lucile salter packard children s hospital at stanford

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Financial Statements and Accompanying Consolidating Information August 31, 2017 and 2016

Lucile Salter Packard Children’s Hospital at Stanford Index August 31, 2017 and 2016

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 ......................................................................................... 5–38

Report of Independent Auditors on Accompanying Consolidating Information .............................. 39

Consolidating Balance Sheets ................................................................................................................... 40

Consolidating Statements of Operations and Changes in Net Assets ...................................................... 41

Note to Accompanying Consolidating Information ..................................................................................... 42

Report of Independent Auditors

To the 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”), which comprise the consolidated balance sheets as of August 31, 2017 and 2016, 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 LPCH'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 SHC'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 Lucile Salter Packard Children’s Hospital at Stanford as of August 31, 2017 and 2016, and the results of its operations and changes in net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

December 5, 2017

PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111 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, 2017 and 2016

(in thousands of dollars)

The accompanying notes are an integral part of these consolidated financial statements.

2

2017 2016

Assets

Current assets

Cash and cash equivalents 406,683$ 532,900$

Patient accounts receivable, net of allowance for doubtful

accounts of $13,214 and $11,670 in 2017 and 2016, respectively 287,493 268,174

Contributions receivable 49,132 32,944

Other receivables 29,634 34,060

Prepaid expenses, inventory and other 19,255 17,497

Total current assets 792,197 885,575

Investments 86,565 70,642

Investments in University managed pools 669,916 599,151

Board designated funds in University managed pools and other 124,148 9,214

Assets limited as to use, held by trustee 33,096 219

Property and equipment, net 1,730,108 1,429,316

Beneficial interest in trusts, net 24,052 15,048

Contributions receivable, net of current portion 113,193 82,707

Equity method investments and other assets 67,838 58,601

Total assets 3,641,113$ 3,150,473$

Liabilities and Net Assets

Current liabilities

Accounts payable and accrued liabilities 151,713$ 151,224$

Accrued salaries and related benefits 59,132 62,712

Due to related parties 79,718 34,189

Third-party payor settlements 2,443 1,849

Current portion of long-term debt and capital leases 5,800 5,695

Self-insurance reserves and other liabilities 9,579 8,612

Total current liabilities 308,385 264,281

Self-insurance reserves and other liabilities, net of current portion 33,327 32,837

Long-term debt, net of current portion 875,337 656,455

Total liabilities 1,217,049 953,573

Commitments and contingencies (Note 16)

Net assets

Unrestricted 1,545,390 1,411,433

Temporarily restricted 651,545 574,119

Permanently restricted 227,129 211,348

Total net assets 2,424,064 2,196,900

Total liabilities and net assets 3,641,113$ 3,150,473$

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Statements of Operations and Changes in Net Assets Years Ended August 31, 2017 and 2016



3

2017 2016

Operating revenues

Net patient service revenue before provision for doubtful accounts 1,392,486$ 1,310,951$

Provision for doubtful accounts, net (7,657) 2,433

Net patient service revenue after provision for doubtful accounts 1,384,829 1,313,384

Other revenue 77,666 65,089

Net assets released from restrictions used for operations 24,363 23,829

Total operating revenues 1,486,858 1,402,302

Operating expenses

Salaries and benefits 659,637 585,503

Professional services 17,831 18,655

Supplies 119,057 113,386

Purchased services 509,302 476,459

Other 127,102 113,223

Depreciation and amortization 66,635 56,454

Total operating expenses 1,499,564 1,363,680

(Loss)/Income from operations (12,706) 38,622

Interest income 2,953 2,351

Income and gains from University managed pools and other 55,848 9,076

Loss on extinguishment of long term debt - (1,114)

Other (500) (500)

Excess of revenues over expenses 45,595 48,435

Net assets released from restrictions used for purchases of

property and equipment 155 27

Transfer of net investment loss on certain endowments - (10)

Adjustment for minimum pension liability (721) 1,385

Transfers to University and other (20,866) (15,447)

Contribution received in acquisition 109,794 -

Increase in unrestricted net assets 133,957 34,390

Changes in temporarily restricted net assets

Contributions and other 67,428 129,868

Income and gains from University managed pools 34,764 9,987

Change in value of beneficial interest in remainder trusts 884 164

Net assets released from restrictions for operations (24,363) (23,829)

Purchase of property and equipment (155) (27)

Transfers to University and other (1,132) (283)

Increase in temporarily restricted net assets 77,426 115,880

Changes in permanently restricted net assets

Contributions and other 14,256 7,669

Change in value of beneficial interest in remainder trusts 400 1,255

Transfers from/(to) University and other 1,125 (1,981)

Increase in permanently restricted net assets 15,781 6,943

Increase in net assets 227,164 157,213

Net assets

Beginning of year 2,196,900 2,039,687

End of year 2,424,064$ 2,196,900$

Lucile Salter Packard Children’s Hospital at Stanford Consolidated Statements of Cash Flows Years Ended August 31, 2017 and 2016



4

2017 2016

Cash flows from operating activities

Change in net assets 227,164$ 157,213$

Adjustments to reconcile change in net assets to

net cash provided by operating activities

Depreciation and amortization 64,433 55,001

Loss on extinguishment of long term debt - 1,114

Premium received related to bond issuance 29,069 14,447

Provision for doubtful accounts 7,657 (2,433)

(Gains)/Loss from University managed pools (57,761) 5,274

(Gains) from Investments (13,012) (1,460)

Contributions and investment income restricted by donors (92,085) (30,043)

Distributions more than undistributed earnings from investees 2,197 1,437

Contribution received in acquisition (109,794) -

Changes in operating assets and liabilities

Patient accounts receivable, net (26,976) 6,027

Contributions receivable 76,673 (82,880)

Due to/from related parties (68,132) 15,429

Other receivables, inventory, other assets, prepaid

expenses and other (7,376) (14,739)

Accounts payable and accrued liabilities 4,015 8,855

Accrued salaries and related benefits (5,786) (2,567)

Third-party payor settlements 594 (118)

Self-insurance and other liabilities 1,457 (477)

Cash provided by operating activities 32,337 130,080

Cash flows from investing activities

Cash received in acquisition 13,290 -

Purchases of investments in University managed pools and other (37,148) -

Sales of investments in University managed pools and other 37,042 270,000

Purchase of investment for assets limited as to use (226,886) (113,458)

Decrease in assets limited as to use 194,243 202,871

Purchases of property and equipment (383,719) (373,743)

Cash used in investing activities (403,178) (14,330)

Cash flows from financing activities

Payment of long term debt (5,695) (5,705)

Cost of issuance related to debt issuance (2,183) (1,188)

Proceeds from issuance of long term debt 200,000 100,000

Contributions and investment income restricted by donors 73,839 24,280

Transfers to related parties (21,337) (36,138)

Cash provided by financing activities 244,624 81,249

Net (decrease)/increase in cash and cash equivalents (126,217) 196,999

Cash and cash equivalents

Beginning of year 532,900 335,901End of year 406,683$ 532,900$

Supplemental disclosures of cash flow information

Interest paid, net of amounts capitalized 9,278$ 10,950$

Noncash activities

Accounts payable related to purchases of property and equipment 17,104 33,071

Transfer of permanent restricted contribution from related party - 5,985

Accrual of net assets transfer to related parties - 2,718

Issuance of refunding bonds - 91,931

Defeasance of 2008 Notes - (90,290)

Donated securities received 7,891 -

Net assets received in acquisition 96,503 -

Net earnings allocated to accounts payable and accrued expenses 198 -

Lucile Salter Packard Children’s Hospital at Stanford Notes to Consolidated Financial Statements August 31, 2017 and 2016


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, California 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 4,069 full time and part time employees as of August 31, 2017.

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 14.

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, 2017, PCHA includes approximately 166 physicians and other providers in 25 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.

LPCH, together with PCHA, the Packard Medical Group and the FPO, comprise and are known in

the marketplace as “Stanford Children’s Health.”

Effective September 1, 2016, LPCH became the sole member of Lucile Packard Foundation for

Children’s Health (“LPFCH”), a public charity, founded in 1996, whose mission is to elevate the

priority of children’s health and increase the quality and accessibility of children’s healthcare

through leadership and direct investment. LPFCH pursues its mission through two distinct and



6

complementary programs: (1) fundraising (development) for LPCH and the pediatric programs at

the Stanford School of Medicine and (2) grant-making and public information and educational

programs to promote the health and well-being of children through statewide and local partnerships

and to raise awareness about children’s health issues. The bylaws of LPFCH afford control of

LPFCH to LPCH and therefore, the activities of LPFCH in FY17 are included in the consolidated

financial statements and footnotes of LPCH.

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 20.3% and 21.6% for the years ended August 31, 2017 and 2016,

respectively. LPCH’s ownership in SUMIT is accounted for using the equity method. As of

August 31, 2017 and 2016, LPCH had an investment of $16,269 and $16,244 in SUMIT,

respectively, which is reflected on the Consolidated Balance Sheets in equity method investments

and 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, 2017 and 2016.

LPCH’s ownership in SRA is accounted for using the equity method. LPCH’s investment in SRA

was a loss of $110 and $59 for year ended August 31, 2017 and 2016, 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 28.6%

and 29.4% for the year ended August 31, 2017 and 2016, respectively. PCHA’s ownership in

PEAC is accounted for using the equity method. PCHA had an investment of $1,309 and $856 or

the years ended August 31, 2017 and 2016, respectively, which is reflected on the Consolidated

Balance Sheets in equity method investments and 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 Stanford School of Medicine. The latest

amendment was adopted as of September 1, 2016.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements are prepared on the accrual basis of accounting. Certain

reclassifications and changes in presentation were made in the 2016 consolidated financial

statements to conform to the 2017 presentation as a result of adoption of recent accounting

pronouncements.



7

Net assets of LPCH and subsidiaries and changes therein have been classified and are reported

as follows:

Unrestricted net assets – Unrestricted net assets represent those resources of LPCH and

subsidiaries 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 subsidiaries 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.

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 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, 2017, 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, 2017 and 2016, respectively. Fair values are based on quoted market prices or

broker or dealer price quotations on a specific identification basis.



8

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, 2017 and 2016 were determined using the average

corporate AAA bond rate as of the fund’s gift date. 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.

Investments

Investments held directly by LPCH and its subsidiaries 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 income and gains from University managed pools and other in the Consolidated

Statements of Operations and Changes in Net Assets 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

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, 2017, the remaining balance of board designated funds

was $10,736. 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.

LPFCH has board designated funds approved by LPFCH’s board of directors for long term

investments. As of August 31, 2017, the balance of LPFCH board designated funds was $113,412.

These funds are invested in a manner that is intended to provide an inflation-adjusted total return,

net of investment management fees, at least equal to the contemplated spending rate of 5% over

time.



9

Beneficial Interest in Trusts

Beneficial interest in trust represent gifts for which LPCH or LPFCH 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, 2017 and 2016 were determined using the T-bill rate. The related

liabilities are based on estimated future cash receipts discounted at 2.14% and 1.46% for the year

ended August 31, 2017 and 2016, respectively. 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 and its subsidiaries capitalize 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 5 to 20 years

Buildings and improvements 5 to 40 years

Equipment 3 to 20 years

Ground leases 57 years

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 and its subsidiaries hold 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



10

the lower of the carrying amount or fair value less costs to sell. There were no impairment losses

for the years ended August 31, 2017 and 2016.

Equity Method Investments and Other Assets

Equity method investments and other assets includes ownership interest in SUMIT, SRA, PEAC,

and four third-party investments in hospital related joint ventures, deposits with vendors, and

goodwill. Investments in hospital related joint ventures where LPCH owns between 20 and 50

percent are accounted for under the equity method as LPCH has the ability to exercise significant

influence over operating and financial policies of the joint venture. Equity method investments

comprises $48,596 and $41,271 of equity method investments and other assets on the

Consolidated Balance Sheets as of August 31, 2017 and 2016, respectively. Earnings from equity

method investments were $10,074 and $11,837 in other revenue in the Consolidated Statements of

Operations and Changes in Net Assets in the periods ended August 31, 2017 and 2016.

In relation to goodwill, 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, 2017 or 2016.

Compensated Absences

In accordance with formal policies concerning vacation and other compensated absences, accruals

of $42,747 and $40,305 were recorded as of August 31, 2017 and 2016, respectively, and are

included in accrued salaries and related benefits.

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.

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.

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



11

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

and its subsidiaries have 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

Consolidated 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

coverage. LPCH also maintains professional liability reserves for claims not covered by

SUMIT which totals $1,828 and $1,761 for the years ended August 31, 2017 and 2016,

respectively. For the policy years September 1, 2016 to September 1, 2017, SUMIT retains

100% of the risk related to the first $15,000 per occurrence subject to $25,000 aggregate. In

FY2017, SUMIT purchased a "buffer" that reduces SUMIT's liability for the first claim from

$15,000 to $10,000 and reduces the aggregate from $25,000 to $20,000. The next $165,000

is transferred to various reinsurance companies rated “A” or better by AM Best rating agency.

For the policy years 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



12

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 receivable, 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 and its subsidiaries to concentrations of

credit risk, consist principally of cash and cash equivalents, patient accounts receivable, and

investments in University managed pools and other (Note 9).

LPCH and its subsidiaries invest its cash and cash equivalents in highly rated financial instruments

including insured deposits. As of August 31, 2017, LPCH and its subsidiaries have invested its

cash and cash equivalents with a financial institution in excess of federal depository insurance

limits.

LPCH and its subsidiaries 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.

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

LPCH, PCHA, and LPFCH are California not-for-profit corporations and have been recognized as

tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code.

Recent Accounting Pronouncements

LPCH and its subsidiaries adopt new standards on a consolidated basis.

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is

the sole source of authoritative nongovernmental U.S. generally accepted accounting principles.



13

Pension services costs - In March 2017, the FASB issued an ASC update which requires that an employer report the service cost component of pension costs in the same line item as employee compensation costs within operating income. The other components of net benefit cost are required to be presented in the Consolidated Statement of Operations and Changes in Net Assets separately from the service cost component and outside a subtotal of income from operations, and will not be eligible for capitalization. The guidance is effective for LPCH during the fiscal year ending August 31, 2020. LPCH is currently evaluating the impact that this guidance will have on the consolidated financial statements. Consolidation - In January 2017, the FASB issued an ASC update which reinstates the presumption that a not-for-profit (“NFP”) entity that is a general partner controls a limited partnership. The amendments in this update also add guidance on when an NFP limited partner should consolidate a for-profit limited partnership. The guidance is effective for LPCH and its subsidiaries during the fiscal year ending August 31, 2018. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on the consolidated financial statements. Statement of cash flows - In November 2016, the FASB issued an ASC update which requires that the amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for fiscal year 2020. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on the consolidated financial statements. In August 2016, the FASB issued an ASC update which intends to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance is effective for fiscal year 2019. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on the consolidated financial statements. Non-for-profit reporting - 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 and its subsidiaries. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. Leases - 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 and its subsidiaries. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. Revenue recognition - 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 and its subsidiaries. LPCH and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. 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



14

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 and its subsidiaries are currently evaluating the impact that this guidance will have on its consolidated financial statements. Debt issuance costs - 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. LPCH has adopted this guidance in fiscal year 2017.



15

3. Business Acquisitions

Effective September 1, 2016, LPCH became the sole member of Lucile Packard Foundation for Children’s Health (“LPFCH”), a public charity, founded in 1996, whose mission is to elevate the priority of children’s health and increase the quality and accessibility of children’s healthcare through leadership and direct investment. LPFCH pursues its mission through two distinct and complementary programs: (1) fundraising (development) for LPCH and the pediatric programs at the Stanford School of Medicine and (2) grant-making and public information and educational programs to promote the health and well-being of children through statewide and local partnerships and to raise awareness about children’s health issues. The bylaws of LPFCH afford control of LPFCH to LPCH and therefore, the activities of LPFCH are included in the consolidated financial statements of LPCH. As a result of LPCH becoming the sole corporate member in LPFCH, LPCH recognized a contribution of $109,794 in the Consolidated Statements of Operations and Changes in Net Assets. No consideration was paid as part of the transaction. Summarized consolidated balance sheet information for LPFCH at September 1, 2016 is shown below:

September 1, 2016

Assets

Current assets

Cash and cash equivalents 13,290$

Contributions receivable 33,113

Other receivables 2

Prepaid expenses, inventory and other 727

Total current assets 47,132

Investments 18,221

Board designated funds in other assets 112,453

Property and equipment, net 657

Beneficial interest in trusts, net 8,696

Contributions receivable, net of current portion 90,075

Other assets 660

Total assets 277,894$


Current liabilities

Accounts payable and accrued liabilities 13,964$

Accrued salaries and related benefits 2,207

Due to related parties 151,929

Total liabilities 168,100

Net assets

Unrestricted 109,794

Total net assets 109,794

Total liabilities and net assets 277,894$



16

For the year ended August 31, 2017, LPFCH reported revenue of $20,288 and excess of revenue

over expenses of $7,160 in the Consolidated Statement of Operations and Changes in Net Assets.

These amounts represent twelve months of operations since being acquired by LPCH.

4. Net Patient Service Revenue

LPCH and PCHA have 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 2017 and 2016.

CCS – The California Children's Services (“CCS”) Program is a partnership between state and

counties that provides medical case management for children in California diagnosed with

serious chronic diseases. Currently, approximately 70 percent of CCS-eligible children are also

Medi-Cal eligible. The Medi-Cal program reimburses their care. The cost of care for the other

30 percent of children is split equally between CCS Only and CCS Healthy Families.

Reimbursement from these programs to providers is through an All Patient Refined-Diagnosis

Related Group (APR-DRG) methodology for inpatient services. Outpatient services are

reimbursed based upon prospectively determined fee schedules. A portion of the CCS Only

children also have other forms of coverage, such as commercial insurance. For these children,

CCS is secondary to the commercial insurance or other form of coverage, and is intended to

limit the financial burden on families and children with chronic conditions

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 263,575$ 6,466$ 270,041$ 254,028$ 6,340$ 260,368$

HMO/PPO 963,369 67,626 1,030,995 905,987 61,822 967,809

Other 87,611 3,839 91,450 79,247 3,527 82,774

1,314,555$ 77,931$ 1,392,486$ 1,239,262$ 71,689$ 1,310,951$

20162017



17

Included above in the Medi-Cal net patient services revenue is $40,976 and $51,793 for Medi-

Cal Fee-For-Service and Managed Care payments for fiscal years 2017 and 2016, respectively,

under the hospital provider fee program.

Amounts due from Blue Cross, Blue Shield and the State of California’s Medi-Cal program

represent 21%, 10% and 17%, and 28%, 12% and 15%, of LPCH net patient accounts

receivable at August 31, 2017 and 2016, respectively. Amounts due from Blue Cross, Blue

Shield and the State of California’s Medi-Cal program represent 24%, 10% and 6%, and 24%,

10% and 9%, of PCHA net patient accounts receivable at August 31, 2017 and 2016,

respectively. LPCH and PCHA do not believe significant credit risks exist with these payors.

Hospital Quality Assurance Fee Program

The State of California enacted SB 239 in October 2013 which established the Hospital Quality

Assurance Fee (“QAF”) and Hospital Fee programs for January 1, 2014 through December 31,

2016. Centers for Medicare and Medicaid Services (“CMS”) has approved, and LPCH has

recognized as revenue on the date of approval, supplemental payments related to the following

programs and periods:

o Fee-for-service programs for January 1, 2014 through December 31, 2016

o Managed care programs for the expansion population for January 1, 2014 through

December 31, 2014

o Managed care programs for the non-expansion population for January 1, 2014 through

June 30, 2015.

For the years ended August 31, 2017 and 2016, respectively, LPCH recognized $40,976 and

$51,793 in net patient service revenue for Medi-Cal Fee-For-Service (“FFS”) and Managed Care

supplemental payments provided for under the California provider fee programs.

Remaining programs awaiting CMS approval for which revenues have not been reflected in the

consolidated financial statements, include:

o Managed care programs for the expansion population for January 1, 2015 through

December 31, 2016

o Managed care programs for the non-expansion population for July 1, 2015 through

December 31, 2016.

For the years ended August 31, 2017 and 2016, respectively, LPCH recognized $22,011 and

$24,196, in other expense for QAF paid to California Department of Health Care Services

(“DHCS”). Expenses were paid for the same CMS approved programs noted above. Additionally,

included in other expense for the year ended August 31, 2017 is $4,371 for the QAF fee collection

for the period July 1, 2015 through June 30, 2016. CMS approved the collection of this fee in

December 2014, and the State has submitted to CMS for approval of the managed care

supplemental payments for the same period. Accordingly, the potential payments will be

recognized in net patient service revenue when CMS approval is obtained.



18

California’s participation in a provider fee program, as authorized under federal regulations, has

been made permanent by the passage of Proposition 52, an initiative on the November 2016 ballot.

However, the first iteration of the hospital provider fee program under the permanent legislation

covering the period from January 1, 2017 to December 31, 2019, has not yet been approved by

CMS. Accordingly, any potential activity under this program related to January 1, 2017 through

August 31, 2017 has not been recorded in the consolidated financial statements.

5. Charity Care and Community Benefits

LPCH and its subsidiaries are committed to advocacy, outreach, education, and research to

improve the health status of children and pregnant women. LPCH and its subsidiaries continually

reaffirm 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

Family and Children Health Advocacy

LPCH and its subsidiaries direct charity care and uncompensated costs of medical services to

government-covered patients for the years ended August 31 is as follows:

2017 2016

Charity care at established rates 7,362$ 5,758$

Estimated cost of charity care 2,050 1,555

Estimated cost of medical services provided to

government covered patients (not including Medicare) 237,464 212,717

239,514$ 214,272$



19

The increase in the estimated cost of Medi-Cal services provided to government covered patients

(not including Medicare) in 2017 was due to higher volume of Medi-Cal utilization. The estimated

uncompensated cost of Medi-Cal services provided to government covered patients does 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.

6. Meaningful Use Funds

LPCH is participating in the Medicare and Medicaid Electronic Health Records Incentive Programs

(EHR), which provides payments to eligible professionals, eligible hospitals and critical access

hospitals as they adopt, implement, upgrade or demonstrate meaningful use of certified Electronic

Health Records technology. LPCH recognized $3,594 in other revenue and $600 in expense in the

Consolidated Statements of Operations and Changes in Net Assets under these programs for the

years ended August 31, 2017 and August 31, 2016, respectively.

7. 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 2.5% to 5.3% for 2017 and 3.2% to 5.3%

for 2016.

Contributions receivable at August 31 are expected to be realized in the following periods:

2017 2016

In one year or less 49,367$ 33,182$

Between one year and five years 102,743 55,921

More than five years 28,050 45,369

180,160 134,472

Less: Discount/allowance (16,551) (18,484)

Less: Reserves for uncollectible pledges (1,284) (337)

Total contributions receivable, net 162,325 115,651

Less: Current portion (49,132) (32,944)

Contributions receivable, net of current portion 113,193$ 82,707$

Contributions receivable at August 31 are to be utilized for the following purposes:

2017 2016

Plant replacement and equipment 135,798$ 108,552$

Clinical services 1,500 7,099

Education 10,491 -

Research 14,536 -

162,325$ 115,651$



20

Conditional pledges depend on the occurrence of a specified future or uncertain event. There were

no conditional pledges as of August 31, 2017 and 2016, respectively.

8. Investments and Investments in University Managed Pools and Other

The composition of investments held directly by LPCH and its subsidiaries at August 31 is as

follows:

Cost Fair Value Cost Fair Value

Board designated funds 112,453$ 113,412$ -$ -$

Board designated funds in

in University managed pools 10,736 10,736 9,214 9,214

Board designated funds - subtotal 123,189 124,148 9,214 9,214

Mutual funds 90,819 86,565 71,389 70,642

Beneficial interest in investments

in University managed pools 408,119 669,916 395,748 599,151

Investments and investments in

University managed pools and other 622,127$ 880,629$ 476,351$ 679,007$

2017 2016

LPFCH has board designated funds approved by LPFCH’s board of directors for long term

investments. As of August 31, 2017, the balance of LPFCH board designated funds was $113,412.

LPCH 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.

Gains and losses on LPCH’s beneficial interest in investments in University Merged Pool of

$57,761 and ($5,274) for the years ended August 31, 2017 and 2016, 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 composition of

investments in MP at August 31, 2017 and 2016 consist of the following:



21

2017 2016

Assets

Cash and cash equivalents 3 % 4 %

Fixed income 7 6

Public equities 27 27

Real estate 8 9

Natural resources 9 9

Absolute return 20 20

Private equities 26 25

100 % 100 %

9. 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 LPCH and its subsidiaries assets and liabilities measured at fair

value as of August 31, 2017, based on the inputs used to value them.



22

NAV Level 1 Level 2 Level 3 Total

Assets

Cash and cash equivalents -$ 406,683$ -$ -$ 406,683$

Assets limited as to use, held by trustee - 33,096 - - 33,096

Investments (mutual funds) 2,225 84,340 - - 86,565

Board designated funds 97,735 11,257 4,420 - 113,412

Board designated funds in University

managed pools 10,736 - - - 10,736

Beneficial interest in trusts - 8,004 - 16,048 24,052

Investments in University

managed pools 669,916 - - - 669,916

Total assets 780,612$ 543,380$ 4,420$ 16,048$ 1,344,460$

There were no transfers of assets or liabilities between Level 1 and Level 2 during the year ended

August 31, 2017.

The following table presents the 2017 activities of financial instruments of which fair value

measurement is using Level 3 inputs:

Balance at September 1, 2016 15,048$

Realized gains (losses) (134)

Unrealized gains (losses) 645

Charitable trusts 489

Balance at August 31, 2017 16,048$

The following table summarizes LPCH and its subsidiaries assets and liabilities measured at fair

value as of August 31, 2016, based on the inputs used to value them.

NAV 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

Investments in University managed

pools 608,365 - - - 608,365

Total assets 608,365$ 603,761$ -$ 15,048$ 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:



23

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$

10. Property and Equipment

Property and equipment consist of the following as of August 31, 2017 and 2016:

LPCH PCHA LPFCH Consolidated LPCH PCHA Consolidated

Land and improvements 32,246$ -$ -$ 32,246$ 32,246$ -$ 32,246$

Buildings and improvements 466,905 3,953 314 471,172 462,050 3,895 465,945

Equipment 355,405 10,542 1,834 367,781 303,298 7,200 310,498

Ground leases 59,384 - - 59,384 59,384 - 59,384

913,940 14,495 2,148 930,583 856,978 11,095 868,073

Less: Accumulated depreciation (477,353) (9,650) (1,645) (488,648) (414,916) (5,815) (420,731)

Construction-in-progress 1,285,865 2,308 - 1,288,173 977,143 4,831 981,974

Property and equipment, net 1,722,452$ 7,153$ 503$ 1,730,108$ 1,419,205$ 10,111$ 1,429,316$

2017 2016

Ground lease accumulated amortization totals $12,153 and $11,113 for the years ended

August 31, 2017 and 2016, respectively.

Total depreciation and amortization expense for the years ended August 31, 2017 and 2016, is

$66,635 and $56,454, respectively.

Capitalized interest expense, net of interest income was $15,954 and $10,897 for the years ended


11. Long-Term Debt and Capital Leases

LPCH’s outstanding debt at August 31 is summarized below:



24

Effective

Year of Interest

Maturity 2017/2016 2017 2016

California Health Facilities

Financing Authority

Variable rate bonds

Series 2014B 2034-2043 1.22%/0.73% 100,000 100,000

Fixed rate bonds

Series 2017A 2018-2056 3.01% 200,000 -

Series 2017A Premium 29,058 -

Series 2016A 2016-2033 2.16%/2.10% 70,415 73,675

Series 2016A Premium 13,287 14,470

Series 2016B 2052-2055 3.34% 100,000 100,000

Series 2016B Premium 14,208 14,382

Series 2014A 2025-2043 3.84% 100,000 100,000


Series 2012A 2044-2051 4.32% 200,000 200,000


Series 2012B 2013-2027 2.71%/2.63% 39,760 42,195

Series 2012B Premium 5,407 5,948

889,298 668,406

Less: Current portion of long term debt (5,800) (5,695)

Less: Debt issuance costs (8,161) (6,256)

Long term debt 875,337$ 656,455$

Outstanding Principal

The fair value of the bonds are estimated based on the current borrowing rates for similar issues,

and amounted to approximately $911,301 and $711,846 at August 31, 2017 and August 31, 2016,

respectively. All bonds held at August 31, 2017 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,

2017, 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

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.



25

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.

In May 2017, LPCH entered into a $200,000 revolving credit agreement with Bank of America

which expires in May 2020. There have been no withdrawals on the revolving credit agreement.

In August 2017, CHFFA issued, on behalf of LPCH, a series of revenue bonds in the aggregate par

amount of $200,000, with a premium of $29,069 (collectively, the “2017 Bonds”). The 2017 bonds

were comprised of Series A revenue bonds. Proceeds of the 2017 Series A were used to finance a

portion of the ongoing construction, equipment purchases, and improvement of the hospital, and to

pay for the cost of issuance. In addition, the proceeds of the bonds may be used to finance costs

of routine capital and the acquisition of the long-term ground lease interest in land and

improvements of a parcel located adjacent to the existing facility.



26

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.

Scheduled principal payments on long-term debt are summarized below:

Scheduled

Principal

Maturities Interest

Year ending August 31,

2018 5,800$ 37,434$

2019 7,920 37,143

2020 8,245 36,817

2021 8,635 36,418

2022 9,045 36,002

Thereafter 770,530 805,546

810,175$ 989,360$

12. Retirement Plans

LPCH and its subsidiaries provide 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 $33,915 and $28,978 for the years ended August 31, 2017 and 2016,

respectively, are included in salaries and benefits expense in the Consolidated Statements of

Operations and Changes in Net Assets.

LPFCH participates in a defined contribution retirement plan covering substantially all LPFCH

employees. Participants are fully vested in LPFCH’s contributions after five years. LPFCH

contributions for the year ended August 31, 2017 was $1,041.

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, 2017 benefit plan liability valuations, LPCH has assumed future

mortality according to the RP 2014 White Collar mortality table and MSS 2017 projection table

(actuarial developed scale based on the rates published in 2017 by the Social Security

Administration).



27

LPCH has recorded a liability totaling $18,356 and $16,749 for the years ended August 31, 2017

and 2016, 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 2017 has recorded

expense of $856 and a decrease of $751 to net assets to increase 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

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

$203 and $195 in cash for the years ended August 31, 2017 and 2016, 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, 2017 and 2016,

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, 2017 and 2016 are as follows:



28

2017 2016

Change in plan assets

Fair value of plan assets at beginning of year 6,390$ 5,664$

Actual return on plan assets 226 820

Employer contributions - 422

Benefits paid (530) (516)

Fair value of plan assets at end of year 6,086$ 6,390$

Change in benefit obligation

Projected benefit obligation at beginning of year 8,700$ 8,046$

Interest cost 266 311

Actuarial loss 11 859

Benefits paid (530) (516)

Projected benefit obligation at end of year 8,447$ 8,700$

Funded status at end of year and

net amount recognized in balance sheet (2,361)$ (2,310)$

Net amount recognized in balance sheet (2,361)$ (2,310)$

Amounts not yet reflected in net periodic benefit cost

and included in other changes in net assets

Accumulated net (loss) (2,656) (2,686)

Adjustment for minimum pension liability (2,656) (2,686)

Cumulative employer contributions in excess of net

periodic benefit cost 295 376

Net amount recognized in balance sheet (2,361)$ (2,310)$

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 $121.

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.



29

Net benefit expense related to the plan for the years ended August 31 includes the following

components:

2017 2016

Interest cost 266$ 311$

Expected return on assets (303) (295)

Amortization of net loss 118 105

Total net periodic benefit cost 81$ 121$

Changes recognized in other changes in net assets for the years ended August 31 include the

following components:

2017 2016

Prior service cost (credit) arising during period -$ -$

Net loss (gain) arising during period 88 334

Amortization of net (loss) (118) (105)

Total recognized in unrestricted net assets (30)$ 229$

Total recognized in net periodic benefit cost and

unrestricted net assets 51$ 350$

The increase to net assets to adjust the minimum pension liability of $30 is included in the

Consolidated Statements of Operations and Changes in Net Assets for the year ended August 31,

2017. The respective decrease to net assets for the year ended August 31, 2016 was $229.

Actuarial Assumptions

The weighted-average assumptions used to determine benefit obligations are as follows for the

years ended August 31:

2017 2016

Weighted-average assumptions

to determine benefit obligations

Discount rate 3.46 % 3.18 %

Rate of compensation increase N/A N/A



30

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:

2017 2016

Weighted average assumptions

to determine net periodic benefit costs

Discount rate 3.18 % 4.03 %

Rate of compensation increase N/A N/A

Expected return on assets 5.00 % 5.50 %

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 5.00% 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, 2017 and 2016.

Fair Value of Plan Assets

The plan assets measured at fair value are as follows for the year ended August 31, 2017:

Level 1 Level 2 Level 3 Total

Assets

Cash and cash equivalents 43$ -$ -$ 43$

Public equities 1,808 - - 1,808

Fixed income 4,235 - - 4,235

Other - - - -

Total plan assets 6,086$ -$ -$ 6,086$

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$



31

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 $200 to the LPCH Frozen Pension Plan during the fiscal year ending

August 31, 2018.

Estimated Future Benefit Payments

The following table presents the expected benefit payments:


2018 693$

2019 686

2020 658

2021 603

2022 565

Next 5 Years 2,563

13. 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 managed pool.

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

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.



32

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 $0 and $10 as

of August 31, 2017 and 2016, respectively.

Changes in LPCH’s endowment, for the years ended August 31, 2017 and 2016, are as follows:

Temporarily Permanently

Unrestricted Restricted Restricted Total

Endowment at beginning of year -$ 94,936$ 211,348$ 306,284$

Investment returns

Earned income - 16,202 - 16,202

Unrealized and realized gains - 18,623 940 19,563

Total investment returns - 34,825 940 35,765

Amounts distributed for operations - (15,669) - (15,669)

Contributions received from donors - - 14,186 14,186

Other - (1,939) 655 (1,284)

Net increase in endowment - 17,217 15,781 32,998

Endowment at end of year -$ 112,153$ 227,129$ 339,282$

2017



33

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

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 8 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:

2017 2016

Permanently restricted

Education 27,009$ 27,009$

Plant replacement and equipment 4,598 4,598


Indigent care and other 35,233 32,735

227,129$ 211,348$



34

Temporarily restricted net assets consist of the following at August 31:

2017 2016

Temporarily restricted

Education 15,691$ 13,042$

Plant replacement and equipment 517,559 460,689


Indigent care and other 19,841 15,576

651,545$ 574,119$

14. 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 $31,360 and $30,416 for the years ended


LPCH also purchases various services from SHC. These services include 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 $44,845 and

$47,214 for the years ended August 31, 2017 and 2016, 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 $40,681 and $33,371 for the years ended

August 31, 2017 and 2016, 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 $25,644, and $23,261 for the fiscal years ended August 31,

2017 and 2016, 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 $3,406 and

$3,537 as of August 31, 2017 and 2016, respectively.



35

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, 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. 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, 2016. The expense recorded related to

payments and accruals for all of these services amounted to approximately $254,066 and

$209,132 for the fiscal years ended August 31, 2017 and 2016, 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 $8,571 and $16,737 as of August 31, 2017 and

August 31, 2016, respectively.

Effective September 1, 2016, the activities of LPFCH are included in LPCH consolidated financial

statements and LPFCH also serves as a fundraising agent for SOM. LPFCH has received a total of

$5,955 from SOM in Purchased Services for development fees.

15. Operating Leases

LPCH and its subsidiaries lease 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, 2017 and 2016 was $27,682 and $27,512, respectively. Net minimum future operating lease payments for periods subsequent to August 31, 2017 are as follows:

LPCH PCHA LPFCH Total


2018 19,729$ 3,675$ 1,100$ 24,504$

2019 17,214 2,666 1,133 21,013

2020 12,691 1,834 1,167 15,692

2021 3,286 927 895 5,108

2022 1,208 434 - 1,642

Thereafter 8,079 338 - 8,417

62,207$ 9,874$ 4,295$ 76,376$

Net Minimum Future Operating

Leases Payments

16. 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.



36

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

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. In March 2016, NTT DATA Corporation (“NTT”) acquired Dell’s information

technology services unit, and Dell assigned its rights and agreements to NTT. 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 $12,000 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 $26 million as of

August 31, 2017.

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.



37

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 has exceeded its originally estimated amount of $1.2 billion because of

cost increases related to changes in technology, change orders, and market availability of

subcontractors such as electricians, among other factors. LPCH management believes that

sources of funding are adequate to cover remaining costs. LPCH has recorded $1,289,737 in

construction in progress related to this project as of August 31, 2017.

Based on current estimated schedules, management currently projects that the Renewal Project

construction will be essentially completed in calendar year 2017.

As of August 31, 2017, the remaining commitment on all contracts, including the Project Renewal

was approximately $69,632.

LPCH is directly liable under irrevocable letters of credit totaling $11,615 at August 31, 2017,

including $7,693 required as security for the workers’ compensation deductible plan as described in

Note 2, $1,422 for security for construction, operation and maintenance of certain utility facilities,

and $2,500 deposit for the acquisition of the long-term ground lease interest in land and

improvements of a parcel located adjacent to the existing facility. No amounts have been drawn on

these letters of credit as of August 31, 2017. LPCH also serves as guarantor for $1,000 loan of

South County Community Health Center in East Palo Alto.

Approximately 41% of LPCH employees are covered by collective bargaining arrangements.

These employees are members of two unions; approximately 32% are covered by an agreement

which expires on March 31, 2019; the other 9% are covered by an agreement which expires on

September 6, 2020.

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 $5,193 as of August 31, 2017.



38

17. Functional Expenses

Expenses incurred comprise the following program services for the years ended August 31:

LPCH PCHA LPFCH ELIM Total LPCH PCHA Total

Patient services 1,235,800$ 87,455$ -$ -$ 1,323,255$ 1,148,607$ 83,604$ 1,232,211$

Management and general 144,262 10,457 4,928 - 159,647 114,122 6,479 120,601

Fundraising 11,996 - 20,167 (15,501) 16,662 10,868 - 10,868

Total functional expenses 1,392,058$ 97,912$ 25,095$ (15,501)$ 1,499,564$ 1,273,597$ 90,083$ 1,363,680$

20162017

18. Subsequent Events

In November 2017, a portion of the proceeds of the 2017 bonds were used to fund the acquisition

of the long-term ground lease interest in land and improvements of a parcel located adjacent to the

existing facility.

LPCH and its subsidiaries have evaluated subsequent events occurring between the end of the

most recent fiscal year and December 5, 2017, the date the financial statements were issued.

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, 2017 and 2016 and for the years then ended and our report thereon appears on page one 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 consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to theconsolidated 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, results of operations and cash flows of the individual companies 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 companies.

December 5, 2017

PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111 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, 2017 and 2016


The accompanying note is an integral part of the accompanying consolidating information.

40

LPCH PCHA LPFCH Elimination Consolidated LPCH PCHA Elimination Consolidated

Assets

Current assets

Cash and cash equivalents 394,401$ 543$ 11,739$ -$ 406,683$ 532,329$ 571$ -$ 532,900$

Patient accounts receivable, net of allowance for doubtful

accounts of $13,214 and $11,670 in 2017 and 2016, respectively 281,376 6,117 - - 287,493 261,963 6,211 - 268,174

Contributions receivable 36,443 - 49,132 (36,443) 49,132 32,944 - - 32,944

Other receivables 28,500 1,134 - - 29,634 33,224 836 - 34,060

Prepaid expenses, inventory and other 18,994 609 551 (899) 19,255 16,961 536 - 17,497

Total current assets 759,714 8,403 61,422 (37,342) 792,197 877,421 8,154 - 885,575

Investments 72,360 - 14,205 - 86,565 70,642 - - 70,642

Investments in University managed pools 669,916 - - 669,916 599,151 - - 599,151

Board designated funds in University managed pools and other 10,736 - 113,412 - 124,148 9,214 - - 9,214

Assets limited as to use, held by trustee 33,096 - - 33,096 219 - - 219

Property and equipment, net 1,722,452 7,153 503 - 1,730,108 1,419,205 10,111 - 1,429,316

Beneficial interest in trusts, net 16,048 - 8,004 - 24,052 15,048 - - 15,048

Contributions receivable, net of current portion 86,037 - 113,193 (86,037) 113,193 82,707 - - 82,707

Equity method investments and other assets 3,053 12,696 665 51,424 67,838 4,935 12,252 41,414 58,601

Total assets 3,373,412$ 28,252$ 311,404$ (71,955)$ 3,641,113$ 3,078,542$ 30,517$ 41,414$ 3,150,473$


Current liabilities

Accounts payable and accrued liabilities 138,579$ 2,229$ 13,232$ (2,327)$ 151,713$ 147,114$ 4,110$ -$ 151,224$

Accrued salaries and related benefits 55,313 1,478 2,341 - 59,132 60,735 1,977 - 62,712

Due to related parties 10,079 16,954 178,878 (126,193) 79,718 17,359 16,830 - 34,189

Third-party payor settlements 2,443 - - - 2,443 1,849 - - 1,849

Current portion of long-term debt and capital leases 5,800 - - - 5,800 5,695 - - 5,695

Self-insurance reserves and other liabilities 9,579 - - - 9,579 8,612 - - 8,612

Total current liabilities 221,793 20,661 194,451 (128,520) 308,385 241,364 22,917 - 264,281

Self-insurance reserves and other liabilities, net of current portion 33,327 - - - 33,327 32,837 - - 32,837

Long-term debt, net of current portion 875,337 - - - 875,337 656,455 - - 656,455

Total liabilities 1,130,457 20,661 194,451 (128,520) 1,217,049 930,656 22,917 - 953,573

Commitments and contingencies

Net assets

Unrestricted 1,364,281 7,591 116,953 56,565 1,545,390 1,362,419 7,600 41,414 1,411,433

Temporarily restricted 651,545 - - - 651,545 574,119 - - 574,119

Permanently restricted 227,129 - - - 227,129 211,348 - - 211,348

Total net assets 2,242,955 7,591 116,953 56,565 2,424,064 2,147,886 7,600 41,414 2,196,900

Total liabilities and net assets 3,373,412$ 28,252$ 311,404$ (71,955)$ 3,641,113$ 3,078,542$ 30,517$ 41,414$ 3,150,473$

20162017

Lucile Salter Packard Children’s Hospital at Stanford Consolidating Statements of Operations and Changes in Net Assets August 31, 2017 and 2016


The accompanying note is an integral part of the accompanying consolidating information.

41

LPCH PCHA LPFCH Elimination Consolidated LPCH PCHA Elimination Consolidated

Operating revenues

Net patient service revenue before provision for doubtful accounts 1,314,555$ 77,931$ -$ -$ 1,392,486$ 1,239,261$ 71,690$ -$ 1,310,951$

Provision for doubtful accounts, net (6,685) (972) - - (7,657) 3,622 (1,189) - 2,433

Net patient service revenue after provision for doubtful accounts 1,307,870 76,959 - - 1,384,829 1,242,883 70,501 - 1,313,384

Other revenue 46,785 10,944 20,287 (350) 77,666 45,532 10,141 9,416 65,089

Net assets released from restrictions used for operations 24,363 - - - 24,363 23,804 25 23,829

Total operating revenues 1,379,018 87,903 20,287 (350) 1,486,858 1,312,219 80,667 9,416 1,402,302

Operating expenses

Salaries and benefits 618,102 27,699 13,836 - 659,637 560,806 24,697 - 585,503

Professional services 14,793 370 2,668 - 17,831 17,517 1,138 - 18,655

Supplies 110,216 8,772 69 - 119,057 104,222 9,164 - 113,386

Purchased services 473,413 50,510 479 (15,100) 509,302 428,927 47,532 - 476,459

Other 112,954 6,726 7,823 (401) 127,102 107,501 5,722 - 113,223

Depreciation and amortization 62,580 3,835 220 - 66,635 54,624 1,830 - 56,454

Total operating expenses 1,392,058 97,912 25,095 (15,501) 1,499,564 1,273,597 90,083 - 1,363,680

(Loss)/Income from operations (13,040) (10,009) (4,808) 15,151 (12,706) 38,622 (9,416) 9,416 38,622

Interest income 2,479 - 474 - 2,953 2,351 - - 2,351

Income and gains from University managed pools and other 44,355 - 11,493 - 55,848 9,076 - - 9,076

Loss on extinguishment of long term debt - - - - (1,114) - - (1,114)

Other (500) - - - (500) (500) - - (500)

Excess of revenues over expenses 33,294 (10,009) 7,159 15,151 45,595 48,435 (9,416) 9,416 48,435

Net assets released from restrictions used for purchases of

property and equipment 155 - - - 155 27 - - 27

Transfer of net investment loss on certain endowments - - - - (10) - - (10)

Adjustment for minimum pension liability (721) - - - (721) 1,385 - - 1,385

Transfers to University and other (30,866) 10,000 - - (20,866) (24,598) 9,151 - (15,447)

Contribution received in acquisition - 109,794 - 109,794 - - - -

Increase in unrestricted net assets 1,862 (9) 116,953 15,151 133,957 25,239 (265) 9,416 34,390

Changes in temporarily restricted net assets

Contributions and other 67,428 - - - 67,428 129,868 - - 129,868

Income and gains from University managed pools 34,764 - - - 34,764 9,987 - - 9,987

Change in value of beneficial interest in remainder trusts 884 - - - 884 164 - - 164

Net assets released from restrictions for operations (24,363) - - - (24,363) (23,829) - - (23,829)

Purchase of property and equipment (155) - - - (155) (27) - - (27)

Transfers to University and other (1,132) - - - (1,132) (283) - - (283)

Increase in temporarily restricted net assets 77,426 - - - 77,426 115,880 - - 115,880

Changes in permanently restricted net assets

Contributions and other 14,256 - - - 14,256 7,669 - - 7,669

Change in value of beneficial interest in remainder trusts 400 - - - 400 1,255 - - 1,255

Transfers from/(to) University and other 1,125 - - - 1,125 (1,981) - - (1,981)

Increase in permanently restricted net assets 15,781 - - - 15,781 6,943 - - 6,943

Increase in net assets 95,069 (9) 116,953 15,151 227,164 148,062 (265) 9,416 157,213

Net assets

Beginning of year 2,147,886 7,600 - 41,414 2,196,900 1,999,824 7,865 31,998 2,039,687

End of year 2,242,955$ 7,591$ 116,953$ 56,565$ 2,424,064$ 2,147,886$ 7,600$ 41,414$ 2,196,900$

20162017

Lucile Salter Packard Children’s Hospital at Stanford Note to Accompanying Consolidating Information August 31, 2017 and 2016


42

Accompanying Consolidating Information

The accompanying consolidating information presents Consolidating Balance Sheets as of August 31,

2017 and 2016, and Consolidating Statements of Operations and Changes in Net Assets for the years

then ended.

The supplemental information has been prepared in a manner consistent with generally accepted

accounting principles and was derived from and relates directly to the underlying accounting and other

records used to prepare the consolidated financial statements. The supplemental consolidating

information is presented only for purposes of additional analysis and not as a presentation of the financial

position and results of the individual entities.

lucile salter packard children s hospital at stanford

Documents