Management Discussion and Analysis

Management Discussion and Analysis For the Three Month Period Ended December 31, 2016 and December 31, 2015 Utilization During the three months ended...
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Management Discussion and Analysis For the Three Month Period Ended December 31, 2016 and December 31, 2015

Utilization During the three months ended December 31, 2016 (the current year), the Corporation experienced a decrease in admissions of 8.6% or 359 to 3,812 and a decrease in inpatient days of 8.7% or 1,293 to 13,543 over the three months ended December 31, 2015 (the prior year). Bedded observation patient equivalent days, however, were up 35.5% over the prior year. Overall acuity of patients receiving care, as measured by the inpatient case mix index, was at 1.60 which was elevated over the prior year of 1.44. Conversely, outpatient visits of 103,411 had increased 2.8% over the prior year at the Hospitals. Clinic and Urgent Care visits at the clinics of 111,191 were down 2.6% over the prior year. The Corporation continues to see growth in volumes from the Mukwonago Emergency Department and Pewaukee Cancer Center. Total Operating Revenue The Corporation generated net patient service revenue of $175.6 million, which represents a 1.3% or $2.3 million increase over the prior year. Gross charges were 3.1% higher than the prior year. The increase is primarily driven by a 4% price increase and favorable outpatient utilization. These were partially offset by a 1.3% decline in inpatient charges from lower utilization. As a percent of total gross patient revenues, allowances and deductions (inclusive of bad debts and charity care) of 65.0% were 0.6% higher than the prior year driven by higher volume of Medicare patients. However, an overall favorable collection experience has favorably impacted total reimbursement rates. Total Days AR was 38.9, which has continued to trend downwards over the past several months from continuous Revenue Cycle initiatives. Other operating revenue was lower by $0.8 million or 4.5% primarily attributed to timing of shared savings recognition at ProHealth Solutions, the Corporation’s ACO. This was partially offset by continued favorable results from the Corporations joint venture entities, which are accounted for on the equity method. Total Operating Expenses Total operating expenses of $184.2 million for the current year decreased 0.7% or $1.3 million from the prior year. Salaries and wages increased 0.4% or $0.3 million from annual wage increases but were primarily offset by continued focus on FTE/productivity initiatives. As a percent of gross patient service revenue for the current year, Salaries and wages was 15.4% compared to 15.8% in the prior year. Management continues to focus on ensuring the most efficient use of staffing resources, flexing with volumes and limiting overhead costs. Benefit costs decreased 11.0% or $2.5 million from the prior year primarily driven by the pension plan freeze effective July 2016, which has reduced benefit costs by $2.0 million over the prior year. The Corporation has also had favorable health and dental claims experience under the Corporation’s self-insured plan. As a percent of total Salaries and wages, Benefit costs were favorable at 25.9% compared to the prior year of 29.3%. Medical supply and drug costs increased $0.9 million or 2.9% from the prior year driven by inflation and mix of services. As a percent of total gross patient revenue, medical supply and drug cost of 6.5% was slightly favorable to 6.6% in the prior year. As a result of the State’s Medicaid Hospital Tax program, the

Corporation was assessed a $3.8 million Medicaid Hospital tax during the current year, which is offset by $3.1 million in additional Medicaid payments from the program, resulting in a net loss of $0.7 million for the current year. In comparison, during the prior year, the Corporation had a net loss of $0.6 million due to Medicaid Hospital taxes paid in excess of Medicaid program payments received. Contracted services and other expenses increased from the prior year by $0.3 million or 0.9%, primarily driven by a slightly higher use of external services. Depreciation was $0.2 million or 1.4% lower than the prior year due to higher than finalized Mukwonago Emergency Department and Pewaukee Cancer Center estimated capital costs being depreciated in the prior year. Towards the end of the prior year, the Corporation realized a favorable adjustment to these capital projects and resulting depreciation. Interest expense was slightly favorable as variable rates have remained low along with annual debt service payments reducing outstanding principal. Non-operating Gains/Losses Non-operating gains, net decreased $8.1 million as compared to the prior year. This was primarily driven by a decrease of $19.5 million of unrealized gains on investments compared to the prior year given market conditions and volatility in the fourth calendar year quarter of the current year. This was partially offset by $4.1 million of higher realized gains and $6.4 million of favorable marks to market on the various interest rate swaps, given the recent increase in interest rates. Revenues and Gains in Excess of Expenses The Corporation recorded expenses in excess of revenues and gains of $14.8 million for the current year which represents a $5.4 million or 26.7% decrease compared to the prior year primarily driven by a decrease in non-operating gains from lower unrealized investment activity. Total operating income of $8.3 million was $2.8 million or 50.3% better than the prior year. Operating income margin remains strong at 4.3% over 2.9% in the prior year as the Corporation continues to focus on clinical efficiencies and reducing overhead costs. Cash and Investments The Corporation has $715.6 million of cash and investments or 391.3 days as of December 31, 2016, which is a 1.3% or $9.3 million increase compared to the $706.3 million of cash and investments as of September 30, 2016. This increase in cash and investments is predominately the result of cash flow from operations and continued favorable turnover in patient AR but both being partially offset by mixed investment results during the quarter. Other During the current year, the Corporation entered into a build to suit lease arrangement with a third-party. This 20 year lease agreement has an anticipated commencement date of March 2018. While the Corporation is still evaluating the impact this lease will have on the financial statements, it is anticipated that this will be a capital lease (obligation) recorded at approximately $21 million and having a $1.8 million increase in Maximum Annual Debt Service. From a Debt to Capitalization perspective, management does not anticipate much erosion from Fiscal 2016 as a result of continued favorable financial performance and continued debt service payments.

PROHEALTH CARE, INC. AND AFFILIATES Consolidated Statements of Operations - UNAUDITED Three Months Ended December 31, 2016 and December 31, 2015 (In thousands)

Dec-16 Net patient service revenue (including bad debt) Other operating revenue Total revenue Expenses: Salaries and wages Employee benefits Medical supplies and drugs State tax assessment Contracted services and other Interest Depreciation Total expenses Income From Operations

$

$

77,370 20,049 32,819 3,772 29,909 4,337 15,912 184,168 $

Non-operating Gains/(Losses), net Investment Income Unrealized (Losses)/Gains, net on Investments Realized Gains/(Losses), net on Investments Interest Rate Swaps - Marks to Market Other Non-Operating Activity Total Non-operating Gains/(Losses), net Revenue and Gains in Excess of (Expenses)

175,556 16,867 192,423

Dec-15

8,255

77,050 22,538 31,887 3,806 29,654 4,400 16,137 185,472 $

3,245 (6,017) 1,180 8,165 (43) 6,530 $

14,785

173,292 17,671 190,963

5,491

2,513 13,467 (2,943) 1,791 (153) 14,675 $

20,166

PROHEALTH CARE, INC. AND AFFILIATES Consolidated Balance Sheet - UNAUDITED December 31, 2016 (In thousands) Assets Current assets: Cash and cash equivalents Assets whose use is limited or restricted Patient accounts receivable, net of estimated uncollectibles Other receivables Inventory of supplies Prepaid expenses and other current assets

Dec-16 $

Total current assets

155,176

Noncurrent assets whose use is limited or restricted Investments in unconsolidated affiliates Net property, plant, and equipment Other assets: Goodwill and other intangibles Other long term assets

662,826 21,574 561,774 6,543 24,788

Total other assets Total Assets

Liabilities and Net Assets Current liabilities: Current installments of long-term debt Accounts payable Accrued expenses and other current liabilities Deferred revenue

44,149 8,656 73,395 5,330 9,059 14,587

31,331 $

1,432,681

$

8,051 39,146 44,305 3,971

Total current liabilities

95,473

Long-term debt and capital lease obligations, less current installments, unamortized bond discount & unamortized issuance costs Fair Value of Interest Rate Swaps Postretirement liability Pension liability Other long-term liabilities Total liabilities

457,225 23,256 110 54,104 27,710 657,878

Total net assets

774,803

Total Liabilities and Net Assets

$

1,432,681

OPERATIONS - NUMBER OF AVAILABLE BEDS

As of December 31, 2016, the Hospitals had a total of 313 staffed acute care beds, which were classified as follows:

Service

Number of Available Beds

General Medical/Surgical Intensive, Coronary and Intermediate Care Obstetrics Psychiatric Oncology Total Available Beds

Source: Records of Corporation

158 72 45 22 16 313

OPERATIONS - SELECTED OPERATING STATISTICS The following table presents certain combined operating statistics of the Hospitals for the period ended December 31, 2016. December 31, 2016 Inpatient Admissions

(1)

3,812 (1)

Average Length of Stay (days) Average Inpatient Daily Census Case Mix Index Outpatient Visits Emergency Room Visits Surgical Cases Open Heart Inpatient Outpatient Total Surgical Cases

3.55 147.2 1.60 103,411 15,151

Catherization Lab Procedures Medical Oncology Visits Radiation Oncology Procedures Cardiovascular Procedures Radiology Procedures CyberKnife Cases (WMH)

945 10,692 3,292 4,885 10,441 112

ProHealth Medical Group Clinic & Urgent Care Visits (1) Figures exclude neonatal intensive care unit and new born activity. Source: Records of Corporation

39 1,039 1,813 2,891

111,191

SOURCES OF NET PATIENT SERVICE REVENUE The following table indicate the sources of the Hospitals' net patient service revenues for the three months ending December 31, 2016

Medicare Commercial Insurance HMO/PPO and other managed care entities Medicaid Self-Pay Total Source: Records of Corporation

December 31, 2016 29.0% 0.9% 66.0% 4.0% 0.1% 100.0%

LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS

Cash and Cash Equivalents Assets Limited by Board Designation Restricted as to Use Total cash and investments Total Expense Depreciation Average Daily Operating Expense Days Cash on Hand

Source: Records of Corporation

December 31, 2016 $ 44,149 645,596 25,886 $ 715,631 $ $

184,168 (15,912) 1,829 391.3

G

PROHEALTH CARE

OFFICER'S CERTIFICATION

Based upon a review of the combined unaudited financial statements of ProHealth Care, Inc., Waukesha Memorial Hospital, Inc., Oconomowoc Memorial Hospital, Inc. and National Regency of New Berlin, Inc. (the Obligated Group) as of December 31, 2016, it is my belief that these financial statements are an accurate interim presentation of the financial results of the Obligated Group.

Ron~ Chief Financial Officer