lucile salter packard children s hospital at...
Post on 19-Aug-2020
1 Views
Preview:
TRANSCRIPT
Lucile Salter Packard Children’s Hospital at Stanford Consolidated Financial Statements August 31, 2016 and 2015
Lucile Salter Packard Children’s Hospital at Stanford Index August 31, 2016 and 2015
Page(s)
Report of Independent Auditors ............................................................................................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets ...................................................................................................................... 2
Consolidated Statements of Operations and Changes in Net Assets ......................................................... 3
Consolidated Statements of Cash Flows ..................................................................................................... 4
Notes to Consolidated Financial Statements ......................................................................................... 5–34
Report of Independent Auditors on Accompanying Consolidating Information .............................. 35
Consolidating Balance Sheets ................................................................................................................... 36
Consolidating Statements of Operations and Changes in Net Assets ...................................................... 37
Report of Independent Auditors
To Board of Directors Lucile Salter Packard Children’s Hospital at Stanford
We have audited the accompanying consolidated financial statements of Lucile Salter Packard Children’s
Hospital at Stanford (“LPCH”) and its entities, which comprise the consolidated balance sheets as of
August 31, 2016 and 2015, and the related consolidated statements of operations and changes in net
assets, and of cash flows for the years then ended.
Management’s Responsibility for the Consolidated Financial Statements
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.
Auditors’ Responsibility
Our responsibility is to express an opinion on the 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 our 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, we consider internal control relevant to the
organization’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 organization’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.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of LPCH and its entities at August 31, 2016 and 2015, and the results of
their operations and changes in their net assets and their cash flows for the years then ended in
accordance with accounting principles generally accepted in the United States of America.
December 6, 2016
PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004 T: (415) 498 5000, F: (415) 498 7100, www.pwc.com/us
Lucile Salter Packard Children’s Hospital at Stanford Consolidated Balance Sheets August 31, 2016 and 2015
(in thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements.
2
2016 2015
Assets
Current assets
Cash and cash equivalents 532,900$ 335,901$
Patient accounts receivable, net of allowance for doubtful
accounts of $11,670 and $21,300 in 2016 and 2015, respectively 268,174 271,768
Contributions receivable 32,944 8,075
Other receivables 34,060 28,344
Prepaid expenses, inventory and other 17,497 15,559
Total current assets 885,575 659,647
Investments 70,642 69,313
Investments in University managed pools 599,151 717,866
Board designated funds in University managed pools 9,214 159,789
Assets limited as to use, held by trustee 219 89,500
Property and equipment, net 1,429,316 1,078,277
Beneficial interest in trusts, net 15,048 16,079
Contributions receivable, net of current portion 82,707 22,468
Other assets 64,857 57,817
Total assets 3,156,729$ 2,870,756$
Liabilities and Net Assets
Current liabilities
Accounts payable and accrued liabilities 151,224$ 108,452$
Accrued salaries and related benefits 62,712 65,279
Due to related parties 34,189 53,759
Third-party payor settlements 1,849 1,967
Current portion of long-term debt and capital leases 5,695 5,675
Self-insurance reserves and other liabilities 8,612 7,924
Total current liabilities 264,281 243,056
Self-insurance reserves and other liabilities, net of current portion 32,837 34,002
Long-term debt, net of current portion 662,711 554,011
Total liabilities 959,829 831,069
Commitments and contingencies (Note 14)
Net assets
Unrestricted 1,411,433 1,377,043
Temporarily restricted 574,119 458,239
Permanently restricted 211,348 204,405
Total net assets 2,196,900 2,039,687
Total liabilities and net assets 3,156,729$ 2,870,756$
Lucile Salter Packard Children’s Hospital at Stanford Consolidated Statements of Operations and Changes in Net Assets Years Ended August 31, 2016 and 2015
(in thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements.
3
2016 2015
Operating revenues
Net patient service revenue before provision for doubtful accounts 1,310,951$ 1,314,587$
Provision for doubtful accounts, net 2,433 (10,474)
Net patient service revenue after provision for doubtful accounts 1,313,384 1,304,113
Other revenue 65,089 52,360
Net assets released from restrictions used for operations 23,829 23,352
Total operating revenues 1,402,302 1,379,825
Operating expenses
Salaries and benefits 585,503 518,780
Professional services 18,655 23,151
Supplies 113,386 97,007
Purchased services 476,459 441,783
Other 113,223 134,731
Depreciation and amortization 56,454 58,532
Total operating expenses 1,363,680 1,273,984
Income from operations 38,622 105,841
Interest income 2,351 2,400
Income and gains from University managed pools 9,076 30,923
Loss on extinguishment of long term debt (1,114) -
Other (500) (833)
Excess of revenues over expenses 48,435 138,331
Net assets released from restrictions used for purchases of
property and equipment 27 1,999
Transfer of net investment loss on certain endowments (10) -
Adjustment for minimum pension liability 1,385 (678)
Transfers to/from University and other (15,447) (50,382)
Increase in unrestricted net assets 34,390 89,270
Changes in temporarily restricted net assets
Contributions 129,868 70,810
Income and gains from University managed pools 9,987 14,549
Change in value of beneficial interest in remainder trusts 164 (254)
Net assets released from restrictions for operations (23,829) (23,352)
Purchase of property and equipment (27) (1,999)
Transfers to/from University and other (283) (878)
Increase in temporarily restricted net assets 115,880 58,876
Changes in permanently restricted net assets
Contributions and other 7,669 850
Change in value of beneficial interest in remainder trusts 1,255 (310)
Transfers to/from University and other (1,981) 523
Increase in permanently restricted net assets 6,943 1,063
Increase in net assets 157,213 149,209
Net assets
Beginning of year 2,039,687 1,890,478
End of year 2,196,900$ 2,039,687$
Lucile Salter Packard Children’s Hospital at Stanford Consolidated Statements of Cash Flows Years Ended August 31, 2016 and 2015
(in thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements.
4
2016 2015
Cash flows from operating activities
Change in net assets 157,213$ 149,209$
Adjustments to reconcile change in net assets to
net cash provided by operating activities
Depreciation and amortization 55,001 57,603
Loss on extinguishment of long term debt 1,114 -
Premium received related to bond issuance 14,447 -
Provision for doubtful accounts (2,433) 10,474
Loss/(gains) from University managed pools 5,274 (22,123)
Income and gains from Investments (1,460) (668)
Contributions and investment income restricted by donors (30,043) (61,682)
Distributions more than undistributed earnings from investees 1,437 -
Changes in operating assets and liabilities
Patient accounts receivable, net 6,027 (50,937)
Contributions receivable (82,880) 3,063
Due to/from related parties 15,429 51,563
Other receivables, inventory, other assets, prepaid
expenses and other (14,739) (17,015)
Accounts payable and accrued liabilities 8,855 14,321
Accrued salaries and related benefits (2,567) 7,844
Third-party payor settlements (118) 452
Self-insurance and other liabilities (477) 2,824
Cash provided by operating activities 130,080 144,928
Cash flows from investing activities
Purchases of investments in University managed pools - (757)
Sales of Investments in University managed pools 270,000 90,000
Purchase of investment for assets limited as to use (113,458) (44)
Decrease in assets limited as to use 202,871 170,201
Purchases of property and equipment (373,743) (251,099)
Cash provided by (used in) investing activities (14,330) 8,301
Cash flows from financing activities
Payment of long term debt (5,705) (5,375)
Cost of issuance related to debt issuance (1,188) -
Proceeds from issuance of long term debt 100,000 -
Contributions and investment income restricted by donors 24,280 41,714
Transfers to related parties (36,138) (27,824)
Cash provided by financing activities 81,249 8,515
Net increase in cash and cash equivalents 196,999 161,744
Cash and cash equivalents
Beginning of year 335,901 174,157End of year 532,900$ 335,901$
Supplemental disclosures of cash flow information
Interest paid 10,950$ 14,854$
Noncash activities
Accounts payable related to purchases of property and equipment 33,071 18,394
Transfer of permanent restricted contribution from related party 5,985 880
Accrual of net assets transfer to related parties 2,718 24,913
Issuance of refunding bonds 91,931 -
Defeasance of 2008 Notes (90,290) -
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
5
1. Organization
Lucile Salter Packard Children’s Hospital at Stanford (“LPCH”) operates a licensed acute care
pediatric and obstetric hospital on the Leland Stanford Junior University (“University”) campus in
Palo Alto and operates several inpatient care units on its license in nearby community hospitals.
LPCH also operates outpatient physician clinics in its facilities and other community settings.
The Board of Trustees of the University is the sole corporate member of LPCH and Stanford Health
Care (“SHC”). LPCH has 3,872 full time and part time employees as of August 31, 2016.
LPCH and SHC are the primary clinical affiliates of the Stanford University School of Medicine (the
“Stanford School of Medicine”) for internship and residency programs, clinical research and other
programs that support the Stanford School of Medicine’s academic mission. Within the Stanford
School of Medicine, the Pediatric and Obstetrics Faculty Practice Organization (“FPO”) exists to
advance the missions of the Stanford School of Medicine and LPCH where they intersect in the
delivery of professional medical services.
The related party transactions between LPCH, SHC, the University and the Stanford School of
Medicine are described further in Note 12.
In 2011, LPCH, together with the Stanford School of Medicine, formed Packard Children’s Health Alliance (“PCHA”), a non-profit medical foundation corporation, which affiliated with Packard Medical Group, Inc. (the “Packard Medical Group”), a physician-owned for-profit California professional corporation. The Stanford School of Medicine and LPCH are the members of PCHA, and appoint directors to the governing board. The bylaws of PCHA afford control of PCHA to LPCH and therefore, the activities of PCHA have been included in the consolidated financial statements of LPCH. LPCH has recorded PCHA’s results of operations as an investment in PCHA and it is eliminated in consolidation. There is a professional services agreement between PCHA and Packard Medical Group. Physicians who provide services through PCHA are all and must be employees of the Packard Medical Group and PCHA assumes responsibility for all aspects of the physicians’ practice, including employee practice staff.
PCHA has been organized to operate community based pediatric specialty and subspecialty and obstetrics practices throughout the Bay Area. The objectives of PCHA are to support the overall network by building a presence in growing service areas, expanding education and clinical research programs and enhancing the quality and coordination of care across different care settings. As of August 31, 2016, PCHA includes approximately 157 physicians and other providers in 24 practices located around the San Francisco Bay Area. PCHA also operates five specialty services centers in Capitola, Emeryville, Fremont, Monterey and Walnut Creek. LPCH has entered into a sponsorship agreement with PCHA, wherein LPCH has agreed to provide funding for the development and the operation of PCHA’s physician practices. In 2016, PCHA purchased three physician practices for approximately $816 which were funded by LPCH through a capital contribution.
LPCH, together with PCHA, the Packard Medical Group and the FPO, comprise and are known in
the marketplace as “Stanford Children’s Health.”
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
6
Effective September 1, 2002, LPCH and SHC entered into an agreement whereby LPCH became a
member of the Stanford University Medical Indemnity Trust (“SUMIT”), a not-for-profit, tax-exempt
corporation that is a captive insurance carrier. SUMIT Holding International, LLC (“SHI”) is the sole
owner of SUMIT Insurance Company Ltd. (“SUMIT”) and Stanford University Medical Network Risk
Authority, LLC (“SRA”). SHC and LPCH are the owners of SHI. LPCH’s share of SUMIT net
assets was approximately 21.6% and 24.7% for the years ended August 31, 2016 and 2015,
respectively. LPCH’s ownership in SUMIT is accounted for using the equity method. As of
August 31, 2016 and 2015, LPCH had an investment of $16,244 and $19,547 in SUMIT,
respectively, which is reflected on the consolidated balance sheets in other assets.
SRA was formed on September 19, 2012 and began operations on December 1, 2012. SRA
provides risk management services to SHI, the owners of SHI and other affiliated and unaffiliated
parties and serves as attorney-in-fact to Professional Exchange Insurance Company (“PEAC”).
LPCH’s ownership interest in SRA was 18% for the year ended August 31, 2016 and 2015.
LPCH’s ownership in SRA is accounted for using the equity method. LPCH’s investment in SRA
was a loss of $59 and $12 for year ended August 31, 2016 and 2015, respectively, which is
reflected on the consolidated balance sheets in other assets.
Professional Exchange Insurance Company (“PEAC”), a captive insurance carrier that entered into
business with SRA on October 18, 2012, provides professional liability insurance coverage for
physicians and other licensed healthcare practitioners of PCHA, University Healthcare Alliance (a
subsidiary of SHC) and other affiliated parties. PCHA’s share of net assets in PEAC was 29.4%
and 29.8% for the year ended August 31, 2016 and 2015, respectively. PCHA’s ownership in
PEAC is accounted for using the equity method. PCHA had an investment of $856 and $674 or the
years ended August 31, 2016 and 2015, respectively, which is reflected on the consolidated
balance sheets in other assets.
On September 1, 2006, LPCH and the University entered into a Professional Services Agreement
(“PSA”) pursuant to which the University assigned to LPCH the right to bill and collect all revenue
related to pediatric and obstetric practices on behalf of the University’s School of Medicine (“SoM”)
faculty as the LPCH Medical Group, a division of LPCH.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements are prepared on the accrual basis of accounting.
Net assets of LPCH and changes therein have been classified and are reported as follows:
Unrestricted net assets – Unrestricted net assets represent those resources of LPCH that are
not subject to donor-imposed stipulations. The only limits on unrestricted net assets are broad
limits resulting from the nature of LPCH and the purposes specified in its articles of
incorporation or bylaws and limits resulting from contractual agreements, if any.
Temporarily restricted net assets – Temporarily restricted net assets represent contributions,
which are subject to donor-imposed restrictions that can be fulfilled by actions of LPCH
pursuant to those stipulations or by the passage of time.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
7
Permanently restricted net assets – Permanently restricted net assets represent
contributions that are subject to donor-imposed restrictions that they be maintained by LPCH in
perpetuity. Generally, the donors of these assets permit LPCH to use all or part of the
investment return on these assets.
Expenses are generally reported as decreases in unrestricted net assets. Donor-imposed
restrictions expire when the stipulated time period has elapsed, when the stipulated purpose for
which the resource was restricted has been fulfilled, or both. Temporarily restricted contributions
are recorded as temporarily restricted net assets when received and when the restriction expires,
the net assets are shown as released from restriction in the Consolidated Statements of Operations
and Changes in Net Assets. Income earned on temporarily restricted or permanently restricted net
assets for which that income is restricted for a stipulated purpose is recorded in temporarily
restricted net assets. When income is made available for release and when the restriction is
deemed to have been met, those amounts are included in net assets released from restrictions in
the Consolidated Statements of Operations and Changes in Net Assets.
Transfers to Related Parties
Certain amounts previously received from donors have been transferred to related parties.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of demand deposits and money market mutual funds
with an original maturity of three months or less when purchased. These amounts are carried at
cost which approximates fair value. The Federal Deposit Insurance Corporation, or FDIC, insures
a corporation’s funds deposited in a bank up to a maximum of $250 in the event of a bank failure.
As of August 31, 2016, our cash and cash equivalents held in bank deposits exceeded the FDIC
insured amount. We have not experienced any losses in relation to cash and cash equivalents in
excess of FDIC insurance limits.
Assets Limited as to Use, Held by Trustee
Assets limited as to use primarily include assets held by trustees under bond indenture
agreements. The bond indenture terms require that the trustee control the disbursement of bond
proceeds for capital projects. Assets limited as to use consist of money market funds for the year
ended August 31, 2016 and 2015, respectively. Fair values are based on quoted market prices or
broker or dealer price quotations on a specific identification basis.
Contributions Receivable
Contributions are recorded at fair value at the date the promise is received. Donations for specific
purposes are reported as either temporary or permanently restricted net assets and are included as
restricted contributions. Contributions to be received after one year are discounted at an
appropriate discount rate commensurate with the risks involved and applicable to the years in
which the promises are received, and recorded in their respective net asset category. The discount
rates used during the year ended August 31, 2016 and 2015 were determined using Moody’s
average corporate AAA bond rate. Amortization of the discount is included in contribution revenue
in the Consolidated Statements of Operations and Changes in Net Assets. Conditional promises to
give are recognized when the condition is substantially met.
Other Receivables
Other receivables are comprised of nonpatient related receivables for medical services provided.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
8
Investments
Investments held directly by LPCH consist primarily of mutual funds classified as trading securities
and are stated at fair value. Investment earnings (including realized gains and losses on
investments, interest, dividends and impairment loss on investment securities) are included in
investment income unless the income or loss is restricted by donor or law. Income on investments
of donor restricted funds is added to or deducted from the appropriate net asset category based on
the donor’s restriction.
Investments in University Managed Pools
Investments in University managed pools consist of funds invested in the University’s Merged Pool
(“MP”). The value of its share of the MP is determined by the University, and is based upon the fair
value of the underlying assets held in the MP. Earnings include distributions and increases or
decreases in the value of LPCH’s share of the pool. LPCH may deposit funds in the MP at its
discretion; however, withdrawals require advance notice. All investment gains and losses and the
increases or decreases in the share value are treated as unrealized and included in the excess of
revenues over expenses, unless the income is restricted by donor or law.
Board Designated Funds in University Managed Pools
LPCH’s board of directors approved designating $213,111 in 2014 for future investment in facilities,
programs, and services over which the Board retains control and may at its discretion subsequently
use for other purposes. As of August 31, 2016, the remaining balance of board designated funds
was $9,214. These funds are primarily invested in the MP and were funded from cash and cash
equivalents. In accordance with the instructions of the Board, investment returns earned on board
designated funds are treated as unrestricted income with the principal to remain intact until
required for future investment in facilities, programs, and services.
Beneficial Interest in Trusts
Beneficial interest in trust represent gifts for which LPCH is the trustee and the remainder
beneficiary of certain charitable remainder trusts, where the trust assets are invested and
administered by outside trustees. Beneficiaries sustain a lifetime interest in a portion of the trust
income. Investments held in these trusts are carried at fair value. The discount rate used during the
year ended August 31, 2016 and 2015 were determined using the T-bill rate. The related liabilities
are based on estimated future cash receipts discounted at 1.46% for the year ended August 31,
2016 and ranging from 0.36% to 2.18% for the year ended August 31, 2015.
Additionally, LPCH is the sole beneficiary of a perpetual trust that is carried at the fair market value
of the trust. Income from the trust (interest, net of fees) is distributed to LPCH and included in
interest income.
Property and Equipment
Property and equipment are stated at cost except for donated assets, which are recorded at fair
market value at the date of donation. LPCH capitalizes certain internal costs of computer software
developed or obtained for internal use. Depreciation of property and equipment is computed using
the straight-line method over the estimated useful lives, which are as follows:
Land improvements 10 to 25 years
Buildings and improvements 10 to 40 years
Equipment 3 to 20 years
Ground leases 51 years
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
9
Significant replacements and improvements are capitalized, while maintenance and repairs, which
do not improve or extend the life of the respective assets, are charged to expense as incurred.
Upon sale or disposal of property and equipment, the cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in the Consolidated
Statements of Operations and Changes in Net Assets.
Assets under capital leases are recorded at the present value at the inception of the lease and are
amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of
the asset. The amortization of assets recorded under capital leases is included in depreciation and
amortization expense in the accompanying Consolidated Statements of Operations and Changes
in Net Assets.
LPCH holds several ground leases, also classified as property and equipment. These ground
leases are amortized on a straight-line basis over the term of the leases and are reflected as
depreciation and amortization in the Consolidated Statements of Operations and Changes in Net
Assets.
Interest costs incurred on borrowed funds during the period of construction of capital assets are
capitalized, net of any interest earned, as a component of the cost of acquiring the asset.
Impairment and Disposition of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. There were no impairment losses
for the years ended August 31, 2016 and 2015.
Other Assets
Other assets include LPCH’s ownership interest in SUMIT, SRA and PEAC, investment in joint
ventures and deposits with vendors, goodwill and deferred debt issuance costs.
LPCH performs an impairment analysis at the reporting unit level when events occur that require
an evaluation to be performed, or at least annually in the fourth quarter. If the carrying value of
goodwill or indefinite lived intangible assets are determined to be impaired, or if the carrying value
of a business that is to be sold or otherwise disposed of exceeds its fair value, then the carrying
value is reduced, including any allocated goodwill, to fair value. Estimates of fair value are based
on appraisals, established market prices for comparative assets or internal estimates of future net
cash flows based on projected performance, depending on circumstances. No impairment of
goodwill is included in the accompanying Consolidated Statement of Operations and Changes in
Net Assets for the years ended August 31, 2016 or 2015.
Deferred debt issuance costs represent costs incurred in conjunction with the issuance of LPCH’s
long-term debt. These costs are amortized on a straight-line basis, which approximates the
effective interest method, over the life of the debt.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
10
Compensated Absences
In accordance with formal policies concerning vacation and other compensated absences, accruals
of $40,305 and $37,237 were recorded as of August 31, 2016 and 2015, respectively, and are
included in accrued salaries and related benefits.
Premiums on Long-Term Debt
Premiums arising from the original issuance of long-term debt are amortized on a straight-line
basis, which approximates the effective interest method, over the life of the debt. The unamortized
portion of these premiums is included in long-term debt.
Excess of Revenues Over Expenses
The Consolidated Statements of Operations and Changes in Net Assets include excess of
revenues over expenses. Changes in unrestricted net assets which are excluded from excess of
revenues over expenses include permanent transfers of assets to and from affiliates for other than
goods and services, contributions of long-lived assets (including assets acquired using
contributions which by donor restriction were to be used for the purposes of acquiring such assets),
adjustment for minimum pension liability, and transfer of funds related to underwater endowments.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated net realizable amounts from patients,
third-party payors including Medi-Cal and others for services rendered. The contractual
commitments and laws and regulations governing the payment for services for government (Medi-
Cal and Medicare) and commercial payors are extremely complex and subject to interpretation. As
a result, there is at least a reasonable possibility that recorded estimates will change by a material
amount in the near term.
The process for estimating the ultimate collectability of receivables involves historical collection
experience, changes in contracts with payors, and significant assumptions and judgment. LPCH
has implemented a standardized approach to this estimation based on the payor classification and
age of outstanding receivables. Account balances are written off against the allowance when
management believes it is probable the receivable will not be recovered. The use of historical
collection experience is an integral part of the estimation of the reserve for doubtful accounts.
Revisions in the reserve for doubtful accounts are recorded as adjustments to the provision for
doubtful accounts.
Charity Care and Community Benefits
LPCH provides care to patients who meet certain criteria under its charity care policy without
charge or at amounts less than its established rates. Amounts determined to qualify as charity
care are not reported as net patient service revenue. LPCH also provides services to patients
under Medi-Cal and other publicly sponsored programs, which reimburse at amounts less than the
cost of the services provided to the recipients. Such amounts are considered community benefits.
Self-Insurance Reserves and Other Liabilities
LPCH self-insures for professional liability risks, postretirement medical benefits, health, dental and
vision, and workers’ compensation. These liabilities are reflected as self-insurance reserves on the
balance sheets.
Professional Liability – LPCH is self-insured through SUMIT (LPCH and SHC Captive
Insurance Company) for medical malpractice and general liability losses under claims-made
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
11
coverage. LPCH also maintains professional liability reserves for claims not covered by
SUMIT which totals $1,761 and $1,891 for the years ended August 31, 2016 and 2015,
respectively. For the policy year’s September 1, 2015 to September 1, 2016, SUMIT retains
100% of the risk related to the first $15,000 per occurrence subject to $25,000 aggregate. The
next $165,000 is transferred to various reinsurance companies rated “A” or better by AM Best
rating agency. For the policy year’s September 1, 2014 to September 1, 2015, SUMIT retained
100% of the risk related to the first $15,000 per occurrence subject to $25,000 aggregate. The
next $150,000 was transferred to various reinsurance companies rated “A” or better by AM
Best rating agency.
Postretirement Medical Benefits – Liabilities for post-retirement medical claims for current
and retired employees are actuarially determined by SHC and allocated to LPCH.
Health, Dental and Vision – Liabilities for health, dental and vision claims for current
employees are based on estimated costs.
Workers’ Compensation – LPCH purchases insurance for workers’ compensation claims with
a $750 deductible per occurrence. Workers’ compensation insurance provides statutory limits
for the State of California. An actuarial estimate of retained losses (or losses retained within
the deductible) has been used to record a liability.
Fair Value of Financial Instruments
Due to the short-term nature of cash and cash equivalents, accounts payable and accrued
liabilities, and accrued salaries and related benefits, their carrying value approximates their fair
value.
Transactions with the University
LPCH enters into various transactions with the University. LPCH records expense transactions
where direct and incremental economic benefits are received by LPCH. Certain expenses are
allocated from the University to LPCH. Allocated expenses reported as operating expenses in the
Consolidated Statements of Operations and Changes in Net Assets are management’s best
estimates of LPCH’s arms-length payment of such amounts for its market specific circumstances.
To the extent that payments to the University exceed an arms-length estimated amount relative to
the benefit received by LPCH, they are recorded as transfers to the University.
Concentration of Credit Risk
Financial instruments, which potentially subject LPCH to concentrations of credit risk, consist
principally of cash and cash equivalents, patient accounts receivable, and investments in University
managed pools (Note 6).
LPCH invests its cash and cash equivalents in highly rated financial instruments including insured
deposits. As of August 31, 2016, LPCH has invested its cash and cash equivalents with a financial
institution in excess of federal depository insurance limits.
LPCH’s concentration of credit risk relating to patient accounts receivable is limited by the diversity
and number of the patients and payers. Patient accounts receivable consists of amounts due from
governmental programs, commercial insurance companies, private pay patients, and other group
insurance programs.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
12
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates relate to patient accounts
receivable allowances and self-insurance reserves. Actual results may differ from those estimates.
Income Taxes
Both LPCH and PCHA are California not-for-profit corporations and have been recognized as tax-
exempt pursuant to Section 501(c)(3) of the Internal Revenue Code.
Adoption of New Standards
LPCH adopts new standards on a consolidated basis (including PCHA).
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is
the sole source of authoritative nongovernmental U.S. generally accepted accounting principles.
In August 2016, the FASB issued an update to the ASC which makes several modifications to the current reporting requirements for not-for-profit (NFP) entities. The ASC update changes the way NFPs classify net assets and results in significant changes to financial reporting and disclosures for NFPs. The new guidance is effective for fiscal year 2019 for LPCH. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements. In March 2016, the FASB issued an update to the ASC which clarifies the implementation guidance on principal versus agent considerations. This guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new guidance is effective for fiscal year 2019 for LPCH. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements. In February 2016, the FASB issued an update to the ASC which requires lessees to recognize operating and financing lease liabilities and corresponding right-of use assets on the balance sheet. The new guidance is effective for fiscal year 2020 for LPCH. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements. In May 2015, the FASB issued an update to the ASC which modifies reporting requirements for investments that are eligible to be measured at fair value using the net asset value (or its equivalent). The ASC update removes the requirement to categorize these investments within the fair value hierarchy and make certain disclosures. The new guidance is effective for fiscal year 2018 for LPCH. LPCH has adopted this guidance in fiscal year 2016. In April 2015, the FASB issued an update to the ASC which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The new guidance is effective for fiscal year 2017 for LPCH. In August 2015, the FASB issued a supplemental ASU which allows an entity to present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the costs ratably over the term of the line of credit arrangement. The recognition and measurement guidance for debt issuance costs is not affected. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
13
In May 2014, the FASB issued an update to the ASC to improve the consistency of revenue recognition practices across industries for economically similar transactions. Subsequently, the FASB has issued several amendments and updates to the original standard. The core principle is that an entity recognizes revenue for goods or services to customers in an amount that reflects the consideration it expects to receive in return. The guidance is effective for fiscal year 2019. LPCH is currently evaluating the impact that this guidance will have on its consolidated financial statements.
3. Net Patient Service Revenue
LPCH has agreements with third-party payors that provide for payments at amounts different from
LPCH’s established rates. A summary of payment arrangements with major third-party payors are
as follows:
Medi-Cal – Inpatient services rendered to State and Managed Medi-Cal program beneficiaries
through June 30, 2013 were reimbursed under contracts with negotiated per diem rates. On
July 1, 2013, the State began reimbursing for Medi-Cal program beneficiaries using an All
Patient Refined-Diagnosis Related Group (APR-DRG) methodology. Outpatient services are
reimbursed based upon prospectively determined fee schedules.
In addition, Disproportionate Share (“DSH”) is another Medi-Cal program that provides for
supplemental funding when a hospital is considered by the State to have relatively more Medi-
Cal utilization than the norm. LPCH must re-qualify for DSH annually. LPCH did not qualify
for DSH in 2016 and 2015.
HMO/PPO and Other – Managed care contracts such as those with HMOs and PPOs
reimburse LPCH at per diem rates or a percent of charges basis, which are less than full
charges. Net patient service revenue by major payor before the provision for doubtful accounts
for the years ended August 31 is as follows:
LPCH PCHA Total LPCH PCHA Total
Medi-Cal 254,028$ 6,340$ 260,368$ 264,638$ 6,593$ 271,231$
HMO/PPO 905,987 61,822 967,809 931,798 57,596 989,394
Other 79,247 3,527 82,774 54,622 (660) 53,962
1,239,262$ 71,689$ 1,310,951$ 1,251,058$ 63,529$ 1,314,587$
20152016
Included above in the Medi-Cal net patient services revenue is $51,793 and $79,775 for Medi-
Cal Fee-For-Service and Managed Care payments for fiscal years 2016 and 2015, respectively,
under the hospital provider fee program.
Amounts due from Blue Cross, Blue Shield and the State of California’s Medi-Cal program
represent 28%, 12% and 15%, and 26%, 11% and 14%, of LPCH net patient accounts
receivable at August 31, 2016 and 2015, respectively. Amounts due from Blue Cross, Blue
Shield and the State of California’s Medi-Cal program represent 24%, 10% and 9%, and 22%,
14% and 15%, of PCHA net patient accounts receivable at August 31, 2016 and 2015,
respectively. LPCH does not believe significant credit risks exist with these payors.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
14
Hospital Quality Assurance Fee Program
The State of California enacted AB 1383 in 2009, as amended by AB 1653 in 2010, which
established a Hospital Quality Assurance Fee Program (“QAF”) and a Hospital Fee Program.
These programs imposed a provider fee on certain California general acute care hospitals that,
combined with federal matching funds, would be used to provide supplemental payments to certain
hospitals and support the State’s effort to maintain health care coverage for children. The effective
period of the Hospital Fee Program was April 1, 2009 through December 31, 2010. The State
received final approval from the Centers for Medicare & Medicaid Services (CMS) in December of
2010 on the rates to pay Medi-Cal managed care plans. Subsequent legislation allowed for three
additional QAF and Hospital Fee programs, the latest of which runs from January 1, 2014 through
December 31, 2016. In December 2014, CMS approved the fee-for-service Medi-Cal supplement
payments portion of this thirty month extension. CMS approved both the expansion population and
non-expansion population portion of the first of four potential managed care supplemental
payments of this thirty month program in April 2016 and June 2015, respectively.
For the years ended August 31, 2016 and 2015, respectively, LPCH recognized $51,793 and
$79,775 in net patient service revenue for Medi-Cal Fee-For-Service (“FFS”) and Managed Care
supplemental payments and $24,196 and $43,156, in other expense in the Consolidated Statement
of Operations and Changes in Net Assets for QAF paid to California Department of Health Care
Services (“DHCS”).
4. Charity Care and Community Benefits
LPCH is committed to advocacy, outreach, education, and research to improve the health status of
children and pregnant women. LPCH continually reaffirms its commitment to its community by
developing innovative programs to enhance its own and the community’s capacity to care for
children and pregnant women. These programs include:
Health Professions Education
Graduate Medical Education
Social Services Internships
Community Programs
Mobile Adolescent Health Services
Pediatric Weight Control Programs
CareAVan
Community Health Education
Perinatal Outreach Programs
Support to Ravenswood Family Health Center
Child Safety & Inquiry Presentation Programs
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
15
Family and Children Health Advocacy
LPCH’s direct charity care and uncompensated costs of medical services to government-covered
patients for the years ended August 31 is as follows:
2016 2015
Charity care at established rates 5,758$ 10,160$
Estimated cost of charity care 1,555 2,753
Estimated cost of medical services provided to
government covered patients (not including Medicare) 212,717 219,644
214,272$ 222,397$
The decrease in the estimated cost of Medi-Cal services provided to government covered patients
(not including Medicare) in 2016 was due to higher Medi-Cal charges in relation to the applicable
costs. The estimated uncompensated cost of Medi-Cal services provided to government covered
patients do not include offset of funds from the QAF program. Additionally, LPCH invests in
improving the health of children of San Mateo and Santa Clara counties primarily by providing
health professional education and community health services.
5. Contributions Receivable
Contributions receivable and contribution revenue are included in the financial statements in the
appropriate net asset category. Contributions are recorded at the discounted net present value of
the future cash flows, using discount rates ranging from 3.2% to 5.3% for 2016 and 1.8% to 5.4%
for 2015.
Contributions receivable at August 31 are expected to be realized in the following periods:
2016 2015
In one year or less 33,182$ 8,372$
Between one year and five years 55,921 3,836
More than five years 45,369 25,000
134,472 37,208
Less: Discount/allowance (18,484) (6,665)
Less: Reserves for uncollectible pledges (337) -
Total contributions receivable, net 115,651 30,543
Less: Current portion (32,944) (8,075)
Contributions receivable, net of current portion 82,707$ 22,468$
Contributions receivable at August 31 are to be utilized for the following purposes:
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
16
2016 2015
Plant replacement and expansion 108,552$ 24,377$
Clinical services 7,099 3,812
Indigent care and other - 2,354
115,651$ 30,543$
Conditional pledges depend on the occurrence of a specified future or uncertain event. There were
no conditional pledges as of August 31, 2016 and 2015, respectively.
6. Investments and Investments in University Managed Pools
The composition of investments held directly by the organization at August 31 is as follows:
Cost Fair Value Cost Fair Value
Investments
Mutual funds 71,389$ 70,642$ 69,925$ 69,313$
2016 2015
Board designated funds, short-term investments and other noncurrent investment funds are
invested in University Merged Pool (MP), holding a variety of investments, which consist of cash
and cash equivalents, government and corporate debt securities, equity securities and mutual
funds, real estate, investment in partnerships, and other.
Cost Fair Value Cost Fair Value
Beneficial interest in investments
in University managed pools 395,748$ 599,151$ 399,560$ 717,866$
Board designated funds 9,214 9,214 156,809 159,789
404,962$ 608,365$ 556,369$ 877,655$
2016 2015
Losses and gains on LPCH’s beneficial interest in investments in University Merged Pool of
($5,274) and $22,123 for the years ended August 31, 2016 and 2015, respectively, represent the
change in the fair value of LPCH’s share of the MP.
The MP is the primary investment pool in which funds are invested. The MP is invested with the
objective of maximizing long-term total return. It is a unitized pool in which the fund holders
purchase investments and withdraw funds based on a monthly share value. The MP’s investments
at August 31, 2016 and 2015 are as follows:
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
17
2016 2015
Assets
Cash and cash equivalents 4 % 5 %
Fixed income 6 5
Public equities 27 26
Real estate 9 9
Natural resources 9 8
Absolute return 20 21
Private equities 25 26
100 % 100 %
7. Fair Value Measurements
U.S. Generally Accepted Accounting Principles (GAAP) defines fair value as the price received
upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market
participants and establishes a hierarchy of valuation inputs based on the extent to which the inputs
are observable in the marketplace. Observable inputs reflect market data obtained from
independent sources. In contrast, unobservable inputs reflect the entity’s assumptions about how
market participants would value the financial instrument. Valuation techniques used under U.S.
GAAP must maximize the use of observable inputs to the extent available.
The following describes the hierarchy of inputs used to measure fair value and the primary
valuation methodologies used for financial instruments measured at fair value on a recurring basis:
Level 1 Quoted prices in active markets for identical assets or liabilities, at the reporting date,
without adjustment. Market price data is generally obtained from relevant exchange or
dealer markets.
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, 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 same term of the assets or liabilities. Inputs are obtained from
various sources including market participants, dealers and brokers.
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.
A financial instrument’s categorization within this hierarchy is based upon the lowest level of input
that is significant to the fair value measurement.
The following table summarizes consolidated LPCH’s assets and liabilities measured at fair value
as of August 31, 2016, based on the inputs used to value them.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
18
Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents 532,900$ -$ -$ 532,900$
Assets limited as to use, held by trustee 219 - - 219
Investments (mutual funds) 70,642 - - 70,642
Beneficial interest in trusts - - 15,048 15,048
Total assets (subject to fair value 603,761$ -$ 15,048$ 618,809$
leveling)
Investments in Stanford University
managed pools (measured at NAV) 608,365
Total assets 1,227,174$
There were no transfers of assets or liabilities between Level 1 and Level 2 during the year ended
August 31, 2016.
The following table presents the 2016 activities of financial instruments of which fair value
measurement is using Level 3 inputs:
Balance at September 1, 2015 16,079$
Realized gains (losses) (321)
Unrealized gains (losses) 1,419
Charitable trusts (2,129)
Balance at August 31, 2016 15,048$
The following table summarizes consolidated LPCH’s assets and liabilities measured at fair value
as of August 31, 2015, based on the inputs used to value them.
Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents 335,901$ -$ -$ 335,901$
Assets limited as to use, held by trustee 89,500 - - 89,500
Investments (mutual funds) 69,313 - - 69,313
Beneficial interest in trusts - - 16,079 16,079
Total assets (subject to fair value 494,714$ -$ 16,079$ 510,793$
leveling)
Investments in Stanford University
managed pools (measured at NAV) 877,655
Total assets 1,388,448$
There were no transfers of assets or liabilities between Level 1 and Level 2 during the year ended
August 31, 2015.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
19
The following table presents the 2015 activities of financial instruments of which fair value
measurement is using Level 3 inputs:
Balance at September 1, 2014 17,028$
Realized gains (losses) (385)
Unrealized gains (losses) (564)
Balance at August 31, 2015 16,079$
8. Property and Equipment
Property and equipment consist of the following as of August 31, 2016 and 2015:
LPCH PCHA Consolidated LPCH PCHA Consolidated
Land and improvements 32,246$ -$ 32,246$ 31,514$ -$ 31,514$
Buildings and improvements 462,050 3,895 465,945 409,869 871 410,740
Equipment 303,298 7,200 310,498 292,854 2,115 294,969
Ground leases 59,384 - 59,384 59,384 - 59,384
856,978 11,095 868,073 793,621 2,986 796,607
Less: Accumulated depreciation (414,916) (5,815) (420,731) (360,293) (3,990) (364,283)
Construction-in-progress 977,143 4,831 981,974 638,807 7,146 645,953
Property and equipment, net 1,419,205$ 10,111$ 1,429,316$ 1,072,135$ 6,142$ 1,078,277$
2016 2015
Ground lease accumulated amortization totals $11,113 and $10,601 for the years ended
August 31, 2016 and 2015, respectively.
Total depreciation and amortization expense for the years ended August 31, 2016 and 2015, is
$56,454 and $58,532, respectively.
Capitalized interest expense, net of interest income was $10,897 and $4,110 for the years ended
August 31, 2016 and 2015, respectively.
9. Long-Term Debt and Capital Leases
LPCH’s outstanding debt at August 31 is summarized below:
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
20
Effective
Year of Interest
Maturity 2016/2015 2016 2015
California Health Facilities
Financing Authority
Variable rate bonds
Series 2014B 2034-2043 0.66%/0.52% 100,000 100,000
Fixed rate bonds
Series 2016A 2016-2033 4.87%/N/A 73,675 -
Series 2016A Premium 14,470 -
Series 2016B 2052-2055 4.99%/N/A 100,000 -
Series 2016B Premium 14,382 -
Series 2014A 2025-2043 4.74%/4.74% 100,000 100,000
Series 2014A Premium 7,720 8,006
Series 2012A 2044-2051 4.93%/4.93% 200,000 200,000
Series 2012A Premium 10,016 10,302
Series 2012B 2016-2027 4.70%/4.70% 42,195 44,600
Series 2012B Premium 5,948 6,488
Fixed rate put bonds
Series 2008A Legally defeased in 2016 N/A/1.41% - 30,340
Series 2008B Legally defeased in 2016 N/A/1.41% - 30,340
Series 2008C Legally defeased in 2016 N/A/1.41% - 29,610
668,406 559,686
Less: Current portion of long term debt (5,695) (5,675)
Long term debt 662,711$ 554,011$
Outstanding Principal
The fair value of the bonds are estimated based on the current borrowing rates for similar issues,
and amounted to approximately $711,846 and $569,300 at August 31, 2016 and August 31, 2015,
respectively. All bonds held at August 31, 2016 are considered to be Level 2 fair value
measurements.
In 2003, LPCH entered into a master indenture of trust (the “LPCH Master Indenture”) as the sole
initial member of an obligated group (“LPCH Obligated Group”), the purpose of which is to provide
for issuance of obligations (“Obligations”) to secure indebtedness of the members of the LPCH
Obligated Group on a joint and several basis.
Obligations issued under the LPCH Master Indenture are collateralized by a lien on the gross
revenues of LPCH. The LPCH Master Indenture also includes various covenants, the most
restrictive of which include maintenance of a minimum annual debt service coverage ratio,
limitations on additional indebtedness, restrictions on the disposition or transfer of assets, mergers
and entry into and withdrawal from the LPCH Obligated Group. During the year ended August 31,
2016, LPCH was in compliance with its covenants.
In July 2003, California Health Facilities Financing Authority (“CHFFA”) issued, on behalf of LPCH,
revenue bonds in the aggregate par amount of $115,000 (collectively, the “2003 Bonds”). The
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
21
2003 Bonds were comprised of $60,000 of Series A and B auction rate revenue bonds and
$55,000 of Series C fixed rate revenue bonds.
In August 2008, CHFFA issued, on behalf of LPCH, three series of revenue bonds in the aggregate
par amount of $93,450 (collectively, the “2008 Bonds”). The 2008 Bonds were comprised of
Series A, B and C variable rate revenue bonds. Proceeds of the 2008 Bonds were used to redeem
the 2003 Series A and B bonds, refinance an outstanding bank loan and pay a portion of the costs
of issuance. The 2008 Bonds initially bore interest at a weekly rate, which reset every 7 days.
In March 2012, LPCH converted the 2008 Bonds from short term variable rate bonds into five-year
fixed rate put bonds with no gain or loss.
In March 2012, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate
par amount of $251,045 (collectively, the “2012 Bonds”). The 2012 Bonds were comprised of
$200,000 Series A bonds (at a premium of $11,288) and $51,045 Series B bonds (at a premium of
$8,351), each series issued as fixed rate bonds. The rates for the Series B bonds are fixed,
however range from 3-5% over the life of the bonds. Proceeds of the 2012 Series A bonds
primarily were used for financing the acquisition, construction, and expansion of the hospital and to
pay a portion of the costs of issuance. Proceeds of the 2012 Series B bonds were used for the
legal defeasance and redemption of 2003 Series C bonds and to pay a portion of the costs of
issuance.
In May 2014, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate par
amount of $200,000 (collectively, the “2014 Bonds”). The 2014 Bonds were comprised of
$100,000 Series A bonds and $100,000 Series B bonds. Proceeds of the 2014 Bonds primarily will
be used for financing the acquisition, construction, and expansion of the hospital and to pay a
portion of the costs of issuance. The 2014 Series A bonds were issued as fixed rate bonds. The
rates for the Series A bonds are fixed, however range from 4-5% over the life of the bonds. The
2014 Series B bonds were issued in a floating index mode with monthly interest rate resets and
were directly placed with The Northern Trust Company. The 2014 Series B bonds are not subject
to remarketing or tender until May 8, 2024 and are classified as long-term liabilities.
In March 2016, CHFFA issued, on behalf of LPCH, two series of revenue bonds in the aggregate
par amount of $176,975 (collectively, the “2016 Bonds”). The 2016 bonds were comprised of
Series A and B revenue bonds. Proceeds of the 2016 Series A were used for the legal defeasance
and redemption of the 2008 Series A, B and C revenue bonds. Proceeds of the 2016 Series B were
used to finance a portion of the ongoing construction, and expansion of the hospital, and to pay for
the cost of issuance.
All the bonds issued by CHFFA on behalf of LPCH are a limited obligation of the CHFFA and are
payable solely from payments made by LPCH and secured by an Obligation issued pursuant to the
LPCH Master Indenture.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
22
Scheduled principal payments on long-term debt are summarized below:
Scheduled
Principal
Maturities Interest
Year ending August 31,
2017 5,695$ 28,101$
2018 5,800 27,844
2019 5,845 27,580
2020 6,135 27,317
2021 6,365 27,003
Thereafter 586,030 577,027
615,870$ 714,872$
10. Retirement Plans
LPCH provides retirement benefits through defined benefit and defined contribution retirement
plans covering substantially all benefit eligible employees and previously leased employees.
Defined Contribution Pension Plan
Employer contributions to the defined contribution retirement plan are based on a percentage of
participant annual compensation. Employer contributions to this plan which are vested immediately
to participants totaling $28,978 and $26,996 for the years ended August 31, 2016 and 2015,
respectively, are included in salaries and benefits expense in the Consolidated Statements of,
Operations and Changes in Net Assets.
Postretirement Medical Benefit Plan
LPCH currently provides health insurance coverage for certain of its employees and previously
leased employees, through the SHC plan, upon retirement as early as age 55, with years of service
as defined by specific criteria. The health insurance coverage for retirees who are under age 65 is
the same as that provided to active employees. A Medicare supplement option is provided for
retirees over age 65.
For purposes of the August 31, 2016 benefit plan liability valuations, LPCH has assumed future
mortality according to the RP 2014 White Collar mortality table and MSS 2007 projection table
(actuarial developed scale based on the rates published by the Social Security Administration).
LPCH has recorded a liability totaling $16,749 and $18,204 for the years ended August 31, 2016
and 2015, respectively, included in self-insurance reserves on the Consolidated Balance Sheets.
This represents the obligation for its employees and previously leased employees. LPCH
reimburses SHC for costs related to this plan on a periodic basis, and in 2016 has recorded
expense of $159 and an increase of $1,614 to net assets to decrease the minimum benefit liability.
Defined Benefit Pension Plans
Certain LPCH employees and previously leased employees are covered by a noncontributory
defined benefit pension plan held by SHC. SHC’s defined benefit pension plan benefits are based
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
23
on years of service and the employee’s compensation. Contributions to the plans are based on
actuarially determined amounts sufficient to meet the benefits to be paid to plan participants.
SHC and LPCH have an arrangement whereby SHC assumes the pension liability of the LPCH
employees and previously leased employees. However, LPCH is required to reimburse SHC for
the annual expense incurred for these employees and previously leased employees. LPCH paid
$195 and $286 in cash for the years ended August 31, 2016 and 2015, respectively, which
represented current year pension expenses related to LPCH employees and previously leased
employees.
The remainder of certain other LPCH employees and previously leased employees not covered by
the previously described plans are covered by a frozen noncontributory defined benefit pension
plan (the “LPCH Frozen Pension Plan”). Benefits are based on years of service and the
employee’s compensation. Contributions to the plan are based on actuarially determined amounts
sufficient to meet the benefits to be paid to plan participants.
The following tables present information on plan assets and obligations, costs, and actuarial
assumptions for the LPCH Frozen Pension Plan for the years ended August 31, 2016 and 2015,
respectively.
The change in pension assets and the related change in benefit obligations, using a measurement
date as of and for the years ended August 31, 2016 and 2015 are as follows:
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
24
2016 2015
Change in plan assets
Fair value of plan assets at beginning of year 5,664$ 5,853$
Actual return on plan assets 820 (108)
Employer contributions 422 300
Benefits paid (516) (381)
Fair value of plan assets at end of year 6,390$ 5,664$
Change in benefit obligation
Projected benefit obligation at beginning of year 8,046$ 7,749$
Interest cost 311 273
Actuarial (gain) loss 859 405
Benefits paid (516) (381)
Projected benefit obligation at end of year 8,700$ 8,046$
Funded status at end of year and
net amount recognized in balance sheet (2,310)$ (2,382)$
Net amount recognized in balance sheet (2,310)$ (2,382)$
Amounts not yet reflected in net periodic benefit cost
and included in other changes in net assets
Accumulated net (loss) (2,686)$ (2,457)$
Adjustment for minimum pension liability (2,686) (2,457)
Cumulative employer contributions in excess of net
periodic benefit cost 376 75
Net amount recognized in balance sheet (2,310)$ (2,382)$
The estimated net loss that will be amortized from other changes in net assets into net periodic
benefit cost over the next fiscal year is $118.
Due to the LPCH pension plan being frozen, the accumulated benefit obligation is the same as the
projected benefit obligation at the end of the year.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
25
Net benefit expense related to the plan for the years ended August 31 includes the following
components:
2016 2015
Interest cost 311$ 273$
Expected return on assets (295) (348)
Amortization of net loss 105 75
Total net periodic benefit cost 121$ -$
Changes recognized in other changes in net assets for the years ended August 31 include the
following components:
2016 2015
Prior service cost (credit) arising during period -$ -$
Net loss (gain) arising during period 334 861
Amortization of net (loss) (105) (75)
Total recognized in unrestricted net assets 229$ 786$
Total recognized in net periodic benefit cost and
unrestricted net assets 350$ 786$
The decrease to net assets to adjust the minimum pension liability of $229 is included in the
Consolidated Statements of Operations and Changes in Net Assets for the year ended August 31,
2016. The respective decrease to net assets for the year ended August 31, 2015 was $786.
Actuarial Assumptions
The weighted-average assumptions used to determine benefit obligations are as follows for the
years ended August 31:
2016 2015
Weighted-average assumptions
to determine benefit obligations
Discount rate 3.18 % 4.03 %
Rate of compensation increase N/A N/A
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
26
The discount rate, expected rate of return on plan assets, and the projected covered payroll growth
rates used in determining the above accrued benefit costs are as follows for the years ended
August 31:
2016 2015
Weighted average assumptions
to determine net periodic benefit costs
Discount rate 4.03 % 3.66 %
Rate of compensation increase N/A N/A
Expected return on assets 5.50 % 6.25 %
LPCH utilizes an independent investment consulting firm to provide an estimate of the future
expected returns for each asset class based on LPCH’s asset allocation targets. The evaluation of
the future expected returns resulted in the use of 5.50% as the assumption for the expected return
on plan assets.
Plan Investments
The investments of the LPCH Frozen Pension Plan have been invested to ensure stability of
returns as well as to preserve the asset base of investments. Changing market cycles require
flexibility in asset allocation to allow movement of capital within the asset classes for the purpose of
increasing investment return and/or reducing risk. The plan asset allocation for the LPCH Frozen
Pension Plan as of the measurement date August 31 is 69% fixed income, 30% equity, and 1%
cash as of August 31, 2016 and 70% fixed income and 29% equity, and 1% other as of August 31,
2015.
Fair Value of Plan Assets
The plan assets measured at fair value are as follows for the year ended August 31, 2016:
Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents 65$ -$ -$ 65$
Public equities 1,894 - - 1,894
Fixed income 4,431 - - 4,431
Other - - - -
Total plan assets 6,390$ -$ -$ 6,390$
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
27
The plan assets measured at fair value are as follows for the year ended August 31, 2015:
Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents 40$ -$ -$ 40$
Public equities 1,628 - - 1,628
Fixed income 3,996 - - 3,996
Other - - - -
Total plan assets 5,664$ -$ -$ 5,664$
Concentration of Risk
LPCH manages a variety of risks, including market, credit, and liquidity risks, across plan assets
through our investment managers. Concentration of risk is defined as an undiversified exposure to
one of the above–mentioned risks that increases the exposure of the loss of plan assets
unnecessarily. LPCH management minimizes risk by diversifying exposure to such risks across a
variety of instruments, markets, and counterparties.
Plan Contributions
LPCH expects to contribute $0 to the LPCH Frozen Pension Plan during the fiscal year ending
August 31, 2017.
Estimated Future Benefit Payments
The following table presents the expected benefit payments:
Year ending August 31,
2017 668$
2018 660
2019 656
2020 620
2021 581
Next 5 Years 2,594
11. Temporarily and Permanently Restricted Net Assets
The endowment is intended to generate investment income that can be used to support their
current operating and strategic initiatives. LPCH invests the majority of the endowments in the
University’s MP.
LPCH’s Board of Directors has adopted the University’s investment and spending policies for its
permanently restricted assets that provide for annual amounts (payout) to be distributed to
appropriate temporarily restricted funds supporting operating and strategic activities of LPCH.
Through the combination of investment strategy and payout policy, the hospital is striving to
provide a reasonably consistent payout from the endowment to support operations, while
preserving the purchasing power of the endowment adjusted for inflation. Consistent with the
Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), when determining the
appropriate payout, the Board considers the purposes of the endowment, the duration and
preservation of the endowment, general economic conditions, the possible effect of inflation or
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
28
deflation, the expected return from income and the appreciation of investments, and investment
policy.
The current University Board of Trustees approved targeted spending rate is 5.5%, which was
adopted by the Board of Directors of LPCH. The payout amount is determined by applying a
smoothing rule that limits payout in a given year to the sum of 70% of the previous year’s actual
rate and 30% of the long-term spending target rate applied to the projected per share value of the
endowment. The smoothing rule and the diversification of the investment asset allocation attempt
to mitigate the impact of short-term market volatility on the flow of funds to support LPCH’s
operations.
LPCH classifies as permanently restricted net assets (a) the original value of gifts donated to the
permanent endowment, (b) the original value of subsequent gifts to the permanent endowment,
and (c) accumulations to the permanent endowment made in accordance with the direction of the
applicable donor gift instrument at the time the accumulation is added to the fund. The remaining
portion of the donor-restricted endowment fund that is not classified in permanently restricted net
assets is classified as temporarily restricted net assets until those amounts are authorized for
expenditure.
Net unrealized losses on permanently restricted endowment funds are classified as a reduction to
unrestricted net assets until such time as the fair value equals or exceeds historic value. The
aggregate amount by which fair value was below historic value was approximately $10 and $0 as
of August 31, 2016 and 2015, respectively.
Changes in LPCH’s endowment, for the years ended August 31, 2016 and 2015, are as follows:
Temporarily Permanently
Unrestricted Restricted Restricted Total
Endowment at beginning of year -$ 103,166$ 204,405$ 307,571$
Investment returns
Earned income - 16,134 - 16,134
Unrealized and realized gains/(losses) - (8,746) 1,255 (7,491)
Total investment returns/(losses) - 7,388 1,255 8,643
Amounts distributed for operations - (15,462) - (15,462)
Contributions received from donors - - 5,763 5,763
Other - (156) (75) (231)
Net (decrease) increase in endowment - (8,230) 6,943 (1,287)
Endowment at end of year -$ 94,936$ 211,348$ 306,284$
2016
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
29
Temporarily Permanently
Unrestricted Restricted Restricted Total
Endowment at beginning of year -$ 105,530$ 203,342$ 308,872$
Investment returns
Earned income - 15,162 - 15,162
Unrealized and realized losses - (2,202) (310) (2,512)
Total investment returns - 12,960 (310) 12,650
Amounts distributed for operations - (14,266) - (14,266)
Contributions received from donors - 2 850 852
Other - (1,060) 523 (537)
Net (decrease) increase in endowment - (2,364) 1,063 (1,301)
Endowment at end of year -$ 103,166$ 204,405$ 307,571$
2015
All of LPCH’s endowments are classified as donor-restricted.
Return Objectives and Risk Parameters
LPCH has adopted endowment investment and spending policies that attempt to provide a
predictable stream of funding to programs supported by its endowment while seeking to maintain
the purchasing power of endowment assets. Under this policy, the return objective for the
endowment assets is to generate optimal total return while maintaining an appropriate level of risk
for LPCH. LPCH expects its endowment funds over time, to provide at least an average rate of
return of approximately 5% annually. Actual returns in any given year may vary from this amount.
Strategies Employed for Achieving Investment Objectives
To achieve its long-term rate of return objectives, LPCH relies on a total return strategy in which
investment returns are achieved through both capital appreciation (realized and unrealized gains)
and current yield (interest and dividends). LPCH targets a diversified asset allocation that places
greater emphasis on types of investments as described in Note 6 to achieve its long-term
objectives within prudent risk constraints. Portfolio asset allocation targets as well as expected
risk, return and correlation amongst the asset classes are reevaluated annually by the asset
manager and reported to the Board of Directors.
Permanently restricted net assets consist of investments to be held in perpetuity and invested to
generate income to support the following purposes at August 31:
2016 2015
Permanently restricted
Education 27,009$ 27,009$
Plant replacement and equipment 4,598 4,598
Clinical services 147,006 142,455
Indigent care and other 32,735 30,343
211,348$ 204,405$
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
30
Temporarily restricted net assets consist of the following at August 31:
2016 2015
Temporarily restricted
Education 13,042$ 14,386$
Plant replacement and equipment 460,689 344,017
Clinical services 84,812 80,364
Indigent care and other 15,576 19,472
574,119$ 458,239$
12. Related-Party Transactions
Transactions with SHC
LPCH and SHC share certain functions, including various information systems, human resources,
managed care contracting, and materials management. The costs for these shared services,
which are included in purchased services in the Consolidated Statements of Operations and
Changes in Net Assets, are allocated between SHC and LPCH based on management’s best
estimates. LPCH’s total cost for shared services was $30,416 and $28,556 for the years ended
August 31, 2016 and 2015, respectively.
LPCH also purchases various services from SHC. These services include operating room, cardiac
catheterization, interventional radiology, radiation oncology, and laboratory. The cost of these
services, which is included in purchased services in the Consolidated Statements of Operations
and Changes in Net Assets, is charged back to LPCH based on a percentage of charges intended
to approximate costs or a cost per procedure. LPCH’s total cost for services purchased from SHC
was $47,214 and $47,087 for the years ended August 31, 2016 and 2015, respectively.
In addition to the services described above, LPCH purchases services from SHC that include
services provided by interns and residents, maintenance and certain operating expenses, including
utilities and capital projects. These services totaled $33,371 and $30,064 for the years ended
August 31, 2016 and 2015, respectively, and are included in purchased services and other
expenses in the Consolidated Statements of Operations and Changes in Net Assets or in property
and equipment, net, in the Consolidated Balance Sheets.
Transactions with the University
LPCH records operating expense or equity transfers to account for transactions with the University.
LPCH purchases services from the University including telecommunications, transportation, certain
utilities, rent, legal, and internal audit. Costs incurred by LPCH for these services purchased from
the University were approximately $23,261, and $28,300 for the fiscal years ended August 31,
2016 and 2015, respectively, and are recorded as professional services, purchased services, and
other expenses in the Consolidated Statements of Operations and Changes in Net Assets for those
fiscal years or as property and equipment, net, in the Consolidated Balance Sheets. The total
recoveries from the University, including rent and certain salary and benefits, was $3,537 and
$3,213 as of August 31, 2016 and 2015, respectively.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
31
Transactions with Stanford School of Medicine (SoM)
Services purchased from the University and specifically, the Stanford School of Medicine, include
clinical services that benefit LPCH, including hospital based physicians, medical direction, blood
products, and medical library services. Payment for these services is based on management’s
best estimate of market value. On September 1, 2006, LPCH and the University entered into a
Professional Services Agreement (“PSA”) which assigned to LPCH the right to bill and collect all
revenue related to pediatric and obstetric clinical services on behalf of the Stanford School of
Medicine faculty. In return, LPCH reimburses the University for the services provided by the
physician faculty. The PSA is revised periodically, most recently as of September 1, 2010. The
expense recorded related to payments and accruals for all of these services amounted to
approximately $209,132 and $188,900 for the fiscal years ended August 31, 2016 and 2015,
respectively. The collections received from external parties by LPCH as agent on behalf of SoM
was recorded in other revenue and purchased services. The amounts were $16,737 and $12,700
as of August 31, 2016 and August 31, 2015, respectively.
Transactions with the Lucile Packard Foundation for Children’s Health
The Lucile Packard Foundation for Children’s Health (“LPFCH”) is a private charity dedicated to
promoting, protecting, and sustaining the physical, mental, emotional and behavioral health of
children in the Bay Area. In addition to serving as a community grant maker, LPFCH is the primary
community fundraising agent for LPCH and the pediatric faculty and programs at the University.
Although these three entities share similar missions, LPFCH is governed by a separate board that
is independent of LPCH and the University. LPCH purchases and records as expense fundraising
services provided by LPFCH. All contributions raised by LPFCH through community fundraising
that are specifically designated for LPCH are recorded by LPCH rather than LPFCH. Contributions
recorded as a result of LPFCH fundraising efforts are as follows:
2016 2015
Unrestricted gifts 7,026$ 2,075$
Temporarily restricted gifts 127,663 70,810
Permanently restricted gifts 5,763 850
Total gifts 140,452$ 73,735$
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
32
13. Operating Leases
The organization leases various equipment and facilities under operating leases expiring at various
dates. Total rental expense (included in other operating expenses in the Consolidated Statements
of Operations and Changes in Net Assets) under these leases for the years ended August 31, 2016
and 2015 was $27,512 and $26,513, respectively. Net minimum future operating lease payments
for periods subsequent to August 31, 2016 are as follows:
LPCH PCHA Total
Year ending August 31,
2017 19,978$ 3,563$ 23,541$
2018 18,529 3,005 21,534
2019 17,040 1,961 19,001
2020 12,347 809 13,156
2021 3,637 283 3,920
Thereafter 6,722 478 7,200
78,253$ 10,099$ 88,352$
Net Minimum Future Operating
Leases Payments
14. Commitments and Contingencies
LPCH is aware of certain asserted and unasserted legal claims. While the outcome cannot be
determined at this time, management is of the opinion that the liability, if any, from these actions
will not have a material effect on LPCH’s financial position.
As with many medical centers across the country, information security and privacy is a growing risk
area based on developments in the law and expanding mobile technology practices. LPCH has
policies, procedures, and training in place to safeguard protected information, but select incidents
have occurred in the past and may occur in the future involving potential or actual disclosure of
such information (including, for example, certain identifiable information relating to patients). In
most cases, there has been no evidence of unauthorized access to, or use/disclosure of, such
information, yet laws may require reporting to potentially affected individuals and federal and state
governmental agencies. Governmental agencies have the authority to investigate and request
further information about an incident or safeguards, to cite LPCH for a deficiency or regulatory
violation, and/or require payment of fines, corrective action, or both. California law also allows a
private right to sue for a breach of medical information. The cost of such possible consequences
has not been material to date to LPCH, and LPCH management does not believe that any future
consequences of these incidents will be material to its consolidated financial statements.
The healthcare industry is subject to numerous laws and regulations of federal, state and local
governments. Compliance with these laws and regulations can be subject to future government
review and interpretation, as well as to regulatory actions unknown or unasserted at this time.
Government activity with respect to investigations and allegations concerning possible violations of
regulations by healthcare providers could result in the imposition of significant fines and penalties,
as well as significant repayments for patient services previously billed. LPCH is subject to similar
regulatory reviews, and while such reviews may result in repayments and/or civil remedies that
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
33
could have a material effect on LPCH’s financial results of operations in a given period,
management believes that such repayments and/or civil remedies would have a material effect on
LPCH’s financial position.
Effective May 1, 2011, LPCH entered into a seven year agreement with Dell Marketing L.P., a
Texas limited partnership (“Dell”), pursuant to which Dell will provide certain information technology
services to LPCH. Under the terms of the agreement, LPCH will be charged a fixed annual service
charge plus expenses, payable monthly, for core services, as defined, and additional fees plus
expenses for special projects. The annual fixed service charges are subject to adjustment under
certain conditions, but unless so adjusted, amount to approximately $7,000 for each year through
to 2018. Adjustments are expected for variations in the number of devices, user demand, and
project specific work that may increase the amount above the baseline in any given period. LPCH
has signed several other information technology contracts with commitments from fiscal year 2015
to fiscal year 2024. The total commitment for these information technology contracts was
approximately $73.7 million as of August 31, 2016.
California’s Hospital Seismic Safety Act requires licensed acute care functions to be conducted
only in facilities that meet specified seismic safety standards. Facilities classified by the State of
California as noncompliant in the event of an earthquake must be retrofitted, replaced or removed
from acute-care service by applicable deadlines prior to 2020 or 2030. There are separate and
distinct seismic safety standards for structural frame performance and for nonstructural element
performance. LPCH complies with the structural frame requirements for the existing hospital
building allowing its use indefinitely past 2030. LPCH will be retrofitting discrete areas of the
existing hospital for compliance to the nonstructural standards by 2020.
LPCH relies upon services located in the SHC hospital facility. Through the construction of a New
Stanford Hospital, as well as through planned retrofits of the existing SHC facility, SHC services
that support LPCH will be compliant to seismic safety regulations within available
deadlines. Amendments of the Hospital Seismic Safety Act via SB 90, permit the Office of
Statewide Health Planning and Development (OSHPD) to extend the structural compliance
deadline for SHC until January 1, 2020 due to its status as a trauma center. At this time, SHC has
approval from OSHPD for extensions under SB 90 for all subject buildings to July 2019. These
extensions will allow sufficient time to construct the new hospital, and mitigate deficiencies of the
existing facility.
In June 2011, the Palo Alto City Council certified the Final Environmental Impact Report, land use
changes, permits and a Development Agreement with Stanford Hospital, LPCH and Stanford
University as part of the Renewal Project. In July 2011, the Palo Alto City Council provided final
approval for the Renewal Project at the second reading of the Development Agreement. The
Renewal Project will rebuild Stanford Hospital and expand LPCH to assure adequate capacity,
meet State-mandated earthquake safety standards, and provide modern, technologically-advanced
hospital facilities. The Renewal Project also includes replacement of outdated laboratory facilities
at the Stanford School of Medicine and remodeling of Hoover Pavilion.
The cost of LPCH’s project is expected to exceed its originally estimated amount of $1.2 billion
because of cost increases related to changes in technology, change orders, and market availability
of subcontractors, among other factors. LPCH management believes that sources of funding are
adequate to cover remaining costs. LPCH has recorded $966,750 in construction in progress
related to this project as of August 31, 2016.
Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2016 and 2015
(in thousands of dollars)
34
Based on current estimated schedules, management currently projects that the Renewal Project
construction will be completed in calendar year 2017.
As of August 31, 2016, the remaining commitment on all contracts, including the Project Renewal
was approximately $188,563.
LPCH is directly liable under irrevocable letters of credit totaling $9,060 at August 31, 2016,
including $7,638 required as security for the workers’ compensation deductible plan as described in
Note 2 and $1,422 for security for construction, operation and maintenance of certain utility
facilities. No amounts have been drawn on these letters of credit as of August 31, 2016. LPCH
also serves as guarantor for $1,000 loan of South County Community Health Center in
East Palo Alto.
Approximately 40% of LPCH employees are covered by collective bargaining arrangements.
These employees are members of two unions; approximately 31% are covered by an agreement
which expires on March 31, 2019; the other 9% are covered by an agreement which expires on
August 26, 2017.
In 2013, LPCH became the guarantor on a ten year building lease under which the total rent
payments over the life of the lease will be approximately $6,137 as of August 31, 2016.
15. Functional Expenses
Expenses incurred comprise the following program services for the years ended August 31:
LPCH PCHA Total LPCH PCHA Total
Patient services 1,148,607$ 83,604$ 1,232,211$ 1,065,727$ 75,844$ 1,141,571$
Management and general 114,122 6,479 120,601 112,345 6,760 119,105
Fundraising 10,868 - 10,868 13,308 - 13,308
Total functional expenses 1,273,597$ 90,083$ 1,363,680$ 1,191,380$ 82,604$ 1,273,984$
20152016
16. Subsequent Events
The Board of Directors of LPFCH and the Board of Directors of LPCH approved a binding
memorandum of understanding pursuant to which LPCH would become the sole member of
LPFCH, effective September 1, 2016. The bylaws of LPFCH afford control of LPFCH to LPCH and
therefore, the activities of LPFCH will be included in the consolidated financial statements of LPCH
starting September 1, 2016.
LPCH has evaluated subsequent events occurring between the end of the most recent fiscal year
and December 6, 2016, the date the financial statements were available for issuance.
Report of Independent Auditors
on Accompanying Consolidating Information
To the Board of Directors
Lucile Salter Packard Children’s Hospital at Stanford
We have audited the consolidated financial statements of Lucile Salter Packard Children’s Hospital at
Stanford (“LPCH”) as of August 31, 2016 and 2015 for the year then ended and our report thereon
appears on pages 1 of this document. That audit was conducted for the purpose of forming an opinion on
the consolidated financial statements taken as a whole. The consolidating information is the responsibility
of management and was derived from and relates directly to the underlying accounting and other records
used to prepare the consolidated financial statements. The consolidating information has been subjected
to the auditing procedures applied in the audit of the financial statements and certain additional
procedures, including comparing and reconciling such information directly to the underlying accounting
and other records used to prepare the financial statements or to the financial statements themselves and
other additional procedures, in accordance with auditing standards generally accepted in the United
States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in
relation to the consolidated financial statements taken as a whole. The consolidating information is
presented for purposes of additional analysis of the consolidated financial statements rather than to
present the financial position, changes in net assets and cash flows of the individual entities and is not a
required part of the consolidated financial statements. Accordingly, we do not express an opinion on the
financial position, results of operations and changes in net assets and cash flows of the individual entities.
December 6, 2016
PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004 T: (415) 498 5000, F: (415) 498 7100, www.pwc.com/us
Lucile Salter Packard Children’s Hospital at Stanford Consolidating Balance Sheets August 31, 2016 and 2015
(in thousands of dollars)
36
LPCH PCHA Elimination Consolidated LPCH PCHA Elimination Consolidated
Assets
Current assets
Cash and cash equivalents 532,329$ 571$ -$ 532,900$ 335,077$ 824$ -$ 335,901$
Patient accounts receivable, net of allowance for doubtful
accounts of $11,670 and $21,300 in 2016 and 2015, respectively 261,963 6,211 - 268,174 264,460 7,308 - 271,768
Contributions receivable 32,944 - - 32,944 8,075 - - 8,075
Other receivables 33,224 836 - 34,060 27,345 999 - 28,344
Prepaid expenses, inventory and other 16,961 536 - 17,497 15,159 400 - 15,559
Total current assets 877,421 8,154 - 885,575 650,116 9,531 - 659,647
Investments 70,642 - - 70,642 69,313 - - 69,313
Investments in University managed pools 599,151 - - 599,151 717,866 - - 717,866
Board designated funds in University managed pools 9,214 - - 9,214 159,789 - - 159,789
Assets limited as to use, held by trustee 219 - - 219 89,500 - - 89,500
Property and equipment, net 1,419,205 10,111 - 1,429,316 1,072,135 6,142 1,078,277
Beneficial interest in trusts, net 15,048 - - 15,048 16,079 - - 16,079
Contributions receivable, net of current portion 82,707 - - 82,707 22,468 - - 22,468
Other assets 11,191 12,252 41,414 64,857 14,021 11,798 31,998 57,817
Total assets 3,084,798$ 30,517$ 41,414$ 3,156,729$ 2,811,287$ 27,471$ 31,998$ 2,870,756$
Liabilities and Net Assets
Current liabilities
Accounts payable and accrued liabilities 147,114$ 4,110$ -$ 151,224$ 103,257$ 5,195$ -$ 108,452$
Accrued salaries and related benefits 60,735 1,977 - 62,712 63,834 1,445 - 65,279
Due to related parties 17,359 16,830 - 34,189 40,793 12,966 - 53,759
Third-party payor settlements 1,849 - - 1,849 1,967 - - 1,967
Current portion of long-term debt and capital leases 5,695 - - 5,695 5,675 - - 5,675
Self-insurance reserves and other liabilities 8,612 - - 8,612 7,924 - - 7,924
Total current liabilities 241,364 22,917 - 264,281 223,450 19,606 - 243,056
Self-insurance reserves and other liabilities, net of current portion 32,837 - - 32,837 34,002 - - 34,002
Long-term debt, net of current portion 662,711 - - 662,711 554,011 - - 554,011
Total liabilities 936,912 22,917 - 959,829 811,463 19,606 - 831,069
Commitments and contingencies
Net assets
Unrestricted 1,362,419 7,600 41,414 1,411,433 1,337,180 7,865 31,998 1,377,043
Temporarily restricted 574,119 - - 574,119 458,239 - - 458,239
Permanently restricted 211,348 - - 211,348 204,405 - - 204,405
Total net assets 2,147,886 7,600 41,414 2,196,900 1,999,824 7,865 31,998 2,039,687
Total liabilities and net assets 3,084,798$ 30,517$ 41,414$ 3,156,729$ 2,811,287$ 27,471$ 31,998$ 2,870,756$
20152016
Lucile Salter Packard Children’s Hospital at Stanford Consolidating Statements of Operations and Changes in Net Assets August 31, 2016 and 2015
(in thousands of dollars)
37
LPCH PCHA Elimination Consolidated LPCH PCHA Elimination Consolidated
Operating revenues
Net patient service revenue before provision for doubtful accounts 1,239,261$ 71,690$ -$ 1,310,951$ 1,251,058$ 63,529$ -$ 1,314,587$
Provision for doubtful accounts, net 3,622 (1,189) - 2,433 (9,972) (502) - (10,474)
Net patient service revenue after provision for doubtful accounts 1,242,883 70,501 - 1,313,384 1,241,086 63,027 - 1,304,113
Other revenue 45,532 10,141 9,416 65,089 32,783 8,153 11,424 52,360
Net assets released from restrictions used for operations 23,804 25 - 23,829 23,352 - 23,352
Total operating revenues 1,312,219 80,667 9,416 1,402,302 1,297,221 71,180 11,424 1,379,825
Operating expenses
Salaries and benefits 560,806 24,697 - 585,503 499,768 19,012 - 518,780
Professional services 17,517 1,138 - 18,655 20,745 2,406 - 23,151
Supplies 104,222 9,164 - 113,386 88,958 8,049 - 97,007
Purchased services 428,927 47,532 - 476,459 396,117 45,666 - 441,783
Other 107,501 5,722 - 113,223 128,987 5,744 - 134,731
Depreciation and amortization 54,624 1,830 - 56,454 56,805 1,727 - 58,532
Total operating expenses 1,273,597 90,083 - 1,363,680 1,191,380 82,604 - 1,273,984
Income from operations 38,622 (9,416) 9,416 38,622 105,841 (11,424) 11,424 105,841
Interest income 2,351 - - 2,351 2,400 - - 2,400
Income and gains from University managed pools 9,076 - - 9,076 30,923 - - 30,923
Loss on extinguishment of long term debt (1,114) - - (1,114) - - - -
Other (500) - - (500) (833) - - (833)
Excess of revenues over expenses 48,435 (9,416) 9,416 48,435 138,331 (11,424) 11,424 138,331
Net assets released from restrictions used for purchases of
property and equipment 27 - - 27 1,999 - - 1,999
Transfer of net investment loss on certain endowments (10) - - (10) - - - -
Adjustment for minimum pension liability 1,385 - - 1,385 (678) - - (678)
Transfers to University and other (17,599) 2,152 - (15,447) (53,160) 2,778 - (50,382)
Increase in unrestricted net assets 32,238 (7,264) 9,416 34,390 86,492 (8,646) 11,424 89,270
Changes in temporarily restricted net assets
Contributions 129,868 - - 129,868 70,810 - - 70,810
Income and gains from University managed pools 9,987 - - 9,987 14,549 - - 14,549
Change in value of beneficial interest in remainder trusts 164 - - 164 (254) - - (254)
Net assets released from restrictions for operations (23,829) - - (23,829) (23,352) - - (23,352)
Purchase of property and equipment (27) - - (27) (1,999) - - (1,999)
Transfers to/from University and other (283) - - (283) (878) - - (878)
Increase in temporarily restricted net assets 115,880 - - 115,880 58,876 - - 58,876
Changes in permanently restricted net assets
Contributions and other 7,669 - - 7,669 850 - - 850
Change in value of beneficial interest in remainder trusts 1,255 - - 1,255 (310) - - (310)
Transfers to University and other (1,981) - - (1,981) 523 - - 523
Increase (decrease) in permanently restricted net assets 6,943 - - 6,943 1,063 - - 1,063
Increase in net assets 155,061 (7,264) 9,416 157,213 146,431 (8,646) 11,424 149,209
Net assets
Beginning of year 1,999,824 7,865 31,998 2,039,687 1,853,393 16,511 20,574 1,890,478
End of year 2,154,885$ 601$ 41,414$ 2,196,900$ 1,999,824$ 7,865$ 31,998$ 2,039,687$
20152016
top related