from this consolidated financial statement can you tell me the net income and total revenues

ORANGE REGIONAL MEDICAL CENTER Consolidated Financial Statements December 31, 2012 and 2011 (With Independent Auditors' Report Thereon) KPMG LLP 345 Park Avenue New York, NY 10154-0102 Independent Auditors' Report The Board of Directors Greater Hudson Valley Health System, Inc.: We have audited the accompanying consolidated financial statements of Orange Regional Medical Center, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; these include the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orange Regional Medical Center as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. New York, New York May 29, 2013 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (\"KPMG International\"), a Swiss entity. ORANGE REGIONAL MEDICAL CENTER Consolidated Balance Sheets December 31, 2012 and 2011 (In thousands) Assets 2012 Current assets: Cash and cash equivalents Patient accounts receivable, net Investments Assets limited or restricted as to use Due from third-party payors Other current assets $ 2011 63,308 41,937 8,489 20,228 1,511 16,053 51,811 44,669 12,496 26,418 4,059 12,243 151,526 151,696 9,648 304,201 12,130 326,298 4,778 13,708 11,677 5,460 15,116 8,488 $ 495,538 519,188 $ 7,134 49,358 628 2,709 6,978 61,110 628 1,209 59,829 69,925 249,694 2,330 16,715 5,160 4,421 61,969 256,828 1,975 17,904 3,850 2,513 48,573 400,118 401,568 88,024 5,402 1,994 109,515 6,111 1,994 95,420 117,620 495,538 519,188 Total current assets Assets limited or restricted as to use, net of current portion Property, plant, and equipment, net Interest in net assets of Orange Regional Medical Center Foundation, Inc., net Insurance claims receivable Other assets, net Total assets Liabilities and Net Assets Current liabilities: Current installments of long-term debt and capital lease obligations Accounts payable and accrued expenses Deferred revenue Current portion of estimated third-party payor liabilities Total current liabilities Long-term debt and capital lease obligations, net of current installments Estimated third-party payor liabilities, net of current portion Estimated malpractice liabilities Other liabilities, net Deferred revenue Accrued retirement benefits, net of current portion Total liabilities Commitments and contingencies Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying notes to consolidated financial statements. 2 ORANGE REGIONAL MEDICAL CENTER Consolidated Statements of Operations Years ended December 31, 2012 and 2011 (In thousands) 2012 Deficiency of revenues, gains, and other support over expenses Other changes in net assets: Transfer to Greater Hudson Valley Health Systems, Inc. Contributions for property, plant, and equipment Transfer to Catskill Regional Medical Center Pension-related changes other than net periodic pension costs Postretirement-related changes other than net benefit cost Decrease in unrestricted net assets $ See accompanying notes to consolidated financial statements. 3 395 (3,638) (4,108) 1,150 (12,750) (1,027) Nonoperating gains: Nonoperating income (4,033) (4,756) Loss from operations 335,578 935 Total expenses 135,426 53,521 59,295 59,445 7,508 3,929 16,454 (5,691) Expenses: Salaries and wages Employee benefits Supplies Purchased services and other Interest Impairment on equipment Depreciation and amortization 331,545 359,452 Total unrestricted revenues, gains, and other support 417 7,469 4 138,634 59,426 61,790 55,915 16,544 27,143 Investment income Other revenue Net assets released from restrictions used for operations 323,655 353,761 Net patient service revenue 336,648 (12,993) 676 8,974 29 $ 357,820 (13,738) 344,082 Unrestricted revenues, gains, and other support: Patient service revenue, less contractual and other allowances Provision for bad debts, net of recoveries 2011 (10,363) 3,399 (382) (12,776) (1,038) (21,491) (24,798) ORANGE REGIONAL MEDICAL CENTER Consolidated Statements of Changes in Net Assets Years ended December 31, 2012 and 2011 (In thousands) Unrestricted Net assets at December 31, 2010 Deficiency of revenues, gains, and other support over expenses Net assets released from restrictions for operating purposes Contributions for property, plant, and equipment Transfer to Greater Hudson Valley Health System, Inc. Transfer to Catskill Regional Medical Center Pension-related changes other than net periodic pension cost Postretirement-related changes other than net periodic benefit cost Change in interest in net assets of Orange Regional Medical Center Foundation, Inc. Investment income $ Permanently restricted Total 134,313 1,994 143,768 (3,638) 3,399 (10,363) (382) (4) (4) 3,399 (10,363) (382) (12,776) (12,776) (1,038) (1,038) Total changes in net assets 7,461 (3,638) (1,348) 2 (1,348) 2 (24,798) (26,148) 1,994 117,620 (4,756) 1,150 (4,108) (29) (29) 1,150 (4,108) (12,750) (12,750) (1,027) (1,027) Total changes in net assets 6,111 (4,756) Deficiency of revenues, gains, and other support over expenses Net assets released from restrictions for operating purposes Contributions for property, plant, and equipment Transfer to Greater Hudson Valley Health System, Inc. Transfer to Catskill Regional Medical Center Pension-related changes other than net periodic pension cost Postretirement-related changes other than net periodic benefit cost Change in interest in net assets of Orange Regional Medical Center Foundation, Inc. Investment income (1,350) 109,515 Net assets at December 31, 2011 Net assets at December 31, 2012 Temporarily restricted (682) 2 (682) 2 (21,491) See accompanying notes to consolidated financial statements. 4 (709) (22,200) 88,024 $ 5,402 1,994 95,420 ORANGE REGIONAL MEDICAL CENTER Consolidated Statements of Cash Flows Years ended December 31, 2012 and 2011 (In thousands) 2012 Cash flows from operating activities: Changes in net assets Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation and amortization Amortization of bond issuance costs Amortization of deferred revenue Restricted contributions and restricted income, net Provision for bad debts, net of recoveries Net realized and unrealized (gains) losses on investments Impairment on equipment Transfer to Greater Hudson Valley Health System, Inc. Transfer to Catskill Regional Medical Center Gain on sale of property, plant, and equipment Change in interest in net assets of Orange Regional Medical Center Foundation, Inc. Pension-related changes other than net periodic pension cost Postretirement-related changes other than net periodic benefit cost Changes in assets and liabilities: Patient accounts receivable Other current assets Due from third-party payors Insurance claims receivable Other assets Accounts payable and accrued expenses Estimated third-party payor liabilities Other liabilities, net Malpractice liability Accrued retirement benefits $ 2011 (22,200) (26,148) 27,143 419 (629) (1,152) 13,738 (362) 4,108 16,454 425 (628) (3,402) 12,993 440 3,929 10,363 382 (171) 682 12,750 1,027 1,348 12,776 1,038 (11,006) (3,810) 2,548 1,408 (576) (6,584) 1,855 1,339 (1,189) (381) (17,273) (2,464) (4,059) (15,116) (613) 8,895 (2,279) 3,526 15,209 (787) 19,128 14,838 (4,248) (5,167) (524) (150,448) 162,690 (44,810) (18,601) (215) (242,341) 297,984 2,303 (7,983) (6,978) (4,108) 1,152 (7,282) (10,363) (382) 3,402 Net cash used in financing activities (9,934) (14,625) Net increase (decrease) increase in cash and cash equivalents 11,497 (7,770) 51,811 59,581 $ 63,308 51,811 $ 16,276 16,540 5,245 7,566 Net cash provided by operating activities Cash flows from investing activities: Purchase of property, plant, and equipment Cash paid for capital expenditures related to the new hospital Investment in joint venture Purchases of investments and assets limited or restricted as to use Sales of investments and assets limited or restricted as to use Net cash provided by (used in) investing activities Cash flows from financing activities: Payment of long-term debt and capital lease obligations Transfer to Greater Hudson Valley Health System, Inc. Transfer to Catskill Regional Medical Center Restricted contributions and restricted income, net Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of noncash investing and financing activities: Cash paid during the year for interest, including capitalized interest Capital lease obligations incurred Increase in accounts payable and accrued expenses for capital expenditures related to the new hospital See accompanying notes to consolidated financial statements. 5 ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (1) Organization Orange Regional Medical Center (ORMC or the Hospital) was formed in September 2002 by the merger of Arden Hill Hospital and Horton Medical Center. On August 5, 2011, ORMC consolidated its two campuses into one newly constructed, wholly owned facility located in the town of Wallkill, New York. ORMC also maintains several off-site locations in the surrounding area. The Hospital is affiliated with Orange Regional Medical Center Foundation, Inc. (the Foundation) whose purpose is to raise funds for the Hospital and the health and welfare of the community. ORMC is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code (the Code), and is exempt from federal and state income taxes and other related income pursuant to Section 501(a) of the Code. ORMC provides acute, psychiatric, and rehabilitative inpatient services, as well as ambulatory surgery, emergency care, and other outpatient services for residents of Orange County, New York and surrounding areas. The Greater Hudson Valley Health System, Inc. (GHVHS) officially became the active parent of Catskill Regional Medical Center (Catskill Regional) on February 5, 2010. Catskill Regional is located in Sullivan County and is licensed for a total of 181 beds maintained on two campuses in Harris, New York, and Calicoon, New York. GHVHS has the same legal authority over, and responsibilities to, both ORMC and Catskill Regional. ORMC and Catskill Regional will maintain independent financial operations and neither will be liable for the other's obligations. (2) Summary of Significant Accounting Policies (a) Basis of Accounting The consolidated financial statements have been prepared on the accrual basis of accounting and include the activities of the Hospital and East Main Street Management Corporation (EMS), The Alpha Network, Inc (the PHO), and Synera Corporation, all dormant corporations. All significant intercompany balances and transactions have been eliminated in preparation of the consolidated financial statements. (b) Investments The Hospital classifies its debt and equity securities included in investments and assets limited or restricted as to use as trading securities. These investments are measured at fair value in the accompanying consolidated balance sheets. Investment income or loss (including realized gains and losses on investments, interest, dividends, and unrealized gains and losses on trading investments) is included in deficiency of revenues, gains, and other support over expenses unless the income or loss is restricted by donor or law. The equity method of accounting is used for joint venture investments in which the Hospital has the ability to exercise neither control nor significant influence. 6 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (c) Patient Accounts Receivable Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectibility of accounts receivable, Orange Regional Medical Center analyses its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, Orange Regional Medical Center analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (e.g., for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with uninsured patients, management records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The following table sets forth the components of the change in the allowance for doubtful accounts for the year ended December 31, 2012 by payor type: Balance at January 1, 2012 Primary payor: Uninsured Managed care and other insurance Blue cross Medicare Medicaid Other $ (d) 34,133 9,629 (5,863) 37,899 5,217 4,486 3,950 293 682 $ Provision for bad debts 1,472 1,265 1,114 83 175 (1,333) (821) (775) (157) (94) 5,356 4,930 4,289 219 763 48,761 13,738 (9,043) 53,456 Bad debt write-offs Balance at December 31, 2012 Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Hospital records impairment losses on long-lived assets used in operations when the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During 2011, ORMC recorded an impairment charge of $3,929 related to equipment, in connection with the move to the new hospital facility. No impairment was recorded in 2012. 7 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (e) Net Assets The net assets of ORMC and changes therein are classified and reported as follows: Unrestricted Net Assets - unrestricted net assets are those whose use is not restricted by donors, even though their use may be limited in other respects, such as by contract, board designation, or under debt agreements. Temporarily and Permanently Restricted Net Assets - temporarily restricted net assets are those whose use by ORMC has been limited by donors to a specific-time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity. (f) Donor-Restricted Gifts Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the contribution is received. The contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the accompanying consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. (g) Charity Care ORMC provides charity care to patients who meet certain criteria under its charity care policy, to patients who are uninsured and to patients who are underinsured at amounts less than its established rates. Because ORMC does not pursue collection of amounts determined to qualify, they are not reported as revenue. The calculation of the cost of these services is done utilizing the ratio of patient care cost to charges based upon the 2011 and 2010 institutional cost report, applied to the gross charity-related allowances, and bad debt expense for 2012 and 2011, respectively. The amount of services related to charity care, uninsured, and underinsured, at cost, is as follows: 2012 Cost of services provided to uninsured patients Cost of services written off for charity care 2011 8,053 506 9,000 8,559 $ 8 8,827 173 $ Cost of services related to bad debt $ 3,755 3,547 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (h) Assets Limited or Restricted as to Use Assets limited or restricted as to use primarily include assets held by trustees under indenture agreements, unused lease line-of-credit agreements, and assets associated with the donor-restricted net assets. (i) Revenue Recognition ORMC recognizes patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, ORMC recognizes revenue based on a discounted rate per the self-pay discount policy. On the basis of historical experience, a significant portion of ORMC's uninsured patients will be unable or unwilling to pay for the services provided. Thus, ORMC records a significant provision for bad debts related to uninsured patients in the period the services are provided. Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources, is as follows: Third-party payors Patient service revenue (net of contractual allowances and discounts) $ 330,162 Uninsured patients 27,658 Total all payors 357,820 The following table reflects the estimated percentages of patient service revenue, net of provision for bad debts, for the year ended December 31, 2012: Medicare Medicaid Managed care and other insurance Uninsured and other fee for service 36% 3 54 7 100% The following table reflects the estimated percentages of patient service revenue by inpatient and outpatient services for the year ended December 31, 2012: Inpatient services Outpatient services 66% 34 100% 9 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (j) Concentration of Credit Risk The Hospital grants credit without collateral to its patients, most of who are local residents and are insured under third-party payor agreements. The mix of receivables, net of contractual allowances by payor at December 31 is as follows: 2012 Medicare Medicaid Managed care and other insurance Uninsured and other fee for service 2011 24% 12 47 17 100% (k) 23% 12 40 25 100% Property, Plant, and Equipment Property, plant, and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the accompanying consolidated financial statements. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Estimated useful lives of the assets are as follows: Land improvements Buildings and building improvements Equipment 5 to 20 years 15 to 40 years 5 to 15 years Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support, and are excluded from the excess of revenues, gains, and other support over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Cash gifts restricted for investment in long-lived assets are released from restriction when the asset is placed in service or as costs are incurred for asset construction. The Hospital's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Capitalization of interest ceased when the new hospital facility opened in August 2011. (l) Supplies Supplies are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Supplies are included in other current assets. 10 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (m) Cash and Cash Equivalents Cash and cash equivalents include certain highly liquid investments with original maturities of three months or less. At December 31, 2012 and 2011, the Hospital had cash balances in financial institutions that exceeded federal depository insurance limits. The Hospital routinely invests its surplus operating funds in money market funds. These funds generally invest in highly liquid U.S. government and agency obligations. Investments in money market funds are not insured or guaranteed by the U.S. government. (n) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. Included in deficiency of revenues, gains and other support over expenses are changes relating to third-party payors, which are disclosed in note 11. (o) Deficiency of Revenues, Gains, and Other Support over Expenses The consolidated statements of operations include deficiency of revenues, gains, and other support over expenses. Changes in unrestricted net assets that are excluded from deficiency of revenues, gains, and other support over expenses, consistent with industry practice, include pension and postretirement changes other than net periodic pension or benefit cost, net assets released from restrictions for property, plant, and equipment, contributions for property, plant, and equipment, and transfer of assets to related parties. (p) Estimated Malpractice, Workers' Compensation Costs, and Health Insurance Costs The provision for estimated medical malpractice, workers' compensation, and health insurance claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported (IBNR). (q) Bond Issuance Costs In connection with the issuance of the Orange Regional Medical Center Obligated Group Revenue Bonds, Series 2008, the Hospital incurred bond issuance costs of approximately $8,600. These costs are included in the accompanying 2012 and 2011 consolidated balance sheets in long-term other assets. The costs are amortized based on the effective-interest method over the lives of the bonds. Accumulated amortization amounted to $1,972 and $1,553 at December 31, 2012 and 2011, respectively. (r) Guarantees The Hospital recognizes a liability at the inception or modification of a guarantee (note 6(e) for details). 11 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (s) Deferred Revenue Deferred revenue consists of the gain associated with the Hospital's sale of the Medical Pavilion (note 6(d)). The sale of the Arden Hill campus resulted in the recording of a long-term asset and related liability (deferred revenue) on the ten-year lease. (t) Tax Exempt Status ORMC is a not-for-profit corporation as described in Section 501(c)(3) of the Code, and is exempt from federal and state income taxes pursuant to Section 501(a) of the Code. There are certain transactions that could be deemed \"Unrelated Business Income\" and would result in a tax liability. Management reviews transactions to estimate potential tax liabilities using a threshold of more likely than not of being sustained. It is management's estimation that there are no material tax liabilities that need to be recorded. (u) Recent Adopted Accounting Standards In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-23, Health Care Entities (Topic 954): Measuring Charity Care for Disclosure. ASU No. 2010-23 is intended to reduce the diversity in practice regarding the measurement basis used in the disclosure of charity care. ASU No. 2010-23 requires that cost be used as a measurement basis for charity care disclosure purposes and that cost be identified as the direct or indirect cost of providing the charity care, and requires disclosure of the method used to identify or determine such costs. The ASU became effective for the Hospital on January 1, 2011. As the Hospital does not recognize revenue when charity care is provided, adoption of this guidance did not have an impact on the consolidated financial statements of ORMC; it only required additional disclosures. In August 2010, the FASB issued ASU No. 2010-24, Presentation of Insurance Claims and Related Insurance Recoveries. This guidance prohibits the netting of estimated insurance recoveries against a related claim liability and requires the claim liability to be calculated without consideration of insurance recoveries, and the recognition of an insurance receivable, subject to the need for a valuation allowance for uncollectible amounts. This guidance was effective for fiscal years beginning after December 15, 2010. The adoption of this guidance had no impact on the Hospital's consolidated statement of operations or cash flows. In July 2011, the FASB issued ASU No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. ASU No. 2011-07 is intended to provide financial statement users with greater transparency about a healthcare entity's net patient service revenue and related allowance for doubtful accounts. The guidance provides information to assist financial statement users in assessing an entity's sources of patient service revenue and related changes in its allowance for doubtful accounts. The guidance requires certain healthcare entities to change the presentation of their consolidated statements of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those healthcare entities are required to provide 12 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) enhanced disclosures about their policies for recognizing revenue and assessing bad debts. The guidance also requires disclosures of patient services revenue (net of contractual allowances and discounts), as well as qualitative information about changes in the allowance for doubtful accounts. For the year ended December 31, 2012, the Hospital adopted ASU No. 2011-07 and reclassified the provision for bad debt expense, net, totaling $13,738 and $12,993 for the years ended December 31, 2012 and 2011, respectively, from operating expenses to a reduction of patient service revenue in the consolidated statements of operations. See note 2(c) and 2(i) for the required disclosures related to the Hospital's sources of patient service revenue and changes in the allowance for doubtful accounts. In September 2011, the FASB issued ASU No. 2011-09, Disclosures About an Employer's Participation in a Multiemployer Plan. The guidance is intended to provide financial statement users with greater transparency about an employer's participation in a multiemployer pension plan. The guidance requires additional qualitative and quantitative information disclosures to assist users of the consolidated financial statements in understanding the commitments and risks involved in participating in multiemployer pension plans, including the financial health of all of the significant plans in which the employer participates. This ASU does not change the current recognition and measurement guidance for an employer's participation in a multiemployer pension plan. This ASU became effective for the Hospital for the year ended December 31, 2011. Adoption of this guidance did not have an impact on the consolidated financial statements of the Hospital; it only required additional disclosures. (v) Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 13 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (3) Investments and Assets Limited or Restricted as to Use The composition of investments and assets limited or restricted as to use as of December 31 is set forth in the following table: 2012 Assets limited or restricted as to use: By Bond Indenture Agreement (primarily cash and cash equivalents and U.S. government issues): Construction fund Cost of issuance fund Debt service fund Debt service reserve fund $ 2011 4,442 635 1,938 20,244 11,868 634 2,337 20,266 27,259 35,105 791 1,812 14 819 1,372 454 2,617 2,645 798 29,876 38,548 20,228 26,418 $ 9,648 12,130 $ 69 1,934 4,584 1,902 66 1,932 6,582 3,916 $ 8,489 12,496 By donor: Cash and cash equivalents Equity securities Mutual funds Under lease line-of-credit agreements (cash and cash equivalent) Total assets limited or restricted as to use Less current portion Assets limited or restricted as to use, net of current portion Investments: Equity securities Mutual funds Corporate bonds Government agencies securities The current portion of assets limited or restricted as to use represents amounts due in 2012 and 2011 for principal and interest on the ORMC Obligated Group Revenue Bonds, Series 2008, along with construction costs related to the new hospital facility, which is also included in accounts payable and accrued expenses in the accompanying consolidated balance sheet at December 31, 2011. 14 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) Investment (loss) income from investments, assets limited or restricted as to use, cash equivalents, and other investments comprise the following for the years ended December 31: 2012 Investment income (loss), net: Interest and dividend income Realized losses, net on sales of securities Unrealized gains, net on trading investments 2011 $ 314 (75) 437 326 (228) 319 $ 676 417 During 2011, investment income of $315, net of realized losses of $531, earned on all bond-related investment accounts was offset against the related interest expense that is being capitalized for the new Hospital project (note 4). Fair Value Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include cash and cash equivalents, debt and equity securities that are traded in an active exchange market, as well as U.S. Treasury securities. Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted market prices that are traded less frequently than exchange-traded instruments. This category generally includes certain U.S. government and agency mortgage-backed debt securities, and corporate debt securities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private debt and equity instruments and alternative investments. 15 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) The following tables present the Hospital's fair value measurements for assets measured at fair value on a recurring basis as of December 31, 2012 and 2011: Fair value Domestic equity securities U.S. government obligations and mortgages Corporate bonds Mutual funds - domestic Cash and cash equivalents (included in cash and cash equivalents and assets limited or restricted as to use) Total $ 1,881 29,155 4,584 1,948 28,430 1,948 725 4,584 64,105 64,105 101,673 $ 1,881 96,364 5,309 Fair value Domestic equity securities U.S. government obligations and mortgages Corporate bonds Mutual funds - domestic Cash and cash equivalents (included in cash and cash equivalents and assets limited or restricted as to use) Total December 31, 2012 Level 1 Level 2 $ December 31, 2011 Level 1 Level 2 1,438 10,213 6,582 2,385 9,204 2,385 1,009 6,582 82,237 82,237 102,855 $ 1,438 95,264 7,591 At December 31, 2012 and 2011, the Hospital did not have any Level 3 assets or liabilities measured at fair value. The Hospital's Level 1 and Level 2 investments and assets limited as to use are liquid and are redeemable within one day of notice. There were no transfers into or out of Level 1 or Level 2 for the years ended December 31, 2012 and 2011. 16 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (4) Property, Plant, and Equipment A summary of property, plant, and equipment at December 31 is as follows: 2012 Less accumulated depreciation Property, plant, and equipment, net $ 4,897 10,303 155,790 196,104 1,560 368,654 69,499 $ 4,897 10,398 155,984 202,364 57 373,700 Land Land improvements Buildings and building improvements Equipment Construction in progress 2011 42,356 304,201 326,298 During 2011, the Hospital completed construction of a new 374-bed facility located in the town of Wallkill, New York. The facility is approximately 606,000 square feet over seven floors and accommodates adult medical/surgical, pediatric, obstetrical/gynecological, rehabilitative, and behavioral health services. Equipment under capitalized lease obligations, included in equipment on the table above, as of December 31 is as follows: 2012 Equipment Less accumulated depreciation 2011 $ 12,086 3,273 12,513 2,441 $ 8,813 10,072 ORMC capitalizes interest cost related to the construction project. A reconciliation of total interest cost incurred to \"interest expense\" as reported in the consolidated statements of operations for 2012 and 2011 is as follows: 2012 Total interest costs Interest costs capitalized 2011 $ 16,847 (9,339) $ Interest expense 16,544 16,544 7,508 Interest cost capitalized is reduced by investment loss of $(216) at December 31, 2011, as discussed in note 3. 17 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (5) Long-Term Debt and Capital Lease Obligations A summary of long-term debt and capital lease obligations at December 31 is as follows: 2012 Current installments Long-term debt and capital lease obligations, net of current installments (a) $ 256,311 7,495 263,806 7,134 $ 252,131 4,697 256,828 Series 2008 Bonds (a) Lease lines of credit (b) 2011 6,978 249,694 256,828 On May 7, 2008, Orange Regional Medical Center Obligated Group Revenue Bonds, Series 2008 (Series 2008 Bonds), were issued with a par value of $261,345 and a net original issue discount of $1,239. The issue is composed of serial bonds of $27,840 with maturity dates ranging from December 1, 2011 to 2016, term bonds of $32,170 maturing December 1, 2021, term bonds of $76,960 maturing December 1, 2029, and term bonds of $124,375 maturing December 1, 2037. The Series 2008 Bonds maturing after December 1, 2018 are subject to redemption prior to maturity, at the option of the Hospital and as provided for in the debt agreement, on or after December 1, 2018, at 100% of the principal amount plus accrued interest to the date of redemption. The Series 2008 Bonds are also subject to redemption upon the occurrence of certain events as discussed in the debt agreement. The Hospital is required to maintain a long-term debt service coverage ratio of 1.25 measured on an annual basis, a days-cash-on-hand ratio of 45 days calculated semiannually during the construction period, and a days-cash-on-hand ratio of 60 days calculated semiannually once the hospital was placed in service, as defined in the debt agreement. Interest on the Series 2008 Bonds is payable on a semiannual basis beginning December 1, 2008. Principal is payable annually beginning December 1, 2011 in varying amounts from $4,020 in 2011 to $19,035 in 2037. The Series 2008 Bonds were issued with various stated interest rates ranging from 5.50% to 6.50%. The effective interest rate for this issue is 6.53%. The Hospital funded the initial requirement of the Debt Service Reserve Fund of $20,230 and the Capitalized Interest Fund of $50,674 in 2008 from the proceeds of the Series 2008 Bonds. At December 31, 2012 and 2011, the Debt Service Reserve Fund was $20,244 and $20,266, respectively, and is included in the accompanying 2012 and 2011 consolidated balance sheets as assets limited or restricted as to use (note 3). At the completion of construction, the remaining balance in the Capitalized Interest Fund was transferred to the Debt Service Fund. The Series 2008 Bonds are collateralized by the land and buildings that comprise the new hospital facility. 18 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (b) The Hospital has lease lines of credit with several entities with interest rates ranging from 3.97% to 5.50%, monthly payments ranging from $23 to $60, and maturity dates through November 2015. In May 2011, the Hospital entered into a lease line of credit for $4,000 for equipment. Unused proceeds are included within assets limited or restricted as to use, which is disclosed in note 3. The Hospital has a $10,000 working capital line of credit under which no amounts were outstanding as of December 31, 2012. Interest on borrowings under this line of credit would be floating at the one-month LIBOR interest rate plus 2.75%. This agreement is renewable annually. Aggregate principal payments on long-term debt and capital lease obligations as of December 31, 2012 for the next five years and thereafter are as follows: 2013 - $7,134; 2014 - $5,816; 2015 - $5,821; 2016 - $5,274; 2017 - 5,595; and thereafter - $227,188. (6) Commitments and Contingencies (a) Professional Liability ORMC has professional liability claims-made commercial insurance coverage for the first $1,000 per occurrence, $5,000 in the aggregate for malpractice claims effective September 1, 2009 (prior to that date it was $1,000/$3,000) and excess insurance for $5,000 per occurrence, $5,000 in the aggregate for claims made prior to September 1, 2008, and $10,000 per occurrence and $10,000 in the aggregate for claims made subsequent to that date. The Hospital has engaged an independent actuary to estimate the liability for both reported and IBNR claims. Based on estimates that incorporate the Hospital's past experience, as well as other considerations including the nature of each claim or incident and relevant trend factors, management, with the assistance of an independent actuary, has recorded an accrual for ultimate undiscounted cost. As of December 31, 2012 and 2011, the Hospital has recorded the following: 2012 Estimated malpractice liabilities Insurance claims receivable 2011 $ 16,715 (13,708) 17,904 (15,116) $ 3,007 2,788 The Hospital has been named as a defendant in various malpractice cases. The outcome of these actions cannot be predicted at this time, and accordingly, a provision for these claims has not been made. It is the opinion of management that any loss that may arise from these actions will not have a material adverse effect on the consolidated financial position, results of operations, or liquidity of ORMC. (b) Workers' Compensation Effective January 1, 2002, the Hospital became a participating member of the Hudson Healthcare Workers Compensation Group Trust (the Trust). The Hospital has entered into an indemnity 19 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) agreement with the Trust to have the Trust provide risk management services and workers' compensation and employers' liability coverage. The agreement stipulates, among other things, that each member is jointly and severally liable for the workers' compensation and employers' liability obligations of the Trust, irrespective of the subsequent termination of a member's membership in the Trust, the insolvency or bankruptcy of another member of the Trust, or other facts or circumstances. However, recourse for any and all payments of workers' compensation and employers' liability benefits covered by the Trust's certificate of coverage to a member shall first be made by the Trust's assets. The Trust provides workers' compensation insurance (medical, indemnity, and legal costs) to Trust members. Such coverage is provided up to the per occurrence New York State statutory limits. The Trust also provides employers' liability insurance with the following limits: Bodily injury by accident Bodily injury by disease Bodily injury by disease $ 100 each accident 100 each employee 500 policy limit The Trust engaged an independent actuary to estimate the liability for uninsured claims for all workers' compensation occurrences beginning January 1, 2002 for both reported claims and IBNR claims. The Hospital has a 33% member interest in this Trust; accordingly, the Hospital accounts for this investment on the equity basis of accounting, which is included in other assets, net in the accompanying consolidated balance sheets. The Hospital's equity investment is fully reserved for as of December 31, 2012. Effective January 1, 2011, the Trust was frozen and took on no additional risk. The Hospital became self-insured for workers' compensation claims occurring January 1, 2011 or later. Pennsylvania Manufacturers Association Insurance Company (PMA) will administer the plan. The Hospital has recorded $3,699 within other liabilities, net related to those claims including IBNR claims as actuarially determined as of December 31, 2012. Interim premiums will be paid and final premiums will be retrospectively set, trued up to historical actual claims paid. Funding for the plan has exceeded claims resulting in a receivable of $790 and $613 at December 31, 2012 and 2011, respectively, and is included within Other Assets. The current Trust will cease underwriting operations and run off its unpaid loss and loss adjustment expenses. The Hospital is responsible for all claims occurring prior to January 1, 2011 through that Trust. During 2012, the Trust's board of directors approved an additional assessment of the members. ORMC's share of this assessment is $1,204, which is recorded as other liabilities in the accompanying consolidated financial statements as of December 31, 2011, which was subsequently paid during 2012. During 2013, ORMC became aware of an additional assessment and recorded a liability in the amount of $1,200 as of December 31, 2012. 20 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (c) Employee Health The Hospital is self-insured for employee health insurance for certain union and nonunion employees. Effective July 1, 2008, technical, service, and clerical employees who participate in collective-bargaining agreements became covered under the union's benefit plan. The Hospital records an estimate for IBNR claims based on information provided by its third-party administrator. The amount accrued was approximately $1,375 and $1,224 at December 31, 2012 and 2011, respectively, and is recorded in accounts payable and accrued expenses in the consolidated balance sheets. (d) Operating Lease Obligations In connection with the opening of the new hospital facility in August 2011, the Hospital terminated its lease associated with the Arden Hill and Horton campuses without any early termination penalty. During 2006, the Hospital sold the Medical Pavilion, a medical office building, with a net book value of $10,800 for $18,890. Simultaneously, the Hospital's Series 2002A Variable Rate Demand Civic Facility Revenue Bonds (Horton Medical Center West Hudson Facility Project) of $9,800 were defeased and the Hospital received cash proceeds of approximately $8,200 relating to the sale of the Medical Pavilion. As part of the transaction, the Hospital leased back the Medical Pavilion through 2016. Accordingly, the gain of $7,160 has been recorded in the accompanying consolidated balance sheets as deferred revenue and is being amortized as an offset to rental expense over the life of the related leases. The following is a schedule of minimum lease payments, sublease income, and deferred revenue (associated with the sale of the Medical Pavilion) under noncancelable operating lease and sublease agreements as of December 31, 2011: Lease obligations Year ending December 31: 2013 2014 2015 2016 2017 Thereafter 5,398 5,216 5,163 5,085 4,216 7,107 Sublease income (138) (4) (4) Deferred revenue (628) (628) (628) (628) Net rent expense was $4,518 and $4,673 for the years ended December 31, 2012 and 2011, respectively. (e) Guarantees The Hospital had entered into net revenue guarantee agreements with physicians for the purpose of recruitment to the local area to provide quality medical services. Under the agreements, the Hospital 21 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) provided financial assistance to physicians in establishing medical services in Middletown and surrounding communities. The agreements state that the Hospital was to provide monthly financial assistance and guarantee that the physicians' cash collections were to equal a predetermined amount for the agreement period. In return, the physicians were to maintain a full medical practice for the term of the agreements. The Hospital had recorded a receivable for the advances paid to the physicians in the amount of $183 and $300 as of December 31, 2012 and 2011, respectively. The Hospital has fully recorded a reserve due to the uncertainty of their collections. During 2010, the Hospital signed a guarantee agreement related to its joint venture with Crystal Run Ambulatory Surgery Center (CRASC), of which it is a 40% owner (note 10). (f) General Various suits and claims arising in the normal course of operations are pending. While the outcome of these suits cannot be determined at this time, management believes that such suits and claims are either specifically covered by insurance or are not material to the Hospital's overall consolidated financial position, operating results, or liquidity. (g) Collective-Bargaining Agreements Approximately 83% of the Hospital's employees are union employees covered under the terms of various collective-bargaining agreements. The collective-bargaining agreement with Local 1199 SEIU covering service, technical, professional, and clerical staffs expires on April 30, 2015. The collective-bargaining agreement with Local 1199 SEIU covering nursing staffs expires on September 30, 2015. The collective-bargaining agreement with Local 530 Security Police Fire Professionals of America covering security staffs expires on March 31, 2017. (7) Pension and Other Postretirement Benefits (a) ORMC's employees not covered by collective-bargaining agreements have a defined-contribution retirement plan that includes a base employer contribution to a 403(b) account equal to a percentage of compensation, to a maximum of 5% based on years of service. During 2012 and 2011, the base employer contribution was $1,256 and $1,264, respectively. In addition, there is an employer-matching component to the plan. As of January 1, 2008, ORMC makes a matching contribution equal to 100% of the employee's 403(b) contribution, up to 4% of the employee's compensation. During 2012 and 2011, the matching contribution was $938 and $875, respectively. ORMC maintains a fully frozen noncontributory defined-benefit pension plan for current and past employees not covered by a collective-bargaining agreement. Effective January 1, 2006, ORMC froze participation in the pension plan to any employees hired after December 31, 2005. Effective January 1, 2008, ORMC froze the pension plan for the remaining active participants in the plan by ceasing any future accrual of credited service and compensation under the plan. 22 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (b) ORMC participates in a multiemployer Local 1199 defined-benefit pension plan for participating staff. The contribution percentages are defined in the collective-bargaining agreements. The risks of participation in this multiemployer plan are different from a single-employer plan in the following aspects: a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; b) if a participating employer stops contributing to the plan, the unfunded obligation of the plan may be borne by the remaining participating employers; and c) if the Hospital chooses to stop participating in its multiemployer plan and if the plan is underfunded, ORMC may be required to pay the plan an amount based on the underfunded status of the plan, referred to as the withdrawal liability. The Hospital's participation in this plan for the year ended December 31, 2012 and 2011 is outlined in the table below. The \"EIN/Pension Plan Number\" column provides the Employer Identification Number (EIN) and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act (PPA) zone status available in 2012 and 2011 is for the plan's year-end at December 31, 2011 and 2010, respectively. The zone status is based on information received from the plan sponsor and, as required by the PPA, is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded, and plans in the green zone are at least 80% funded. The \"FIR/RP Status Pending/Implemented\" column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement requiring contributions to the plan. Pension fund EIN/Pension plan number 1199 SEIU Health Care Employees Pension Fund 13-3604862 Plan No. 001 Pension Protection Act Zone Status January 1, January 1, 2012 2011 Green Green FIP/RP Status pending/ implemented No Contributions of ORMC 2012 2011 8,963 7,684 Surcharge imposed Expiration date of collective bargaining agreement No 8/30/15 Total amounts expensed under the union-sponsored multiemployer plans were $8,849 and $8,543 for the years ended December 31, 2012 and 2011, respectively. There have been no significant changes that affect the comparability of 2012 and 2011 contributions. ORMC was not listed in the plan's most recent available annual report (Form 5500 for U.S. Plans) for providing more than five percent of the total contributions to the plan for the years ended December 31, 2011 and 2010. At the date the financial statements were issued, Form 5500 was not available for the plan year ended December 31, 2012. (c) ORMC sponsors a defined-contribution healthcare plan that provides postretirement medical, dental, and life insurance benefits to employees who meet the eligibility requirements under the plans. ORMC offers executives under age 65 medical coverage to age 65 based on years of service. Nonunion and security employees who retired prior to age 65 with 5 years of service are offered medical insurance at 55% of the full monthly benefit. For those same employees with 20 years of 23 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) service, medical benefits are provided to them until the age of 65. ORMC provides individual dental coverage at no cost until age 65. The following table sets forth the benefit obligations and fair value of plan assets at December 31, 2012 and 2011: Pension benefits 2012 2011 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Actuarial loss Benefits paid and administrative expenses Projected benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid and administrative expenses Fair value of plan assets at end of year $ Postretirement benefits 2012 2011 113,328 5,289 16,077 104,157 5,429 8,249 3,519 47 163 642 3,223 25 155 604 (4,935) (4,507) (509) (488) $ 129,759 113,328 3,862 3,519 $ 67,856 4,681 3,600 71,574 (1,620) 2,409 509 488 (4,935) (4,507) (509) (488) 71,202 67,856 $ 24 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) The following table sets forth the plan's benefit obligations, fair value of plan assets, and funded status at December 31, 2012 and 2011: Pension benefits 2012 2011 Benefit obligation Fair value of plan assets Postretirement benefits 2012 2011 $ (3,862) (3,519) (58,557) (45,472) (3,862) (3,519) $ (58,557) (45,472) (450) (3,412) (418) (3,101) $ Amounts recognized in the consolidated balance sheet consist of: Current liabilities Noncurrent liabilities (113,328) 67,856 $ Funded status (129,759) 71,202 (58,557) (45,472) (3,862) (3,519) Amounts recognized in accumulated other changes in unrestricted net assets consist of the following: Pension benefits 2012 2011 Prior service cost Net actuarial loss Postretirement benefits 2012 2011 $ 63,409 50,659 (2,772) 3,912 (3,452) 3,565 $ 63,409 50,659 1,140 113 The estimated amount that will be amortized from unrestricted net assets into net periodic pension cost in 2013 is $5,446 related to actuarial gains and losses. The components of net periodic pension cost for the years ended December 31, 2012 and 2011 are as follows: Pension benefits 2012 2011 Service cost Interest cost Expected return on assets Amortization of prior service cost Recognized net actuarial loss Net periodic benefit cost Postretirement benefits 2012 2011 $ 5,289 (5,329) 3,975 5,429 (5,614) 2,707 47 163 (680) 295 25 155 (680) 246 $ 3,935 2,522 (175) (254) 25 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) Pension plan 2012 2011 Weighted average assumptions used to determine obligations: Discount rate Weighted average assumptions used to determine net benefit cost: Discount rate Expected return on plan assets Postretirement plans 2012 2011 3.95% 4.75% 3.80% 4.75% 4.75 5.35 4.75 5.15 8.00 8.00 During 2011, the Hospital's management changed their discount rate methodology to a more appropriate and preferred method. This change in methodology resulted in a favorable change in estimate of approximately $8,895. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments. Effective December 31, 2012, the annual rate of increase in the per capita cost of covered healthcare benefits was 9% and assumed to decrease to 5% by 2017. (a) Plan Assets The weighted average asset allocation of the plan assets at December 31, 2012 and 2011 was as follows: 2012 Asset category: Debt securities Equity securities Alternative investments 2011 30% 53 17 35% 51 14 100% 100% The Hospital's financial and investment objectives are to meet present and future obligations to beneficiaries while minimizing the Hospital's contributions over the long term, by earning an adequate return on assets with moderate volatility. 26 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) The asset allocations of the Hospital's pension benefits as of December 31, 2012 and 2011 were as follows: Total Asset category: Cash Equity securities - domestic Equity securities - foreign Mutual funds Fixed income securities: U.S. Treasuries Corporate bonds - domestic Corporate bonds - foreign Mortgage-backed securities Alternative investments Total $ 3,094 25,026 8,955 2,732 9,609 8,742 121 1,658 11,265 9,609 8,742 121 1,658 11,265 71,202 $ 3,094 25,026 8,955 2,732 49,416 21,786 Total Asset category: Cash Equity securities - domestic Equity securities - foreign Mutual funds Fixed income securities: U.S. Treasuries Corporate bonds - domestic Corporate bonds - foreign Mortgage-backed securities Alternative investments Total December 31, 2012 Level 1 Level 2 $ December 31, 2011 Level 1 Level 2 3,136 22,500 7,586 3,253 8,951 11,852 196 1,408 8,974 8,951 11,852 196 1,408 8,974 67,856 $ 3,136 22,500 7,586 3,253 45,426 22,430 Level 2 assets consist of shares or units in funds of funds and limited partnerships as opposed to direct interests in the funds' underlying holdings, which may be marketable. Because the net asset value reported by each fund is used as a practical expedient to estimate the fair value of the Hospital's interest therein, its classification is based on the Hospital's ability to redeem its interest at or near the date of the consolidated balance sheet. The Hospital has six alternative investments classified as Level 2 at December 31, 2012 and 2011; one can be redeemed on a monthly basis with three days prior written notification, and the remaining can be redeemed on a quarterly basis with a written notification period ranging to 65 days. The Hospital does not have any Level 3 assets at December 31, 2012 and 2011. The classification of investments in the fair value hierarchy is not 27 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) necessarily an indication of the risks, liquidity, or degree of difficulty in estimating the fair value of each investment's underlying assets and liabilities. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects: Onepercentagepoint increase Effect on total of service and interest cost components Effect on postretirement benefit obligation (b) $ 10 134 Onepercentagepoint decrease (9) (120) Contributions The Hospital expects to contribute $3,600 to the pension plan and $450 to its postretirement plans in 2013. (c) Estimated Future Benefit Payments The benefits expected to be paid in each year from 2013 to 2017 for the pension plan are $5,440, $5,580, $5,780, $5,940, and $6,350, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2022 are $35,110. The expected benefits are based on the same assumptions used to measure the Hospital's benefit obligation at December 31, 2012 and include estimated future employee service. The benefits expected to be paid in each year from 2013 to 2017 for the postretirement plans are $450, $350, $290, $240, and $240, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2022 are $1,120. The expected benefits are based on the same assumptions used to measure the Hospital's benefit obligation at December 31, 2012 and include estimated future employee service. 28 (Continued) ORANGE REGIONAL MEDICAL CENTER Notes to Consolidated Financial Statements December 31, 2012 and 2011 (In thousands) (8) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are available for the following purposes at December 31: 2012 Temporarily restricted: Programs, capital equipment, and improvements Health education Scholarships 2011 5,363 9 30 5,925 158 28 $ Permanently restricted: Investments held in perpetuity, with income restricted to equipment purchases Investments held in perpetuity, with income available for operations $ 5,402 6,111 $ 1,866 1,866 128 128 1,994 1,994 $ Net assets released from temporary restrictions by incurring expenditures satisfying the restricted purposes are as follows: 2012 Healthcare services: Construction of new medical center Health education 2011 1,150 29 3,399 4 $ (9) $ 1,179 3,403 Related-Party Transactions (a) Certain individuals serving on the bo