El Paso | University Medical Center of El Paso - El Paso ......El Paso County Hospital District...

El Paso County Hospital District d/b/a University Medical Center of El Paso

A Component Unit of El Paso County, Texas Auditor’s Report and Financial Statements

September 30, 2013 and 2012


A Component Unit of El Paso County, Texas September 30, 2013 and 2012

Contents Independent Auditor’s Report on Financial Statements and

Supplementary Information ............................................................................................... 1 Management’s Discussion and Analysis ............................................................................. 4 Financial Statements

Balance Sheets .................................................................................................................................. 19

Statements of Revenues, Expenses and Changes in Net Position .................................................... 20

Statements of Cash Flows ................................................................................................................ 21

Notes to Financial Statements .......................................................................................................... 23

Required Supplementary Information Schedule of Funding Progress for Pension Plan ............................................................................... 53

Other Information

Combined Balance Sheet Information .............................................................................................. 54

Combined Statements of Revenues, Expenses and Changes in Net Position Information ............... 56

Combined Statements of Cash Flows Information ........................................................................... 57

Independent Auditor’s Report on Financial Statements and Supplementary Information

Board of Managers El Paso County Hospital District d/b/a University Medical Center of El Paso El Paso, Texas We have audited the accompanying financial statements of El Paso County Hospital District d/b/a University Medical Center of El Paso (the Medical Center), and its aggregate discretely presented component units, collectively, a component unit of El Paso County, Texas, which are comprised of the balance sheets as of September 30, 2013 and 2012, and the related statements of revenues, expenses and changes in net position and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

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

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness 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 financial statements.

Board of Managers El Paso County Hospital District d/b/a University Medical Center of El Paso Page 2

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Medical Center and its aggregate discretely presented component units as of September 30, 2013 and 2012, and its respective changes in its financial position and its cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note 14, in 2013, the Medical Center changed its method of accounting for certain items previously reported as assets and liabilities and to recognize certain items that were previously reported as assets and liabilities as expenses and revenues in accordance with GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter.

As discussed in Note 14, in 2013, the Medical Center adopted GASB Statement No. 61, The Financial Reporting Entity: Omnibus – an amendment of GASB Statements No. 14 and No. 34. Application of this standard resulted in certain entities previously presented as blended component units now being presented as discretely presented component units. Our opinion is not modified with respect to this matter.

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and pension information listed in the table of contents be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements and other knowledge we obtained during our audits of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Board of Managers El Paso County Hospital District d/b/a University Medical Center of El Paso Page 3

Other Information

Our audit was conducted for the purpose of forming an opinion on the basic financial statements as a whole. The other information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it.

Dallas, Texas December 20, 2013


A Component Unit of El Paso County, Texas Management’s Discussion and Analysis

Years Ended September 30, 2013 and 2012 (In Millions)

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Introduction

This management’s discussion and analysis of the financial performance of El Paso County Hospital District d/b/a University Medical Center of El Paso (the Medical Center) provides an overview of the Medical Center’s financial activities for the years ended September 30, 2013 and 2012. It should be read in conjunction with the financial statements of the Medical Center. Unless otherwise indicated, amounts are in millions.

Financial Highlights

• In April 2013, Standard and Poor’s affirmed the bond rating at ‘AA-’ with a Stable outlook and Fitch Ratings affirmed the bond rating at ‘AA’ rating and a Stable outlook.

• The Medical Center’s property tax rate was $0.192363 in 2013 and $0.182124 in 2012.

• In 2013, the Medical Center issued $134.3 million in new bonds to construct and equip new outpatient medical clinic sites, renovate existing hospital inpatient floors and acquire new medical equipment for the main campus.

• The Medical Center placed in service over $292 million in assets with the opening of the El Paso Children’s Hospital (El Paso Children’s) and Women’s Tower in February 2012 and renovations throughout the Medical Center completed in June 2012.

• Total assets and deferred outflows of resources increased by $159.5 million (29.0%) between 2012 and 2013 and total assets increased by $3.9 million (.7%) between 2011 and 2012.

• Net position decreased $5.5 million (2.4%) between 2012 and 2013 and net position decreased $1.4 million (.6%) between 2011 and 2012. The decrease in net position is attributable to increased operating expenses in 2012 and 2013.

• Operating revenues increased $11.0 million or 4.2% between 2012 and 2013 primarily from an increase in net patient revenue ($6.5 million) and an increase in net contract revenue attributable to El Paso Children’s Hospital (El Paso Children’s) ($9.7 million) and the associated facility lease, medical equipment and information technology lease and purchased service agreements.

• El Paso First HealthPlans, Inc. experienced an increase in membership of approximately 3.5% from 2012 to 2013.




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Using this Annual Report

The Medical Center’s financial statements consist of three statements–a balance sheet; a statement of revenues, expenses and changes in net position; and a statement of cash flows. These statements provide information about the activities of the Medical Center, including resources held by the Medical Center but restricted for specific purposes by creditors, contributors, grantors or enabling legislation. The Medical Center is accounted for as a business-type activity and presents its financial statements using the economic resources measurement focus and the accrual basis of accounting.

The Balance Sheet and Statement of Revenues, Expenses and Changes in Net Position

One of the most important questions asked about any hospital’s finances is “Is the hospital as a whole better or worse off as a result of the year’s activities?” The balance sheet and the statement of revenues, expenses and changes in net position report information about the Medical Center’s resources and its activities in a way that helps answer this question. These statements include all restricted and unrestricted assets and all liabilities using the accrual basis of accounting. Using the accrual basis of accounting means that all of the current year’s revenues and expenses are taken into account regardless of when cash is received or paid.

These two statements report the Medical Center’s net position and changes in them. The Medical Center’s total net position–the difference between assets, deferred outflows of resources and liabilities–is one measure of the Medical Center’s financial health or financial position. Over time, increases or decreases in the Medical Center’s net position are an indicator of whether its financial health is improving or deteriorating. Other nonfinancial factors, such as changes in the Medical Center’s patient base, changes in legislation and regulations, measures of the quantity and quality of services provided to its patients, and local economic factors should also be considered to assess the overall financial health of the Medical Center.

The Statement of Cash Flows

The statement of cash flows reports cash receipts, cash payments and net changes in cash and cash equivalents resulting from four defined types of activities. It provides answers to such questions as where did cash come from, what was cash used for, and what was the change in cash and cash equivalents during the reporting period.




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The Hospital District

Management of the Medical Center is responsible for the discretely presented component units of the Medical Center, El Paso First HealthPlans, Inc. (the “Health Plan”) and the University Medical Center Foundation of El Paso (the “Foundation”), which collectively comprise the “Hospital District.” While presentation of combined financial statements is not in accordance with accounting principles generally accepted in the United States of America (GAAP), management believes it is important for readers of the financial statements to comprehend the combined activities of these component units. The combined financial position and results of operations of the Hospital District are presented in the following tables.

Table 1: Assets and Deferred Outflows of Resources, Liabilities and Net Position

2012 2011(Restated - (Restated -

2013 Note 14 ) Note 14 )Assets and Deferred Outflows of Resources

Current and other assets $ 341.1 $ 168.3 $ 198.8 Capital assets, net 388.7 406.4 386.7 Deferred outflows of resources 10.4 - -

Total assets and deferred outflows of resources 740.2$ 574.7$ 585.5$

LiabilitiesLong-term debt, including current maturities $ 409.8 $ 253.5 $ 258.5 Other liabilities 78.3 70.2 79.3

Total liabilities 488.1 323.7 337.8

Net PositionNet investment in capital assets 137.9 154.3 162.0 Restricted 6.2 4.1 6.0 Unrestricted 108.0 92.6 79.7

Total net position 252.1 251.0 247.7

Total liabilities and net position 740.2$ 574.7$ 585.5$




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Table 2: Operating Results and Changes in Net Position


2013 Note 14 ) Note 14 )Operating Revenue

Net patient service revenue $ 155.4 $ 148.9 $ 148.3 Premium revenue 123.9 122.3 118.3 Medicaid supplemental program revenue 70.4 73.6 56.8 Net contract revenues 23.4 13.7 - Other revenue 20.8 17.8 19.5

Total operating revenues 393.9 376.3 342.9

Operating ExpenseSalaries and employee benefits 146.7 139.7 132.7 Medical claims expense 102.8 100.2 95.2 Purchased services 40.2 38.9 36.2 Professional fees 1.4 3.9 5.9 Supplies and other 84.8 84.7 80.8 Intergovernmental transfers 50.3 43.8 35.8 Depreciation 32.7 28.2 18.2

Total operating expenses 458.9 439.4 404.8

Operating Loss (65.0) (63.1) (61.9)

Nonoperating Revenues, Net 66.1 66.4 65.8

Change in Net Position $ 1.1 $ 3.3 $ 3.9




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The Medical Center’s Net Position

A summary of the Medical Center’s balance sheets are presented in the following table:

Table 3: Assets and Deferred Outflows of Resources, Liabilities and Net Position


2013 Note 14 ) Note 14 )Assets and Deferred Outflows of Resources

Current and other assets $ 311.4 $ 144.8 $ 162.0 Capital assets, net 386.9 404.4 383.3 Deferred outflows of resources 10.4 - -

Total assets and deferred outflows of resources 708.7$ 549.2$ 545.3$

LiabilitiesLong-term debt, including current maturities $ 409.8 $ 253.5 $ 258.5 Other liabilities 79.6 71.0 60.7

Total liabilities 489.4 324.5 319.2

Net PositionNet investment in capital assets 136.1 152.4 139.1 Restricted 2.1 1.4 24.3 Unrestricted 81.1 70.9 62.7

Total net position 219.3 224.7 226.1

Total liabilities and net position 708.7$ 549.2$ 545.3$

Total assets and deferred outflows of resources increased $159.5 million or 29.0% between 2012 and 2013.

• Current and other assets increased $166.6 million or 115.1% primarily as a result of unexpended bond proceeds in connection with the 2013 debt issuance. The proceeds from the issuance are held in a repurchase agreement. Another contribution to this growth is an increase in the Medicaid Supplemental Revenue receivable of $20.1 million.




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• Capital assets decreased $17.5 million or 4.3% primarily due to a full year of depreciation on the Master Facility Expansion and the El Paso Children’s construction projects that were placed into service in 2012.

• The Medical Center refunded a substantial portion of the 2005 bonds and incurred a loss of approximately $10.6 million as a result. The balance of the deferred loss is $10.4 million at September 30, 2013, and is included as a deferred outflow of resources. From a cash standpoint, the refunding generated a net present value savings of $9.0 million.

• Total liabilities increased $164.9 million or 50.8% primarily due to the issuance of the 2013 bond issue, the proceeds of which will be used to construct and equip new outpatient medical clinic sites, renovate existing hospital inpatient floors and acquire new medical equipment for main campus.

Total assets increased $3.9 million or .7% between 2011 and 2012.

• Current and other assets decreased $17.2 million or 10.6% primarily as a result of cash reserves and bond funds expended on construction projects.

• Capital assets increased $21.1 million or 5.5% primarily due to the Master Facility Expansion and the El Paso Children’s construction projects.

• Total liabilities increased $5.3 million or 1.7% primarily due to the timing of UPL Program payments.

Operating Results and Changes in the Medical Center’s Net Position

The following table presents a summary of the Medical Center’s revenues and expenses for each of the years ended September 30, 2013, 2012 and 2011.




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Table 4: Operating Results and Changes in Net Position


2013 Note 14 ) Note 14 )Operating Revenue

Net patient service revenue $ 155.4 $ 148.9 $ 148.3 Medicaid Supplemental Program revenue 70.4 73.6 56.8 Net contract revenues 23.4 13.7 - Other revenue 25.9 27.9 28.1

Total operating revenues 275.1 264.1 233.2

Operating ExpenseSalaries and employee benefits 147.1 142.7 137.6 Purchased services 35.2 34.8 31.8 Professional fees 1.4 3.8 5.9 Supplies and other 80.5 79.1 77.6 Intergovernmental transfers 50.2 43.8 35.8 Depreciation 32.0 27.4 17.6

Total operating expenses 346.4 331.6 306.3

Operating Loss (71.3) (67.5) (73.1)

Nonoperating Revenues, Net 65.8 66.1 66.0

Decrease in Net Position $ (5.5) $ (1.4) $ (7.1)

Operating revenues increased $11.0 million or 4.2% between 2012 and 2013.

• Medicaid Supplemental Revenue decreased $3.2 million or 4.4% primarily due to the continued implementation of the Medicaid Transformation Waiver Program and changes to federal funding levels.

• Net contract revenues increased $9.7 million or 70.8% for El Paso Children’s Hospital services and the associated facility lease, medical equipment and information technology lease and purchased service agreements.




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• Net patient service revenue increased $6.5 million or 4.4% primarily due to growth in adult services and associated payments for these services.

• Uncompensated care increased to $336.9 million in 2013 ($222.8 million in charity care - a 13.4% increase from 2012 and $114.1 million in bad debt expense – a 12.1% decrease from 2012) from $326.2 million in 2012 ($196.4 million in charity care and $129.8 million in bad debt expense) - an overall increase of 3.3%.

Operating revenues increased $30.9 million or 13.3% between 2011 and 2012.

• Medicaid Supplemental Revenue increased $16.8 million or 29.6% primarily due to the implementation of the Medicaid Transformation Waiver Program and increased federal funding levels.

• Net patient service revenue remained consistent between 2012 and 2011.

• Uncompensated care increased to $326.2 million in 2012 ($196.4 million in charity care - a 1.7% increase from 2011 and $129.8 million in bad debt expense - an 8.4% increase from 2011) from $312.8 million in 2011 ($193.1 million in charity care and $119.7 million in bad debt expense) - an overall increase of 4.3%

The following table presents the relative percentages of gross charges billed for patient services by payer for the fiscal years ended September 30, 2013, 2012 and 2011:

Table 5: Payer Mix by Percentage

Payer 2013 2012 Change 2011 Change

Medicare 21% 18% 3% 17% 1%Medicaid 16% 19% -3% 22% -3%Commercial 5% 6% -1% 5% 1%Charity 26% 24% 2% 24% 0%Self-pay 18% 22% -4% 22% 0%HMO/PPO 6% 5% 1% 5% 0%Other 8% 6% 2% 5% 1%

100% 100% 100%

Years Ended September 30




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Operating expenses increased $14.8 million or 4.5% between 2013 and 2012.

• Salaries and employee benefits expense increased $4.4 million or 3.1% due to higher staffing associated with growth and expansion in adult service lines and the impact of converting certain physicians from contractors to employees. This changed contributed to a decrease in professional fees expenses of $2.4 million or 63.2%.

• Supplies and other expenses increased $1.4 million or 1.8% primarily due to increase in operating room supply costs and pharmaceutical prices for certain drugs.

• Depreciation expense increased by $4.6 million or 16.8% due to full year of depreciation expense on the El Paso Children’s and Master Facility Expansion completed in February 2012.

• Purchased services expense increased by $.4 million or 1.2% as a result of an increase in computer fees and repairs and maintenance expenses associated with a fiscal year 2012 expansion and growth in systems, licenses and associated service support for the medical equipment.

• Intergovernmental transfer expense increased $6.4 million or 14.7% due to additional physician contracts that became part of the Private UPL Program, which required additional funding.

Operating expenses increased $25.3 million or 8.2% between 2012 and 2011.

• Salaries and employee benefits expense increased $5.1 million or 3.7% due to higher staffing associated with growth and expansion in adult service lines and shift of doctor expenses from physician fees to direct employees of the Medical Center. Professional fees expense decreased $2.1 million or 35.6% as a result of shift of doctor expenses from contractors to direct employees of the Medical Center.

• Depreciation expense increased by $9.8 million or 55.7% due to opening El Paso Children’s and Master Facility Expansion in February 2012.

• Purchased services expense increased by $3.0 million or 9.4% as a result of an increase in utilities, computer fees and repairs and maintenance expenses associated with opening of El Paso Children’s and the Master Facility Expansion.

• Intergovernmental transfer expense increased $8.0 million or 22.4% due to additional physician contracts that became part of the Private UPL Program, which required additional funding.




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Net nonoperating revenues decreased $0.3 million or 0.5% between 2013 and 2012.

• Property tax revenue increased $2.4 million or 3.5% from 2012.

• Debt issuance costs of $1.8 million were incurred in 2013 due to the issuance of the 2013 bonds.

• Interest expense increased by $3.1 million or 37% due to full year of expense for the El Paso Children’s bond issue.

Net nonoperating revenue was consistent between 2012 and 2011.

• Property tax revenue increased by approximately $6.0 million or 9.3% from 2011 to 2012.

• Interest expense increased $6.8 million or 450% due to ceasing of interest expense capitalization for construction assets that were placed in service in February 2012.

Capital Assets

The following table presents a summary of the Medical Center’s capital assets as of September 30, 2013, 2012 and 2011:

Table 6: Capital Assets

2012 2011(Restated - Dollar (Restated -

2013 Note 14 ) Change Note 14 )

Land and land improvements $ 10.3 $ 10.3 $ 0.0 $ 10.1 Building and leasehold improvements 412.5 410.0 2.5 162.6 Equipment 226.8 219.7 7.1 175.1

649.6 640.0 9.6 347.8

Construction in progress 5.3 0.5 4.8 244.2

Accumulated depreciation (268.0) (236.1) (31.9) (208.7)

Property, plant and equipment, net of accumulated depreciation $ 386.9 $ 404.4 $ (17.5) $ 383.3




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Capital assets decreased $17.5 million or 4.3% between 2013 and 2012. The decrease is due to annual depreciation expense exceeding current year additions of new equipment. The Medical Center invested $14.4 million of which over $1.2 million was used to construct a new Digestive Center of Excellence in the main hospital campus. The Medical Center spent an additional $1 million to prepare for Phase 2 of Meaningful Use certification and implement the preliminary upgrades needed for ICD10 compliance effective in 2014. The balance of additions was for routine annual capital purchases.

Capital assets increased $21.1 million or 5.50% between 2012 and 2011. The Medical Center invested $48.5 million in new additions, of which $39.5 million was for the Master Facility Expansion Project, Infrastructure Improvement and El Paso Children’s construction projects. The remaining capital purchases were for an additional MRI and CT Scan unit for the expanded Radiology area and annual routine capital purchases.

Long-term Debt

Long-term debt consists of the following:

• Series 2013, $134.3 million Combination Tax and Revenue Certificates of Obligation • Series 2013, $110.4 million General Obligation Refunding Bonds (of the previously issued Series

2005 Combination Tax and Revenue Bonds) • Series 2009, $25.8 million Refunding Bonds • Series 2008A, $120.1 million General Obligation Bonds • Series 2005, $4.1 million Combination Tax and Revenue Bonds

Long-term debt, including current maturities, at September 30, 2013, totaled $409.8 million and increased 61.6% from 2012 primarily due to the 2013 bond issue. Long-term debt represents 83.7% of the total liabilities at September 30, 2013.

Long-term debt, including current maturities, at September 30, 2012, totaled $253.5 million and decreased 1.9% from 2011 primarily due to scheduled principal payments. Long-term debt represents 78.1% of total liabilities at September 30, 2012

More detailed information about the Medical Center’s long-term debt is presented in the notes to the financial statements.




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Economic Factors and Key Challenges

The Medical Center’s board and senior management considered many factors while forecasting its fiscal year 2014 budget. One of the most significant concerns taken into consideration while planning the budget is the status of the economy, which takes into account market forces and environmental factors, such as:

Medicaid Transformation Waiver

In December 2011, the Health and Human Services Commission (“HHSC”) received federal approval of a waiver that allows the state to expand Medicaid managed care while preserving hospital funding, provides incentive payments for health care improvements and directs more funding to hospitals that serve large numbers of uninsured patients.

The Texas Healthcare Transformation and Quality Improvement Program (the “Transformation” or “Waiver”) allowed the state to expand Medicaid managed care while preserving federal hospital funding historically received as Upper Payment Limit (“UPL”) Program payments (supplemental payments to make up the difference between what Medicaid pays for a service and what Medicare would pay for the same service). This program will be the basis for the supplemental payments in 2012 through 2016. This system replaced the UPL Program payment methodology with two funding pools – the Uncompensated Care (“UC”) pool and Delivery System Reform Incentive Payment (“DSRIP”) pool.

UC Pool Payments are designed to help offset the costs of uncompensated care provided by the hospital or other providers.

DSRIP Pool Payments are incentive payments to hospitals and other providers that develop programs or strategies to enhance access to health care, increase the quality of care and improve the health of the patients and families served, and improve the cost-effectiveness of the care provided. Preliminary estimates from HHSC indicates approximately $500 million is available for Region 15 DSRIP funding for the five year period ending 2016. Of these amounts, the Medical Center is entitled to $217 million of the $500 million.

Under the transformation waiver, eligibility to receive UC pool or DSRIP pool payments requires participation in a regional health care partnership. Within a partnership, participants include governmental entities providing public funds known as intergovernmental transfers (“IGTs”), Medicaid providers and other stakeholders. Participants will develop a regional plan that identifies partners, community needs, the proposed projects to meet those needs and funding distribution. Each partnership must have one anchoring entity (of which the Medical Center is the anchoring entity for Region 15), which acts as a primary point of contact for HHSC in the region and is




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responsible for seeking regional stakeholder engagement and coordinating development of a regional plan.

Since 2007, under the UPL Program, the Medical Center has participated with a local health care provider for payment of health care services provided to indigent patients being performed at the Medical Center. The 2014 budget assumes that this program will continue at its current funding and expense alleviation level under the Waiver program.

HHSC has had challenges in timely implementing the Waiver program and has delayed certain Medicaid Supplemental payments throughout 2013 and 2012. Consequently, the delayed payments have necessitated that the Medical Center implement a cash conservation plan which is projected to extend until the second quarter of fiscal 2014.

Health Policy

Governor Rick Perry announced that Texas will opt-out of a provision of the Affordable Care Act that would have extended Medicaid coverage to nearly 2 million of the state’s 6.2 million uninsured citizens. That means that an estimated 135,000 uninsured El Pasoans who would have qualified for Medicaid under the expansion will likely remain uninsured.

Funding for the Women’s Health Program in Texas (family planning) remains in jeopardy after state officials earlier this year acted to exclude Planned Parenthood from participating in the program in violation of federal guidelines. The $40 million-a-year program gets 90% of its funding from the federal government. Texas now must absorb that cost or eliminate the program.

El Paso Children’s Hospital

El Paso Children’s commenced operations in February 2012. They received Joint Commission accreditation on March 8, 2012, received their Medicare provider number in late May 2012 and received their Medicaid number in late June 2012.

Included in the Medical Center’s operating revenues are service and lease-type agreements with the El Paso Children’s which approximate $30.1 million (prior to the allowances for uncollectible amounts) and include the following:

• Contractual services agreement • Facility lease agreement • Medical equipment (new and transferred) lease agreement • IT lease agreement • Administrative services agreement • Pre-opening costs agreement • Working capital advance agreement




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Certain of these agreements have an initial six-month no payment provision and the remaining have an initial one-year no payment provision enabling El Paso Children’s to establish their billing and collection processes before they begin making payments on these agreements. El Paso Children’s began making payments on these agreements in August 2012 and as of September 2013 paid over $30 million. The Medical Center also provides for an allowance for uncollectible accounts based upon review of outstanding receivables, current economic conditions and cash flows of El Paso Children’s.

Contacting the Medical Center’s Financial Manager

This financial report is designed to provide our citizens, customers and creditors with a general overview of the Medical Center’s finances and to demonstrate the Medical Center’s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the El Paso County Medical Center, Fiscal Services Office, 4815 Alameda Avenue, El Paso, Texas 79905.

Report of Management’s Responsibility

The management of the Medical Center is responsible for the preparation and integrity of the financial information presented in this report. The basic financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as promulgated by the Governmental Accounting Standards Board and include amounts based on judgments and estimates made by management. Management also prepares the other information included in the report and is responsible for its accuracy and consistency with the financial statements.

The 2013 and 2012 financial statements have been audited by the independent accounting firm of BKD, LLP, as stated in their reports, who was given unrestricted access to all financial records and related data, including the minutes of all meetings of the board of managers. The board of managers, through its Finance Committee (the “Committee”), provides oversight to the financial reporting process. Integral to this process is the Committee’s review and discussion with management of the monthly financial statements and the external auditors for the annual financial statements.

The Medical Center maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance that transactions are executed as authorized and accurately recorded and that assets are properly safeguarded, and also to provide reasonable assurance to our management and the board of managers regarding the reliability of our financial statements. The internal control system includes:

• A documented organizational structure and division of responsibility.

• Established policies and procedures that are regularly communicated and that demand highly ethical conduct from all employees.




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• The Medical Center’s Compliance Department monitors the operation of the internal control system and reports findings and recommendations to management and the board of managers as appropriate. Corrective actions are taken to address control deficiencies and other opportunities for improvement as they are identified.


/s/ James N. Valenti /s/ Michael L. Nuñez James N. Valenti Michael L. Nuñez, CHFP, CPA President and Chief Executive Officer Chief Financial Officer


A Component Unit of El Paso County, Texas Balance Sheets

September 30, 2013 and 2012 (In Thousands)

See Notes to Financial Statements

Medical El Paso Medical El PasoAssets and Deferred Outflows of Resources Center First Foundation Eliminations Total Center First Foundation Eliminations Total

Current AssetsCash and cash equivalents $ 37,827 $ 23,568 $ - $ - $ 61,395 $ 48,775 $ 19,072 $ - $ - $ 67,847 Short-term investments 6 - - - 6 6 - - - 6 Held by trustee for self insurance, current portion 1,685 - - - 1,685 1,936 - - - 1,936 Patient accounts receivable, net 30,850 - - - 30,850 19,911 - - - 19,911 County appropriation - property taxes receivable, net 1,999 - - - 1,999 1,628 - - - 1,628 Uncompensated care funds receivable 37,456 - - - 37,456 17,318 - - - 17,318 Supplies 6,141 - 6 - 6,147 5,646 - 33 - 5,679 Contract receivable, net 31,870 - - - 31,870 25,119 - - - 25,119 Prepaid expenses and other 6,332 2,651 787 - 9,770 5,084 2,005 471 - 7,560 Due from component units 1,619 16,243 - (17,862) - 1,319 17,115 - (18,434) -

Total current assets 155,785 42,462 793 (17,862) 181,178 126,742 38,192 504 (18,434) 147,004

Noncurrent Cash and InvestmentsHeld by trustee for debt service 2,074 - - - 2,074 1,441 - - - 1,441 Held by trustee for self-funded insurance 2,791 - - - 2,791 3,546 - - - 3,546 Held by trustee for project construction 150,779 - - - 150,779 7,656 - - - 7,656 Held by Foundation - - 2,593 - 2,593 - - 1,182 - 1,182 Internally designated 954 - - - 954 995 - - - 995 Restricted for medical claims - 700 - - 700 - 700 - - 700

156,598 700 2,593 - 159,891 13,638 700 1,182 - 15,520 Less amount required to meet current obligations 1,685 - - - 1,685 1,936 - - - 1,936

154,913 700 2,593 - 158,206 11,702 700 1,182 - 13,584

Capital Assets, Net 386,911 1,831 - - 388,742 404,465 1,981 - - 406,446

Other AssetsContract receivable - - - - - 5,637 - - - 5,637 Other 645 600 498 - 1,743 670 600 718 - 1,988

Total other assets 645 600 498 - 1,743 6,307 600 718 - 7,625

Deferred Outflows of Resources 10,402 - - - 10,402 - - - - -

Total assets and deferred outflows of resources $ 708,656 $ 45,593 $ 3,884 $ (17,862) $ 740,271 $ 549,216 $ 41,473 $ 2,404 $ (18,434) $ 574,659

Component Units2013 2012 - (Restated, Note 14)

Component Units


A Component Unit of El Paso County, Texas Balance Sheets

September 30, 2013 and 2012 (In Thousands)

See Notes to Financial Statements 19

Medical El Paso Medical El PasoLiabilities and Net Position Center First Foundation Total Center First Foundation Total

Current LiabilitiesAccounts payable and accrued expenses $ 59,630 $ 14,955 $ 5 $ - $ 74,590 $ 49,710 $ 16,416 $ 2 $ - $ 66,128 Current maturities of long-term debt 6,725 - - - 6,725 5,211 - - - 5,211 Estimated self-insurance costs - current 1,685 - - - 1,685 1,936 - - - 1,936 Due to component units 16,274 1,152 436 (17,862) - 17,251 711 472 (18,434) -

Total current liabilities 84,314 16,107 441 (17,862) 83,000 74,108 17,127 474 (18,434) 73,275

Estimated Self-insurance Costs 851 - - - 851 1,081 - - - 1,081

Long-term Debt 403,112 - - - 403,112 248,314 - - - 248,314

Other Long-term Liabilities 1,173 - - - 1,173 991 - - - 991

Total liabilities 489,450 16,107 441 (17,862) 488,136 324,494 17,127 474 (18,434) 323,661

Net PositionNet investment in capital assets 136,097 1,831 - - 137,928 152,368 1,981 - 154,349 Restricted - expendable 2,074 700 2,972 - 5,746 1,441 700 1,680 - 3,821 Restricted - non-expendable - - 471 - 471 - - 250 - 250 Unrestricted 81,035 26,955 - - 107,990 70,913 21,665 - - 92,578

Total net position 219,206 29,486 3,443 - 252,135 224,722 24,346 1,930 - 250,998

Total liabilities and net position $ 708,656 $ 45,593 $ 3,884 $ (17,862) $ 740,271 $ 549,216 $ 41,473 $ 2,404 $ (18,434) $ 574,659

Eliminations

2013Component Units

2012 - (Restated, Note 14)Component Units

Eliminations


A Component Unit of El Paso County, Texas Statements of Revenues, Expenses and Changes in Net Position

Years Ended September 30, 2013 and 2012 (In Thousands)


Medical El Paso Medical El PasoCenter First Foundation Total Center First Foundation Total

Operating RevenuesNet patient service revenue $ 155,398 $ - $ - $ - $ 155,398 $ 148,933 $ - $ - $ - $ 148,933 Premium revenue - 123,930 - - 123,930 - 122,327 - - 122,327 Medicaid Supplemental Program revenue 70,380 - - - 70,380 73,589 - - - 73,589 Net contract revenues 23,393 - - - 23,393 13,700 - - - 13,700 Other revenue 25,929 1,309 3,978 (10,419) 20,797 27,906 1,222 2,403 (13,767) 17,764

Total operating revenues 275,100 125,239 3,978 (10,419) 393,898 264,128 123,549 2,403 (13,767) 376,313

Operating ExpensesSalaries and employee benefits 147,074 - - (409) 146,665 142,747 - - (3,032) 139,715 Medical claims expense - 102,833 - - 102,833 - 100,232 - - 100,232 Purchased services 35,167 12,581 908 (8,469) 40,187 34,758 11,967 918 (8,711) 38,932 Professional fees 1,406 - - - 1,406 3,847 - - - 3,847 Supplies and other 80,480 4,051 1,767 (1,541) 84,757 79,151 3,998 3,603 (2,024) 84,728 Intergovernmental transfers 50,263 - - - 50,263 43,740 - - - 43,740 Depreciation 32,015 718 - - 32,733 27,426 772 - - 28,198

Total operating expenses 346,405 120,183 2,675 (10,419) 458,844 331,669 116,969 4,521 (13,767) 439,392

Operating Income (Loss) (71,305) 5,056 1,303 - (64,946) (67,541) 6,580 (2,118) - (63,079)

Nonoperating Revenues (Expenses)Investment return 184 84 - (58) 210 87 65 1 - 153 Interest expense (11,342) - - 58 (11,284) (8,268) - - - (8,268)County appropriation - property taxes, net 73,080 - - - 73,080 70,637 - - - 70,637 Tobacco settlement 1,392 - - - 1,392 1,322 - - - 1,322 Debt issuance costs (1,829) - - - (1,829) - - - - - Miscellaneous - other 4,304 - 210 4,514 2,339 - 150 - 2,489

Total nonoperating revenues, net 65,789 84 210 - 66,083 66,117 65 151 - 66,333

Capital Distributions - - - - - - (12,825) - 12,825 -

Changes in Net Position (5,516) 5,140 1,513 - 1,137 (1,424) (6,180) (1,967) 12,825 3,254

Net Position, Beginning of Year, Restated (Note 14 ) 229,128 30,526 3,897 (12,825) 250,726

Cumulative Effect of Change in Accounting Principle (2,982) - - - (2,982)

Net Position, Beginning of Year, As Restated 224,722 24,346 1,930 - 250,998 226,146 30,526 3,897 (12,825) 247,744

Net Position, End of Year $ 219,206 $ 29,486 $ 3,443 $ - $ 252,135 $ 224,722 $ 24,346 $ 1,930 $ - $ 250,998

Eliminations

2013Component Units

2012 - (Restated, Note 14)Component Units

Eliminations


A Component Unit of El Paso County, Texas Statements of Cash Flows



2012(Restated -

2013 Note 14 )

Operating ActivitiesReceipts from and on behalf of patients $ 143,654 $ 139,006 Payments to suppliers and contractors (152,114) (144,234)Payments to employees (145,437) (141,607)Cash received from contract revenues

and other operating activities 21,217 18,450 Cash received from uncompensated care related activities 50,242 64,095

Net cash used in operating activities (82,438) (64,290)

Noncapital Financing ActivitiesCounty appropriations supporting operations 62,803 59,442 Cash received from tobacco settlement 1,392 1,322 Capital distribution from the Health Plan - 12,825 Other cash received 1,475 1,360

Net cash provided by noncapital financing activities 65,670 74,949

Capital and Related Financing ActivitiesPayment of financing costs (1,829) - Proceeds from issuance of bonds payable 279,931 - Principal paid on bonds payable (132,321) (4,835)Interest paid on bonds payable (11,119) (12,138)County appropriations to acquire or retire debt for

acquisitions of capital assets 9,906 11,154 Purchase of capital assets (18,475) (61,199)

Net cash provided by (used in) capital and related financing activities 126,093 (67,018)

Investing ActivitiesPayments received from El Paso Children’s 23,503 4,950 Funding to El Paso Children’s - (19,570)Interest on investments 170 87 Purchase of investments (148,026) - Proceeds from disposition of investments - 22,711 Payments to Health Plan under line of credit (17,000) - Advances from Health Plan under line of credit 16,000 17,000

Net cash provided by (used in) investing activities (125,353) 25,178

Decrease in Cash and Cash Equivalents (16,028) (31,181)

Cash and Cash Equivalents, Beginning of Year 61,418 92,599

Cash and Cash Equivalents, End of Year $ 45,390 $ 61,418


A Component Unit of El Paso County, Texas Statements of Cash Flows (Continued)



2012(Restated -

2013 Note 14 )Supplemental Cash Flows Information

Capital assets acquisition included in accounts payable located in payables to suppliers and contractors 2,125$ 6,229$

Equipment provided to El Paso Children’s -$ 1,457$

Reconciliation of Cash and Cash Equivalents to the Balance Sheets

Cash and cash equivalents in current assets $ 37,827 $ 48,775 Cash and cash equivalents in current portion of cash and

investments held for self-funded insurance reserves 1,685 1,936 Cash and cash equivalents in noncurrent cash and investments 5,878 10,707

Total cash and cash equivalents $ 45,390 $ 61,418

Reconciliation of Operating Loss to Net Cash Used in Operating Activities

Operating loss $ (71,305) $ (67,541)Depreciation 32,015 27,426 Provision for uncollectible accounts 114,084 129,832 Changes in operating assets and liabilities

Patient accounts receivable, net (125,023) (138,447)Estimated third party payer settlements (805) (1,312)Accounts payable and accrued expenses 12,907 8,860 Other assets and liabilities (44,311) (23,108)

Net cash used in operating activities $ (82,438) $ (64,290)


A Component Unit of El Paso County, Texas Notes to Financial Statements September 30, 2013 and 2012

(In Thousands)

23

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Reporting Entity

The El Paso County Hospital District d/b/a University Medical Center of El Paso (the Medical Center) is a component unit of El Paso County, Texas (the County). The Commissioner’s Court of the County appoints the Medical Center’s governing body (the “Board of Managers”) and approves the Medical Center’s budget, tax rate and issuance of bonded debt. The Medical Center is charged with the legal responsibility to provide medical and hospital care to all County residents regardless of their ability to pay based upon Board approved eligibility guidelines.

The accompanying financial statements present the Medical Center and its component units, entities for which the Medical Center is considered to be financially accountable. Blended component units are, in substance, part of the primary government’s operations, even though they are legally separate entities. Thus, blended units are appropriately presented as funds of the primary government. Discretely presented component units are reported in a separate column in the financial statements to emphasize that they are legally separate from the government.

Blended component unit. The Medical Center is the sole corporate member of Thomason Cares, Inc. (Thomason Cares). Thomason Cares was incorporated as a Texas not-for-profit corporation and has been certified under the Medical Practices Act of Texas as Section 501(a) not-for-profit health organizations. Thomason Cares operates as a physician group practice of primary care physicians. It primarily employs physicians for the Medical Center’s outpatient clinics. Thomason Cares does not issue separate financial statements.

Discretely presented component units. The Medical Center is the sole corporate member of El Paso First HealthPlans, Inc. (the Health Plan). The Health Plan is organized as a health maintenance organization (HMO) licensed only in Texas, to provide prepaid health coverage to employees and dependents of various organizations in its service area. The Health Plan has agreements with health care providers in its service area to provide health care to its members. Payments under these agreements include predetermined, prepaid periodic fee and prospectively determined rates and discounts from established charges. The Health Plan has a Certificate of Authority from the Texas Department of Insurance (TDI) and commenced insurance operations in October 2000. The Health Plan is reported as a discretely presented component unit of the Medical Center since the Health Plan’s Board of Directors is appointed by the Medical Center’s Board of Managers and the Medical Center can impose its will on the Health Plan. Separately issued financial reports are available for the Health Plan and may be obtained by contacting El Paso First Health Plans, Inc. 1145 Westmoreland, El Paso, Texas 79925.



(In Thousands)

24

The Medical Center is the sole corporate member of the University Medical Center Foundation of El Paso (the Foundation). The Foundation is a designated Section 501(c)(3) charitable organization for the Medical Center and El Paso Children’s Hospital (El Paso Children’s). The Foundation’s purpose is to provide support for the Medical Center and El Paso Children’s in fulfilling their vital mission of providing patient care, education of health care professionals, research and community service for the County. The Foundation is reported as a discretely presented component unit of the Medical Center since the Foundation’s Board of Directors is appointed by the Medical Center’s Board of Managers and the Medical Center can impose its will on the Foundation. Separately issued financial reports are available for the Foundation and may be obtained by contacting the El Paso County Hospital District, Fiscal Services, Office, 4815 Alameda Avenue, El Paso, Texas 79905.

In 2013, the Medical Center implemented Governmental Accounting Standards Board (GASB) Statement No. 61, The Financial Reporting Entity: Omnibus – an amendment of GASB Statements No. 14 and No. 34, which became effective for reporting periods beginning after June 15, 2012. As a result, the Medical Center reported the Foundation and the Health Plan as discretely presented component units in the financial statements for the years ended September 30, 2013 and 2012. Previously, the Health Plan and the Foundation were presented in the Medical Center’s financial statements as blended component units. See Note 14.

Unless otherwise noted, the following notes do not include the Health Plan or the Foundation.

Basis of Accounting and Presentation

The financial statements of the Medical Center have been prepared on the accrual basis of accounting using the economic resources measurement focus. Revenues, expenses, gains, losses, assets and liabilities from exchange and exchange-like transactions are recognized when the exchange transaction takes place, while those from government-mandated nonexchange transactions (principally federal and state grants and county appropriations) are recognized when all applicable eligibility requirements are met. Operating revenues and expenses include exchange transactions and program-specific, government-mandated nonexchange transactions. Government-mandated nonexchange transactions that are not program specific (such as county or state appropriations), investment income and interest on capital assets-related debt are included in nonoperating revenues and expenses. The Medical Center first applies restricted net position when an expense or outlay is incurred for purposes for which both restricted and unrestricted net position are available.



(In Thousands)

25

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Medical Center considers all liquid investments with original maturities of three months or less to be cash equivalents. At September 30, 2013 and 2012, cash equivalents consisted primarily of money market funds.

Authorized Investments

The Medical Center’s Board of Managers has adopted a written investment policy regarding the investment of its funds as defined in the Public Funds Investment Act (Section 2256, Texas Government Code). Under the Public Funds Investment Act, the Medical Center is authorized to make investments in (1) obligations of the United States or its agencies, (2) direct obligations of the state of Texas or its agencies, (3) obligations of political subdivisions rated not less than A by a national investment rating firm, (4) certificates of deposit and (5) other instruments and obligations authorized by statute.

For the fiscal years ended September 30, 2013 and 2012, management of the Medical Center believes that it has complied with the provisions of the Public Funds Investment Act and the Medical Center’s investment policies.

County Appropriations – Property Taxes

The Medical Center received approximately 21% of its support from County appropriations funded by property taxes in both 2013 and 2012. These funds were used as follows:

2013 2012

Percentage used to support operations 86.4% 84.2%Percentage used for debt service on bonds 13.6% 15.8%

Total 100.0% 100.0%



(In Thousands)

26

Property taxes are levied January 1 and become due October 1 each year based on the value of all real and personal property located in the County. Assessed taxes become delinquent the following February 1. The tax rate is set at a level to meet the Medical Center’s budgeted debt service and operating needs. Debt service needs include both interest expense and scheduled principal reductions of general obligation bonds and obligations for which property tax revenues have been pledged.

County appropriations funded by property taxes are recorded in the fiscal period for which the appropriations are budgeted. Appropriations receivable for delinquent property taxes are recorded net of a provision for uncollectible amounts, collection expenses and appraisal fees. Subsequent adjustments to the tax rolls made by the County Assessor are included in revenues in the period such adjustments are made.

Premium Revenue

Premium revenue for the Health Plan represents premiums collected through the Texas Department of Health and Human Services (HHSC), Children’s Health Insurance Program (CHIP) and the State of Texas Access Reform Medicaid programs (STAR). Premiums are due monthly and are recognized as revenue during the period in which the Health Plan is obligated to provide services to members.

Intergovernmental Transfer

The Medical Center has entered into an affiliation agreement with an area hospital to improve the level of health care provided to the County indigent population by participating in one of the state’s Medicaid supplemental payment programs for privately owned safety-net hospitals. The Medical Center provides funding for the nonfederal share of the Medicaid Supplemental Payment Program (“Private” UPL Program). This amount approximated $50.3 million in 2013 and $43.7 million in 2012.

Tobacco Settlement Revenue

Tobacco settlement revenue is the result of a settlement between various counties and Medical Centers in Texas and the tobacco industry for tobacco-related health care costs. The Medical Center received approximately $1.4 million in 2013 and $1.3 million in 2012, associated with the settlement. The funding from the tobacco industry is to offset indigent health care costs of local governments.



(In Thousands)

27

Risk Management

The Medical Center is exposed to various risks of loss from torts; theft of, damage to and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; and employee health, dental and accident benefits. Commercial insurance coverage is purchased for claims arising from such matters other than medical malpractice, worker’s compensation and employee health claims. Settled claims have not exceeded this commercial coverage in any of the three preceding years.

The Medical Center is self-insured for a portion of its exposure to risk of loss from medical malpractice, worker’s compensation and employee health claims. Annual estimated provisions are accrued for the self-insured portion of medical malpractice, worker’s compensation and employee health claims and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported.

Investments and Investment Income

Investments in U.S. Treasury, agency and instrumentality obligations with a remaining maturity of one year or less at time of acquisition and in nonnegotiable certificates of deposit are carried at amortized cost. All other investments are carried at fair value. Fair value is determined using quoted market prices.

Investment income includes dividend and interest income, realized gains and losses on investments carried at other than fair value and the net change for the year in the fair value of investments carried at fair value.

Patient Accounts Receivable

The Medical Center reports patient accounts receivable for services rendered at net realizable amounts from third-party payers, patients and others. The Medical Center provides an allowance for uncollectible accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions.

Reserves for Incurred But Not Reported Medical Claims

The Health Plan management estimates and provides reserves for incurred but not reported physician and hospital services rendered to enrolled members during the period. These reserves represent management’s best estimate of the ultimate net cost of all reported and unreported claims incurred during the reporting period. The estimate is based on actuarial projections of the historical development of claims incurred but not reported and case-basis estimates of claims reported prior to the end of the reporting period.



(In Thousands)

28

The estimate of the unpaid claims liability is based on the best data available to management; however, because of the limited history, the estimates are subject to a significant degree of inherent variability. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.

Although management believes the estimate of the unpaid liability is reasonable, it is possible that actual incurred claims expense will not conform to the assumptions inherent in the determination of the liability; accordingly, the ultimate settlement of the claims may vary significantly from the estimate included in the accompanying financial statements.

Supplies

Supply inventories are stated at the lower of cost, determined using the first-in, first-out method or market.

Capital Assets

Capital assets are recorded at cost at the date of acquisition or fair value at the date of donation if acquired by gift. Depreciation is computed using the straight-line method over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives.

During the years ended September 30, 2013 and 2012, the Medical Center capitalized interest expense of $2.0 million and $3.7 million, respectively.

Compensated Absences

Medical Center policies permit most employees to accumulate vacation and sick leave benefits that may be realized as paid time off or, in limited circumstances, as a cash payment. Expenses and the related liability are recognized as vacation benefits are earned whether the employee is expected to realize the benefit as time off or in cash. Extended sick leave benefits are recognized when time off occurs and no liability is accrued for such benefits. Compensated absence liabilities are computed using the regular pay and termination pay rates in effect at the balance sheet date.



(In Thousands)

29

Net Position

Net position of the Medical Center is classified in four components. Net investment in capital assets consists of capital assets net of accumulated depreciation and reduced by the outstanding balances of borrowings used to finance the purchase or construction of those assets. Restricted expendable net position is made up of noncapital assets that must be used for a particular purpose, as specified by creditors, grantors or donors external to the Medical Center, including amounts deposited with trustees as required by bond indentures, reduced by the outstanding balances of any related borrowings. Restricted nonexpendable net position consists of noncapital assets that are required to be maintained in perpetuity as specified by external parties, such as permanent endowments. Unrestricted net position is the remaining net position that does not meet the definition of net investment in capital assets or restricted net position.

Net Patient Service Revenue

The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments and a provision for uncollectible accounts. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known.

Charity Care

The Medical Center provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue.

Income Taxes

As an essential government function of the County, the Medical Center is generally exempt from federal income taxes under Section 115 of the Internal Revenue Code. However, the Medical Center is subject to federal income tax on any unrelated business taxable income. The Medical Center also holds dual status as a 501(c)(3) organization.

Thomason Cares, the Foundation and the Health Plan are incorporated as not-for-profit corporations in the state of Texas and are exempt from income taxes under Section 501(a) of the Internal Revenue Code. These entities are subject to federal income tax on any unrelated business income.



(In Thousands)

30

As part of the Affordable Care Act, hospitals exempt from the tax under Section 501(c)(3) of the Internal Revenue Code are required to comply with the new requirements under new Code Section 501(r). Code Section 501(r) requires exempt hospitals prepare and implement a community health needs assessment, implement a financial assistance policy, implement an emergency care policy, limit charges to individuals eligible for financial assistance and refrain from certain collection actions for patients that may qualify for financial assistance. Failure to comply with these requirements could result in a hospital not being recognized as exempt under Code Section 501(c)(3). The Internal Revenue Service has not issued final guidance on how they intend to enforce the provisions related to Code Section 501(r). The Medical Center believes it has taken reasonable steps to comply with 501(r) and has recorded no provision relative to the organization’s compliance or noncompliance with Code Section 501(r). However, this could change materially in the near-term.

Electronic Health Records Incentive Program

The Electronic Health Records Incentive Program, enacted as part of the American Recovery and Reinvestment Act of 2009, provides for one-time incentive payments under both the Medicare and Medicaid programs to eligible hospitals that demonstrate meaningful use of certified electronic health records technology (EHR). Payments under the Medicare program are generally made for up to four years based on a statutory formula. Payments under the Medicaid program are generally made for up to four years based upon a statutory formula, as determined by the state, which is approved by the Centers for Medicare and Medicaid Services. Payment under both programs are contingent on the hospital continuing to meet escalating meaningful use criteria and any other specific requirements that are applicable for the reporting period. The final amount for any payment year is determined based upon an audit by the fiscal intermediary. Events could occur that would cause the final amounts to differ materially from the initial payments under the program.

The Medical Center recognizes revenue ratably over the reporting period starting at the point when management is reasonably assured it will meet all of the meaningful use objectives and any other specific grant requirements applicable for the reporting period.

The Medical Center completed the first-year requirements under the Medicaid program in 2012 and the first-year requirements under the Medicare program in 2013 and has recorded revenue of approximately $2.8 million and $1.8 million in 2013 and 2012, respectively, which is included in other revenues within operating revenues in the statements of revenues, expenses and changes in net position.



(In Thousands)

31

Reclassifications

Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 financial statement presentation. The reclassifications had no effect on the changes in financial position.

Subsequent Events

Subsequent events have been evaluated through the date of the Independent Auditor’s Report, which is the date the financial statements were available to be issued.

Note 2: Net Patient Service Revenue

The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established rates. These payment arrangements include:

• Medicare. Inpatient acute care services and substantially all outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Certain inpatient nonacute services and defined medical education costs are paid based on a cost reimbursement methodology. The Medical Center is reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by the Medicare fiscal intermediary. The Medical Center’s Medicare cost reports have been audited by the Medicare administrative contractor through September 30, 2009.

• Medicaid – Non-managed. Inpatient services rendered to Medicaid program beneficiaries that are not part of a managed care plan are paid at prospectively determined rates per discharge similar to those of the Medicare inpatient program. Medicaid outpatient beneficiaries are reimbursed using a mixture of cost-based and a fee schedule methodologies. For outpatients, the Medical Center is reimbursed for cost-based services at a preliminary rate, with the final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by the Medicaid fiscal intermediary. The Medical Center’s Medicaid cost reports have been audited by the Medicaid fiscal intermediary through September 30, 2007.


A Component Unit of El Paso County, Texas Notes to Financial Statements September 30, 2

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