MCHD 2005 Audit
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MCHD 2005 Audit

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MENDOCINO COAST HEALTH CARE DISTRICT ANNUAL FINANCIAL REPORT JUNE 30, 2005 and 2004 THOMAS L. CAMP Certified Public Accountant MENDOCINO COAST HEALTH CARE DISTRICT ANNUAL FINANCIAL REPORT JUNE 30, 2005 and 2004 INDEX PAGES MANAGEMENT’S DISCUSSION AND ANALYSIS 1 – 18 INDEPENDENT AUDITOR'S REPORT 19 FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 Balance Sheets 20 – 21 Statements of Operations and Changes in Net Assets 22 Statements of Cash Flows 23 Notes to Financial Statements 24 – 41 The District’s Total Operating Revenue increased in each of the past two years by $340,591 (1.1 percent) in 2005 and $2,285,028 (8.2 percent) in 2004. Total Operating Expenses also increased in each of the past two years by $1,941,589 (6.4 percent) in 2005 and $1,612,781 (5.6 percent) in 2004. The District reported Net Operating Losses in 2005 and 2004. Operating losses in 2005 exceeded 2004’s level by $1,600,998 (847.0 percent). The Districts’ Board of Directors has approved managements’ plan to correct the prior years’ deficits and target a 2.2% or approximately a $726,000 Operating Margin in 2006. This plan consists of the following actions for 2006: 1. Renegotiation of Workers Compensation premiums. The District has renegotiated and estimates the premium reduction will increase the operating margin by more than of $550,000 for 2006. 2. ...

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MENDOCINO COAST HEALTH CARE DISTRICT  ANNUAL FINANCIAL REPORT  JUNE 30, 2005 and 2004
THOMAS L. CAMP
Certified Public Accountant
      
MENDOCINO COAST HEALTH CARE DISTRICT  ANNUAL FINANCIAL REPORT JUNE 30, 2005 and 2004    INDEX
         MANAGEMENT’S DISCUSSION AND ANALYSIS  INDEPENDENT AUDITOR'S REPORT  FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2005 AND 2004   Balance Sheets   Statements of Operations and Changes in Net Assets   Statements of Cash Flows   Notes to Financial Statements
PAGES 1 – 18 19 20 – 21 22 23 24 – 41
     
  
  
 
The District’s Total Operating Revenue increased in each of the past two years by $340,591 (1.1 percent) in 2005 and $2,285,028 (8.2 percent) in 2004. Total Operating Expenses also increased in each of the past two years by $1,941,589 (6.4 percent) in 2005 and $1,612,781 (5.6 percent) in 2004. 2005 and 2004. Operating losses inThe District reported Net Operating Losses in 2005 exceeded 2004’s level by $1,600,998 (847.0 percent).  The Districts’ Board of Directors has approved managements’ plan to correct the prior years’ deficits and target a 2.2% or approximately a $726,000 Operating Margin in 2006. This plan consists of the following actions for 2006: 1. Renegotiation of Workers Compensation premiums. The District has renegotiated and estimates the premium reduction will increase the operating margin by more than of $550,000 for 2006.  2. Review of non-core hospital services operated by the District and their opportunity to be relocated as community based services. Estimated increase in operating margin of $412,000 in 2006. 3. Based on a pricing survey of neighboring hospitals in Mendocino and Sonoma counties, increase prices above the scheduled 2006 increase of 10%. Estimated increase in operating margin of approximately $500,000 in 2006. 4. Recruitment of additional surgical specialty Physicians to the community. Beyond replacement of an orthopedic surgeon and ophthalmologist, who began their practices in the District in late 2005, management recently has signed agreements with a general surgeon and an urologist who are scheduled to start in October 2005, as well as an ENT, to start in December 2005. The District estimates the new physicians will increase the operating margin by $440,000 in 2006. Additionally, the general surgeon will decrease the Locum Tenen general surgery costs by approximately $135,000 in 2006. 5. Additionally, looking beyond 2006 the Board of Directors have approved: a. Exploring the pros and cons of and initiating the application process for Critical Access Hospital Status. b. Evaluation of affiliation with a larger system and a time line and steps to accomplish.  Losses in 2004 were less than 2003 by $672,247 (75.8 percent), due primarily to additional Medi-Cal/Federal reimbursement reported in 2004 for 2004 and 2003 from a new reimbursement program, Public Hospital Outpatient Services Supplemental Reimbursement Program for previously unreimbursed outpatient costs.
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 District reported contributions from the Mendocino Coast Hospital FoundationThe of $1,654,266 in 2005, which included a portion received for purchase of new ultrasound equipment and the accrual of the balance of the $1,500,000 pledge for imaging equipment. $378,580 in 2004 from the Foundation included the accrual for the third $250,000 installment towards the Clinical Information Technology Project.   USING THIS ANNUAL REPORT  Overview of the Financial Statements  Management’s discussion and analysis is designed to assist the reader in focusing on significant financial issues, provide an overview of the District’s financial activity and identify changes in the District’s financial position. Unless otherwise noted, all discussion and analysis pertains to the District’s financial condition, results of operations and cash flows as of and for the years-ended June 30, 2005 and June 30, 2004. Please read it in conjunction with the financial statements in this report. Unless otherwise indicated, dollar amounts are in thousands.  This discussion and analysis is intended to serve as an introduction to the District’s basic financial statements, which consist of financial statements and footnotes to the financial statements. The District’s government wide financial statements consist of three statements: a Balance Sheet; a Statement of Operations and Changes in Net Assets; and a Statement of Cash Flows. These financial statements and related notes provide information about the activities of the District, including resources held by the District but restricted for specific purposes by contributors, grantors, or enabling legislation.  Financial Reporting Entity  The financial reporting entity consists of the primary government including the Hospital and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the financial statements to be misleading or incomplete.  The definition of the reporting entity is based on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. The primary government also has financial reporting responsibilities for legally separate organizations (Component Units) where there is a potential that the nature and significance of the relationship for the organization to provide specific financial benefits to, or to impose specific financial burdens on the primary government that by not including them would provide misleading and/or incomplete financial statements.  District-Wide Financial Statements  The Financial Statements are designed to provide readers with a broad overview of the District’s finances, in a manner similar to a private-sector business. The District’s financial statements are treated as an Enterprise Fund (proprietary). The statements are prepared utilizing the accrual basis of accounting and the flow of economic resources. The District  3
follows (1) all GASB Pronouncements and (2) all FASB Statements and Interpretations, APB Opinion, and ARBs, no matter when issued, except those that conflict with a GASB Pronouncement.  The Balance Sheet  The Balance Sheet presents information on all of the District’s Assets, Liabilities, and Net Assets. The Balance Sheet includes information about the nature of the District’s assets and liabilities and classifies them as current and noncurrent. It also provides the basis for evaluation of the capital structure of the District and for assessing the liquidity and financial flexibility of the District. Over time, increases or decreases in Net Assets may serve as a useful indicator of whether the financial position of the District is improving or deteriorating.  The Statement of Operations and Changes in Net Assets  The Statement of Operations and Changes in Net Assets presents information showing the results of the District’s operations during each fiscal year. All changes in revenues and expenses are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in the statement for some items that will result in cash flow in future fiscal periods (for example, uncollected taxes, and earned but unused vacation leave) or result in cash flows from past fiscal periods (for example, prior year contractuals, prepaid insurance, and supplies from inventory). This statement measures the District’s operations and can be used to determine whether the District has been able to recover all of its operating costs from patient service and other operating revenue sources.  The Statement of Cash Flows  The primary purpose of the Statement of Cash Flows is to provide information about the District’s cash from operating, noncapital financing, capital and related financing and investing activities. It provides answers to such questions as what were the District’s sources of cash, what was cash used for and what was the change in cash balances during the reporting period.  The Notes to the Financial Statements  The Notes to the Financial Statements provide additional information that is essential for a full understanding of the information provided in the District’s financial statements. The notes also present certain required supplemental information concerning the District’s concentration of credit risk, tax revenues, and long-term debt.  Net Assets  The District’s Net Assets are the difference between its assets and liabilities reported in the Balance Sheet. The District’s Net Assets increased in the past two years by a total of $1,039,000 (9.4 percent), due primarily to contributions, as can be seen in Table 1.  
 
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A summary of the District’s Balance Sheets is presented in Table 1 below:  
TABLE 1 CONDENSED NET ASSETS STATEMENTS (in Thousands)            June 30, June 30, Dollar Percent June 30, June 30, Dollar Percent  2005 2004 Change Change 2004 2003 Change Change           Current Assets $ 7,394 $ 8,536 $ (1,142) -13.4% $ 8,536 $ 7,252 $ 1,284 17.7% Assets Whose Use is Limited $ 4,772 $ 8,056 $ (3,284) -40.8% $ 8,056 $ 11,108 $ (3,052) -27.5% Capital Assets $ 14,745 $ 9,363 $ 5,382 57.5% $ 9,363 $ 7,130 $ 2,233 31.3% Donor Restricted Assets $ 1,473 $ 785 $ 688 87.6% $ 785 $ 875 $ (90) -10.3% Other Assets $ 276 $ 250 $ 26 10.4% $ 250 $ 270 $ (20) -7.4%                  Total Assets $ 28,660 $ 26,990 $ 1,670 6.2% $ 26,990 $ 26,635 $ 355 1.3%           Current Liabilities $ 7,783 $ 6,612 $ 1,171 17.7% $ 6,612 $ 6,650 $ (38) -0.6% Long-Term Debt Outstanding $ 8,835 $ 8,882 $ (47) -0.5% $ 8,882 $ 8,982 $ (100) -1.1%                  Total Liabilities $ 16,618 $ 15,494 $ 1,124 7.3% $ 15,494 $ 15,632 $ (138) -0.9%           Invested in Capital Assets, Net of Debt $ 6,316 $ 2,655 $ 3,661 137.9% $ 2,655 $ 3,051 $ (396) -13.0% Restricted $ 1,690 $ 2,730 $ (1,040) -38.1% $ 2,730 $ 1,572 $ 1,158 73.7% Unrestricted $ 4,036 $ 6,112 $ (2,076) -34.0% $ 6,112 $ 6,380 $ (268) -4.2%                  Total Net Assets $ 12,042 $ 11,497 $ 545 4.7% $ 11,497 $ 11,003 $ 494 4.5%            Total Liabilities and Net Assets $ 28,660 $ 26,990 $ 1,669 6.2% $ 26,990 $ 26,635 $ 356 1.3%  As reflected in Table 1, net assets increased in 2005 by $545,000 (4.7 percent) to $12,042,000 and by $494,000 (4.5 percent) to $11,497,000 in 2004.  The significant component changes in the District’s 2005 Balance Sheet were decreases in net estimated third-party settlements (receivable less payable) from third-party reimbursement cost reports and unexpended bond funds for capital asset projects, and increases in capital assets and donor restricted assets. Overall net estimated third-party settlements in 2005 changed from a receivable of $1,497,763 in 2004 to a payable of $621,925. The previous year’s borrowings from board designated assets to pay prior year’s third-party payables were repaid in full in 2005. Unexpended bond funds for capital asset projects decreased by $3,274,028 and became a portion of the increase in net capital assets of $5,382,078 in 2005. Both the outpatient service building and the materials handling building portion of the construction project were substantially completed at the end of 2005. Donor restricted assets increased in 2005 by $687,254 due to the net of the accrual for the Foundation’s pledge receivable of $1.29 million for diagnostic imaging equipment less the expenditure of the remaining balance of $630,000 from the previous Foundation’s donation for information technology.  The significant component changes in the District’s 2004 Balance Sheet were an increase in net estimated third-party settlements (receivable less payable) from third-party reimbursement cost reports, a decrease in board designated assets, and an increase in accounts payable due vendors and others. In 2004 net estimated third-party settlements
 
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receivables increased by $3,255,000 (185.2 percent) while in 2003 they decreased by $2,400,000 (373.2 percent). The need to pay back prior years’ third–party settlements while the District was building a receivable in the current year’s third-party settlements created a cash flow short fall during 2004 that was managed partly by borrowings from board designed assets and an increase in accounts payable due vendors and others. The result was a decrease in board designated assets in 2004 of $1,092,000 (21.2 percent) after an increase in 2003 of $712,000 (16.0 percent). The decrease in 2004 was from borrowings to pay third-party settlements and accounts payable of $1,869,000, at a 5 percent interest rate, of which $642,000 has been repaid during 2004. These net withdrawals were partially offset by net deposits of $130,000 for the clinical information technology project. Accounts payable due vendors and others increased by $1,060,000 (58.7 percent) in 2004 and decreased in 2003 by $274,000 (13.2 percent). The priority established for cash payouts was employees and benefits, debt service requirements, local vendors, medical vendors determined to be strategic, and other vendors.                           
 
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ANALYSIS OF THE DISTRICT’S OPERATING AND FINANCIAL PERFORMANCE  Activities  The following Table 2 presents a summary of the District’s activities measured by its operating statistics:  
TABLE 2 OPERATING STATISTICS     Percent 30, June 30, June Percent 30, JuneJune 30,    Change2005 2004 Change Change 2004 2003 Change Patient Admissions  Medical/Surgical 1,332 1,420 (88) -6.2% 1,420 1,496 (76) -5.1%  Obstetrics 209 198 11 5.6% 198 249 (51) -20.5%  Swing 286 288 (2) -0.7% 288 206 82 39.8%           Patient Days  Medical/Surgical 5,060 6,051 (991) -16.4% 6,051 6,160 (109) -1.8%  Obstetrics 423 413 10 2.4% 413 519 (106) -20.4%  Swing 3,323 3,060 263 8.6% 3,060 2,740 320 11.7%           Length of Stay  Medical/Surgical 3.80 4.26 (0.46) -10.8% 4.26 4.12 0.14 3.4%  Obstetrics 2.02 2.09 (0.07) -3.3% 2.09 2.08 0.01 0.5%  Swing 11.62 10.63 0.99 9.3% 10.63 13.30 (2.67) -20.1%           Outpatient Center Registrations 44,918 43,885 1,033 2.4% 43,885 43,590 295 0.7%           Emergency Department Visits 10,662 11,456 (794) -6.9% 11,456 11,106 350 3.2% Caring for Women Visits 4,325 4,249 76 1.8% 4,249 5,037 (788) -15.6% Home Health Visits 9,321 9,841 (520) -5.3% 9,841 8,735 1,106 12.7%  Inpatient activity at the District as measured by acute admissions and patient days was 1,541 and 5,483 respectively for 2005 and 1,618 and 6,464, respectively for 2004. The 2005 decrease of 981 (15.2 percent) in acute patient days was due to a combination of a decrease of 77 (4.8 percent) in acute admissions and a decrease in length of stay of 0.44 (10.9 percent) that occurred in all major payor groups except self-pay. In 2004 admissions decreased by 127 (7.3 percent) as did patient days by 215 (3.2 percent). The 2004 decrease in patient days was tempered by an increase in average length of stay of .17 (4.4 percent). The effect of this longer length of stay and its impact on profitability is more fully discussed later herein. The average length of stay in 2004 compared to 2003 is a decrease overall of .27 (7.0 percent) with MediCal and other state and local government payors showing increases and Medicare showing a decrease.  Swing bed activity at the District as measured by swing bed admissions and patient days was 286 and 3,323 respectively for 2005 and 288 and 3,060 respectively for 2004. 2005  7
experienced a decrease in admissions of 2 (0.7 percent) and an increase in patient days of 263 (8.6 percent), which were the result of an increase of .99 (9.3 percent) in the length of stay due to the lack of continuum of care options to discharge patients to within the District. In 2004 swing bed admissions increased by 82 (39.8 percent) and patient days increased by 320 (11.7 percent) with a decrease in length of stay of 2.67 (20.1 percent). There was in 2003 a shrinkage in swing bed patient volumes, (admissions decreased by 22.6 percent and patient days decreased by 17.7 percent), and an increase in length of stay by 6.2 percent that was due primarily to Medicare’s change to a Prospective Payment System. This trend was reversed in 2004 through an educational program with nursing personnel and the medical staff on the appropriateness of admissions to this area.  Total outpatient activity at the District as measured by outpatient registrations, emergency department visits, caring for women visits, and home health visits was 69,226 for 2005 and 69,431 for 2004. For 2005 outpatient registrations increased by 1,033 (2.4 percent), emergency department visits decreased by 794 (6.9 percent), caring for women visits increased by 76 (1.8 percent), and home health visits decreased by 520 (5.3 percent) with the number of home health patients decreasing by 10.1 percent. Emergency department’s decreased results occurred in both emergent and occupational medicine visits. For 2004 outpatient registrations increased by 295 (0.7 percent), emergency department visits increasing by 350 (3.2 percent), caring for women visits decreased by 788 (15.6 percent), and home health visits increased by 1,106 (12.7 percent) with the number of home health patients increasing by 9.5 percent. Emergency department’s increase in visits due totally to occupational medicine visits. The caring for women visit results were totally due to a decrease in obstetrical visits. In reviewing the trend over the last two years the results were an increase in outpatient registrations of 3.0 percent, a decrease in emergency department visits of 4.0 percent, a decrease in caring for women visits of 14.1 percent, while home health visits increased by 6.7 percent.                    
 
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Operating Results and Changes in Net Assets  In 2005 the District’s net assets increased by $545,000 (4.7 percent), as shown in Table 3. This increase consists of operating, non-operating and contribution components. This represents an improvement of 10.3 percent compared with the increase in net assets for 2004 of $494,000 (4.5 percent).  The following Table 3 presents a summary of the District’s revenues and expenses and changes in net assets for 2005, 2004 and 2003.    
TABLE 3 CONDENSED STATEMENTS OF REVENUE AND EXPENSES, AND CHANGES IN NET ASSETS (in Thousands)              June 30, June 30, Dollar Percent June 30, June 30, Dollar Percent  2005 2004 Change Change 2004 2003 Change Change             Total Operating Revenue $ 30,408 $ 30,067 $ 341 1.1% $ 30,067 $ 27,782 $ 2,285 8.2%             Salaries and Benefits $ 18,153 $ 16,128 $ 2,025 12.6% $ 16,128 $ 13,794 $ 2,334 16.9% Medical and Other Supplies $ 4,835 $ 4,540 $ 295 6.5% $ 4,540 $ 4,391 $ 149 3.4% Registry and Contract Therapists $ 1,495 $ 2,048 $ (553) -27.0% $ 2,048 $ 2,747 $ (699) -25.4% Professional Fees $ 2,679 $ 2,667 $ 12 0.4% $ 2,667 $ 2,955 $ (288) -9.7% Depreciation and Amortization $ 829 $ 784 $ 45 5.7% $ 784 $ 1,007 $ (223) -22.1% Other Expenses $ 4,232 $ 4,114 $ 118 2.9% $ 4,114 $ 3,775 $ 339 9.0%                    Total Operating Expenses $ 32,223 $ 30,281 $ 1,942 6.4% $ 30,281 $ 28,669 $ 1,612 5.6%                    Operating Income (Loss) $ (1,815) $ (214) $ (1,601) 748.1% $ (214) $ (887) $ 673 75.9%             Nonoperating Gains, Net of Nonoperating Losses $ 686 $ 557 $ 129 23.2% $ 557 $ 468 $ 89 19.0%              Excess of Expenses over Revenues  and Gains before Contributions $ (1,129) $ 343 $ (1,472) -429.2% $ 343 $ (419) $ 762 181.9%             Contributions $ 1,674 $ 151 $ 1,523 1008.6% $ 151 $ 548 $ (397) -72.4%                    Change in Net Assets $ 545 $ 494 $ 51 10.3% $ 494 $ 129 $ 365 282.9%              Net Assets - Beginning of Year $ 11,497 $ 11,003 $ 494 4.5% $ 11,003 $ 10,874 $ 129 1.2%              Net Assets - End of Year $ 12,042 $ 11,497 $ 545 4.7% $ 11,497 $ 11,003 $ 494 4.5%       Operating Revenues  For 2005 the District derived 97.8 percent of its total revenue from operations, of which net patient service revenue represents 99.0 percent. In 2004 operating revenue represented 98.2 percent of total revenues with 99.2 percent of operating revenue from net patient service revenue. Net patient service revenue includes patient care revenue
 
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