Grand Canyon University Financial Viability for A Large Purchase Presentation

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Grand Canyon University Financial Viability for A Large Purchase Presentation

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Nursing homework help

show your understanding of the needs that go into determining financial viability for a large purchase in an organization. You will be creating a PowerPoint presentation to explain and justify a capital purchase to the vice president of your healthcare organization.

Read the Northwestern Memorial Financial Statement and Vendor Information Sheet.

Students answer the following about the attachments:

After comparing vendors, create a presentation for the capital purchase to your vice president. Address the following:

1. Why would this be a good investment for the hospital?
2. What are the operating costs you took into consideration? Explain.
3. What facility considerations are involved regarding this new piece of equipment? Explain.
4. What is a reasonable ROI? What are the minimum quality standards?
5. What training options would need to occur?
6. Cite a minimum of three references to support your rationale.

 

Vendor Information Sheet You recently requested bids for a new MRI (magnetic resonance imaging) machine in for your radiology department. As a result, two vendors have submitted quotes based off the specs in your proposal. You anticipate the service life of this machine to be 10 years and that it should generate $600,000 per year at 50% capacity. To remove any potential for bias, your compliance department has provided the bids to you (below) and removed the name of each company. Bid: Company A Supply and install a 3T (3 Tesla) MRI scanner. Once bid is accepted, work will be completed in 90 days. Each day after 90 days incurs a $5,000 (a day) penalty. Warranty is for 2 years. Software upgrades for 1 year. • Total cost: $3,650,000 • Additional warranty: $150,000 (per year to year 5) • Software upgrades: $50,000 (per year up to year 5) Bid: Company B Supply and install a 3T (3 Tesla) MRI scanner. Once bid is accepted, work will be completed in 90 days. Each day after 90 days incurs a $5,000 (a day) penalty. Warranty is for 4 years. Software upgrades for 5 years. 1. Total cost: $4,400,000 2. Additional warranty: $75,000 (per year to year 10) 3. Software upgrades: $25,000 (per year up to year 10) © 2020. Grand Canyon University. All Rights Reserved. CONSOLIDATED FINANCIAL STATEMENTS Northwestern Memorial HealthCare and Subsidiaries Years Ended August 31, 2018 and 2017 With Report of Independent Auditors Ernst & Young LLP Northwestern Memorial HealthCare and Subsidiaries Consolidated Financial Statements Years Ended August 31, 2018 and 2017 Contents Report of Independent Auditors………………………………………………………………………………………….1 Consolidated Financial Statements Consolidated Balance Sheets ……………………………………………………………………………………………..3 Consolidated Statements of Operations and Changes in Net Assets ………………………………………..5 Consolidated Statements of Cash Flows ………………………………………………………………………………7 Notes to Consolidated Financial Statements…………………………………………………………………………8 1809-2875972 1 Ernst & Young LLP 155 North Wacker Drive Chicago, IL 60606-1787 Tel: +1 312 879 2000 Fax: +1 312 879 4000 ey.com Report of Independent Auditors The Board of Directors Northwestern Memorial HealthCare We have audited the accompanying consolidated financial statements of Northwestern Memorial HealthCare and Subsidiaries which comprise the consolidated balance sheets as of August 31, 2018 and 2017, and the related consolidated statements of operations and 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 Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity 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 financial statements that are free of 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1809-2875972 A member firm of Ernst & Young Global Limited 1 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwestern Memorial HealthCare and Subsidiaries at August 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.  November 30, 2018 1809-2875972 A member firm of Ernst & Young Global Limited 2 Northwestern Memorial HealthCare and Subsidiaries Consolidated Balance Sheets (In Thousands) August 31 2018 2017 Assets Current assets: Cash and cash equivalents Short-term investments Current portion of investments, including assets limited as to use Patient accounts receivable, net of estimated allowances for uncollectible accounts of $252,353 at August 31, 2018 and $223,411 at August 31, 2017 Current portion of pledges and grants receivable, net Current portion of insurance recoverable Inventories Other current assets Total current assets Investments, including assets limited as to use, less current portion Property and equipment, at cost: Land Buildings Equipment and furniture Construction in progress Less accumulated depreciation Prepaid pension cost Pledges and grants receivable, less current portion Insurance recoverable, less current portion Other assets, net Total assets 3 $ 407,249 $ 51,998 258,463 30,685 148,848 136,352 769,567 16,107 12,642 71,565 131,284 1,609,260 716,277 24,561 14,186 64,443 154,752 1,399,719 5,980,955 5,490,526 353,975 3,970,145 1,353,766 126,535 5,804,421 2,221,667 3,582,754 347,036 3,465,273 1,166,884 539,340 5,518,533 2,059,946 3,458,587 118,562 180,063 35,770 44,856 69,706 89,224 153,452 175,739 $ 11,662,851 $ 10,726,322 1809-2875972 August 31 2018 2017 Liabilities and net assets Current liabilities: Accounts payable Accrued salaries and benefits Grants and academic support payable, current portion Accrued expenses and other current liabilities Due to third-party payors Current accrued liabilities under self-insurance programs Current maturities of long-term debt Short-term debt Total current liabilities Long-term debt, less current maturities Accrued liabilities under self-insurance programs, less current portion Grants and academic support payable, less current portion Interest rate swaps Other liabilities Total liabilities Net assets: Unrestricted: Undesignated Board-designated Non-controlling interest in consolidated venture Total unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ 239,682 $ 230,588 314,163 285,043 38,753 33,932 115,254 130,799 434,965 545,759 94,256 105,659 30,239 24,571 87,299 27,466 1,345,517 1,392,911 1,394,396 1,324,776 541,589 76,954 73,350 150,502 3,629,702 495,709 79,469 112,586 143,428 3,501,485 6,602,984 7,364,425 229,455 242,870 (3,599) 626 6,828,840 7,607,921 220,917 242,596 175,080 182,632 7,224,837 8,033,149 $ 11,662,851 $ 10,726,322 See accompanying notes to the consolidated financial statements. 1809-2875972 4 Northwestern Memorial HealthCare and Subsidiaries Consolidated Statements of Operations and Changes in Net Assets (In Thousands) Year Ended August 31 2018 2017 Revenue Net patient service revenue Provision for uncollectible accounts Net patient service revenue after provision for uncollectible accounts Rental and other revenue Net assets released from donor restrictions and federal and state Total revenue $ 5,053,132 $ 4,749,433 202,047 175,516 Expenses Salaries Employee benefits Supplies Purchased services Depreciation and amortization Insurance Rent and utilities Repairs and maintenance Interest Illinois Hospital Assessment Other Total expenses Operating income Nonoperating gains (losses) Investment return Change in fair value of interest rate swaps Loss on extinguishment of long term debt Grants and academic support provided Other Total nonoperating gains, net Excess of revenue over expenses Net gain (loss) attributable to non-controlling interest in subsidiaries Excess of revenue over expenses attributable to NMHC and Subsidiaries 1809-2875972 4,877,616 313,757 35,290 5,226,663 4,547,386 256,362 27,248 4,830,996 2,126,172 317,874 1,000,194 552,525 310,948 112,834 100,814 101,960 41,027 110,339 180,926 4,955,613 271,050 1,969,531 297,842 877,030 538,642 287,149 104,578 91,307 88,331 44,106 103,362 127,949 4,529,827 301,169 490,971 31,353 (23,990) (34,307) 9,846 473,873 744,923 775 $ 744,148 $ 655,269 37,521 (216) (20,172) 9,291 681,693 982,862 (703) 983,565 5 Northwestern Memorial HealthCare and Subsidiaries Consolidated Statements of Operations and Changes in Net Assets (continued) (In Thousands) Year Ended August 31 2018 Total Unrestricted net assets Excess (deficiency) of revenue over expenses Net assets released from restrictions used for property and equipment Postretirement-benefit-related changes other than net periodic Distribution to non-controlling interest Other Increase (decrease) in unrestricted net assets $ 744,923 7,672 Controlling $ 2017 Noncontrolling Total Controlling 744,148 $ 775 $ 982,862 $ 7,672 – 6,279 33,863 (1,243) (6,134) 779,081 33,863 – (10,827) 774,856 – (1,243) 4,693 4,225 64,884 (785) (313) 1,052,927 983,565 Noncontrolling $ 6,279 (703) – 64,884 – (446) 1,054,282 – (785) 133 (1,355) Temporarily restricted net assets Contributions Investment return Net assets released from restrictions used for: Operating expenses, charity care, research and education Property and equipment additions Change in fair value of split-interest agreements Other Increase in temporarily restricted net assets 49,373 15,389 49,373 15,389 – – 44,892 14,051 44,892 14,051 – – (32,208) (7,672) 411 (3,614) 21,679 (32,208) (7,672) 411 (3,614) 21,679 – – – – – (34,859) (6,279) 147 (8,804) 9,148 (34,859) (6,279) 147 (8,804) 9,148 – – – – – Permanently restricted net assets Contributions Change in fair value of split-interest agreements Other Increase in permanently restricted net assets 6,403 525 624 7,552 6,403 525 624 7,552 – – – – 5,609 775 6,785 13,169 5,609 775 6,785 13,169 – – – – Change in net assets Net assets, beginning of period Net assets, end of period 808,312 7,224,837 $ 8,033,149 804,087 7,228,436 $ 8,032,523 $ 1,075,244 1,076,599 4,225 6,149,593 6,151,837 (3,599) 626 $ 7,224,837 $ 7,228,436 $ (1,355) (2,244) (3,599) See accompanying notes to consolidated financial statements. 1809-2875972 6 Northwestern Memorial HealthCare and Subsidiaries Consolidated Statements of Cash Flows (In Thousands) Year Ended August 31 2018 2017 Operating activities Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Postretirement benefit-related changes other than net periodic pension cost Change in fair value of interest rate swaps Loss on extinguishment of long-term debt Net unrestricted realized investment return and net change in unrestricted and restricted unrealized investment gains/losses Restricted contributions, change in fair value of split interest agreements, and realized investment return Depreciation and amortization Provision for uncollectible accounts Changes in operating assets and liabilities: Patient accounts receivable Due to third-party payors Grants and academic support payable Other operating assets and liabilities Net cash provided by operating activities $ Investing activities Purchase of investments Sale of investments Net unrestricted realized investment return Capital expenditures, net Net cash used in investing activities Financing activities Proceeds from line of credit Proceeds from commercial paper Proceeds from issuance of long-term debt Payments of commercial paper Payments of line of credit Payments of long-term debt Restricted contributions, change in fair value of split interest agreements, and realized investment return Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of the period $ 808,312 $ 1,075,244 (33,863) (31,353) 23,990 (64,884) (37,521) 216 (492,730) (657,573) (70,342) 310,948 175,516 (63,170) 287,149 202,047 (228,806) 115,152 (7,336) (58,669) 510,819 (318,552) 29,161 (31,468) (38,764) 381,885 (2,028,729) 1,791,936 205,285 (432,084) (463,592) (2,501,222) 2,456,759 194,902 (512,804) (362,365) – – 790,240 (59,833) – (699,190) 45,000 87,299 – – (104,750) (69,939) 70,342 101,559 63,170 20,780 148,786 258,463 407,249 $ 40,300 218,163 258,463 See accompanying notes to consolidated financial statements. 1809-2875972 7 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (In Thousands) August 31, 2018 1. Organization and Summary of Significant Accounting Policies Northwestern Memorial HealthCare (NMHC) is the parent of an integrated nonprofit health care organization, anchored by Northwestern Memorial Hospital (NMH) and Northwestern Medical Group (NMG), that provides health care services to communities in northern Illinois. NMHC partners with Northwestern University’s Feinberg School of Medicine (FSM) to form an academic medical center, branded as Northwestern Medicine, that is shaping the future of medicine through outstanding patient care, research and training of resident physicians. Basis of Presentation The accompanying consolidated financial statements include the accounts of NMHC and its subsidiaries (collectively referred to herein as Northwestern Memorial). All significant intercompany transactions and balances have been eliminated in consolidation. Charity Care and Community Benefit Northwestern Memorial provides care to patients regardless of their ability to pay. Northwestern Memorial developed a Free and Discounted Care Policy (the Policy) for both the uninsured and the underinsured. Under the Policy, patients are offered discounts of up to 100% of charges on a sliding scale, which is based on income as a percentage of the federal poverty level guidelines (up to 600%). The Policy also contains provisions that are responsive to those patients subject to catastrophic health care expenses and uninsured patients not covered by the provisions above. Since Northwestern Memorial does not pursue collection of these amounts, they are not reported as Net patient service revenue, and the cost of providing such care is recognized within operating expenses. Northwestern Memorial 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. The cost of providing charity care was $67,146 and $61,258 for the years ended August 31, 2018 and 2017, respectively. Northwestern Memorial also received certain funds of $392 and $342 for the years ended August 31, 2018 and 2017, respectively, to offset or subsidize charity care services provided. These funds are primarily received from investment return on free care endowment funds. In the Annual Non Profit Hospital Community Benefits Plan Report filed with the Illinois Attorney General for the year ended August 31, 2017, Northwestern Memorial reported total community benefit of $831,862 (unaudited), including unreimbursed cost of charity care of $65,761 (unaudited), which is calculated using a different 1809-2875972 8 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) methodology than that used for the consolidated financial statements. Management is currently collecting the information needed to file the 2018 report; however, it does not expect a material change from prior year. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include highly liquid short-term investments with maturities of 90 days or less from the date of purchase. Patient Accounts Receivable Patient accounts receivable are stated at net realizable value. Northwestern Memorial maintains allowances for uncollectible accounts and for estimated losses resulting from a payor’s inability to make payments on accounts. Northwestern Memorial estimates the allowance for uncollectible accounts based on management’s assessment of historical and expected net collections, considering historical and current business and economic conditions, trends in health care coverage, and other collection indicators. Patient accounts receivable are charged to the provision for uncollectible accounts when they are deemed uncollectible. Assets Limited as to Use Assets limited as to use consist primarily of investments designated for certain medical education and health care programs. The particular Northwestern Memorial corporation that controls these investments makes such designations and may, at its discretion, subsequently use them for other purposes. In addition, assets limited as to use include investments held by trustees under debt agreements and for self-insurance and collateral related to interest rate swaps. 1809-2875972 9 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair value based on quoted market prices. Unless in pension plan assets, alternative investments are reported using the equity method. Alternative investments can include common collective trusts, commingled funds, 103-12 entities and other limited partnership interests in hedge funds, private equity, venture capital and real estate funds. Alternative investments in the pension plan are reported at fair value based on net asset value (NAV) per share or equivalent. Derivative Instruments Derivative instruments, specifically interest rate swaps, are recorded in the accompanying consolidated balance sheets at fair value. The change in the fair value of derivative instruments is recorded in Nonoperating gains (losses). Inventories Inventories, consisting primarily of pharmaceuticals and other medical supplies, are stated at the lower of cost on the first-in, first-out method or fair value. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Generally, buildings and building service equipment have a composite life of approximately 40 years and equipment and furniture have useful lives of 3-20 years. Interest incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Other Intangible Assets Intangible assets are stated at fair value at time of purchase and are amortized using the straight line method over the estimated life based on terms of the underlying agreement giving rise to the intangible. 1809-2875972 10 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) Asset Impairment Northwestern Memorial considers whether indicators of impairment are present and performs the necessary tests to determine if the carrying value of an asset is appropriate. Impairment write downs are recognized in operating income at the time the impairment is identified. There were no impairments of long-lived assets in 2018 or 2017. Deferred Charges Deferred finance charges and bond discounts or premiums are amortized or accreted using the effective interest method or the bonds outstanding method, which approximates the effective interest method, over the life of the related debt. Net Assets Resources are classified for reporting purposes as unrestricted, temporarily restricted and permanently restricted, according to the absence or existence of donor-imposed restrictions. In addition unrestricted net assets are further classified as general unrestricted or board-designated unrestricted. Board-designated net assets are unrestricted net assets that have been set aside by the Board for specific purposes. Temporarily restricted net assets are those assets, including contributions and accumulated investment returns, whose use has been limited by donors for a specific purpose or time period. Permanently restricted net assets are those for which donors require the principal of the gifts to be maintained in perpetuity to provide a permanent source of income. Any changes in donor restrictions that change the net asset category of previously recorded contributions are recorded as Other in the accompanying consolidated statements of operations and changes in net assets in the period communicated by the donor. Net Patient Service Revenue Northwestern Memorial has agreements with third-party payors that provide for payments to Northwestern Memorial at amounts different from its established rates. Payment arrangements include prospectively determined rates per admission or visit, reimbursed costs, discounted charges and per diem rates. Net patient service revenue is reported at the estimated net amount due 1809-2875972 11 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) from patients and third-party payors for services rendered, including estimated adjustments under reimbursement agreements with third-party payors, certain of which are subject to audit by administering agencies. These adjustments are accrued on an estimated basis and are adjusted, as needed, in future periods. Contributions Unrestricted gifts, other than long-lived assets, are included within other in Nonoperating gains (losses) in the accompanying consolidated statements of operations and changes in net assets. Unrestricted gifts of long-lived assets, such as land, buildings or equipment, are recorded at fair value as an increase in unrestricted net assets. Contributions are reported as either temporarily or permanently restricted net assets if they are received with donor restrictions. 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 accompanying consolidated statements of operations and changes in net assets as net assets released from restrictions. Unconditional promises to give cash or other assets are reported as pledges receivable and contributions within the appropriate net asset category. An allowance for uncollectible pledges receivable is estimated based on historical experience and other collection indicators. Pledges receivable with payment terms extending beyond one year are discounted using market rates of return reflecting the terms and credit of the pledges at the time a pledge is made. Northwestern Memorial is a beneficiary of several split-interest agreements, primarily perpetual trusts held by others, and recognizes its interest in these perpetual trusts as temporarily or permanently restricted net assets based on its percentage of the fair value of the trusts’ assets. Nonoperating Gains (Losses) Nonoperating gains (losses) consist primarily of investment returns (including realized and unrealized gains and losses, changes in Northwestern Memorial’s equity interest in alternative investments, interest and dividends), contributions of unrestricted net assets in excess of consideration paid (where applicable), unrestricted contributions received, grants and academic support provided to external organizations, net assets released from restrictions and used for grants and academic support, changes in fair value of interest rate swaps and loss on extinguishment of debt. 1809-2875972 12 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) Excess of Revenue Over Expenses The accompanying consolidated statements of operations and changes in net assets include the Excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from the Excess of revenue over expenses, consist primarily of 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), transfers between net asset categories based on changes in donor restrictions and Postretirement benefit-related changes other than net periodic pension cost. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 converged and replaced existing revenue recognition guidance, including industry-specific guidance, and 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 disclose sufficient information to enable the financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. This ASU allows two alternative methods for application, either retrospectively to each reporting period presented or a modified retrospective approach with a cumulative effect adjustment to net assets at the date of initial application. Northwestern Memorial expects to use the modified retrospective approach. Northwestern Memorial expects substantially all of its current provision for uncollectible accounts to qualify as a price concession under the new guidance and, therefore, be netted along with charity care and contractual discounts in Net patient service revenue. Northwestern Memorial expects expanded disclosures to also be made. Although the adoption of ASU 2014-09 will have an impact on the amounts presented in certain categories of the consolidated statements of operations and changes in net assets, it is not expected to materially impact Northwestern Memorial’s consolidated financial statements 1809-2875972 13 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing accounting standards. The guidance also eliminates current real estatespecific provisions for all entities. This new guidance is effective for the fiscal years and interim periods within those fiscal years beginning after December 15, 2018, with early adoption permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. Northwestern Memorial is currently evaluating the impact this guidance will have on its consolidated financial statements. In August 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 will change certain financial statement requirements for not-for-profit (NFP) entities in the scope of Topic 958 in an effort to make the information more meaningful to users and make reporting less complex. NFP entities will no longer be required to distinguish between resources with temporary and permanent restrictions on the face of the financial statements. Additionally, NFP entities will be required to present expenses by their natural and functional classification and present investment returns net of external and direct internal investment expenses. This new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. This guidance is to be applied retrospectively and early adoption is permitted. Northwestern Memorial is currently evaluating the impact this guidance will have on its consolidated financial statements In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the presentation of periodic benefit cost components. Under ASU 2017-07, service costs will continue to be presented within operating expenses but amortization of prior service credits and other components of net periodic benefit cost in Nonoperating gains (losses) in the consolidated statements of operation and changes in net assets. Northwestern Memorial has evaluated the effect of this guidance on the consolidated financial statements and has determined that this guidance will reduce operating income but will have no effect on revenues in excess of expenses. This guidance will not have an effect on the measurement of pension cost nor presentation of prepaid pension expense or pension plan liabilities on the consolidated balance sheets. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. 1809-2875972 14 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 1. Organization and Summary of Significant Accounting Policies (continued) In June 2018, the FASB issued ASU 2018-08, Not-for-Profit Entities (Topic 958) – Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. ASU 2018-08 provides a more robust framework to determine when a transaction should be accounted for as a contribution or as an exchange transaction and provides additional guidance about how to determine whether a contribution is conditional. This ASU is effective for annual periods beginning after June 15, 2018, including interim periods therein, and will be applied on a modified prospective basis. Northwestern Memorial is currently evaluating the impact this guidance will have on its consolidated financial statements. 2. Net Patient Service Revenue Northwestern Memorial recognizes net patient service revenue associated with services provided to patients who have third-party payment coverage with Medicare, Medicaid, Blue Cross, other managed care programs and other third-party payors on the basis of the contractual rates for the services rendered at the time services are provided. Payment arrangements with those payors include prospectively determined rates per admission or visit, reimbursed costs, discounted charges and per diem rates. Reported costs and/or services provided under certain of the arrangements are subject to retroactive audit and adjustment. Net patient service revenue increased by $7,176 and $33,843 in 2018 and 2017, respectively, as a result of changes in estimates due to settlements of prior fiscal years’ cost reports and the disposition of other payor audits and settlements. Changes in Medicare and Medicaid programs and reduction in funding levels could have an adverse effect on Northwestern Memorial. Northwestern Memorial also provides care to self-pay patients. Under its Free and Discounted Care Policy, Northwestern Memorial provides medically necessary care to patients in its community with inadequate financial resources at discounts of up to 100% of charges using a sliding scale that is based on patient household income as a percentage (up to 600%) of the federal poverty level guidelines. The Policy also contains a catastrophic financial assistance provision that limits a patient’s total financial responsibility to Northwestern Memorial. Since Northwestern Memorial does not pursue collection of these amounts, they are not reported as net patient service revenue. The Policy has not changed in fiscal year 2018 or 2017. Northwestern Memorial implemented presumptive eligibility screening procedures for free care in fiscal year 2014. Northwestern Memorial recognizes net patient service revenue on services provided to these patients at the discounted rate at the time services are rendered. 1809-2875972 15 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 2. Net Patient Service Revenue (continued) Net patient service revenue, net of contractual allowances and discounts, is reduced by the provision for uncollectible accounts, and net patient accounts receivable are reduced by an allowance for uncollectible accounts. These amounts are based primarily on management’s assessment of historical and expected write-offs and net collections, along with the aging status for each major payor source. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the estimated allowances for uncollectible accounts. Based on historical experience, a portion of Northwestern Memorial’s self-pay patients who do not qualify for charity care will be unable or unwilling to pay for the services provided. Thus, a provision is recorded for uncollectible accounts in the period services are provided related to these patients. After all reasonable collection efforts have been exhausted in accordance with Northwestern Memorial’s policies, accounts receivable are written off and charged against the estimated allowances for uncollectible accounts. For receivables associated with self-pay patients, Northwestern Memorial records estimated allowances for uncollectible accounts in the period of service on the basis of past experience. These adjustments are accrued on an estimated basis and are adjusted as needed in future periods. Net patient service revenue (including patient co pays and deductibles), net of contractual allowances and discounts (but before the provision for uncollectible accounts) by primary payor source was as follows for the years ended August 31: 2018 Third-party payors Patients 1809-2875972 2017 $ 4,960,402 $ 4,643,685 105,748 92,730 $ 5,053,132 $ 4,749,433 16 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 2. Net Patient Service Revenue (continued) Northwestern Memorial grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. Patient accounts receivable, by major primary payor source, including patient co-pays and deductibles before deducting estimated allowances for uncollectible accounts, were as follows at August 31: Medicare Medicaid Blue Cross Other managed care Other third-party payors Patients 2018 2017 18% 11 22 25 7 17 100% 14% 11 16 32 8 19 100% The estimated allowance for uncollectible accounts was $252,353 and $223,411, or 25.1% and 24.3% of the related patient accounts receivable, net of contractual adjustments as of August 31, 2018 and August 31, 2017, respectively. The significant variance was caused primarily due to the aging of outstanding accounts receivable. 3. Illinois Hospital Assessment Program In December 2008, the Illinois Hospital Assessment Program was approved by the Federal Centers for Medicare and Medicaid Services (CMS) for the period from July 1, 2008 through June 30, 2013. In July 2012, this program was extended to December 31, 2014, as part of the Save Medicaid Access and Resources Together (SMART) Act. In June 2014, this program was extended to June 30, 2018 as part of the Omnibus Medicaid Bill Senate Bill 741. In October 2013, the Enhanced Illinois Hospital Assessment Program as authorized under Illinois Public Act 97-688 was approved by CMS retroactive to June 10, 2012. Together, these two programs are referred to herein as (HAP). Under HAP, the state receives additional federal Medicaid funds for the State’s healthcare system, administered by the Illinois Department of Healthcare and Family Services. HAP includes payments to NMHC hospitals from the state and assessments against NMHC hospitals, which are paid to the state in the same year. 1809-2875972 17 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 3. Illinois Hospital Assessment Program (continued) In June 2014, Omnibus Medicaid Bill Senate Bill 741 authorized a new supplemental program (Access Program) to cover new Medicaid beneficiaries under the Affordable Care Act (ACA), which was approved by CMS in January 2015. In May 2016, the State of Illinois passed HB 4678 (Expanded Access Program) which implemented a framework to increase ACA access funds to Illinois hospitals. The new ACA access funds are attributable to the ACA adults enrolled in managed care products. In September 2016, the Illinois Department of Family and Healthcare Services submitted its certification of the new Medicaid managed care organization rates to CMS. After agreements between managed care organizations and providers were executed, payments for this new program and an adjustment to the assessments began in November 2016 and were retroactive to January 1, 2016. HAP and the Expanded Access Program ended on June 30, 2018. In June 2018, the Illinois General Assembly approved SB 1773, which was signed by the Governor and is now Illinois Public Law 100-581; the law as amended redesigns both programs. CMS approved the new program on June 20, 2018. Supplemental payments for the new HAP program began in July 2018 and are reflected below. In addition to the supplemental payments, the new HAP program provides for increased Illinois Medicaid and Illinois Medicaid Managed Care inpatient rates. A summary of the amounts recognized for the HAP and Access programs is as follows: Net patient service revenue: HAP Access program Expanded access program Illinois hospital assessment Net excess of HAP and ACA revenue over Illinois assessment 2018 2017 $ 123,455 $ 15,843 20,393 159,691 110,339 112,813 20,418 42,557 175,788 103,362 $ 49,352 $ 72,426 The Expanded Access Program Revenue and Illinois Hospital Assessment expense for the twelve months ended August 31, 2017 include retroactive portions from January 1, 2016 through August 31, 2016 of $16,728 and $2,004, respectively. 1809-2875972 18 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 4. Investments and Other Financial Instruments The composition of investments, including assets limited as to use, and cash and cash equivalents and short-term investments, at August 31 is as follows: 2018 Measured at fair value: Cash and short-term investments Mutual funds Corporate bonds U.S. government and agency issues Equity securities Other fixed income $ Measured at net asset value as practical expedient: Common collective trusts and commingled funds Interest in 103-12 investment entities Accounted for under the equity method: Alternative investments 2017 502,382 $ 321,507 228,599 262,719 312,980 305,081 268,858 258,970 220,543 222,356 13,393 23,926 1,365,880 1,575,434 765,371 297,217 1,062,588 685,948 291,304 977,252 3,572,894 3,951,028 $ 6,589,050 $ 5,916,026 Investments, including assets limited as to use, and cash and cash equivalents and short-term investments, consist of the following at August 31: 2018 Assets limited as to use: Trustee-held funds Self-insurance programs Board-designated funds Total assets limited as to use Donor-restricted funds Unrestricted, undesignated funds Total investments, excluding short-term investments Other financial instruments: Cash and cash equivalents and short-term investments 1809-2875972 $ 2017 67,082 651 $ 579,780 627,438 181,417 190,188 828,279 818,277 337,025 360,442 4,461,574 4,951,084 5,626,878 6,129,803 289,148 459,247 $ 6,589,050 $ 5,916,026 19 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 4. Investments and Other Financial Instruments (continued) The composition and presentation of investment returns are as follows for the years ended August 31: Interest and dividend income Investment expenses Realized gains on alternative investments, net Realized gains on other investments, net Net change in unrealized gains on alternative investments Net change in unrealized gains on other investments Change in value of joint ventures $ $ Reported as: Rental and other revenue Nonoperating investment return Temporarily restricted – investment return $ $ 2018 2017 27,373 $ (4,683) 98,365 97,782 246,963 40,872 77 506,749 $ 25,135 (5,613) 123,759 62,870 348,167 115,062 497 669,877 389 $ 490,971 15,389 506,749 $ 557 655,269 14,051 669,877 Northwestern Memorial’s investments measured at fair value include mutual funds; common equities; corporate and U.S. government debt issues; state, municipal and foreign government debt issues; commingled funds; common collective trusts; and 103-12 entities. Commingled investments, common collective trusts and 103-12 entities are commingled funds formed from the pooling of investments under common management. Unlike a mutual fund, these investments are not registered investment companies and, therefore, are exempt from registering with the Securities and Exchange Commission. The investment strategy for the mutual funds, commingled funds, common collective trusts and 103-12 entities involves maximizing the overall long-term return by investing in a wide variety of assets, including domestic large cap equities, domestic small cap equities, international developed equities, blended equities, (i.e., a mix of domestic and international equities), natural resources and private investment limited partnerships (LPs). 1809-2875972 20 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 4. Investments and Other Financial Instruments (continued) Northwestern Memorial’s non-pension plan investments measured under the equity method of accounting include absolute return hedge funds, equity long/short hedge funds, real estate, natural resources and LPs, collectively referred to as alternative investments. Alternative investments in the pension plan assets are measured at fair value. Absolute return hedge funds include funds with the ability to opportunistically allocate capital among several strategies. Generally, these funds diversify across strategies in an effort to deliver consistently positive returns regardless of the movement within global markets, exhibit relatively low volatility and are redeemable quarterly with a 60-day notice period. Equity long/short hedge funds include hedge funds that invest both long and short in U.S. and international equities. These funds typically focus on diversifying or hedging across particular sectors, regions or market capitalizations and are generally redeemable quarterly with a 60-day notice period. Absolute return and equity long/short managers are redeemable quarterly or annually with a 45- to 90-day notice period. Real estate includes LPs that invest in land and buildings and seek to improve property level operations by increasing lease rates, recapitalizing properties, rehabilitating aging/distressed properties, and repositioning properties to maximize revenue. Real estate LPs typically use moderate leverage. Natural resources include a diverse set of LPs that invest in oil and natural gasrelated companies, commodity-oriented companies, and timberland. Private equity includes LPs formed to make equity and debt investments in operating companies that are not publicly traded. These LPs typically seek to influence decision-making within the operating companies. Investment strategies in this category may include venture capital, buyouts and distressed debt. These three categories of investments cannot be redeemed with the funds. Distributions from each fund will be received as the underlying assets of the fund are expected to be liquidated periodically over the lives of the LPs, which generally run 10 to 12 years. Because of the timing of the preparation and delivery of financial statements for limited partnership investments, the use of the most recently available financial statements provided by the general partners results in a two month delay in the inclusion of the limited partnership results in Northwestern Memorial’s consolidated statements of operations and changes in net assets due to results recorded based on June 30 investment statements. Due to this delay, these consolidated financial statements do not yet reflect the market conditions experienced in the last two months of the fourth quarter of fiscal 2018 or 2017 for the limited partnership investments. 1809-2875972 21 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 4. Investments and Other Financial Instruments (continued) As of August 31, 2018, $2,918,935 of alternative investments is subject to various redemption limits and lockup provisions, of which $2,602,923 expires within one year and $316,012 expires after one year from the balance sheet date. At August 31, 2018, Northwestern Memorial had commitments to fund approximately an additional $815,000 to alternative investment entities. This funding is expected to occur over the next 12 years. 5. Fair Value Measurements Northwestern Memorial follows the requirements of ASC 820, Fair Value Measurement, in regards to measuring the fair value of certain assets and liabilities as well as disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or paid for a transfer of a liability in an orderly transaction on the measurement date. The methodologies used to determine the fair value of assets and liabilities reflect market participant objectives and are based on the application of a three-level valuation hierarchy that prioritizes observable market inputs over unobservable inputs. The three levels are defined as follows: • Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Examples of Level 2 inputs are quoted prices for similar assets or liabilities in inactive markets or pricing models with inputs that are observable for substantially the full term of the asset or liability. • Level 3 – Inputs to the valuation methodology are significant to the fair value of the asset or the liability and less observable. These inputs reflect the assumptions market participants would use in the estimation of the fair value of the asset or liability. 1809-2875972 22 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 5. Fair Value Measurements (continued) Fair Values A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following table presents the financial instruments measured at fair value on a recurring basis at August 31, 2018: Level 1 Assets Cash and cash equivalents Investments: Short-term investments: Currency Fixed Income Total short-term investments $ Mutual funds: Fixed income U.S. equities Total mutual funds Other fixed income Bonds: Corporate bonds U.S. government and agency issues Total bonds Equity securities Cash equivalents in investment accounts Total investments Beneficial interest in trusts Total assets $ Investments recorded at fair value based on NAV Total assets measured at fair value Liabilities Interest rate swaps 1809-2875972 Level 2 407,249 $ Total – $ – $ 15,136 36,862 51,998 – – – – – – 15,136 36,862 51,998 95,944 166,775 262,719 – – – – 23,926 – – – – 95,944 166,775 262,719 23,926 – 305,081 – 305,081 – – 258,970 564,051 – – 258,970 564,051 221,948 408 – 222,356 – 588,385 15,048 603,433 $ – – – – 43,135 1,168,185 15,048 1,590,482 – – $ 1,062,588 2,653,070 – $ 73,350 43,135 579,800 – 987,049 $ – – $ Level 3 – $ – – 73,350 $ 407,249 23 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 5. Fair Value Measurements (continued) The following table presents the financial instruments measured at fair value on a recurring basis at August 31, 2017: Level 1 Assets Cash and cash equivalents Investments: Short-term investments: Currency Fixed Income Total short-term investments $ Mutual funds: Fixed income U.S. equities Total mutual funds Other fixed income Bonds: Corporate bonds U.S. government and agency issues Total bonds Equity securities Cash equivalents in investment accounts Total investments Beneficial interest in trusts Total assets $ Investments recorded at fair value based on NAV Total assets measured at fair value Liabilities Interest rate swaps Level 2 258,463 $ Total – $ – $ 27 30,658 30,685 – – – – – – 27 30,658 30,685 98,130 130,469 228,599 – – – – 13,393 – – – – 98,130 130,469 228,599 13,393 – 312,980 – 312,980 – – 268,858 581,838 – – 268,858 581,838 220,037 506 – 220,543 – 595,737 14,203 609,940 $ – – – – 32,359 1,107,417 14,203 1,380,083 – – $ 977,252 2,357,335 – $ 112,586 32,359 511,680 – 770,143 $ – – $ Level 3 – $ – – 112,586 $ 258,463 There were no transfers into or out of Level 1 or Level 2 during the years ended August 31, 2018 or 2017. 1809-2875972 24 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 5. Fair Value Measurements (continued) Reconciliation to the Consolidated Balance Sheets A reconciliation of the fair value of financial assets to the consolidated balance sheets at August 31 is as follows: 2018 Short-term investments measured at fair value Investments, including assets limited as to use measured at fair value Total investments at fair value Alternative investments accounted for under equity method included in investments, including assets limited as to use Total investments Pledges and grants receivable, less current portion: Beneficial interests in trusts at fair value Pledges and grants receivable, less current portion, net Total pledges and grants receivable, less current portion $ 51,998 $ 2,178,775 2,230,773 2017 30,685 2,053,984 2,084,669 3,572,894 3,951,028 $ 6,181,801 $ 5,657,563 $ $ 15,048 $ 29,808 44,856 $ 14,203 21,567 35,770 Valuation Techniques and Inputs Beneficial Interests in Trusts – The fair value of beneficial interests in trusts is based on Northwestern Memorial Foundation’s (the Foundation) percentage of the fair value of the trusts’ assets adjusted for any outstanding liabilities (discounted using a rate per Internal Revenue Service (IRS) regulations), based on each trust arrangement. Interest Rate Swaps – The fair value of interest rate swaps is based on generally accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative and quoted prices from dealer counterparties and other independent market sources. The valuation incorporates observable interest rates and yield curves for the full term of the swaps. The valuation is also adjusted to incorporate nonperformance risk for NMHC or the respective counterparty. The adjustment is based on the credit spread for entities with similar credit characteristics as NMHC 1809-2875972 25 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 5. Fair Value Measurements (continued) or market-related data for the respective counterparty. Northwestern Memorial pays various fixed rates and receives cash flows based on rates equal to a percentage of the London Interbank Offered Rate (LIBOR) plus a spread for certain interest rate swaps. Investments – The fair value of Level 1 investments, which consist of equity securities and mutual funds, is based on quoted market prices that are valued on a daily basis. Level 2 investments consist of U.S. equities, government and agencies’ issues and corporate bonds, and fixed income instruments issued by municipalities and foreign government. The fair value of the U.S. government and agencies’ issues and corporate bonds is established based on values obtained from nationally recognized pricing services that value the investments based on similar securities and matrix pricing of similar quality and maturity securities. The fair values of commingled funds, common collective trusts and 103-12 entities are based on the ownership interest in the net asset value (NAV) per share or its equivalent, of the respective fund. Northwestern Memorial’s investments are exposed to various kinds and levels of risk. Equity securities and equity mutual funds expose Northwestern Memorial to market risk, performance risk and liquidity risk. Market risk is the risk associated with major movements of the equity markets. Performance risk is that risk associated with a company’s operating performance. Fixed income securities and fixed income mutual funds expose Northwestern Memorial to interest rate risk, credit risk and liquidity risk. As interest rates change, the value of many fixed income securities is affected, including those with fixed interest rates. Credit risk is the risk that the obligor of the security will not fulfill its obligations. Liquidity risk is affected by the willingness of market participants to buy and sell particular securities. Liquidity risk tends to be higher for equities related to small capitalization companies and certain alternative investments. Due to the volatility in the capital markets, there is a reasonable possibility of subsequent changes in fair value, resulting in additional gains and losses in the near term. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities and short-term borrowings are reasonable estimates of their fair values due to their short-term nature. The fair value of the long-term debt portfolio, including the current portion, was $1,434,210 and $1,424,354 at August 31, 2018 and 2017 respectively. The fair value of this Level 2 liability is based on quoted market prices for the same or similar issues and the relationship of those bond 1809-2875972 26 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 5. Fair Value Measurements (continued) yields with various market indices. The market data used to determine yield and calculate fair value represents Aa/AA-rated tax-exempt municipal health care bonds. The effect of third-party credit valuation adjustments, if any, is immaterial. The fair value of pledges receivable, a Level 2 asset, is based on discounted cash flow analysis and approximates the carrying value of $46,791 and $42,241 at August 31, 2018 and August 31, 2017, respectively. 6. Investment in Joint Ventures Northwestern Memorial has joint venture and operating partnership investment interests ranging from 30.0% to 50.0% in health-related businesses, as well as a 33.3% restricted interest in two non-health-related businesses that were donated to Northwestern Memorial. These investment interests are accounted for under the equity method of accounting, as Northwestern Memorial holds a 20% or more voting interest. The carrying value of the non-health-related investments of $6,919 and $7,811 at August 31, 2018 and 2017, respectively, is included in Investments, including assets limited to use, less current portion in the accompanying consolidated balance sheets. The carrying value of the health-related investments of $21,733 and $23,144 at August 31, 2018 and 2017, respectively, is included in other assets, net in the accompanying consolidated balance sheets. Net equity earnings from the health-related investments totaled $75 and $446 for the years ended August 31, 2018 and 2017, respectively, and are included in Investment return in the accompanying consolidated statements of operations and changes in net assets. The carrying value of these investments exceeds the underlying equity in net assets by $7,400, reflecting the fair value change recorded at the time of acquisition of CDH-Delnor Health System (Cadence), and KishHealth System (KishHealth). 1809-2875972 27 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 6. Investment in Joint Ventures (continued) The following is a summary of financial information as of and for the years ended August 31 relating to these investments: 2018 Current assets Current liabilities Net working capital Property, plant, and equipment Other long-term assets Long-term liabilities Net assets Revenue Expenses Excess of revenue over expenses $ $ $ $ 2017 72,792 $ 31,884 40,908 77,343 31,834 45,509 36,734 3,187 32,665 48,164 $ 36,192 3,192 32,950 51,943 38,584 $ 32,163 6,421 $ 37,869 29,821 8,048 Net equity earnings from the non-health-related investments totaled $1,758 and $2,304 for the years ended August 31, 2018 and 2017, respectively, and are included in temporarily restricted net assets investment return in the accompanying consolidated statements of operations and changes in net assets. Northwestern Memorial made no capital contributions to such joint ventures for the years ended August 31, 2018 or 2017. Northwestern Memorial received cash distributions from such joint ventures of $3,478 and $4,067 for the years ended August 31, 2018 and 2017, respectively. 1809-2875972 28 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 7. Long-Term Debt Long-term debt consists of the following at August 31: 2018 Revenue Bonds, Series 2017A (NMHC), payable in annual installments through July 15, 2047 (fixed coupon rates range from 3.00% to 5.00%) $ Revenue Bonds, Series 2017B (NMHC), payable in annual installments through July 25, 2057 (fixed coupon rate of 5.00% through December 15, 2022) Revenue Bonds, Series 2015A and 2015B (KishHealth System), payable in monthly installments through March 1, 2035 (fixed coupon rate of 2.80%) Revenue Bonds, Series 2013 (NMHC), payable in annual installments beginning August 15, 2031 through August 15, 2043 (fixed coupon rates from 4.00% to 5.00%) Revenue Bonds, Series 2011A and 2011B (CDH), with interest at a variable rate payable in annual instalments through November 1, 2038, (weighted average interest rate of 1.78% and 0.98% for the twelve months ended August 31, 2018 and 2017, respectively) Revenue Bonds, Series 2011C (Delnor), with interest at a variable rate payable in annual installments through November 1, 2038, (weighted average interest rate of 1.73% and 0.92% for the twelve months ended August 31, 2018 and 2017, respectively) Revenue Bonds, Series 2009A (NMH), payable in annual installments through August 15, 2039 (fixed coupon rates range from 5.00% to 6.00%) Revenue Bonds, Series 2009B (NMH), payable in annual installments through August 15, 2030 (fixed coupon rates range from 5.00% to 5.75%) Revenue Bonds, Series 2009 (CDH) payable in annual installments through November 1, 2039 (fixed coupon rates range from 5.00% to 5.25%) Revenue Bonds, Series 2009B (CDH) payable in annual installments through November 1, 2039 (fixed coupon rates range from 4.00% to 5.75%) Variable Rate Demand Revenue Bonds, Series 2008A (NMH), payable in annual installments through August 15, 2038 (weighted average interest rate of 1.30% and 0.68% for the twelve months ended August 31, 2018 and 2017, respectively) 1809-2875972 2017 538,225 $ – 162,380 – 10,662 11,158 111,235 111,235 114,600 116,300 56,050 56,595 – 291,760 – 37,700 – 84,165 – 215,330 69,330 74,250 29 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 7. Long-Term Debt (continued) Variable Rate Demand Revenue Bonds, Series 2007A (NMH), payable in annual installments through August 15, 2042 (weighted average interest rate of 1.17% and 0.73% for the twelve months ended August 31, 2018 and 2017, respectively) $ Revenue Bonds, Series 2003A–Series 2003C (Delnor) payable in annual installments through May 15, 2033 (fixed coupon rates range from 5.00% – 5.25%) Revenue Bonds, Series 2002A–Series 2002D (Delnor) payable in annual installments beginning May 15, 2020 through May 1, 2032 (fixed coupon rate of 5.25%) NMHC variable rate note dated October 4, 2016, matures October 4, 2019 (weighted average interest rate of 2.14% and 1.13% for the twelve months ended August 31, 2018 and 2017, respectively) The Midland Surgical Center, LLC line of credit due July 10, 2019, interest payments required monthly at a variable rate not less than 3.75%, and loan with maturity date of December 10, 2018 NMHC commercial paper dated October 4, 2016 (weighted average interest rate of 1.53% for the twelve months ended August 31, 2018, and 0.97% for the eleven months ended August 31, 2017) Less: Unamortized (premium) discount, net and debt issuance costs Current maturities Commercial paper, included in short‐term debt 2018 2017 203,400 $ 204,700 – 19,950 – 35,000 105,000 105,000 330 357 27,466 1,398,678 87,299 1,450,799 8,485 (47,755) 30,239 24,571 87,299 27,466 $ 1,394,396 $ 1,324,776 Per the Second Amended and Restated Master Trust Indenture dated as of December 1, 2017, as supplemented and amended (the NMHC Master Indenture), the Obligated Group includes NMHC, NMH, Northwestern Lake Forest Hospital (NLFH), Central DuPage Hospital (CDH), Cadence, Delnor-Community Hospital (Delnor), Cadence Physician Group (CPG) d/b/a Northwestern Medicine Regional Medical Group (NMRMG), the Foundation, Northwestern Medical Faculty Foundation d/b/a Northwestern Medical Group (NMG), Lake Forest Health and Fitness Institute (HFI), KishHealth, Kishwaukee Community Hospital, Valley West Community Hospital, Kishwaukee Physician Group, Inc. (KPG), Marianjoy Rehabilitation Hospital & Clinic, Inc., Rehabilitation Medicine Clinic, Inc, and Marianjoy Foundation, with Wells Fargo Bank, N.A., as master trustee. 1809-2875972 30 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 7. Long-Term Debt (continued) On September 1, 2018, NMHC implemented a number of actions to streamline its organization structure; some of which impacted members of the Obligated Group. Cadence was merged into NMHC; KPG was merged into CPG; and KishHealth Foundation was merged into the Foundation. None of these actions had a material impact on the Obligated Group or any impact on the accompanying consolidated financial statements. Northwestern Memorial had lines of credit of $50,000 and $80,000 that were to expire in May 2019 and September 2018, respectively. In October 2016, the lines of credit in the amounts of $50,000 and $80,000 were replaced with two $65,000 lines of credit, totaling $130,000. At August 31, 2018 and August 31, 2017, Northwestern Memorial had restricted $1,556 of one of the $65,000 lines of credit to secure a letter of credit. Northwestern Memorial has the option to borrow at various rates expressed as an adjustment to LIBOR, prime rate or other bank-offered rates. At August 31, 2018, no amounts were borrowed under the lines of credit. Northwestern Memorial has standby bond purchase agreements (SBPAs) with multiple banks that cover all of its variable rate demand revenue bonds (VRDBs). The short-term credit rating for each series of VRDBs is based on the respective bank’s short-term credit rating. The long-term credit rating for each series of VRDBs is based on Northwestern Memorial’s long-term credit rating. Changes in credit ratings may impact the interest paid on or remarketing of the VRDBs. As of August 31, 2018, the banks provided liquidity support in the event of a failed remarketing as follows: Par Value Subseries 2007A-2, 2007A-4 Series 2008A Subseries 2007A-1, 2007A-3 $ 101,700 69,330 101,700 Expiration Date October 2019 October 2020 October 2020 The SBPAs include reporting and financial requirements and other covenants. If an SBPA is not renewed or replaced prior to its expiration, or if some portion, or all, of the related VRDBs are not successfully remarketed (failed remarketing) during the term of the SBPAs, the related VRDBs convert to a term loan at the earlier of the expiration date of the related SBPA or after 90 consecutive days of failed remarketing. The principal payment on the term loan would then be 1809-2875972 31 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 7. Long-Term Debt (continued) payable over a three-year term. The earliest principal payment on any term loan associated with the bonds is 367 days from the initial failed remarketing date. Therefore the VRDBs, all SBPAs with maturities greater than one year less any current portion, are classified as long-term debt in the accompanying consolidated balance sheets. CDH and Delnor Series 2011A, 2011B, and 2011C Revenue Bonds, which are classified as longterm due to their long-term amortization periods, have one-year remarketing periods that occur at staggered dates throughout the year. The bondholders are required to hold the bonds for additional one year periods, unless notice of their intent to put the bonds to the NMHC Obligated Group is given not less than 150 days prior to the end of the remarketing date. To the extent that bondholders may, under the terms of the debt, put their bonds within a maximum of 12 months after August 31, 2018, the principal amount of such bonds has been classified as a current obligation in the accompanying consolidated balance sheets. Management believes the likelihood of a material amount of bonds being put to the NMHC Obligated Group is remote. Scheduled principal repayments for the next five years, assuming remarketing of variable rate debt, on long-term debt are as follows: Year ending August 31: 2019 2020 2021 2022 2023 $ 24,571 18,370 22,946 23,786 24,657 The provisions under the respective debt agreements require the Obligated Group to maintain reporting, financial, and other covenants. At August 31, 2018, the Obligated Group was in compliance with these provisions. Northwestern Memorial paid interest of $47,137 and $49,475 in 2018 and 2017, respectively (which includes $5,910 and $7,266, respectively, for net swap payments included in Interest expense in the accompanying consolidated statements of operations and changes in net assets). Northwestern Memorial capitalized interest of $12,027 and $18,703 in 2018 and 2017, respectively. 1809-2875972 32 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 7. Long-Term Debt (continued) In October 2016, the SBPAs for the $103,000 Illinois Finance Authority Variable Rate Demand Revenue Bonds, Subseries 2007A-1 and Subseries 2007A-3 (NMH) and for the $78,775 Illinois Finance Authority Variable Rate Demand Revenue Bonds, Series 2008A (NMH) were each extended for four years. The SBPA for the $103,000 Illinois Finance Authority Variable Rate Demand Revenue Bonds, Subseries 2007A-2 and Subseries 2007A-4 was replaced by a new standby bond purchase agreement. In October 2016, the Illinois Finance Authority Variable Rate Demand Revenue Bonds, Series 2011A, 2011B, and 2011C (CDH-Delnor Health System) in the aggregate amount of $175,020 were purchased by different banks at variable rates for a period of seven years, five years, and three years, respectively. In October 2016, the existing $105,000 CDH-Delnor Health System variable rate note was replaced with a $105,000 NMHC variable rate note with a different lender and extended to 2019. In October 2016, NMHC issued commercial paper in the aggregate amount of $87,299. Proceeds were used to redeem all outstanding $27,450 NMH Series 2002C Bonds and pay down a $59,750 NMHC line of credit. In July 2017, NMHC paid Morton Bank $13,534 to extinguish the existing Delnor medical office building loan. In December 2017 and January 2018, the following transactions occurred related to Northwestern Memorial’s long- and short-term debt: Revenue Bonds, Series 2002A-Series 2002D (Delnor); Revenue Bonds, Series 2003A-Series 2003C (Delnor) and Revenue Bonds, Series 2009B (NMH) with principal outstanding of $35,000, $19,950 and $37,700, respectively, were fully legally defeased. A portion of the Revenue Bonds, Series 2009A (NMH) and Revenue Bonds, Series 2009B bonds (CDH) were legally defeased in the amount of $53,000 and $28,000, respectively. The Illinois Finance Authority issued tax-exempt fixed rate bonds, Series 2017A, in the aggregate amount of $544,520 on behalf of NMHC as the borrower with varying maturities through 2047. The proceeds of these bonds were used to establish an escrow to legally defease 1809-2875972 33 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 7. Long-Term Debt (continued) the Revenue Bonds, Series 2009 (CDH) of $81,985 and the remaining principal of the Revenue Bonds, Series 2009A (NMH) and Revenue Bonds, Series 2009B (CDH) in the amount of $238,760 and $180,730, respectively. Additionally, $59,833 outstanding under the NMHC Commercial Paper program was redeemed. The Illinois Finance Authority issued tax-exempt bonds, Series 2017B, in the aggregate amount of $162,380 with a nominal maturity of 2057 and an interest rate initially fixed through December 15, 2022. The proceeds of these bonds were used to reimburse NMHC for a portion of the cost of the replacement Northwestern Lake Forest Hospital in Lake Forest, IL. As a result of the above transactions, Northwestern Memorial recorded a $23,990 Loss on extinguishment of long-term debt for the twelve months ended August 31, 2018. 8. Derivatives Northwestern Memorial’s only derivative financial instruments are interest rate swaps approximately equal to its Series 2007A and Series 2011A-C variable rate bonds for the sole purpose of risk management. These bonds expose Northwestern Memorial to variability in interest payments due to changes in interest rates. To manage fluctuations in cash flows resulting from interest rate risk, Northwestern Memorial entered into various interest rate swap agreements. These swaps limit the variable-rate cash flow exposure on the variable rate bonds to synthetically fixed cash flows. By using interest rate swaps to manage the risk of changes in interest rates, Northwestern Memorial exposes itself to credit risk and market risk. Credit risk is the risk that a counterparty will fail to perform under the terms of a derivative contract. When the fair value of a swap is positive, the counterparty owes Northwestern Memorial, which creates credit risk for Northwestern Memorial. When the fair value of a swap is zero or negative, the counterparty does not owe Northwestern Memorial. Northwestern Memorial minimizes the credit risk in its swap contracts by entering into transactions that either require the counterparty to post collateral for the benefit of Northwestern Memorial based on the credit rating of the counterparty and the fair value of the swap contract or whose cash flows are insured by a third-party. For certain interest rate swaps, Northwestern Memorial is required to post collateral for the benefit of the counterparty when the negative fair value of the swap exceeds a defined threshold. The aggregate fair value liability of the swaps on the consolidated balance sheets reflect a reduction of $2,134 and $3,555 for non-performance risk at August 31, 2018 and 2017, respectively. Market risk is the adverse 1809-2875972 34 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 8. Derivatives (continued) effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Management also mitigates risk through periodic reviews of its swap positions in the context of their total blended cost of capital. The following is a summary of the outstanding positions under existing interest rate swap agreements at August 31: Notional Amount 2018 2017 $ $ 101,700 $ 101,700 61,113 61,113 – – 325,626 $ 102,350 102,350 61,650 61,650 35,000 19,950 382,950 Maturity Date Rate Paid Rate Received August 2042 August 2042 November 2038 November 2038 May 2032 May 2033 3.89% 3.89 3.82 3.52 4.18 2.89 63% of 1-Month LIBOR + 28 bps 63% of 1-Month LIBOR + 28 bps 67% of 3-Month LIBOR 67% of 3-Month LIBOR 67% of 1-Month LIBOR 67% of 1-Month LIBOR The fair value of derivative instruments at August 31 is as follows: Derivatives Liabilities Balance Sheet Location 2018 Derivatives not designated as hedging instruments: Interest rate contracts 1809-2875972 Interest rate swap liabilities $ 73,350 $ 2017 112,586 35 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 8. Derivatives (continued) The effects of derivative instruments on the accompanying consolidated statements of operations and changes in net assets for August 31 are as follows: Amount of Loss Recognized in Excess of Revenue Over Expenses on Derivatives 2018 2017 Derivatives not designated as hedging instruments: Operating expense – interest Nonoperating – change in fair value of interest rate swaps $ (5,910) $ (7,266) 31,353 37,521 Northwestern Memorial’s derivative instruments contain provisions that require Northwestern Memorial’s debt to maintain an A- or better credit rating from Standard & Poor’s and an A3 or better rating from Moody’s. If Northwestern Memorial’s debt were to fall below those levels, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. Northwestern Memorial has not posted collateral as of August 31, 2018 and posted collateral of $330 as of August 31, 2017. If the credit risk-related contingent features underlying these agreements were triggered to the fullest extent on August 31, 2018, Northwestern Memorial would be required to post $75,484 of collateral to its counterparties. In October 2016, three interest rate swaps were novated under the same notional amounts and contract terms to a new counterparty, except for the one swap that was subject to a collateral requirement. As a result of this transaction, none of these novated swaps required collateral to be posted. In February 2018, Northwestern Memorial terminated two of its existing swaps with notional amounts of $35,000 and $19,950, which did not have a material impact on the consolidated statements of operations and changes in net assets. 1809-2875972 36 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 9. Goodwill and Other Intangible Assets Goodwill has been recorded for the excess of purchase price over fair value of assets purchased in business acquisitions of several medical practices. Northwestern Memorial has goodwill of $25,306 and $25,115 included in other assets, net at August 31, 2018 and 2017, respectively. There were no impairments of goodwill in the years ended August 31, 2018 or 2017. The fair value of in-place leases is the present value associated with re-leasing the in-place lease as if the property was vacant. The value of at market in-place leases is amortized as amortization expense over the expected life of the lease. Above-market and below-market lease values for acquired properties are recorded based upon the present value of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimates of the fair market lease rates for comparable leases. The values of above- and below-market leases are recorded as an adjustment to rental revenue over the remaining terms of the leases. The following table summarizes Northwestern Memorial’s identifiable intangible asset balances as of August 31, which are included in other assets, net on the accompanying consolidated balance sheets: 2018 Gross Carrying Value Amortized intangible assets: In-place leases Above-market leases Total intangible assets Below-market lease intangibles 1809-2875972 $ $ $ Accumulated Net Carrying Amortization Amount 12,672 $ 104 12,776 $ (3,194) $ (7,921) $ (6) (7,927) $ 871 $ 4,751 98 4,849 (2,323) 37 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 9. Goodwill and Other Intangible Assets (continued) 2017 Gross Carrying Value Amortized intangible assets: In-place leases Above-market leases Total intangible assets Below-market lease intangibles $ $ $ Accumulated Net Carrying Amortization Amount 14,580 $ 308 14,888 $ (7,861) $ (9,736) $ (192) (9,928) $ 4,690 $ 4,844 116 4,960 (3,171) Amortization expense, which is included in Depreciation and amortization, was $2,554 and $2,632 for the years ended August 31, 2018 and 2017, respectively. The estimated amortization expense for intangible assets subject to amortization for each of the years ending August 31, 2019 through 2023 is as follows: $2,408, $1,224, $727, $254, and $8. 10. Income Tax Status Each of the NMHC not-for-profit entities is qualified under the Internal Revenue Code (the Code) as a tax-exempt organization and is exempt from tax on income related to its tax-exempt purposes under Section 501(a) of the Code. Accordingly, no income taxes are provided for the majority of the income in the accompanying consolidated financial statements for these corporations. Certain corporations had unrelated business income (UBI) generated primarily from the sale of certain services that are not directly related to patient care and through limited partnerships within the investment portfolio. Certain corporations have unused net operating loss carryforwards available to offset the UBI tax. The net operating loss carryforwards expire through 2037. The deferred tax assets associated with these net operating loss carryforwards of $10,844 and $6,802 at August 31, 2018 and 2017, respectively, are offset by valuation allowances on the accompanying consolidated balance sheets of $10,844 and $6,802, respectively. The total net operating loss carryforwards at August 31, 2018 and 2017 were $33,113 and $16,938, respectively. NMHC calculates income taxes for its taxable subsidiaries. Taxable income differs from pretax book income principally due to certain income and deductions for tax purposes being recorded in the consolidated financial statements in different periods. Deferred income tax assets and liabilities are recorded for the tax effect of these differences using enacted tax rates for the years in which the differences are expected to reverse. 1809-2875972 38 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 10. Income Tax Status (continued) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. The Cayman Islands government does not impose any tax on income or capital gains. However, such corporations are subject to U.S. federal corporate taxation to the extent that they generate net income that is effectively connected with a U.S. trade or business. These corporations were not engaged in any such trade or business in the U.S. during fiscal year 2018 or 2017. Therefore, no income tax provision has been recorded related to these corporations and their operations. Provisions for federal and state income taxes of $6,028 and $13,010 for the years ended August 31, 2018 and 2017, respectively, are included within other in Nonoperating gains (losses) in the accompanying consolidated statements of operations and changes in net assets. 11. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are available for the following purposes at August 31: Health care services: Purchase of property and equipment Operating expenses and charity care Research, education, and other $ $ 1809-2875972 2018 2017 27,948 $ 100,082 114,566 242,596 $ 26,273 96,462 98,182 220,917 39 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 11. Temporarily and Permanently Restricted Net Assets (continued) Net assets were released from donor restrictions by incurring expenditures for the following purposes in the years ended August 31: 2018 Health care services: Purchase of property and equipment Operating expenses and charity care Research, education, and other $ $ 7,672 $ 10,633 21,575 39,880 $ 2017 6,279 16,167 18,692 41,138 Net assets released from donor restrictions reported in the statements of operations and changes in net assets were recorded as follows for the years ended August 31: 2018 Net assets released from donor restrictions and federal and state grants Nonoperating other $ $ 18,216 $ 13,992 32,208 $ 2017 17,916 16,943 34,859 Permanently restricted net assets are summarized below, the income from which is expendable to support the following for the years ended August 31: Health care services: Purchase of property and equipment Operating expenses and charity care Research, education, and other $ $ 2018 2017 14,304 $ 66,803 101,525 182,632 $ 14,304 64,412 96,364 175,080 Northwestern Memorial’s endowment consists of individual donor-restricted funds established for a variety of purposes. Net assets associated with endowment funds are classified and reported based on the donor-imposed restrictions. 1809-2875972 40 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 11. Temporarily and Permanently Restricted Net Assets (continued) Northwestern Memorial has interpreted the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA), as adopted by the state of Illinois, as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, Northwestern Memorial classifies as permanently restricted net assets the original value of gifts donated to the permanent endowment, the original value of subsequent gifts to the permanent endowment, and accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure, consistent with the donor intent or, where silent, the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, Northwestern Memorial considers the following factors in making a determination to appropriate or accumulate donor-restricted funds: • The duration and preservation of the fund • The purposes of Northwestern Memorial and the endowment fund • General economic conditions • The possible effects of inflation and deflation • The expected total return from investment income • Other resources of Northwestern Memorial • The investment policies of Northwestern Memorial Northwestern Memorial has adopted investment and spending policies for endowment assets designed to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that must be held in perpetuity or for a donor-specified period. Under this policy, endowment assets are allocated a fixed annual return, which is currently set at 6%. 1809-2875972 41 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 11. Temporarily and Permanently Restricted Net Assets (continued) Northwestern Memorial has a policy that generally limits annual spending from endowment funds to 4% of the endowment fund balance at the midpoint of the preceding fiscal year. In establishing this policy, Northwestern Memorial considered the long-term expected return on its endowment. Accordingly, over the long term, Northwestern Memorial expects the spending policy to allow its endowment to grow at an average annual rate of 2%. This is consistent with its objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specific term, as well as to provide additional real growth through new gifts and investment return. The changes in endowment net assets for the years ended August 31, 2018 and 2017, are summarized below: Temporarily Permanently Restricted Restricted Endowment net assets, September 1, 2016 Contributions Change in value of trusts Investment return Appropriation for expenditure Other Endowment net assets, August 31, 2017 Contributions Change in value of trusts Investment return Appropriation for expenditure Other Endowment net assets, August 31, 2018 1809-2875972 $ $ 57,316 $ 460 – 7,353 (5,602) (705) 58,822 135 – 8,144 (6,186) (5,112) 55,803 $ 161,911 $ 5,609 775 – – 6,785 175,080 6,403 525 – – 624 182,632 $ Total 219,227 6,069 775 7,353 (5,602) 6,080 233,902 6,538 525 8,144 (6,186) (4,488) 238,435 42 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 12. Pledges Receivable As of August 31, 2018, donor-restricted pledges, which are included in Current portion of pledges and grants receivable, net and Pledges and grants receivable, less current portion, are expected to be realized as follows: Less than one year One to five years Thereafter Total pledges receivable Less allowances Less present value discount Net pledges receivable $ $ 17,040 29,266 10,937 57,243 (2,096) (8,344) 46,803 13. Self-Insurance Liabilities and Related Insurance Recoverables Northwestern Memorial retains certain levels of professional and general liability risks. Northwestern Memorial also retain certain levels of workers’ compensation risks through State of Illinois sanctioned self-insurance arrangements and through commercial insurance programs subject to large deductibles. For those self-insured risks, Northwestern Memorial has established revocable trust funds and two captive insurance companies to pay claims and related costs. In addition, various insurance policies have been purchased to provide coverage in excess of selfinsured limits. Northwestern Memorial’s self-insurance liability and related amounts recoverable from reinsurers are reported in the accompanying consolidated balance sheets at present value based on an annual discount rate of 1.5% as of August 31, 2018 and 2017. This discount rate is based on several factors, including rolling averages of risk-free rates based on estimated payment patterns of the underlying liability. The undiscounted gross liabilities for the self-insured programs were $675,913 and $624,438 at August 31, 2018 and 2017, respectively. The undiscounted amounts recoverable from reinsurers were $107,927 and $88,543 at August 31, 2018 and 2017, respectively. Provisions for the professional and general liability risks are based on an actuarial estimate of losses using actual loss data adjusted for industry trends and current conditions and on an evaluation of claims by Northwestern Memorial’s legal counsel. The provision for estimated self-insured claims includes estimates of ultimate costs for both reported claims and claims incurred but not reported. 1809-2875972 43 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 13. Self-Insurance Liabilities and Related Insurance Recoverables In the opinion of management, based in part on the advice of outside actuaries, adequate provision has been made at August 31, 2018 for all claims incurred to date. Although there is considerable variability inherent in such estimates, management further believes that the ultimate disposition of these claims will not have a material adverse effect on the consolidated financial position of Northwestern Memorial. 14. Employee Benefit Obligations There are two noncontributory defined benefit pension plans: Northwestern Memorial Hospital and Lake Forest Hospital (the Plans), maintained within Northwestern Memorial that cover specified employee groups. The sponsors for the Plans approved resolutions to amend the Plans effective at the end of the day on December 31, 2012. The amendments implemented a hard freeze, such that no participant will earn any additional or new benefits under the Plans on and after January 1, 2013. The following table summarizes the change in the projected benefit obligation for the years ended August 31: Projected benefit obligation, beginning of year Interest cost Net actuarial gain Benefits paid Projected benefit obligation, end of year $ $ 2018 2017 629,775 $ 20,141 (16,875) (26,656) 606,385 $ 646,693 19,130 (9,648) (26,400) 629,775 The net actuarial gain in 2018 was caused primarily by the change in the discount rate used compared to prior years. 1809-2875972 44 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 14. Employee Benefit Obligations (continued) The following table summarizes the changes in the Plans’ assets for the years ended August 31: Plan assets at fair value, beginning of year Actual return on the Plans’ assets, net of expenses Benefits paid $ $ 2018 2017 748,337 $ 64,767 (26,656) 786,448 $ 679,342 95,395 (26,400) 748,337 The following table sets forth the Plans’ funded status, as well as recognized amounts in the accompanying consolidated balance sheets as of August 31: Plan assets at fair value Projected benefit obligation Funded status recognized as prepaid pension cost $ $ 2018 2017 786,448 $ 606,385 180,063 $ 748,337 629,775 118,562 The funded status of the Northwestern Memorial Hospital plan was $159,137 and $111,015 for the years ended August 31, 2018 and 2017, respectively. The funded status for the Northwestern Lake Forest Hospital plan was $20,926 and $7,547 for the years ended August 31, 2018 and 2017, respectively. Included in unrestricted net assets are the Plans’ amounts that have not yet been recognized in net periodic pension cost at August 31, as follows: 2018 Unrecognized actuarial loss 1809-2875972 $ 98,717 $ 2017 132,539 45 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 14. Employee Benefit Obligations (continued) Changes in the Plans’ assets and benefit obligations recognized in unrestricted net assets for the years ended August 31 include the following: 2018 Current year actuarial gain Recognized actuarial loss $ $ 32,071 $ 1,752 33,823 $ 2017 60,122 3,763 63,885 The Plans’ prior service cost and net actuarial loss included in unrestricted net assets expected to be recognized in net periodic pension cost during the year ending August 31, 2019 are $0 and $617, respectively. Net periodic pension benefit included in operating results for the years ended August 31 consists of the following: 2018 Plan expenses Interest cost of projected benefit obligation Expected return on the Plans’ assets Recognized actuarial loss Net periodic pension benefit $ $ 1,541 $ 20,141 (51,112) 1,752 (27,678) $ 2017 1,407 19,130 (46,330) 3,763 (22,030) The following table sets forth the discount rate assumptions used to determine the projected benefit obligation and benefit cost as of August 31: 2018 2017 Used to determine projected benefit obligation Discount rate – Northwestern Memorial Hospital Discount rate – Northwestern Lake Forest Hospital 4.24% 4.28 3.86% 3.90 Used to determine benefit cost Discount rate – Northwestern Memorial Hospital Discount rate – Northwestern Lake Forest Hospital Expected long-term rate of return on the Plans’ assets 3.86% 3.90 6.00 3.67% 3.73 7.00 1809-2875972 46 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 14. Employee Benefit Obligations (continued) The expected long-term rate of return on assets is determined based on a capital market asset model, which assumes that future returns are based on long-term, historical performance as adjusted for contemporary dividend yields. The adjusted historical returns were weighted by the current long-term asset allocation targets and reduced by 100 basis points to produce a more normal risk premium. Northwestern Memorial’s investment advisor assisted with the analysis. The Plans’ asset allocation and investment strategies are designed to earn returns on plan assets consistent with a reasonable and prudent level of risk. Investments are diversified across classes, sectors and manager style to minimize the risk of loss. Northwestern Memorial uses professional investment managers specializing in each asset category and, where appropriate, provides the investment managers with specific guidelines that include allowable and/or prohibited investment types. Northwestern Memorial regularly monitors manager performance and compliance with investment guidelines. The target allocation of the Plans’ assets as of August 31 is as follows: Equity securities Alternative investments Fixed income 1809-2875972 2018 2017 51% 37 12 100% 51% 37 12 100% 47 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 14. Employee Benefit Obligations (continued) The following table presents the Plans’ financial instruments as of August 31, 2018, measured at fair value on a recurring basis by the valuation hierarchy described in Note 5: Level 1 Cash and cash equivalents U.S. government securities Corporate debt: Other $ Level 2 105 $ – Level 3 – $ 5,882 Total – $ – 105 5,882 – 16,312 – 16,312 Equity securities: U.S. equities International equities Total equity securities 20,662 81 20,743 99 – 99 – – – 20,761 81 20,842 Mutual funds: Fixed income U.S. equities Total mutual funds 63,226 23,561 86,787 – – – – – – 63,226 23,561 86,787 – 392 – 392 22,685 $ – 130,320 Other fixed income Total assets measured on recurring basis at fair value Investments recorded at fair value based on NAV Total assets measured at fair value 1809-2875972 $ 107,635 $ 656,128 $ 786,448 48 Northwestern Memorial HealthCare and Subsidiaries Notes to Consolidated Financial Statements (continued) (In Thousands) 14. Employee Benefit Obligations (continued) The following table presents the Plans’ financial instruments as of August 31, 2017, measured at fair value on a recurring basis by the valuation hierarchy described in Note 5: Level 1 Cash and cash equivalents U.S. government securities Corporate debt: Preferred Other Total corporate debt Equity securities: U.S. equities Mutual funds: Fixed income U.S. equities Total mutual funds Total assets measured on recurring basis at fair value Investments recorded at fair value based on NAV Total assets measured at fair value $ Level 2 508 $ – Level 3 – $ 8,358 Total – $ – 508 8,358 – – – 839 12,881 13,720 – – – 839 12,881 13,720 18,971 155 – 19,126 64,103 18,484 82,587 – – – – – – 64,103 18,484 82,587 – 124,299 $ 102,066 $ 22,233 $ 624,038 $ 748,337 The fair value of Level 1 investments, which consist of equity securities and certain mutual funds, is based on quoted market prices that are valued on a daily basis. Level 2 investments consist of U.S. government securities, corporate bonds and U.S. equities. The fair value of the U.S. government securities and corporate bonds is established based on values obtained from nationally recognized pricing services that value the investments based on similar securities and matrix pricing of similar quality and maturity securities. 1809-2875972 49 Northwestern Memorial He…