrevenueinCMC’sconsolidatedstatementsofoperations
whenqualifyingexpensesareincurredforthestatedpurposeofthegrants.4. SUBRECIPIENTAWARDS Of the federal expenditures presented in the Schedule, CMC provided federal awards to
subrecipientsasfollows:
FederalCFDA/ContractNumber
AmountProvided
GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteProgram) 93.153 90,000$
ProgramName
35
REPORTOFINDEPENDENTAUDITORSONINTERNALCONTROLOVERFINANCIALREPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDITOFFINANCIALSTATEMENTS
PERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS
TotheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersWehaveauditedtheconsolidatedfinancialstatementsofCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC),fortheyearendedAugust31,2012,andhaveissuedourreportthereondatedNovember21,2012.Weconductedourauditinaccordancewithauditingstandardsgenerallyaccepted intheUnitedStatesofAmericaandthestandardsapplicabletofinancialauditscontained inGovernmentAuditingStandards, issuedbytheComptrollerGeneralof theUnitedStates.InternalControlOverFinancialReportingManagement of CMC is responsible for establishing and maintaining effective internal control overfinancial reporting. In planning andperforming our audit,we consideredCMC’s internal control overfinancial reportingasabasis fordesigningourauditingprocedures for thepurposeofexpressingouropinionon theconsolidated financialstatements,butnot for thepurposeofexpressinganopinionontheeffectivenessofCMC’s internalcontrolover financialreporting.Accordingly,wedonotexpressanopinionontheeffectivenessofCMC’sinternalcontroloverfinancialreporting.A deficiency in internal control exists when the design or operation of a control does not allowmanagementoremployees,inthenormalcourseofperformingtheirassignedfunctions,toprevent,ordetectandcorrectmisstatementsonatimelybasis.Amaterialweaknessisadeficiencyorcombinationofdeficienciesininternalcontrolsuchthatthereisareasonablepossibilitythatamaterialmisstatementofthefinancialstatementswillnotbeprevented,ordetectedandcorrectedonatimelybasis.Ourconsiderationoftheinternalcontroloverfinancialreportingwasforthelimitedpurposedescribedinthefirstparagraphofthissectionandwasnotdesignedtoidentifyalldeficienciesininternalcontroloverfinancialreportingthatmightbedeficiencies,significantdeficiencies,ormaterialweaknesses.Wedid not identify any deficiencies in internal control over financial reporting that we consider to bematerialweaknessesasdefinedabove.
36
ComplianceandOtherMattersAspartofobtainingreasonableassuranceaboutwhetherCMC’sconsolidated financialstatementsarefree ofmaterialmisstatement,we performed tests of its compliancewith certain provisions of laws,regulations, contracts and grant agreements, non‐compliance with which could have a direct andmaterialeffecton thedeterminationofconsolidated financialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofourauditand,accordingly,wedonot express such an opinion. The results of our tests disclosedno instances of non‐compliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards.This report is intendedsolely for the informationanduseof theAuditCommittee,BoardofTrustees,management of CMC, and state and federal awarding agencies and pass‐through entities and is notintendedtobeandshouldnotbeusedbyanyoneotherthanthesespecifiedparties.Stockton,CaliforniaNovember21,2012
37
REPORTOFINDEPENDENTAUDITORSONCOMPLIANCEWITHREQUIREMENTSTHATCOULDHAVEADIRECTANDMATERIALEFFECTONEACHMAJORPROGRAMANDONINTERNAL
CONTROLOVERCOMPLIANCEINACCORDANCEWITHOMBCIRCULARA‐133TheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersComplianceWehaveauditedCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedical Centers’ (CMC) compliancewith the types of compliance requirementsdescribed in theOMBCircularA‐133 Compliance Supplement that could have a direct andmaterial effect on each of CMC’smajor federal programs for the year ended August 31, 2012. CMC’s major federal programs areidentified in the summary of auditor’s results section of the accompanying schedule of findings andquestioned costs. Compliance with the requirements of laws, regulations, contracts, and grantsapplicable to each of its major federal programs is the responsibility of CMC’s management. OurresponsibilityistoexpressanopiniononCMC’scompliancebasedonouraudit.
WeconductedourauditofcomplianceinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica;thestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandards, issuedby theComptrollerGeneralof theUnitedStates; andOMBCircularA‐133,AuditsofStates, Local Governments, and Non‐Profit Organizations. Those standards and OMB Circular A‐133require that we plan and perform the audit to obtain reasonable assurance about whethernoncompliancewith the typesof compliance requirements referred toabove that couldhaveadirectandmaterialeffectonamajorfederalprogramoccurred.Anaudit includesexamining,onatestbasis,evidenceaboutCMC’scompliancewiththoserequirementsandperformingsuchotherproceduresasweconsiderednecessary in the circumstances.Webelieve thatour auditprovidesa reasonablebasis forour opinion. Our audit does not provide a legal determination of CMC’s compliance with thoserequirements.
In ouropinion, CMC complied, in allmaterial respects,with the compliance requirements referred toabove that couldhaveadirect andmaterial effect oneachof itsmajor federalprograms for theyearendedAugust31,2012.InternalControloverComplianceManagement of CMC is responsible for establishing and maintaining effective internal control overcompliance with the requirements of laws, regulations, contracts, and grants applicable to federalprograms.Inplanningandperformingouraudit,weconsideredCMC’sinternalcontrolovercompliancewith the requirements that could have a direct and material effect on a major federal program todeterminetheauditingproceduresforthepurposeofexpressingouropiniononcomplianceandtotestandreportoninternalcontrolovercomplianceinaccordancewithOMBCircularA‐133,butnotforthepurposeofexpressinganopinionontheeffectivenessofinternalcontrolovercompliance.Accordingly,wedonotexpressanopinionontheeffectivenessofCMC’sinternalcontrolovercompliance.
38
InternalControlOverCompliance(continued)Adeficiencyin internalcontrolovercomplianceexistswhenthedesignoroperationofacontrolovercompliance does not allow management or employees, in the normal course of performing theirassigned functions, to prevent, or detect and correct, non‐compliance with a type of compliancerequirement of a federal program on a timely basis. A material weakness in internal control overcomplianceisadeficiency,orcombinationofdeficiencies,ininternalcontrolovercompliance,suchthatthereisareasonablepossibilitythatmaterialnon‐compliancewithatypeofcompliancerequirementofafederalprogramwillnotbeprevented,ordetectedandcorrectedonatimelybasis.Ourconsiderationofinternalcontrolovercompliancewasforthelimitedpurposedescribedinthefirstparagraph of this section and was not designed to identify all deficiencies in internal control overcompliance that might be deficiencies, significant deficiencies, or material weaknesses. We did notidentifyanydeficienciesininternalcontrolovercompliancethatweconsidertobematerialweaknesses,asdefinedabove.Thepurpose of this report on internal control over compliance is solely todescribe the scope of ourtestingofinternalcontrolovercomplianceandtheresultsofthattestingbasedontherequirementsofOMBCircularA‐133.Accordingly,thisreportisnotsuitableforanyotherpurpose.
Stockton,CaliforniaMay30,2013
COMMUNITYMEDICALCENTERSSCHEDULEOFFINDINGSANDQUESTIONEDCOSTS
YEARENDEDAUGUST31,2012
39
SECTIONI–SUMMARYOFAUDITOR’SRESULTSFinancialStatementsTypeofauditor’sreportissued: UnqualifiedInternalcontroloverfinancialreporting:
Materialweakness(es)identified? yes no Significantdeficiency(ies)identified? yes nonereported
Non‐compliancematerialtofinancial
statementsnoted? yes noFederalAwardsInternalcontrolovermajorprograms:
Materialweakness(es)identified? yes no Significantdeficiency(ies)identified? yes nonereported
Typeofauditor’sreportissuedon
complianceformajorprogram: UnqualifiedAnyauditfindingsdisclosedthatare
requiredtobereportedinaccordancewithsection510(a)ofOMBCircularA‐133? yes no
IdentificationofMajorPrograms
CFDANumber(s) NameofFederalProgramorCluster
93.917 RyanWhiteHIV/AIDSTreatmentExtensionActof200993.918 RyanWhitePartCEISProgram
DollarthresholdusedtodistinguishbetweenTypeAandTypeBprograms $300,000
Auditeequalifiedaslow‐riskauditee? yes noSECTIONII–FINANCIALSTATEMENTFINDINGSNonenoted.SECTIONIII–FEDERALAWARDFINDINGSANDQUESTIONEDCOSTSNonenoted.
COMMUNITYMEDICALCENTERSSUMMARYSCHEDULEOFPRIORAUDITFINDINGS
YEARENDEDAUGUST31,2012
40
SECTIONIV–SUMMARYOFPRIORAUDITFINDINGSFINDING2011‐01–Programincome(Instanceofnon‐complianceandsignificantdeficiency)Condition: CMC’s charity policy does not specifically address the requirements above and does notreferenceaseparatepolicy forHIVpatients, the trackingof thecap ismaintainedby theLabTrackersystem,buttheinformationforqualifyingpatientsisnotconsistentlymaintained.Recommendation:CMCupdatetheircharitypolicytoincludetherequirementsaboveandtrainstaffonthis policy and ensure consistency is maintained to monitor the cap on the charges and sliding feeadjustmentsaremadeaccordingly.Currentstatus:Implemented.InAugust2011,CMCdevelopedandimplementedanewslidingfeepolicyfortheHIVpatient.