Harris Memorial Hospital and Foundation Financial Report

This document contains the combined financial statements of Harris Memorial Hospital and Harris Community Foundation and subsidiaries for the years ended December 31, 20X7 and 20X6. It includes the independent auditors' report from Pennypacker & Vandelay, LLC, along with combined balance sheets, statements of operations, changes in net assets, and cash flows. The report details the organization's assets, liabilities, net assets, revenues, and expenses, offering insights into the financial performance and position of the hospital and foundation. Key components include current and non-current assets, liabilities, and net asset classifications (unrestricted, temporarily restricted, and permanently restricted). The statements of operations outline net patient service revenue, operating expenses, and non-operating gains and losses. The statements of cash flows present cash flows from operating, investing, and financing activities. The notes to the financial statements provide detailed information on organization, significant accounting policies, and specific financial data, such as patient accounts receivable, assets limited as to use, property and equipment, and derivative financial instruments. The Foundation operates various entities, including a skilled nursing facility, insurance subsidiary, and for-profit subsidiaries, and is affiliated with the Harris Health Plan. The report highlights commitments for capital projects and provides context for the financial results.

Harris Memorial Hospital and Harris Community Foundation
Years Ended December 31, 20X7 and 20X6
Contents
Report of Independent Auditors 225
Combined Financial Statements
Combined Balance Sheets 226
Combined Statements of Operations 227
Combined Statements of Changes in Net Assets 228
Combined Statements of Cash Flows 229
Notes to Combined Financial Statements 231
Report of Independent Auditors—Pennypacker & Vandelay, LLC
The Board of Trustees
Harris Memorial Hospital and Harris Community Foundation
We have audited the accompanying combined balance sheets of Harris
Memorial Hospital and Harris Community Foundation and subsidiaries (the
Foundation) as of December 31, 20X7 and 20X6, and the related combined
statements of operations, changes in net assets, and cash flows for the years
then ended.
Management is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.

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 consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of
the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making this risk assessment, we consider
internal control relevant to the Foundation’s preparation and fair
presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Foundation’s
internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated financial
statements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the combined financial position of Harris Memorial
Hospital and Harris Community Foundation and subsidiaries at December 31,
20X7 and 20X6, and the combined changes in their net assets and their cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
TABLE 9A-1 Harris Memorial Hospital and Harris Community
Foundation Combined Balance Sheets (in Thousands)
December 31,
20X7
December 31,
20X6
Assets
Current assets

TABLE 9A-1 Harris Memorial Hospital and Harris Community
Foundation Combined Balance Sheets (in Thousands)
December 31,
20X7
December 31,
20X6
Cash and cash equivalents $82,815 $59,696
Assets limited as to use, current portion 5,327 5,088
Accounts receivable
Patients, less allowance for doubtful accounts
($25,302 in 20X7 and $23,014 in 20X6)
70,025 59,939
Other 28,990 24,995
Supplies 7,078 6,663
Total current assets 194,235 156,381
Assets limited as to use
For donor-restricted purposes 84,440 67,826
Board designated for specific purposes 382,835 378,413
Held by trustees under bond agreements 51,038 25,937
518,313 472,176
Less current portion 5,327 5,088
512,986 467,088
Property and equipment, net 563,349 458,829
Other assets 34,476 34,302
Total assets $1,305,046 $1,116,600
Liabilities and net assets

TABLE 9A-1 Harris Memorial Hospital and Harris Community
Foundation Combined Balance Sheets (in Thousands)
December 31,
20X7
December 31,
20X6
Current liabilities
Accounts payable $32,572 $24,631
Accrued expenses and other liabilities 58,878 53,725
Due to third-party payers 7,380 12,633
Current maturities of long-term debt 4,692 5,908
Total current liabilities 103,522 96,897
Long-term debt, less current maturities 439,597 332,354
Contingent professional liabilities 33,260 48,487
Due to broker 15,128 19,608
Other liabilities 20,713 5,298
Postretirement benefit obligation, other than pensions 8,207 7,694
Total liabilities 620,427 510,338
Net assets
Unrestricted 600,179 538,436
Temporarily restricted 55,213 40,393
Permanently restricted 29,227 27,433
Total net assets 684,619 606,262
Total liabilities and net assets $1,305,046 $1,116,600

TABLE 9A-2 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Operations (in Thousands)
December 31,
20X7
December 31,
20X6
Operating revenues and other support
Net patient service revenue $829,005 $774,662
Provision for doubtful accounts (55,851) (57,975)
Net patient service revenue less provision for
doubtful accounts
773,154 716,687
Other operating revenue 27,055 29,334
Total operating revenue 800,209 746,021
Operating expenses
Salaries and wages $371,449 $329,668
Employee benefits 81,532 77,231
Supplies and purchased services 228,244 225,497
Advertising 3,072 2,376
Staff enrichment 10,767 8,591
Occupancy cost 14,346 13,442
Depreciation 44,392 41,627
Interest 10,974 6,145
Operating expenses 764,776 704,577
Excess of revenue over expenses 35,433 41,444
Nonoperating gains (losses)

TABLE 9A-2 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Operations (in Thousands)
December 31,
20X7
December 31,
20X6
Contributions, gifts, and bequests 3,189 1,318
Net assets released from restrictions for
research expenditures
14,070 14,474
Research, education, and other nonoperating
expenses
(22,980) (24,773)
Change in interest rate swap value and put
agreements
1,578 9,397
Investment income 30,453 18,402
26,310 18,818
Excess of revenues and gains over expenses and
losses
$61,743 $60,262
TABLE 9A-3 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Changes in Net Assets (in
Thousands)
December 31,
20X7
December 31,
20X6
Unrestricted net assets
Excess of revenues and gains over expenses
and losses
$61,743 $60,262
Net assets released from restrictions for capital
expenditures
— 119
Cumulative effect of change in accounting
principle
— (3,943)
Increase in unrestricted net assets 61,743 56,438

TABLE 9A-3 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Changes in Net Assets (in
Thousands)
December 31,
20X7
December 31,
20X6
Temporarily restricted net assets
Contributions, gifts, and bequests 20,435 15,512
Investment income 8,455 3,972
Net assets released from restrictions for
research expenditures
(14,070) (14,474)
Net assets released from restrictions for capital
expenditures
— (119)
Increase in temporarily restricted net assets 14,820 4,891
Permanently restricted net assets
Contributions, gifts, and bequests 1,794 3,218
Increase in permanently restricted net assets 1,794 3,218
Net assets at beginning of year 606,262 541,715
Net assets at end of year $684,619 $606,262
TABLE 9A-4 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Cash Flows (in Thousands)
December 31,
20X7
December 31,
20X6
Operating activities
Increase in net assets $78,357 $64,547
Adjustments to reconcile increase in net assets to net
cash provided by operating activities

TABLE 9A-4 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Cash Flows (in Thousands)
December 31,
20X7
December 31,
20X6
Change in net unrealized gains and losses on
investment securities
(26,358) 11,432
Cumulative effect of change in accounting principle — (3,943)
Depreciation 44,392 41,627
Gain on sale or disposal of assets, net (6,119) —
Provision for bad debts 55,851 57,975
Change in interest rate swap value and put
agreements
(1,578) (9,397)
Changes in operating assets and liabilities
Assets limited as to use (19,779) (14,274)
Accounts receivable (65,937) (51,251)
Other assets (7,071) (43)
Supplies (415) 840
Accounts payable 7,941 10,613
Accrued expenses and other liabilities 20,568 8,430
Due to third-party payers (5,253) (4,877)
Contingent professional liabilities (15,227) 3,743
Postretirement benefit obligation, other than
pensions
513 456
Net cash provided by operating activities 59,885 115,878

TABLE 9A-4 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Cash Flows (in Thousands)
December 31,
20X7
December 31,
20X6
Investing activities
Property and equipment acquired (142,793) (159,943)
Cash used in investing activities (142,793) (159,943)
Financing activities
Repayment of long-term debt (177,294) (5,545)
Proceeds from borrowing 283,321 57,614
Net cash provided by financing activities 106,027 52,069
Net increase in cash and cash equivalents 23,119 8,004
Cash and cash equivalents at beginning of year 59,696 51,692
Cash and cash equivalents at end of year $82,815 $59,696
Harris Memorial Hospital and Harris Community Foundation
Notes to Combined Financial Statements
December 31, 20X7
1. Organization and Significant Accounting Policies
Organization and Basis of Combination
Harris Memorial Hospital (the Hospital) and Harris Community Foundation (the
Foundation) are a hospital and charitable foundation located in Jersey, Ohio. The
Hospital and Foundation are exempt from federal income taxes under Section
501(c)(3) of the Internal Revenue Code (IRC). The Hospital and Foundation are
collectively referred to herein as the Foundation.
The Foundation owns and operates the Renee Center, which has 27 skilled nursing
beds; Harris Assurance, Ltd. (Assurance), a for-profit, wholly owned insurance
subsidiary; and Harris Properties (Condit Inn), a for-profit, wholly owned subsidiary.
During 20X6, the Foundation formed the Harris Community Hospital Corporation
(dba Harris Hospital) located in Oldstone, Ohio and the Harris Long Term Acute Care
Hospital Corporation (dba Harris Continuing Care Hospital) located in Jersey, Ohio.

The 60-bed Harris Continuing Care Hospital opened in May 20X7. Harris Hospital,
with 92 beds, opened in late July 20X7. At December 31, 20X7, the Foundation has
remaining commitments totaling approximately $7,360,000 under construction
contracts for these and other capital projects.
The Foundation is affiliated with the Harris Health Plan (the Health Plan). The Health
Plan’s financial statements are not included in these combined financial statements.
The Foundation provides healthcare services in the central Ohio region. All
appropriate intercompany accounts have been eliminated in combination.
Cash Equivalents
The Foundation considers all undesignated highly liquid investments with maturities
of 3 months or less when purchased to be cash equivalents.
Supplies
Supplies are stated at cost (first-in, first-out method), which is not in excess of
market value.
Patient Accounts Receivable
Patient accounts receivable are stated at estimated net realizable value. Significant
concentrations of patient accounts receivable were 20% and 19% at December 31,
20X7 and 20X6, respectively, from government-related programs. Patient accounts
receivable from the Health Plan were 25% and 29% at December 31, 20X7 and
20X6, respectively.
The Foundation maintains allowances for uncollectable accounts for estimated
losses resulting from a payer’s inability to make payments on accounts. The
Foundation uses a balance sheet approach to value the allowance account based on
historical write-offs, payer type, and the aging of the accounts. Accounts are written
off when collection efforts have been exhausted. Management continually monitors
and adjusts, as necessary, allowances associated with its receivables. The majority
of uncollectable accounts are from uninsured and the patient portion of accounts
receivable.
Assets Limited as to Use
Assets limited as to use at December 31, 20X7, include 76% and 9% held under
master trust agreements with Liberty Eagle Trust and Highbanks, respectively, and
15% held in government-insured time deposits and other financial instruments.
Assets limited as to use at December 31, 20X6, include 78% and 5% held under
master trust agreements with Liberty Eagle Trust and Highbanks, respectively, and
17% held in government-insured time deposits and other financial instruments. The
investments held under the master trust agreements are diversified among equity,
debt, and money market instruments and are reported at estimated fair value. The
fair value of these investments is generally based on quoted market prices on
national exchanges.
Property and Equipment
Property and equipment are recorded at cost at the date of acquisition or estimated
fair value at the date of donation. Depreciation is computed on the straight-line
method using the estimated economic lives of the depreciable assets, generally
ranging from 3 to 40 years. Expenditures that materially increase values, change
capacities, or extend useful lives are capitalized. Routine maintenance and repair
items are charged to operating expenses.
The Foundation evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
assessment of possible impairment is based on whether the carrying amount of the
asset exceeds the expected total undiscounted value of cash flows expected to
result from the use of the assets and their eventual disposition. No amounts were
recognized in 20X6.

In 20X7, the Foundation recorded a charge of $4,000,000, net of reimbursement, for
unrecoverable costs incurred in connection with repair and maintenance costs of
the Condit Inn.
Derivative Financial Instruments
The Foundation accounts for its derivatives under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or
SFAS No. 133. SFAS No. 133 requires that all derivative financial instruments that
qualify for hedge accounting be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are recognized
periodically either in operations or in changes in unrestricted net assets. The
Foundation’s policy is to not hold or issue derivatives for trading purposes and to
avoid derivatives with leverage features.
Restricted Support
The Foundation records unconditional promises of cash or other assets at estimated
fair value on the date the promises are received. The Foundation reports gifts of
cash and other assets as restricted support if they are received with donor
stipulations that limit the use of the donated assets. When a donor restriction
expires, that is, when a stipulated time restriction ends or a purpose of restriction is
accomplished, temporarily restricted net assets are reclassified to unrestricted net
assets and reported in the combined statements of operations or combined
statements of changes in net assets (based on nature of restriction) as net assets
released from restrictions.
The Foundation reports gifts of land, buildings, and equipment as unrestricted
support unless explicit donor stipulations specify how the donated assets must be
used. Gifts of long-lived assets with explicit restrictions that specify how the assets
are to be used and gifts of cash or other assets that must be used to acquire long-
lived assets are reported as restricted support. The Foundation reports expirations
of donor restrictions when the donated or acquired long-lived assets are placed in
service.
Permanently restricted net assets have been restricted by donors to be maintained
by the Foundation in perpetuity. The income from permanently restricted net assets
is recorded as unrestricted unless explicitly restricted by donors. Donor-restricted
income on permanently restricted net assets is generally available to support
research and education and is reported as temporarily restricted.
The Foundation’s temporarily restricted net assets are restricted primarily for
research, education, capital projects, and medical care programs and its
permanently restricted net assets are primarily restricted for endowment purposes.
Net Patient Service Revenue
Net patient service revenue is reported at estimated net realizable amounts from
patients, third-party payers, and others for services rendered and includes
estimated retroactive revenue adjustments due to future audits, reviews, and
investigations. Retroactive adjustments are considered in the recognition of
revenue on an estimated basis in the period the related services are rendered, and
such amounts are adjusted in future periods as adjustments become known or as
years are no longer subject to such audits, reviews, and investigations.
Charity Care
The Foundation provides care without charge or at amounts less than its
established rates to patients who meet certain criteria under its charity policy.
Because the Foundation does not pursue collection of amounts determined to
qualify as charity care, they are not reported as revenue. Hospital charges foregone
for charity care, based on established rates, were approximately $35,200,000 in
20X7, prior to application of disproportionate share funds of approximately
$4,800,000 received from the State of Ohio, and $35,300,000 in 20X6, prior to
application of disproportionate share funds of approximately $5,800,000 received

from the State of Ohio. Clinic charges forgone for charity care, based on established
rates, were $12,525,000 and $10,216,000 in 20X7 and 20X6, respectively.
Health Insurance Program Reimbursement
Revenue from the Medicare and Medicaid programs accounted for approximately
45% and 8%, respectively, of the Foundation’s net patient service revenue for the
year ended December 31, 20X7, and 51% and 11%, respectively, for the year ended
December 31, 20X6. Laws and regulations governing the Medicare and Medicaid
programs are extremely complex and are subject to interpretation. Federal
regulations require the submission of annual cost reports covering medical costs
and expenses associated with services provided to program beneficiaries. Medicare
and Medicaid cost report settlements are estimated in the period services are
provided to beneficiaries. As a result, there is at least a reasonable possibility that
recorded estimates will change by a material amount in the near term. The 20X7
and 20X6 net patient service revenue increased (decreased) approximately
$10,340,000 and $(1,332,000), respectively, due to changes in allowances
previously estimated as a result of the final settlements for years that are no longer
subject to audits, reviews, and investigations. The Foundation believes that it is in
compliance with all applicable laws and regulations and is not aware of any pending
or threatened investigations involving allegations of potential wrongdoing.
Medicare cost reports filed by the Hospital for all years before 20X4 have been
audited and settled as of December 31, 20X7. Medicare cost reports filed by the
Clinic for all years before 20X0 have been audited and settled as of December 31,
20X7. Amounts due to the Medicare and Medicaid programs totaled approximately
$7,380,000 and $12,633,000 at December 31, 20X7 and 20X6, respectively, and
are included in due to third-party payers in the accompanying combined balance
sheets.
Nonoperating Gains and Losses
Nonoperating gains and losses include unrestricted contributions, gifts and
bequests, interest earnings on investments, net assets released from restrictions for
research and education expenditures (net of contributions for such expenditures),
change in interest rate swap value and put agreements, and other gains and losses
unrelated to the Foundation’s primary operations.
Excess of Revenues and Gains over Expenses and Losses
Included in excess of revenues and gains over expenses and losses in the
accompanying combined statements of operations are all changes in unrestricted
net assets other than net assets released from restrictions for capital expenditures,
unrealized gains and losses on investments other than trading investment
securities, and investment returns restricted by donors.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
Other
Certain reclassifications of donor trust liabilities, previously included in assets
limited as to use, were made to the 20X6 combined financial statements to conform
to the 20X7 presentation.
Additionally, in previous years, the Foundation’s investment portfolio (see Note 7)
was classified as other than trading. As such, unrealized gains and losses that were
considered temporary were excluded from excess of revenues and gains over
expenses and losses. During fiscal year 20X7, the Foundation determined that
substantially all of its investment portfolio was more accurately classified as trading
with unrealized gains and losses included in excess of revenues and gains over
expenses and losses. Therefore, a reclassification was made in the accompanying