PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Consolidated Financial Statements
June 30, 2017 and 2016
(With Independent Auditors’ Report Thereon)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Table of Contents
Page(s)
Independent Auditors’ Report
1
Consolidated Financial Statements:
Consolidated Balance Sheets
2
Consolidated Statements of Operations
3
Consolidated Statements of Changes in Net Assets
4
Consolidated Statements of Cash Flows
5
Notes to Consolidated Financial Statements
6–44
KPMG LLP
Suite 2000
303 Peachtree Street, N.E.
Atlanta, GA 30308-3210
Independent Auditors’ Report
The Board of Directors
Piedmont Healthcare, Inc. and Affiliates:
We have audited the accompanying consolidated financial statements of Piedmont Healthcare, Inc. and
Affiliates, which comprise the consolidated balance sheets as of June 30, 2017 and 2016, and the related
consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the
related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and
maintenance of internal control relevant to the preparation and fair presentation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial 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 consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Piedmont Healthcare, Inc. and Affiliates as of June 30, 2017 and 2016, and the results
of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted
accounting principles.
Atlanta, Georgia
October 18, 2017
KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Consolidated Balance Sheets
June 30, 2017 and 2016
Assets
2017
2016
(In thousands)
Current assets:
Cash and cash equivalents
Patient accounts receivable, net of allowance for doubtful accounts
of $307,597 and $302,596 in 2017 and 2016, respectively
Bond proceeds receivable
Current portion of self-insurance investments
Other current assets
565,999
512,131
316,339
47,985
12,097
95,354
252,591
26,610
8,537
82,727
Total current assets
1,037,774
882,596
Investments and assets limited as to use
Property and equipment, net
Self-insurance investments, net of current portion
Beneficial interest in perpetual trust
Other assets
710,899
1,220,789
37,032
7,694
124,940
573,724
821,535
33,469
7,298
115,642
$
3,139,128
2,434,264
$
24,290
273,331
33,847
30,812
15,320
258,165
27,024
23,376
362,280
323,885
787,783
43,358
32,234
55,504
77,768
108,195
513,091
43,121
34,799
42,035
109,997
101,552
1,467,122
1,168,480
1,620,787
27,537
23,682
1,224,519
18,033
23,232
1,672,006
1,265,784
3,139,128
2,434,264
Total assets
$
Liabilities and Net Assets
Current liabilities:
Current portion of bonds payable
Accounts payable and accrued expenses
Estimated third-party payor settlements
Current portion of self-insurance reserves
Total current liabilities
Bonds payable, net of current portion
Medical office building financing obligation
Note payable to a bank
Self-insurance reserves, net of current portion
Accrued pension cost
Other long-term liabilities
Total liabilities
Net assets:
Unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
$
See accompanying notes to consolidated financial statements.
2
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Consolidated Statements of Operations
Years ended June 30, 2017 and 2016
2017
2016
(In thousands)
Unrestricted revenue, gains, and other support:
Patient service revenue
Provision for bad debt
$
Net patient service revenue
Other revenue
Total revenue, gains, and other support
Expenses:
Salaries and benefits
Supplies and other
Depreciation and amortization
Interest
Total expenses
Operating income before loss on extinguishment of
debt, acquisition costs and unrestricted
contribution received in acquisition
Loss on extinguishment of debt
Acquisition cost
Contribution received in acquisition
2,585,540
(163,681)
2,224,016
(321,683)
2,421,859
1,902,333
87,681
80,863
2,509,540
1,983,196
1,330,355
892,923
106,004
33,479
1,044,062
703,922
87,852
27,729
2,362,761
1,863,565
146,779
119,631
(28,416)
(6,418)
173,832
Operating income
285,777
Nonoperating income (expense):
Investment income (loss), net
Other components of pension expense
Loss from equity investment
Change in fair value of interest rate swaps
Total nonoperating income (expense)
Excess of revenue, gains, and other support
over expenses
Net assets released from restrictions used for purchase of
property and equipment
Pension adjustments
Other
Change in unrestricted net assets
See accompanying notes to consolidated financial statements.
3
131,700
77,406
(688)
—
8,855
(15,538)
(8,739)
(3,100)
(7,108)
85,573
(34,485)
371,350
97,215
1,904
24,447
(1,433)
$
—
(1,717)
13,786
396,268
1,188
(46,097)
(468)
51,838
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Consolidated Statements of Changes in Net Assets
Years ended June 30, 2017 and 2016
2017
2016
(In thousands)
Unrestricted net assets:
Excess of revenue, gains, and other support over expenses
Net assets released from restrictions used for purchase of
property and equipment
Pension adjustments
Other
$
1,904
24,447
(1,433)
Change in unrestricted net assets
Temporarily restricted net assets:
Contributions
Restricted contribution received in acquisition
Net assets released from restrictions used for purchase of
property and equipment
Net assets released from restrictions used for operations
Other
Change in temporarily restricted net assets
Permanently restricted net assets:
Contributions
Change in beneficial interest in perpetual trust
Change in permanently restricted net assets
Change in net assets
Net assets at beginning of year
Net assets at end of year
$
See accompanying notes to consolidated financial statements.
4
371,350
97,215
1,188
(46,097)
(468)
396,268
51,838
12,983
2,067
4,097
—
(1,904)
(3,647)
5
(1,188)
(5,643)
(635)
9,504
(3,369)
54
396
532
(620)
450
(88)
406,222
48,381
1,265,784
1,217,403
1,672,006
1,265,784
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Consolidated Statements of Cash Flows
Years ended June 30, 2017 and 2016
2017
2016
(In thousands)
Cash flows from operating activities:
Change in net assets
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Depreciation and amortization
Contribution received in acquisitions, net of cash acquired
Net unrealized (gains) losses on investments
Net realized gains on investments
Change in beneficial interest in perpetual trust
Amortization of bond (premium) discount
Loss on extinguishment of debt
Provision for bad debt
Pension adjustments
Change in fair value of interest rate swaps
Contributions restricted for long-term investment
(Increase) decrease in:
Patient accounts receivable
Other current assets
Other assets
(Decrease) increase in:
Accounts payable and accrued expenses
Estimated third-party payor settlements
Self-insurance reserves
Accrued pension cost
Other long-term liabilities
$
Net cash provided by operating activities
406,222
48,381
106,004
(115,208)
(25,871)
(41,575)
(396)
(5,761)
28,416
163,681
(24,447)
(8,855)
(15,104)
87,852
(13,183)
36,228
(7,303)
620
38
—
321,683
46,097
7,108
(4,629)
(171,823)
(7,843)
(9,773)
(327,274)
(14,654)
(6,716)
(57,640)
(3,445)
12,297
(7,782)
14,780
11,735
4,677
(8,644)
5,739
(81)
235,877
187,674
(970,011)
906,560
(184,978)
(94,988)
81,378
(103,077)
(248,429)
(116,687)
15,104
(2,565)
(12,800)
469,532
(402,851)
4,629
(2,425)
(10,510)
—
—
Net cash provided by (used in) financing activities
66,420
(8,306)
Net increase in cash and cash equivalents
53,868
62,681
512,131
449,450
565,999
512,131
Cash flows from investing activities:
Purchases of investments and assets limited as to use
Proceeds from sale of investments and assets limited as to use
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Contributions restricted for long-term investment
Repayments on note payable to a bank
Repayments of indebtedness
Proceeds from issuance of bonds
Bond redemptions
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes (net of refunds)
Supplemental schedule of noncash investing and financing activities:
Bond proceeds held by a trustee
See accompanying notes to consolidated financial statements.
5
$
26,196
(344)
$
39,448
27,961
485
—
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(1) Organization and General
The Board of Directors of Piedmont Healthcare, Inc. and Affiliates (collectively, PHC) appoints the
governing boards of:
Piedmont Atlanta Hospital, Inc. (Atlanta). Atlanta, located in Atlanta, Georgia, is a not-for-profit acute
care hospital providing inpatient, outpatient, and emergency care services primarily for residents of the
Atlanta metropolitan area.
Piedmont Fayette Hospital, Inc. (Fayette). Fayette, located in Fayetteville, Georgia, is a not-for-profit
acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents
of Fayette County.
Piedmont Mountainside Hospital, Inc. (Mountainside). Mountainside, located in Jasper, Georgia, is a
not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily
for residents of Pickens County and Gilmer County.
Piedmont Newnan Hospital, Inc. (Newnan). Newnan, located in Newnan, Georgia, is a not-for-profit
acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents
of Coweta County.
Piedmont Henry Hospital (Henry). Henry, located in McDonough, Georgia, is a not-for-profit acute care
hospital providing inpatient, outpatient, and emergency care services primarily for residents of Henry
County.
Piedmont Newton Hospital (Newton). Newton, located in Covington, Georgia, is a not-for-profit acute
care hospital providing inpatient, outpatient, and emergency care services primarily for residents of
Newton County.
Piedmont Athens Regional Hospital (Athens). Athens, located in Athens, Georgia, is a not-for-profit
acute care hospital providing inpatient, outpatient, and emergency care services for residents of
northeast Georgia and provides a home care nursing service to patients residing in the five Georgia
counties of Clarke, Oconee, Madison, Barrow, and Jackson.
Piedmont Medical Care Corporation (PMCC). PMCC is a taxable, not-for-profit entity whose purpose is
to develop a network of primary care, hospital-based and certain specialty physicians for the benefit of
the PHC affiliates.
Piedmont Heart Institute Physicians, Inc. (PHIP). PHIP is a taxable, not-for-profit entity whose purpose
is to provide an integrated cardiovascular healthcare delivery program for the benefit of the PHC
affiliates.
Athens Regional Physician Services, Inc. (ARPS). ARPS is a not-for-profit corporation whose purpose
is acquiring and operating primary care physician practices.
Athens Regional Specialty Services Inc. (ARSS). ARSS is not-for-profit corporation whose purpose is
acquiring and operating specialty physician practices.
Regional FirstCare, Inc. (RFC). RFC is a not-for-profit corporation whose purpose is acquiring and
operating urgent care centers and developing workers’ compensation/occupational medicine programs.
Athens Regional Health Resources, Inc. (ARHS). ARHS is a not-for-profit corporation whose purpose is
to provide outpatient medical care and health services outside the Athens-Clarke County, Georgia
area.
6
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
Piedmont Heart Institute, Inc. (PHI). PHI is a not-for-profit entity whose purpose is to provide
cardiovascular research services for the benefit of the PHC affiliates.
Amster-McRae Insurance Company (AMIC). AMIC was incorporated on December 10, 2003, under the
laws of the Cayman Islands. AMIC insures the hospital professional liability and commercial general
liability risks of PHC and certain PHC affiliates.
Piedmont Clinic, Inc. (the Clinic). The Clinic is a physician-hospital organization whose purpose is to
negotiate contracts with various managed care payors for the PHC affiliates.
Piedmont Healthcare Foundation, Inc. (PHF). The Foundation’s primary purpose is assisting PHC in
fund-raising and related management, making grants, and soliciting gifts.
Athens Regional Foundation, Inc. (ARF). ARF is a not-for-profit corporation whose purpose is assisting
Athens, ARPS, ARSS and RFC in fund-raising and related management, making grants, and soliciting
gifts.
Athens Area Health Plan Select (HPS). HPS is a taxable not-for-profit health maintenance organization
that is discontinuing operations and was only operational through January 2016. HPS provided
healthcare services to its enrolled members. HPS operated under a health maintenance organization
(HMO) license from, and was regulated by, the State of Georgia Department of Insurance.
(2) Significant Accounting and Reporting Policies
A summary of the significant accounting and reporting policies followed by PHC in the preparation of its
consolidated financial statements is presented below:
(a) Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared on the accrual basis of accounting
in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the
accounts of PHC, Atlanta, Fayette, Mountainside, Newnan, Henry, Newton, Athens, PMCC, PHIP,
ARPS, ARSS, RFC, ARHS, PHI, AMIC, the Clinic, PHF, ARF, and HPS. All significant intercompany
transactions and accounts have been eliminated in consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Significant items subject to such estimates and assumptions include the determination of the allowance
for doubtful accounts, allowance for contractual adjustments, fair value of investments and assets
limited as to use and interest rate swaps, reserves for general and professional liability, workers’
compensation and health insurance claims, third-party payor settlements, and the actuarial determined
liability related to PHC’s defined-benefit pension plan.
7
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, deposits with banks, and investments in highly
liquid debt instruments with maturities of three months or less when purchased, excluding amounts
limited as to use. PHC invests cash not required for immediate operating needs principally with major
financial institutions with strong credit ratings. By policy, the amount of credit exposure to any one
institution is limited, and such investments are generally not collateralized.
(d) Investments and Investment Income
Investments in equity securities with readily determinable fair values and all investments in debt
securities are measured at fair value in the accompanying consolidated balance sheets. Investment
income or loss (including unrealized and realized gains and losses on investments, interest, and
dividends) is included in the excess of revenue, gains, and other support over expenses unless the
income or loss is restricted by donor or law. PHC accounts for investment transactions on a
settlement-date basis. All of PHC’s investment portfolio is classified as trading, with unrealized gains
and losses included in excess of revenue, gains, and other support over expenses. Fair values are
based on quoted market prices if available, or estimated using quoted market prices for similar
securities. PHC invests in alternative investments, which provide PHC with a proportionate share of the
fair value of the fund returns. PHC accounts for its ownership interests in the alternative investments
based upon the equity method. Accordingly, PHC’s share of the alternative investments’ income or
loss, both realized and unrealized, is recognized as investment income. Alternative investments held by
the noncontributory defined-benefit plan are accounted for at estimated fair value. The cost of
substantially all securities sold is based on the average-cost method.
PHC classifies investments with maturities of less than one year from the balance sheet date when
purchased as short term and investments with maturities of greater than one year from the balance
sheet date when purchased as long term.
(e) Assets Limited as to Use
These assets are limited as to use by debt instruments or designations by PHC’s governing board for
plant replacement, expansion of certain facilities, purchase of equipment, and payment of certain future
debt service requirements.
(f) Inventory
Inventory is valued at average cost. Inventory consists primarily of pharmaceuticals and medical
supplies and is recorded within other current assets in the accompanying consolidated balance sheets.
8
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(g) Property and Equipment
Property and equipment acquisitions are recorded at cost, with the exception of donated items which
are recorded at fair value at the date of donation. Expenditures for renewals and improvements are
charged to the property accounts. For properties sold or retired, the cost and related accumulated
depreciation are removed from the property accounts. Any resulting gains or losses are included in
other revenue. Replacements, maintenance, and repairs that do not improve or extend the life of the
respective assets are charged to operations. Depreciation is provided over the estimated useful life of
each class of depreciable asset and is computed using the straight-line method. The ranges of
estimated useful lives are 10–25 years for land improvements, 15–40 years for buildings and fixtures,
and 3–20 years for equipment.
Property and equipment under capital leases is stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value at inception of the lease. All property
and equipment under capital leases is amortized using the straight-line method over the shorter of the
asset life or term of the lease.
Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support
and are excluded from excess of revenue, gains, and other support over expenses, unless explicit
donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit
restrictions that specify how the assets are to be used, and gifts of cash or other assets that must be
used to acquire long-lived assets, are reported as restricted support. Absent explicit donor stipulations
about how long those long-lived assets must be maintained, expirations of donor restrictions are
reported when the donated or acquired long-lived assets are placed in service.
(h) Software and Software Development Costs
Software and software development costs include costs incurred by PHC to develop software for
internal use in medical records maintenance, physician order entry, and clinical documentation.
Costs of software developed for internal use are accounted for in accordance with the provisions of
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350-40,
Internal-Use Software. In accordance with ASC 350-40, internal and external costs incurred to develop
internal-use computer software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding, installation of hardware, and
testing. Costs of significant upgrades and enhancements that result in additional functionality are also
capitalized.
All other costs incurred in connection with an internal software project, including maintenance, minor
upgrades, enhancements, and training, are expensed as incurred. Capitalized software costs are
amortized on a straight-line basis over the estimated useful lives of the related software applications
(3–12 years).
9
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(i) Long-Lived Assets
PHC periodically reviews long-lived assets, such as property and equipment, whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized to the extent that the carrying amount of an asset exceeds its fair value. Assets to
be disposed of are separately presented in the consolidated balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held-for-sale are presented separately in the appropriate
asset and liability sections of the consolidated balance sheet. In the period in which the disposal group
is sold or classified as held-for-sale, the results of its operations are classified as discontinued
operations in the consolidated statements of operations. Management believes that the long-lived
assets in the accompanying consolidated balance sheets are appropriately valued at June 30, 2017
and 2016 and no related impairment losses were recognized during the years then ended.
(j) Other Assets
Other assets include goodwill of $62,133,000 at June 30, 2017 and 2016. In accordance with ASC 350,
Intangibles – Goodwill and Other, PHC evaluates its goodwill annually for potential impairment. No
impairment losses on goodwill were recognized for the years ended June 30, 2017 or 2016.
(k) Beneficial Interest in Perpetual Trust
PHC is the beneficiary of six separate endowments held in trust by a local bank, with fair values at
June 30, 2017 and 2016 aggregating $7,694,000 and $7,298,000, respectively. The beneficial interest
at June 30, 2017 and 2016 has been recorded in long-term assets at fair value and the change in value
for the years then ended has been recorded as a change in permanently restricted net assets.
(l) Vacation Policy
PHC accrues employee vacation pay as earned by the employee.
(m) Advertising Costs
Advertising costs are expensed as incurred and approximated $10,886,000 and $8,438,000 for the
years ended June 30, 2017 and 2016, respectively, and are included in supplies and other expenses in
the accompanying consolidated statements of operations.
(n) Estimated Malpractice Costs
The provision for estimated medical malpractice claims includes estimates of the ultimate costs for both
reported claims and claims incurred but not reported and are included in self-insurance reserves on the
accompanying consolidated balance sheets.
10
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(o) Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by PHC is restricted by donors for a specific
time period or purpose. Permanently restricted net assets have been restricted by donors to be
maintained by PHC in perpetuity, with related investment earnings generally available for unrestricted
or donor-restricted purposes.
(p) Net Patient Service Revenue, Patient Accounts Receivable, and Allowance for Doubtful
Accounts
PHC has agreements with third-party payors that provide for payments to PHC at amounts different
from their established rates. Payment arrangements include prospectively determined rates per
discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue
is reported at the estimated net realizable amounts from patients, third-party payors, and others for
services rendered, and includes estimated retroactive revenue adjustments under reimbursement
agreements with third-party payors due to future audits, reviews, and investigations. Retroactive
adjustments are considered in the recognition of revenue on an estimated basis in the period the
related services are rendered, and such amounts are adjusted in future periods as adjustments
become known or as years are no longer subject to such audits, reviews, and investigations.
Net patient service revenue is summarized below (in thousands):
Year ended June 30
2017
2016
Patient service charges
Less contractual adjustments and other deductions
$
Patient service revenue
Less provision for bad debt
Net patient service revenue
$
10,135,557
7,550,017
7,998,670
5,774,654
2,585,540
2,224,016
163,681
321,683
2,421,859
1,902,333
Recognition of patient service revenue (gross patent service charges less contractual adjustments and
other deductions) is dependent on factors such as proper completion of medical charts following a
patient visit, medical coding of charts and processing charts through PHC’s billing systems, and
verification of patient representations at the time services are rendered with the payors responsible for
payment of PHC’s services. Patient service revenue is recorded based on the information known at the
time of billing, which is subject to change. For example, patient payor information may change following
an initial attempt to bill for services due to a change in payor status. Such changes in payor status have
an impact on recorded net revenue due to different contractual agreements among payors. These
changes in patient revenue are recognized in the period that the changes in payor become known.
11
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
The provision for bad debt is based upon management’s assessment of historical and expected net
collections considering business and economic conditions, trends in healthcare coverage, and other
collection indicators. Periodically, management assesses the adequacy of the allowance for doubtful
accounts based upon historical write-off experience by payor category. The results of this review are
then used to make any modifications to the provision for bad debt to establish an appropriate allowance
for uncollectible receivables.
Patient service revenue, net of contractual adjustments and other discounts and before the provision
for bad debt, recognized from major payor sources are as follows (in thousands):
Year ended June 30
2017
2016
Third-party payors, net of contractual allowances
Self-pay patients
Patient service revenue
$
2,245,460
340,080
1,959,796
264,220
$
2,585,540
2,224,016
PHC records a provision for bad debt in the period services are provided related to self-pay patients.
For receivables associated with patients who have third-party coverage, PHC analyzes contractually
due amounts and provides an allowance for doubtful accounts and a provision for bad debt, if
necessary. Accounts receivable are written off after collection efforts have been undertaken in
accordance with PHC’s policies. The allowance for doubtful accounts was 49% and 55% of patient
accounts receivable after contractual allowances as of June 30, 2017 and 2016, respectively.
(q) Charity Care
PHC provides care to patients who meet certain criteria under its charity care policy without charge or
at amounts less than its established rates. Amounts determined to qualify as charity care are not
reported as patient service revenue.
(r) Excess of Revenue, Gains, and Other Support over Expenses
The consolidated statements of operations include excess of revenue, gains, and other support over
expenses. Changes in unrestricted net assets, which are excluded from excess of revenue, gains, and
other support over expenses, consistent with industry practice, include pension adjustments and
contributions of long-lived assets (including assets acquired using contributions, which by donor
restriction, are to be used for the purposes of acquiring such assets).
12
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(s) Pledges Receivable and Donor-Restricted Gifts
Unconditional promises to give cash and other assets to PHC are reported at fair value at the date the
promise is received. Conditional promises to give and indications of intentions to give are reported at
fair value at the date the gift is received or the date the donor conditions are substantially met. Gifts are
reported as either temporarily or permanently restricted support if they are received with donor
stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a
stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets
are reclassified as unrestricted net assets and reported in the consolidated statements of operations as
net assets released from restrictions. Donor-restricted contributions whose restrictions are met within
the same year as received are reported as unrestricted contributions in the accompanying consolidated
financial statements.
In February 2016, PHC was awarded a conditional grant by The Marcus Foundation, Inc. totaling
$75,000,000 to support a portion of the construction of the Marcus Heart and Vascular Center. The
grant is conditional upon incurring qualified expenditures toward and completion of the donor-stipulated
construction project. As of June 30, 2017, PHC had not recognized any contribution revenue related to
the grant.
(t) Interest Expense
PHC incurred interest expense totaling approximately $33,479,000 and $27,729,000 for the years
ended June 30, 2017 and 2016, respectively. There was no interest capitalized in 2017 or 2016.
(u) Electronic Health Record Incentive Payments
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive
payments beginning in 2011 for eligible hospitals and professionals that adopt and meaningfully use
certified electronic health record (EHR) technology. PHC has recognized approximately $2,695,000
and $5,553,000 of Medicare incentive payments in other revenue in the accompanying consolidated
statements of operations for the years ended June 30, 2017 and 2016, respectively. PHC recognizes
income related to Medicare and Medicaid incentive payments using a gain contingency model that is
based upon when eligible hospitals have demonstrated meaningful use of certified EHR technology for
the applicable period and the cost report information for the full cost report year that will determine the
final calculation of the incentive payment is available.
(v) Income Taxes
Piedmont Healthcare, Inc., Atlanta, Fayette, Mountainside, Newnan, Henry, Newton, Athens, ARPS,
ARSS, RFC, ARHS, PHI, PHF, and ARF are organizations exempt from federal income tax pursuant to
U.S. Internal Revenue Code (IRC) Section 501(a), as organizations described in Section 501(c)(3) of
the IRC of 1986, as amended, and state income tax. AMIC is exempt from federal and local income tax
pursuant to the laws of the Government of the Cayman Islands. There is currently no taxation imposed
on income or capital gains by the Government of the Cayman Islands. If any form of tax legislation
were to be enacted, AMIC has been granted an exemption until the year 2024. PMCC and PHIP are
taxable, not-for-profit entities that operated in a net loss position for financial reporting and tax
purposes during the years ended June 30, 2017 and 2016. The Clinic is a taxable, not-for-profit entity
that operated in a net loss position for financial reporting and tax purposes during the year ended
June 30, 2017 and a net income position for financial reporting and tax purposes during the year ended
13
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
June 30, 2016. HPS is a taxable, not-for-profit entity that operated in a net income position for financial
reporting and tax purposes during the period from October 1, 2016 through June 30, 2017. Due to
previous operating losses and other factors, historical and current income tax effects associated with
HPS are immaterial to the accompanying consolidated financial statements.
At June 30, 2017 and 2016, Atlanta (as it relates to unrelated business income), PMCC, the Clinic, and
PHIP had net operating loss carryforwards totaling approximately $752,692,000 and $623,444,000,
respectively, which expire at various dates between 2019 and 2034. PMCC, the Clinic, and PHIP had
deferred income tax assets totaling approximately $287,820,000 and $236,039,000 at June 30, 2017
and 2016, respectively. The deferred income tax assets, which consist primarily of net operating loss
carryforwards and differences relating to allowances for doubtful accounts and accruals, were offset by
a full valuation allowance.
PHC accounts for income taxes under the provisions of the Income Taxes Topic of ASC (ASC 740).
Under the requirements of ASC 740, tax-exempt organizations may be required to record an obligation
as the result of a tax position they have historically taken on various uncertain tax exposure items.
There were no material uncertain tax positions at June 30, 2017 or 2016.
(w) Prior-Year Reclassifications
Certain reclassifications have been made to the fiscal year 2016 consolidated financial statements to
conform to the fiscal year 2017 presentation. These reclassifications had no impact on the results of
operations, change in net assets, or cash flows in the accompanying consolidated financial statements.
(x) Defined-Benefit Pension Plan
PHC accounts for its defined-benefit pension plan in accordance with ASC 715, Compensation –
Retirement Benefits. ASC 715 requires an entity to recognize in its balance sheet an asset for a
defined-benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status;
measure a defined-benefit postretirement plan’s assets and obligations that determine its funded status
at the end of the employer’s fiscal year; and recognize changes in the funded status of a
defined-benefit postretirement plan as a separate line item or items within changes in unrestricted net
assets, apart from expenses, in the year in which the changes occur. Certain PHC employees
participate in PHC’s trusteed noncontributory defined-benefit pension plan (the Plan). The Plan’s
benefits are based on a combination of years of service and the employee’s compensation. PHC’s
funding policy is to contribute annually to the Plan an amount sufficient to meet the minimum funding
standards of Employee Retirement Income Security Act (ERISA) or an amount sufficient to maintain
the Plan on a sound actuarial basis, as certified by an enrolled actuary. Plan assets consist primarily of
common stocks, alternative investments, fixed-income investments, and cash equivalents. On
September 20, 2012, the PHC Board of Directors and PHC management approved a freeze of the Plan
effective December 31, 2014, whereby participants cease to accrue further benefits for service
rendered subsequent to December 31, 2014. See note 2(z) regarding presentation of pension cost.
(y) Subsequent Events
PHC evaluated events and transactions occurring subsequent to June 30, 2017 through October 18,
2017, the date the consolidated financial statements were available to be issued. During this period,
there were no additional subsequent events that required recognition in the accompanying
consolidated financial statements. See note 18 for related disclosures.
14
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(z) Recent Accounting Pronouncements
The FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with
Customers, in May 2014. ASU No. 2014-09 requires an entity to recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. An entity should also
disclose sufficient quantitative and qualitative information to enable users of financial statements to
understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The new standard is effective for annual reporting periods beginning after
December 15, 2017. PHC will implement the provisions of ASU No. 2014-09 as of July 1, 2018. PHC
has not yet determined the impact of the new standard on its current policies for revenue recognition.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes
FASB ASC Topic 840, Leases, and makes other conforming amendments to U.S. GAAP.
ASU No. 2016-02 requires, among other changes to the lease accounting guidance, lessees to
recognize most leases on balance sheet via a right-of-use asset and lease liability, and additional
qualitative and quantitative disclosures. ASU No. 2016-02 is effective for annual periods in fiscal years
beginning after December 15, 2019, permits early adoption, and mandates a modified retrospective
transition method. PHC is required to adopt ASU No. 2016-02 on July 1, 2019. PHC expects
ASU No. 2016-02 to add significant right-of-use assets and lease liabilities to its consolidated balance
sheet and it is evaluating other effects that the new standard will have on the consolidated financial
statements.
The FASB issued ASU No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, in
August 2016. ASU No. 2016-14 is intended to improve the presentation of net asset classification as
well as the information presented in the financial statements and financial statement notes regarding
liquidity, financial performance, and cash flows for not-for-profit entities. ASU No. 2016-14 is effective
for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning
after December 15, 2018. PHC is required to adopt ASU No. 2016-14 as of June 30, 2019. PHC has
not determined the impact of ASU No. 2016-14 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments – a consensus of the Emerging Issues
Task Force. ASU No. 2016-15 amends ASC Topic 230, Statement of Cash Flows, to add or clarify
guidance on the classification of certain cash receipts and payments in the statement of cash flows with
the intent of reducing diversity in practice with respect to eight types of cash flows. ASU No. 2016-15 is
effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. Early adoption is permitted and entities must apply the guidance
retrospectively to all periods presented. PHC has not determined the impact of ASU No. 2016-15 on its
consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires companies
to present amounts generally described as restricted cash and restricted cash equivalents in cash and
cash equivalents on the statement of cash flows. ASU No. 2016-18 is effective for annual periods in
fiscal years beginning after December 15, 2017 and requires retrospective application. PHC elected to
early adopt ASU No. 2016-18 as of July 1, 2016. The adoption of ASU No. 2016-18 had no impact on
PHC’s consolidated financial statements.
15
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to present the
service cost component of net benefit cost in the income statement line items where they report
compensation cost, and all other components of net benefit cost in the income statement separately
from the service cost component and outside of operating income, if this subtotal is presented.
Additionally, the service cost component will be the only component that can be capitalized.
ASU No. 2017-07 is effective in annual periods in fiscal years beginning after December 15, 2018.
The standard requires retrospective application for the amendments related to the presentation of the
service cost component and other components of net benefit cost, and prospective application for the
amendments related to the capitalization requirements for the service cost components of net benefit
cost. PHC adopted the provisions of ASU No. 2017-07 as of July 1, 2016. As a result of adopting the
standard, PHC reclassified $8,739,000 from salaries and wages expense to other components of
pension expense within nonoperating expense in the consolidated statement of operations for the year
ended June 30, 2016.
(3) Acquisitions
Effective October 1, 2016, PHC entered into an affiliation agreement with Athens Regional Health Services,
Inc. and Piedmont Athens Regional Hospital, Inc. (f/k/a Athens Regional Medical Center, Inc.) whereby
PHC became the sole corporate member of the entity and its affiliates (collectively, The Athens Entities).
Although no consideration was transferred, PHC assumed all the assets and liabilities of The Athens
Entities as of the affiliation date. As part of the affiliation, PHC assumed Athens’ lease with the Hospital
Authority of Clarke County, Georgia (the Clarke County Authority). The lease covers certain land, buildings,
fixtures, improvements, mechanical systems, and parking areas. At the termination of the lease, the assets
and liabilities revert back to the Clarke County Authority. In connection with the affiliation and PHC’s
assumption of the lease, the lease term was extended to expire in 40 years. The total cost of affiliation with
the Athens Entities has been allocated to the assets acquired and liabilities assumed based upon their
respective fair values in accordance with ASC 958-805, Not-for-Profit Entities – Business Combinations.
Based on the purchase price allocation as of June 30, 2017, PHC recorded the fair value of all assets
acquired and liabilities assumed, resulting in a contribution of approximately $175,899,000 being recorded
as a contribution received in affiliation on the accompanying 2017 consolidated statement of operations.
16
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
A summary of the purchase price allocation, including assumed liabilities, is as follows (in thousands):
Assets:
Cash
Net patient accounts receivable
Other current assets
Assets limited as to use
Property and equipment
Other assets
Liabilities:
Current liabilities
Long-term debt
Other liabilities
$
(78,551)
(200,264)
(9,328)
Unrestricted contribution
received in affiliation
173,832
Restricted contribution received in affiliation
Total contribution received
in affiliation
58,624
55,609
26,159
12,976
306,864
1,743
2,067
$
175,899
Effective October 1, 2015, PHC entered into an affiliation agreement with Piedmont Newton Hospital (f/k/a
Newton Health System, Inc.) whereby it became the sole corporate member of the entity. Although no
consideration was transferred, PHC assumed all the assets and liabilities of Newton as of the affiliation
date. As part of the affiliation, PHC assumed Newton’s lease with the Newton County Hospital Authority
(the Newton County Authority). The lease covers all the assets and liabilities of Newton at the inception of
the lease. At the termination of the lease, the assets and liabilities revert back to the Newton County
Authority. In connection with the affiliation and PHC’s assumption of the lease, the lease term was
extended to expire in 40 years. The total cost of the Newton affiliation has been allocated to the assets
acquired and liabilities assumed based upon their respective fair values in accordance with ASC 958-805.
Based on the purchase price allocation as of June 30, 2016, PHC recorded the fair value of all assets
acquired and liabilities assumed, resulting in a contribution of approximately $13,786,000 being recorded
as a contribution received in affiliation on the accompanying 2016 consolidated statement of operations.
17
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
A summary of the purchase price allocation, including assumed liabilities, is as follows (in thousands):
Assets:
Cash
Net patient accounts receivable
Other current assets
Assets limited as to use
Property and equipment
Other assets
Liabilities:
Current liabilities
Long-term debt
Other liabilities
$
603
10,656
3,222
5,072
22,424
2,631
(11,938)
(17,388)
(1,496)
Contribution received
in affiliation
$
13,786
The operating results of The Athens Entities and Newton have been included in the consolidated
statements of operations since their respective acquisition dates. The revenue, gains, and other support;
operating income; and change in unrestricted net assets attributable to PHC related to the acquired
operations of The Athens Entities for the period from October 1, 2016 through June 30, 2017 were
approximately $554,031,000, $198,762,000, and $260,867,000, respectively. The revenue, gains, and
other support; operating loss; and change in unrestricted net assets attributable to PHC related to the
acquired Newton operations for the period from July 1, 2016 through June 30, 2017 were approximately
$74,014,000, $1,190,000, and $19,409,000, respectively. The revenue, gains, and other support; operating
loss; and change in unrestricted net assets attributable to PHC related to the acquired Newton operations
for the period from October 1, 2015 through June 30, 2016 were approximately $56,135,000, $6,369,000,
and $19,793,000, respectively. The unaudited pro forma combined summary of operations, which gives
effect to including the acquired operating results of The Athens Entities and Newton as if the acquisitions
had occurred as of July 1, 2015, is as follows (in thousands):
Year ended June 30
2017
2016
Revenue, gains, and other support
Operating income
Change in unrestricted net assets
$
2,810,106
108,663
406,685
2,490,811
124,550
48,238
Pro forma adjustments to operating income and change in unrestricted net assets include adjustments to
record The Athens Entities’ and Newton’s operating results on a consolidated basis, to record depreciation
expense based on the estimated fair value assigned to the long-lived assets acquired, and to remove loss
on extinguishment of debt relating to The Athens Entities’ acquired debt. These pro forma results are not
necessarily indicative of the actual results of operations that would have occurred if these acquisitions had
occurred on July 1, 2015.
18
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(4) Net Patient Service Revenue
PHC has agreements with third-party payors that provide for payments to PHC at amounts different from its
established rates. A summary of payment arrangements with major third-party payors is as follows:
(a) Medicare and Medicaid
PHC renders care to patients covered by the Medicare and Medicaid programs. Inpatient acute care
services rendered to Medicare program beneficiaries are paid at prospectively determined rates per
discharge. These rates vary according to a patient classification system that is based on clinical,
diagnostic, and other factors. Medicare reimburses for outpatient services based on a prospective
outpatient payment system similar to the inpatient system.
Inpatient services rendered to Medicaid program beneficiaries are reimbursed under a prospective
payment reimbursement methodology. Outpatient services are reimbursed under a cost-based
methodology. PHC is reimbursed at a tentative rate with final settlement determined after submission of
annual cost reports by PHC and audits thereof by the Medicaid fiscal intermediary.
Services rendered under these programs are recorded at established rates and reduced to the
estimated amount due from the third-party payors through recording of contractual adjustments and
other discounts. Because PHC cannot pursue collections for the contractual or discounted amounts,
they are not reported as revenue.
Net patient service revenue from the Medicare and Medicaid programs accounted for approximately
36% and 4%, respectively, of PHC’s net patient service revenue for the year ended June 30, 2017. Net
patient service revenue from the Medicare and Medicaid programs accounted for approximately 32%
and 4%, respectively, of PHC’s net patient service revenue for the year ended June 30, 2016. Laws
and regulations governing the Medicare and Medicaid programs are extremely complex and subject to
interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change
by a material amount in the near term. Net patient service revenue is reported at the estimated net
realizable amounts from the Medicare and Medicaid programs for services rendered and includes
estimated retroactive revenue adjustments due to future audits, reviews, and investigations.
Final settlement has been reached for all Medicare and Medicaid cost reports prior to fiscal year 2010.
PHC has recorded amounts due to Medicare and Medicaid of $33,847,000 and $27,024,000 at
June 30, 2017 and 2016, respectively, as an estimate of final third-party payor settlements for open
cost report years. Management recorded a favorable change in estimate to net patient service revenue
in the accompanying consolidated statements of operations related to third-party settlements of
$7,590,000 and $4,689,000 for the years ended June 30, 2017 and 2016, respectively. The amounts
due to Medicare and Medicaid represent management’s best estimates of final settlements.
(b) Managed Care and Other Payors
PHC has also entered into payment agreements with certain commercial insurance carriers, health
maintenance organizations (HMOs), and preferred provider organizations. The bases for payments to
PHC under these agreements include prospectively determined rates per discharge, discounts from
established charges, and daily rates.
19
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(c) Self-Pay
PHC incurred bad debt expense, valued at established charges, of $163,681,000 and $321,683,000 for
the years ended June 30, 2017 and 2016, respectively. In an effort to improve amounts collected from
uninsured patients that do not apply and/or qualify for charity assistance, PHC offered discounted
prices to the uninsured under a policy that was revised in June 2016, as described below. In addition to
charity care and bad debt write-offs, PHC provided discounts to the uninsured of $268,060,000 and
$19,459,000 (recorded as deductions from net patient service revenue) for the years ended June 30,
2017 and 2016, respectively. The decrease in bad debt expense is due to the following changes in
PHC’s policies:
Implementation of a 70% uninsured discount offered to self-pay patients (implemented June 2016)
Further automation of charity care determination with revised scoring methodologies (implemented
January 2017)
(d) Georgia Provider Payment Agreement Act
Effective July 1, 2010, the State of Georgia imposed a fee on not-for-profit hospitals based on net
revenue levels as defined by the State of Georgia. Included in supplies and other expenses in the
accompanying consolidated statements of operations for the years ended June 30, 2017 and 2016 is
approximately $23,852,000 and $18,751,000, respectively, relating to this fee.
(5) Charity Care and Community Benefits
PHC provides care to patients who meet certain criteria under its charity care policy without charge or at
amounts significantly less than its established rates. Amounts determined to qualify as charity care are not
reported as revenue or patient accounts receivable in the accompanying consolidated financial statements.
PHC maintains records to identify and monitor the level of charity care it provides. These records include
the amount of charges forgone for services furnished under its charity care policy. The cost of providing this
charity care was estimated to be approximately $81,564,000 and $36,226,000 for years ended June 30,
2017 and 2016, respectively. PHC estimates the direct and indirect costs of providing charity care by
applying a cost to gross charges ratio to the gross uncompensated charges associated with providing
charity care to patients.
PHC offers many other wellness and educational services to the community at low and, in some cases, no
cost. PHC also partners with five charitable clinics to provide supportive services for low-income patients,
including the provision of free laboratory and diagnostic services to clinic patients at no charge. PHC
operates 24-hour emergency rooms that provide care to all patients, regardless of ability to pay. The costs
for these services are included in operating expenses in the accompanying consolidated statements of
operations.
20
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(6) Investments
(a) Investments and Assets Limited as to Use
The composition of investments and assets limited as to use is set forth in the following table
(in thousands):
June 30
2017
Investments internally designated for capital acquisition:
Cash and short-term investments
Corporate obligations
Fixed-income securities
Corporate stocks
Mutual funds
Alternative investments
$
Assets limited as to use:
Cash and short-term investments
Corporate obligations
Fixed-income securities
Corporate stocks
Mutual funds
Alternative investments
Totals
$
21
2016
13,318
49
152,504
16,789
324,400
176,444
8,298
18,782
94,748
55,760
220,661
153,206
683,504
551,455
1,399
2
5,912
590
13,126
6,366
335
758
3,826
2,252
8,911
6,187
27,395
22,269
710,899
573,724
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(b) Alternative Investments
Alternative investments included in investments and assets limited as to use at June 30, 2017 and
2016 and related net unrealized gains and losses for the years then ended consist of the following
(in thousands):
Estimated fair value,
year ended June 30
2017
2016
Lighthouse Diversified Fund
$
Archipelago Holdings Ltd
Offshore Fund
Titan Masters International Fund
Clarion Lion Properties ING Fund
LSV Emerging Markets Equity
Fund
Harvest MLP Income II Fund
Golub Capital Investment
Corporation
IFP Global Equity, L.P.
Chatham Asset High Yield
Offshore Fund, Ltd.
Canyon Balanced Fund
PHC Fund, Ltd.
$
Net unrealized gains (losses),
year ended June 30
2017
2016
—
28,211
—
(3,465)
—
—
17,726
31,260
26,808
25,468
—
—
(988)
(1,523)
(2,997)
1,906
—
15,386
19,538
28,108
—
74
(3,232)
(4,833)
1,556
20,029
—
—
—
1,629
—
—
24,627
18,537
84,949
—
—
—
1,214
1,537
343
—
—
—
182,810
159,393
3,809
(14,144)
Redemption frequency and redemption notice periods for alternative investments held at June 30, 2017
are as follows:
Clarion Lion Properties ING Fund
Harvest MLP Income II Fund
Golub Capital Investment Corporation
IFP Global Equity L.P.
Chatham Asset High Yield Offshore Fund, Ltd.
Canyon Balanced Fund
PHC Fund, Ltd.
Redemption
frequency
Redemption
notice period
Quarterly
Monthly
Upon IPO
Bi-weekly
Quarterly
Quarterly
Monthly
90 Days
30 Days
N/A
3 Days
45 Days
90 Days
90 Days
As of June 30, 2017, PHC had an unfunded commitment with Golub Capital Investment Corporation of
$15,470,000.
22
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(c) Investment Income (Loss), Net
Investment income (loss), net related to investments and assets limited as to use is comprised of the
following (in thousands):
Year ended June 30
2017
2016
Interest income
Net realized and unrealized gains (losses) on investments
Other
$
11,112
67,446
(1,152)
13,009
(28,925)
378
Investment income (loss), net
$
77,406
(15,538)
(7) Property and Equipment
A summary of property and equipment, net is as follows (in thousands):
June 30
2017
Land and land improvements
Buildings and fixtures
Equipment
$
Less accumulated depreciation
Construction in progress
Property and equipment, net
$
2016
101,417
1,281,943
901,870
66,898
982,782
760,989
2,285,230
1,810,669
1,140,488
1,038,609
1,144,742
772,060
76,047
49,475
1,220,789
821,535
Construction in progress at June 30, 2017 primarily relates to ongoing construction at Atlanta. Construction
in progress at June 30, 2016 primarily relates to ongoing construction at Fayette completed in 2017.
Depreciation and amortization expense for the years ended June 30, 2017 and 2016 totaled approximately
$106,004,000 and $87,852,000, respectively. Amortization of capitalized software costs of approximately
$13,284,000 and $9,899,000 are included in depreciation and amortization expense in the accompanying
consolidated statements of operations for the years ended June 30, 2017 and 2016, respectively.
23
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
Capitalized software and software development costs included in property and equipment were as follows
(in thousands):
June 30
2017
Capitalized software and software development costs
Less accumulated amortization
Capitalized software and software development
costs, net
2016
$
109,658
46,744
82,468
35,748
$
62,914
46,720
Based on the amortizable capitalized software and software development costs that have been placed into
service at June 30, 2017, the estimated amortization expense for the succeeding five fiscal years and
thereafter is as follows (in thousands):
Year ending June 30:
2018
2019
2020
2021
2022
Thereafter
$
14,337
11,953
9,805
8,248
6,901
11,670
$
62,914
At June 30, 2017 and 2016, PHC’s remaining commitment for software and construction contracts
approximated $351,901,000 and $49,263,000, respectively, primarily relating to ongoing construction at
Atlanta expected to be completed by 2021.
During fiscal year 2012, PHC completed construction of a new Piedmont Newnan hospital. In May 2012,
the operations of Newnan were transferred to the new hospital. At that time, the replaced hospital building
and certain assets that were not transferred to the new hospital were written down to fair value less
estimated cost to sell. The building and related assets of $3,050,000 are classified as held-for-sale and are
included in other current assets in the accompanying consolidated balance sheets as of June 30, 2017 and
2016. Sale of the assets is expected to occur within one year.
In August 2006, Fayette entered into a ground lease with Piedmont Fayette Medical Office Building, LLC
(PFB), whereby Fayette is leasing real property to PFB. In accordance with ASC 840, Leases, Fayette is
considered the owner of the Medical Office Building (Fayette MOB) during the construction period and
thereafter due to Fayette’s continuing involvement in the Fayette MOB. Accordingly, the value of the
building and the construction notes paid by the developer are included in the accompanying consolidated
balance sheets. At June 30, 2017 and 2016, the net book value of the Fayette MOB included in buildings
and fixtures totaled approximately $12,384,000 and $13,516,000, respectively, and the related Medical
Office Building financing obligation approximated $13,708,000 and $14,242,000, respectively.
24
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
In August 2005, Atlanta entered into a ground lease with Piedmont Physicians Plaza, L.P. (PPP), whereby
Atlanta is leasing real property to PPP. In accordance with ASC 840, Atlanta is considered the owner of the
Medical Office Building (Piedmont MOB) during the construction period and thereafter due to Atlanta’s
continuing involvement in the Piedmont MOB. Accordingly, the cost of the building and the related financing
obligation are included in PHC’s consolidated balance sheets. At June 30, 2017 and 2016, the net book
value of the Piedmont MOB included in buildings and fixtures totaled approximately $14,277,000 and
$15,264,000, respectively, and the related Medical Office Building financing obligation approximated
$29,650,000 and $28,878,000, respectively.
(8) Long-Term Debt
(a) Bonds Payable
Bonds payable consists of the following (in thousands):
June 30
2017
Series 2006, fixed interest rate of 4.50%, interest payments
due semiannually, payable through 2024
Series 2007, fixed interest rate of 2.47%, interest payments
due semiannually, payable through 2024
Series 2009A, fixed interest rates ranging from 4.375% to
5.25%, interest payments due semiannually,
payable through 2024
Series 2009C, variable interest rates (1.15% and 0.76% at
June 30, 2017 and 2016, respectively), interest
payments due monthly, payable through 2019
Series 2010, fixed interest rates ranging from 4.50% to
5.00%, interest payments due semiannually, payable
through 2045
Series 2014A, fixed interest rates ranging from 3.00% to
5.00%, interest payments due semiannually, payable
through 2044
Series 2014B, variable interest rates (1.35% and 0.96%
at June 30, 2017 and 2016, respectively) interest
payments due monthly, payable through 2034
Series 2016A, fixed interest rates ranging from 3.00% to
5.00%, interest payments due semiannually, payable
through 2046
Unamortized original issue premium, net
Unamortized debt issuance costs
$
Less current maturities
$
25
2016
4,380
4,905
9,929
11,131
35,895
208,140
17,465
25,650
100,000
100,000
86,885
87,125
89,590
92,270
423,360
51,982
(7,413)
—
4,383
(5,193)
812,073
528,411
(24,290)
(15,320)
787,783
513,091
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
In connection with the acquisition of Athens effective October 1, 2016, PHC assumed responsibility for
payment of the Clarke Authority’s outstanding revenue certificates through the lease agreement
described in note 3.
On October 27, 2016, the Development Authority of Fulton County, the Hospital Authority of Fayette
County, and the Hospital Authority of Clarke County, Georgia issued $197,555,000, $47,580,000, and
$178,225,000, respectively ($423,360,000 collectively), in Revenue Bonds Series 2016A
(the Series 2016 Bonds) on behalf of PHC. The proceeds of the Series 2016 Bonds were used to
redeem previously outstanding Series 2009A and Athens Series 2007 and 2012 Revenue Bonds and
for certain construction projects. PHC recognized a $28,416,000 loss on extinguishment resulting from
the write-off of associated unamortized bond issuance costs, premium and discount related to the
Series 2009A and Athens Series 2007 and 2012 revenue bonds. The Series 2016 Bonds have been
issued on a tax-exempt basis and are secured under a master trust indenture with all members of the
Obligated Group (Piedmont Healthcare, Inc. and all of its affiliates exclusive of AMIC, ARPS, ARSS,
RHC, ARHS, ARF, and HPS), which provides for, among other things, the deposit of revenue with the
master trustee in the event of certain defaults, pledges of accounts receivable, pledges not to
encumber property, and limitations on additional borrowings.
Included in bond proceeds receivable on the accompanying June 30, 2017 consolidated balance sheet
is $30,927,000 of bond proceeds from the Series 2016 Bonds, currently being held by a trustee that is
remitted to PHC upon completion of certain construction projects.
On November 19, 2014, the Development Authority of Fulton County, the Hospital Authority of Fayette
County, and the Hospital Authority of Henry County issued $87,730,000, $42,060,000, and
$53,420,000, respectively ($183,210,000 collectively), in Revenue Bonds Series 2014A and 2014B
(the Series 2014 Bonds) on behalf of PHC. The proceeds of the Series 2014 Bonds were used to
redeem previously outstanding Series 2004 and Series 2009B Revenue Bonds and for certain
construction projects. The Series 2014 Bonds have been issued on a tax-exempt basis and are
secured under a master trust indenture with all members of the Obligated Group, which provides for,
among other things, the deposit of revenue with the master trustee in the event of certain defaults,
pledges of accounts receivable, pledges not to encumber property, and limitations on additional
borrowings.
Included in bond proceeds receivable on the accompanying June 30, 2017 and 2016 consolidated
balance sheets is $6,758,000 and $24,861,000, respectively, of bond proceeds from the Series 2014
Bonds, being held by a trustee which is remitted to PHC upon completion of certain construction
projects.
On October 27, 2010, the Coweta County Development Authority issued $100,000,000 in Revenue
Bonds Series 2010 (the Series 2010 Bonds) on behalf of PHC. The proceeds of the Series 2010 Bonds
were used to construct a replacement hospital for Newnan. The Series 2010 Bonds have been issued
on a tax-exempt basis and are secured under a master trust indenture with all members of the
Obligated Group, which provides for, among other things, the deposit of revenue with the master
trustee in the event of certain defaults, pledges of accounts receivable, pledges not to encumber
property, and limitations on additional borrowings.
26
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
On November 24, 2009, the Development Authority of Fulton County and the Hospital Authority of
Fayette County issued $304,345,000 and $79,540,000, respectively ($383,885,000 collectively), in
Revenue Bonds Series 2009A, 2009B, and 2009C (the Series 2009 Bonds) on behalf of PHC. The
proceeds of the Series 2009 Bonds were used primarily to redeem previously outstanding Series 2007,
Series 2005, Series 2001, and Series 1999 Revenue Bonds and fully repay a line of credit totaling
approximately $65,000,000. The Series 2009 Bonds have been issued on a tax-exempt basis and are
secured under a master trust indenture with all members of the Obligated Group, which provides for,
among other things, the deposit of revenue with the master trustee in the event of certain defaults,
pledges of accounts receivable, pledges not to encumber property, and limitations on additional
borrowings. The Series 2009A Bonds were partially repaid ($172,245,000) with proceeds from the
Series 2016 Bonds. The Series 2009B Bonds were repaid in full ($94,735,000) with proceeds from the
Series 2014 Bonds.
In connection with the acquisition of Newton effective October 1, 2015, PHC assumed responsibility for
payment of the Newton Authority’s outstanding revenue certificates through the lease agreement
described in note 3.
In April 2006, the Newton County Hospital Authority issued $8,930,000 Revenue Certificates,
Series 2006 (the Series 2006 Bonds). The certificates were issued for the purpose of financing certain
capital additions and improvements to Newton’s facilities and paying costs of issuance of the
Series 2006 Bonds. The Series 2006 bonds have been issued on a tax-exempt basis and are secured
by a pledge of and lien on the gross revenues derived by Newton and payments made by Newton
County, Georgia to Newton pursuant to a contract between Newton and Newton County. Under the
terms of the Series 2006 Bonds, Newton is required to maintain certain deposits with a trustee for
payment of bond principal and interest. Such deposits are included in investments and assets limited
as to use on the accompanying June 30, 2016 and 2017 consolidated balance sheets. At the
acquisition date, the stated value of the Series 2006 Bonds approximated $5,405,000; however, they
were recorded at their fair value upon acquisition. At June 30, 2017 and 2016, the stated value and
carrying value of the Series 2006 Bonds approximated $4,380,000 and $4,905,000, respectively.
In May 2007, the Newton County Hospital Authority issued $17,225,000 Revenue Refunding
Certificates, Series 2007 (the Series 2007 Bonds). The certificates were issued for the purpose of
advance refunding Piedmont Newton’s Series 1999 bonds and paying costs of issuance of the 2007
bonds. The Series 2007 Bonds have been issued on a tax-exempt basis and are secured by a pledge
of and lien on the gross revenues derived by Newton and payments made by Newton County, Georgia
to Newton pursuant to a contract between Newton and Newton County. Under the terms of the 2007
Bonds, Newton is required to maintain certain deposits with a trustee for payment of bond principal and
interest. Such deposits are included in investments and assets limited as to use on the accompanying
June 30, 2017 and 2016 consolidated balance sheets. At the acquisition date, the stated value of the
Series 2007 Bonds approximated $11,985,000; however, they were recorded at their fair value upon
acquisition. At June 30, 2017 and 2016, the stated value of the Series 2007 Bonds approximated
$9,690,000 and $10,860,000, respectively, and the carrying value approximated $9,929,000 and
$11,131,000, respectively.
27
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
Scheduled principal repayments on the Series 2016, Series 2014, Series 2010, Series 2009,
Series 2007, and Series 2006 Bonds are as follows (in thousands):
Year ending June 30:
2018
2019
2020
2021
2022
Thereafter
$
24,290
20,795
22,705
25,065
26,210
648,200
$
767,265
(b) Note Payable to a Bank
Effective February 1, 2012, PHC entered into a note payable with a bank. The proceeds of the note
totaling approximately $44,819,000 were used to fully repay Henry’s Series 1999 Bonds during fiscal
year 2013. Amounts outstanding at June 30, 2017 and 2016 totaled $32,234,000 and $34,799,000,
respectively. Effective June 29, 2016, the note was refinanced and certain terms were amended.
Previous to June 29, 2016, the note bore interest at a rate of 1.8% per annum, payable monthly.
Effective June 29, 2016, the note bears interest at a rate of the London InterBank Offered Rate
(LIBOR) floating rate plus 0.650% (1.876% as of June 30, 2017) and the payment terms are as follows:
$2,715,000 due on July 1, 2018, $1,950,000 due on July 1, 2019, $2,065,000 due on July 1, 2020, and
the remaining principal of $25,504,000 due on July 1, 2021.
(c) Line of Credit
During fiscal year 2010, PHC entered into a line of credit for $70,000,000 with a local bank with an
interest rate based on 30-day LIBOR plus 0.75% and a maturity date of December 31, 2011. During
fiscal year 2012, PHC entered into an amendment to the line of credit, which reduced available
borrowings to $1,000,000 and extended the maturity to December 31, 2012. On December 17, 2012,
PHC entered into an amendment to the line of credit, which extended the maturity to December 31,
2015 and revised the interest rate to LIBOR plus 0.60%. On October 7, 2013, PHC entered into an
amendment to the line of credit, which increased available borrowing, to $70,000,000. On December 7,
2015, PHC entered into an amendment to the line of credit that reduced available borrowings to
$1,000,000 and extended the maturity to December 31, 2018. There were no outstanding borrowings
on the line of credit at June 30, 2017 or 2016.
(d) Interest Rate Swap Agreements
PHC has seven interest rate swap agreements that are not accounted for as cash flow hedges. These
interest rate swaps are primarily utilized to economically hedge PHC’s exposure to variable interest
rates under its debt obligations. The change in value of the interest rate swaps is reported as a
component of nonoperating income (expense) in the period it occurs. At June 30, 2017 and 2016, the
total notional amount of PHC’s interest rate swaps was approximately $121,820,000 and
$125,520,000, respectively.
28
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
These interest rate swap agreements expose PHC to credit losses in the event of nonperformance by
the counterparty to the financial instruments. The counterparty is a creditworthy financial institution and
PHC management believes the counterparty will be able to fully satisfy its obligations under the
contracts.
PHC’s interest rate swaps are reported at estimated fair value in the accompanying consolidated
balance sheets, as follows (in thousands):
June 30
2017
Other long-term liabilities
$
24,743
2016
33,537
The effects of PHC’s interest rate swaps on the accompanying consolidated statements of operations
are as follows (in thousands):
Year ended June 30
2017
2016
Loss recognized in nonoperating income (expense)
Loss recognized in supplies and other expenses
$
8,855
3,866
7,108
4,325
$
12,721
11,433
(9) Medical Office Buildings
As discussed in note 7, PHC is considered the owner of the Fayette MOB and the Piedmont MOB for
financial reporting purposes. In accordance with ASC 840, Leases, PHC has reflected the operations of the
Piedmont and Fayette MOBs in its consolidated financial statements, which resulted in other revenue of
approximately $6,279,000, interest expense of approximately $5,184,000, and supplies and other
expenses of approximately $2,322,000 for the year ended June 30, 2017 and other revenue of
approximately $6,011,000, interest expense of approximately $5,305,000, and supplies and other
expenses of approximately $2,141,000 for the year ended June 30, 2016.
(10) Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets available primarily for capital purchases, education, and geriatric services
were approximately $27,537,000 and $18,033,000 at June 30, 2017 and 2016, respectively.
29
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
Permanently restricted net assets are summarized as follows, whose investment income is to be used
according to the purpose description below (in thousands):
June 30
2017
Support of education
Beneficial interest in perpetual trust
Support of specific services
2016
$
1,064
7,694
14,924
1,064
7,298
14,870
$
23,682
23,232
(11) Employee Benefits
(a) Pension Plan
PHC has a trusteed, noncontributory defined-benefit pension plan (the Plan) covering certain PHC
employees. The Plan’s benefits are based on a combination of years of service and the employee’s
compensation. PHC’s funding policy is to contribute annually to the Plan an amount sufficient to meet
the minimum funding standards of ERISA or an amount sufficient to maintain the Plan on a sound
actuarial basis, as certified by an enrolled actuary. Plan assets consist primarily of common stocks,
alternative investments, guaranteed investment contracts, and cash equivalents.
In fiscal year 2008, the PHC’s Board of Directors approved the freezing of the Plan for participation
purposes, so that employees hired or rehired on and after July 1, 2008 are not eligible to participate in
the Plan. Then-current participants had the option under the “Choice” program to continue to accrue
benefits in the Piedmont Healthcare Retirement Plan or to participate in the new Piedmont 401(k) plan,
which began on January 1, 2009. Approximately 64% of active participants elected to continue to
accrue benefits in the defined-benefit pension plan.
On September 20, 2012, the Plan was amended to reflect a freeze as of December 31, 2014.
Therefore, no further benefit accruals will be provided after that date for additional credited service or
earnings. In addition, all existing participants became fully vested as of December 31, 2014.
The following cumulative amounts have not yet been recognized in the net periodic cost, and are
recognized as a reduction to unrestricted net assets (in thousands):
June 30
2017
Actuarial losses
Prior service cost
Total
30
2016
$
115,539
—
139,986
—
$
115,539
139,986
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
Changes in the Plan’s obligations and assets resulted in the following changes in unrestricted net
assets (in thousands):
Year ended June 30
2017
2016
Amortization of prior service cost
Amortization of net actuarial loss
Net actuarial income (loss) during the year
Total
$
—
3,148
21,299
—
13,133
(59,230)
$
24,447
(46,097)
The unrecognized loss included in unrestricted net assets and expected to be recognized in net
periodic pension cost during the year ended June 30, 2018 is approximately $2,487,000.
The following table presents a reconciliation of the beginning and ending balances of the Plan’s
projected benefit obligation, the fair value of plan assets, the funded status of the Plan, and the
accumulated benefit obligation (in thousands):
June 30
2017
Change in benefit obligation:
Projected benefit obligation, beginning of year:
Service cost
Interest cost
Benefits paid
Settlements
Actuarial (gain) loss
Administrative expenses paid from pension trust
Projected benefit obligation, end of year
Accumulated benefit obligation
31
2016
$
400,303
3,530
15,594
(11,608)
—
(9,860)
(3,186)
387,257
2,000
17,995
(10,560)
(32,872)
39,181
(2,698)
$
394,773
400,303
$
394,773
400,303
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
June 30
2017
Change in Plan assets:
Fair value of Plan assets, beginning of year
Actual return on Plan assets
Employer contributions
Benefits paid
Settlements
Administrative expenses paid from pension trust
Fair value of Plan assets, end of year
Funded status of the Plan
2016
$
290,306
29,493
12,000
(11,608)
—
(3,186)
329,096
2,340
5,000
(10,560)
(32,872)
(2,698)
$
317,005
290,306
$
(77,768)
(109,997)
The unfunded status of the Plan of approximately $77,768,000 and $109,997,000 at June 30, 2017 and
2016, respectively, is recognized in the accompanying consolidated balance sheets as accrued
pension cost. No Plan assets are expected to be returned to PHC during the fiscal year ending
June 30, 2018.
During the year ended June 30, 2016, the Plan offered a bulk lump-sum payment window. Benefits
paid from the Plan relating to this bulk lump-sum window totaled approximately $32,872,000 and
resulted in a curtailment charge of $11,498,000, which is included in other components of pension
expense with in nonoperating expense in the accompanying consolidated statement of operations for
the year ended June 30, 2016.
The following table sets forth the components of net periodic benefit cost (in thousands):
Year ended June 30
2017
2016
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on Plan assets
Curtailment charge
Amortization of prior service cost
Amortization of net actuarial loss
Total net periodic benefit cost
32
$
3,530
15,594
(18,054)
—
—
3,148
2,000
17,995
(22,389)
11,498
—
1,635
$
4,218
10,739
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
The actuarial assumptions used in the accounting for the net periodic cost for the Plan were as follows:
Year ended June 30
2017
2016
Discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on Plan assets
3.96 %
N/A
6.40
4.72 %
N/A
6.95
The actuarial assumptions used to determine the year-end benefit obligations for the Plan were as
follows:
June 30
Discount rate
Rate of increase in future compensation levels
2017
2016
4.03 %
N/A
3.96 %
N/A
PHC uses fair value as the market-related value of assets in calculating the expected return on Plan
assets component of net periodic pension expense for the years ended June 30, 2017 and 2016.
No contributions are expected to be paid to the Plan during fiscal year 2018.
Benefits expected to be paid in each of the next five fiscal years are as follows: fiscal year 2018,
$15,214,000; fiscal year 2019, $15,397,000; fiscal year 2020, $16,572,000; 2021, $17,699,000; and
fiscal year 2022, $18,680,000. For fiscal years 2023–2027, the aggregate benefits expected to be paid
is $105,098,000.
The following table sets forth the asset allocation for the Plan:
June 30
2017
Growth/equity securities
Hedge funds/private equity
Fixed-income securities
33
2016
44 %
13
43
43 %
14
43
100 %
100 %
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
The target allocation for the Plan is as follows:
June 30
2017
Growth/equity securities
Hedge funds/private equity
Fixed-income securities
2016
45 %
15
40
57 %
13
30
100 %
100 %
To develop the expected long-term rate of return on assets assumption, PHC considered the historical
returns and the future expectations for returns for each asset class, as well as the target asset
allocation of the Plan’s portfolio.
The investment strategy of the Plan is to ensure, over the long-term life of the Plan, an adequate pool
of assets, along with contributions by PHC to satisfy the benefit obligations to participants and
beneficiaries. PHC desires to achieve market returns consistent with a prudent level of diversification.
All investments are made solely in the interest of the Plan’s participants and beneficiaries for the
exclusive purposes of providing benefits to such participants and their beneficiaries and defraying the
expenses related to administering the Plan. The target allocation of all assets is to reflect proper
diversification in order to reduce the potential of a single security or single sector of securities having a
disproportionate impact on the portfolio. In an effort to maintain the overall risk level of the portfolio
within an acceptable range, the relative mix of asset classes will be rebalanced back toward the target
allocations as opportunities permit, but in any event not less often than annually. The use of futures
and options contracts will be limited to liquid instruments listed and actively traded on major exchanges
(except for short-term funds) to over-the-counter options or forward-contract positions executed with
major dealers. No derivatives strategy may be used if it would subject the portfolios to greater variance
than would be the case with the physical portfolio under a worst case scenario. Short-term funds may
use only exchange-traded futures contracts and options–specifically prohibited are any off-exchange
instruments and any exotic or structured securities, as well as notes whose interest rate is tied to
security with a maturity of more than one year. PHC utilizes an outside investment consultant to
implement its investment strategy.
34
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
The fair value of plan assets of the Plan measured at fair value on a recurring basis was determined
using the following inputs (note 15) at June 30, 2017 (in thousands):
Level 1
Cash and short-term
investments
Corporate obligations
Fixed-income securities
Municipal securities
Corporate stocks
Mutual funds
Total assets
at fair value
Level 2
Level 3
Total
$
27,424
13,512
9,998
—
6,873
126,270
—
58,381
—
5,201
—
—
—
—
—
—
—
—
27,424
71,893
9,998
5,201
6,873
126,270
$
184,077
63,582
—
247,659
Investments measured at
NAV as a practical
expedient
69,346
$
317,005
The fair value of Plan assets measured at fair value on a recurring basis was determined using the
following inputs (note 15) at June 30, 2016 (in thousands):
Level 1
Cash and short-term
investments
Corporate obligations
Fixed-income securities
Corporate stocks
Mutual funds
Total assets
at fair value
Level 2
Level 3
Total
$
1,849
422
25,878
20,513
132,065
—
7,920
—
—
—
—
—
—
—
—
1,849
8,342
25,878
20,513
132,065
$
180,727
7,920
—
188,647
Investments measured at
NAV as a practical
expedient
101,659
$
35
290,306
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
Alternative investments included in the Plan at June 30, 2017 and 2016 and related net unrealized
gains and losses for the years then ended consist of the following (in thousands):
Estimated fair value,
year ended June 30
2017
2016
Lighthouse Diversified Fund
$
Archipelago Holdings Ltd
Offshore Fund
Titan Masters International Fund
Clarion Lion Properties ING Fund
LSV Emerging Markets Equity
Fund
Loomis Sayles Long
Duration Fund
IFP Global Equity L.P.
Chatham Asset High Yield
Offshore Fund, Ltd.
Canyon Balanced Fund
PHC Fund, Ltd.
LGIMA Long Duration Fund
Harvest MLP Income II Fund
$
Net unrealized gains (losses),
year ended June 30
2017
2016
—
9,398
—
(424)
—
—
5,289
6,248
12,861
8,507
—
—
323
(416)
(1,438)
733
—
11,579
—
(1,948)
—
11,335
22,900
—
—
921
3,000
—
12,873
9,465
25,899
—
4,485
—
—
—
22,049
8,117
1,373
865
355
—
431
69,346
101,659
4,268
—
—
—
2,747
(1,686)
568
Redemption frequency and redemption notice periods for alternative investments held by the Plan at
June 30, 2017 are as follows:
Clarion Lion Properties ING Fund
Harvest MLP Income II Fund
Canyon Balanced Fund
Chatham Asset High Yield Offshore Fund, Ltd.
IFP Global Equity, L.P.
PHC Fund, Ltd.
Redemption
frequency
Redemption
notice period
Quarterly
Monthly
Quarterly
Quarterly
Biweekly
Monthly
90 Days
30 Days
90 Days
45 Days
3 Days
90 Days
All investments at June 30, 2017 and 2016 were in domestic investments.
The fair values of the securities included in Level 1 were determined through quoted market prices. The
fair values of Level 2 financial assets for the corporate obligations were determined through evaluated
bid prices provided by third-party pricing services where quoted market prices are not available. The
fair value of Level 2 alternative investments was determined based on the use of net asset value per
share as a practical expedient in accordance with ASC 820, Fair Value Measurement.
36
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(b) Deferred Compensation Plans
PHC also offers two nonqualified deferred compensation plans, which are available to certain highly
compensated PMCC and PHIP employees. These plans permit such employees to defer the receipt
and taxation of all or a portion of their salary until future years. The deferred compensation is available
for distribution to employees upon the election by the employee, provided the distribution election with
respect to the deferred amounts has been made for a minimum of one year prior to the date of
distribution.
All deferrals are held as part of PHC’s general assets and are subject to the claims of PHC’s general
creditors. Employees’ rights to the payment of benefits under these plans are equal to those of general
and unsecured creditors of the PHC. PHC has no liability for losses under the deferred compensation
plans.
The amounts recorded for the deferred compensation plans are approximately $48,390,000 and
$38,360,000 at June 30, 2017 and 2016, respectively, and are recorded within other long-term liabilities
in the accompanying consolidated balance sheets.
(c) 401(k) Plan
PHC offers, as the sponsor, a deferred tax annuity plan (the 401(k) Plan) pursuant to Section 401(k) of
the IRC of 1986, covering substantially all employees of PHC. PHC contributes 100% of pretax
contributions up to the first 3% of eligible pay and 50% of pretax contributions up to the next 2% into
the 401(k) Plan and may make an additional discretionary contribution. PHC recognized as salaries
and benefits expense approximately $39,006,000 and $34,158,000 for the years ended June 30, 2017
and 2016, respectively, related to the 401(k) Plan. No discretionary contributions were made during the
year ended June 30, 2017 or 2016.
(12) Concentrations of Credit Risk
PHC grants credit without collateral to its patients, most of whom are local residents and are insured under
third-party payor agreements. The mix of gross receivables from patients and third-party payors was as
follows:
June 30
2017
Medicare
Medicaid
Other third-party payors
Patients
2016
30 %
14
43
13
26 %
13
43
18
100 %
100 %
PHC recognizes that revenue and receivables from government agencies and third-party payors are
significant to its operations. PHC does not believe that there are significant credit risks associated with
these sources of revenue.
37
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
As of June 30, 2017 and 2016, PHC had approximately $560,831,000 and $514,737,000, respectively, in
funds deposited with various financial institutions in excess of Federal Deposit Insurance Corporation limits.
(13) Commitments and Contingencies
(a) General and Professional Liability Insurance
PHC has a self-insurance program for general and professional liability coverage through AMIC. AMIC
insures PHC with professional liability and commercial general liability risks of PHC affiliates, namely
Atlanta, Mountainside, Fayette, Newnan, Henry, Newton, Athens, PHIP, PMCC, ARPS, ARSS, and
RFC on a claims-made basis for the hospital professional liability and on an-occurrence basis for the
commercial general liability. The insurance policies between PHC and AMIC are $5,000,000 per
occurrence and $20,000,000 aggregate annual limit for coverage effective May 1, 2003 through
April 30, 2005, and $5,000,000 per occurrence and $19,000,000 aggregate annual limit for coverage
effective May 1, 2005 through April 30, 2014 returning to $5,000,000 per occurrence and $20,000,000
aggregate annual limit for coverage effective May 1, 2014 through April 30, 2016 and $5,000,000 per
occurrence and $21,000,000 annual aggregate as of May 1, 2016 and changing to $5,000,000 per
occurrence and $25,000,000 annual aggregate as of May 1, 2017. The per occurrence general liability
limit provided by AMIC was reduced from $5,000,000 to $2,000,000 on May 1, 2011 and remains at
that level. AMIC is consolidated by PHC. PHC records the reported and estimated
incurred-but-not-reported liability based on an actuarial study at June 30, 2017 and 2016, which totaled
approximately $66,603,000 and $49,863,000, respectively, and is recorded as self-insurance reserves
in the accompanying consolidated balance sheets. Commercial insurance has been obtained on a
claims-made (professional liability) and on an-occurrence (general liability) basis to provide for excess
coverage.
The general and professional self-insurance reserves included in the accompanying consolidated
balance sheets include estimates of the ultimate costs for claims incurred but not reported through
June 30, 2017 and 2016, applicable to the general and professional liability self-insurance plans for
PHC. PHC has employed independent actuaries to estimate the ultimate costs, if any, of the settlement
of such claims. Accrued malpractice and general losses have been discounted at 2% at June 30, 2017
and 2016.
(b) Other Self-Insurance Programs
PHC self-insures a portion of its workers’ compensation liability exposure up to $450,000 per claim at
June 30, 2017 and 2016. Reserves for the self-insurance program are established to provide for
estimated claims losses and applicable legal expenses for any claims incurred, both reported and
unreported, through June 30, 2017 and 2016, and are recorded in the accompanying consolidated
financial statements. PHC recorded the reported and estimated incurred-but-not-reported liability for its
claims at June 30, 2017 and 2016, which totaled approximately $5,800,000 and $4,621,000,
respectively. Commercial insurance has been obtained on an-occurrence basis to provide for excess
coverage.
38
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
The workers’ compensation self-insurance reserves included in the accompanying consolidated
balance sheets include estimates of the ultimate costs for claims incurred but not reported through
June 30, 2017 and 2016. PHC has employed independent actuaries to estimate the ultimate costs, if
any, of the settlement of such claims. Accrued workers’ compensation losses have been discounted at
2% at June 30, 2017 and 2016.
PHC is self-insured for employee health benefits for its subsidiaries with reinsurance for high dollar
claims. Effective January 1, 2016, QualCare, Inc., a Cigna company, became the plan administrator for
PHC’s health benefits. Prior to that, beginning January 1, 2014, Piedmont WellStar HealthPlans, Inc.
(PWHP), a 50% owned subsidiary of PHC (note 16), administered the plan for PHC’s health benefits.
At June 30, 2017 and 2016, PHC recorded $13,409,000 and $10,927,000, respectively, as an
estimated liability for health benefit claims within the current portion of self-insurance reserves line item
in the accompanying consolidated balance sheets.
The employee health benefits self-insurance reserves in the accompanying consolidated balance
sheets include estimates of the ultimate costs for claims incurred but not reported through June 30,
2017 and 2016, applicable to the employee health benefits self-insurance plans. PHC has employed
independent actuaries to estimate the ultimate costs, if any, of the settlement of such claims. Accrued
employee health benefits losses have not been discounted due to the short-term nature of the payout
of these liabilities.
In the opinion of management, adequate provision has been made for losses that may occur from the
asserted and unasserted claims for all self-insurance programs.
(c) Operating Leases
PHC leases various equipment and facilities under operating leases expiring at various dates through
fiscal year 2099. Total rent expense in fiscal years 2017 and 2016 for all operating leases was
approximately $44,915,000 and $41,708,000, respectively, and is included in supplies and other
expenses on the accompanying consolidated statements of operations.
The following is a schedule by year of future minimum lease payments under operating leases that
have initial or remaining lease terms in excess of one year (in thousands):
Year ending June 30:
2018
2019
2020
2021
2022
Thereafter
39
$
36,785
35,049
33,538
31,144
27,884
103,792
$
268,192
(Continued)
PIEDMONT HEALTHCARE, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
June 30, 2017 and 2016
(d) Litigation and Other Commitment and Contingencies
PHC is involved in litigation arising in the ordinary course of business. Liabilities for loss contingencies
arising in the ordinary course of business are recorded when it is probable that a liability has been
incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss
contingencies are expensed as incurred. After consultation with legal counsel, management estimates
that these matters will be resolved without a material adverse effect on PHC’s future financial position
or results of operations.
On December 15, 2016, the United States Attorney's Office for the Northern District of Georgia issued
a Civil Investigative Demand in connection with an investigation of PHC under the civil False Claims
Act. PHC is cooperating fully with the United States Attorney's Office in connection with this
investigation. PHC is currently unable to predict the likely outcome of this matter and unable to
estimate the amount or range of potential loss that could result in the event of an unfavorable outcome.
(14) Functional Expenses
PHC does not present expense information by functional classification because its resources and activities
are primarily related to providing healthcare services. Further, since PHC receives substantially all of its
resources from providing healthcare services in a manner similar to a business enterprise, other indicators
contained in these consolidated financial statements are considered important in evaluating how well
management has discharged their stewardship responsibilities.
(15) Fair Value of Financial Instruments
PHC applies ASC 820, Fair Value Measurements, which defines fair value as the price that would be
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