Business Proposal

Assignment Content

As a team, analyze consolidated financial statements attached and make recommendations to leadership based on your findings. MEDSTAR HEALTH, INC.
Consolidated Financial Statements
June 30, 2019 and 2018
(With Independent Auditors’ Report Thereon)
MEDSTAR HEALTH, INC.
Table of Contents
Page
Independent Auditors’ Report
1
Consolidated Financial Statements:
Consolidated Balance Sheets
3
Consolidated Statements of Operations and Changes in Net Assets
5
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
8
KPMG LLP
750 East Pratt Street, 18th Floor
Baltimore, MD 21202
Independent Auditors’ Report
The Board of Directors
MedStar Health, Inc.:
We have audited the accompanying consolidated financial statements of MedStar Health, Inc.
(the Corporation), which comprise the consolidated balance sheets as of June 30, 2019 and 2018, and the
related consolidated statements of operations and changes in net assets, and cash flows for the years then
ended and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with U.S. generally accepted accounting principles; 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 these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made
by management, as well as evaluating 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 MedStar Health, Inc. as of June 30, 2019 and 2018, and the results of its operations and
changes in net assets, and its cash flows for the years then ended in accordance with U.S. generally accepted
accounting principles.
KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
Emphasis of Matter
As discussed in note 1(u) to the consolidated financial statements, the Corporation adopted Accounting
Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements
of Not-for-Profit Entities, and ASU No. 2014-09, Revenue from Contracts with Customers, during the year
ended June 30, 2019 on a modified retrospective basis. Our opinion is not modified with respect to these
matters.
October 2, 2019
2
MEDSTAR HEALTH, INC.
Consolidated Balance Sheets
June 30, 2019 and 2018
(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents
Investments
Assets whose use is limited or restricted
2019
$
Receivables:
Patient accounts receivable, net
Other receivables
Inventories
Prepaids and other current assets
Total current assets
Investments, net of current portion
Assets whose use is limited or restricted, net of current portion
Property and equipment, net
Interest in net assets of foundation
Goodwill and other intangible assets, net
Other assets
Total assets
$
3
2018
559.6
188.7
65.1
692.6
162.7
64.3
691.7
101.6
651.5
88.5
793.3
740.0
71.5
57.6
67.1
53.2
1,735.8
1,779.9
1,209.5
902.2
1,433.4
65.0
379.6
130.3
1,077.2
938.1
1,321.0
62.5
380.9
129.9
5,855.8
5,689.5
(Continued)
MEDSTAR HEALTH, INC.
Consolidated Balance Sheets
June 30, 2019 and 2018
(Dollars in millions)
Liabilities and Net Assets
2019
Current liabilities:
Accounts payable and accrued expenses
Accrued salaries, benefits, and payroll taxes
Amounts due to third-party payors, net
Current portion of long-term debt
Current portion of self insurance liabilities
Other current liabilities
$
Total current liabilities
Long-term debt, net of current portion
Self insurance liabilities, net of current portion
Pension liabilities
Other long-term liabilities, net of current portion
Total liabilities
Net assets:
Without donor restrictions – attributable to MedStar Health, Inc.
Without donor restrictions – noncontrolling interest
Total net assets without donor restrictions
With donor restrictions
Total net assets
Total liabilities and net assets
$
See accompanying notes to consolidated financial statements.
4
2018
493.8
394.8
86.3
63.9
98.4
156.0
471.8
368.8
96.6
157.3
95.5
158.0
1,293.2
1,348.0
1,574.4
272.6
436.5
254.4
1,514.0
283.2
290.0
259.4
3,831.1
3,694.6
1,795.6
18.0
1,787.7
16.2
1,813.6
1,803.9
211.1
191.0
2,024.7
1,994.9
5,855.8
5,689.5
MEDSTAR HEALTH, INC.
Consolidated Statements of Operations and Changes in Net Assets
Years ended June 30, 2019 and 2018
(Dollars in millions)
2019
Operating revenues:
Net patient service revenue
Premium revenue
Other operating revenue
$
2018
4,930.7
525.4
234.3
4,740.2
636.6
227.2
5,690.4
5,604.0
3,213.0
836.1
762.4
479.1
46.4
201.6
3,037.8
805.5
844.8
502.9
46.2
205.9
Total operating expenses
5,538.6
5,443.1
Earnings from operations
151.8
160.9
52.8
(3.1)
(13.6)
118.5
1.6
(9.1)
36.1
111.0
187.9
271.9
Net operating revenues
Operating expenses:
Personnel
Supplies
Purchased services
Other operating
Interest expense
Depreciation and amortization
Nonoperating gains (losses):
Investment gains, net
Income tax (provision) benefit
Other nonoperating activities, net
Total nonoperating gains
Excess of revenues over expenses
$
5
(Continued)
MEDSTAR HEALTH, INC.
Consolidated Statements of Operations and Changes in Net Assets
Years ended June 30, 2019 and 2018
(Dollars in millions)
Without donor restrictions
Balance at June 30, 2017
Medstar
Health, Inc.
Noncontrolling
Interest
With donor
restrictions
1,472.8
17.7
179.8
$
Excess of revenues over expenses
Change in funded status of defined benefit plans
Distributions to noncontrolling interests
Net assets released from restrictions used for purchase of
property and equipment and other
Net assets released from restrictions for operations
Contributions
Investment gains on restricted investments, net
Increase in net assets of foundation
269.4
42.2
—
3.3
—
—
—
—
Increase (decrease) in net assets
Balance at June 30, 2018
314.9
$
1,787.7
Excess of revenues over expenses
Change in funded status of defined benefit plans
Distributions to noncontrolling interests
Net assets released from restrictions used for purchase of
property and equipment and other
Net assets released from restrictions for operations
Contributions
Investment gains on restricted investments, net
Increase in net assets of foundation
184.8
(183.1)
—
6.2
—
—
—
—
Increase in net assets
Balance at June 30, 2019
$
See accompanying notes to consolidated financial statements.
6
2.5
—
(4.6)
—
—
—
Total
1,670.3
271.9
42.2
(4.6)
0.6
—
—
—
—
(3.9)
(9.6)
17.8
3.7
3.2
(1.5)
11.2
324.6
16.2
191.0
1,994.9
3.1
—
(3.2)
1.9
—
—
—
—
—
—
—
(8.1)
(5.2)
29.2
1.7
2.5
—
(9.6)
17.8
3.7
3.2
187.9
(183.1)
(3.2)
—
(5.2)
29.2
1.7
2.5
7.9
1.8
20.1
29.8
1,795.6
18.0
211.1
2,024.7
MEDSTAR HEALTH, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 2019 and 2018
(Dollars in millions)
2019
Cash flows from operating activities:
Change in net assets
Adjustments to reconcile change in net assets to net cash
provided by operating activities:
Depreciation and amortization
Gain on sale of property and equipment and other
Change in funded status of defined benefit plans
Investment gains, net and change in derivative instrument
Increase in net assets of foundation
Deferred income tax provision (benefit)
Donor restricted contributions
Changes in operating assets and liabilities:
Patient accounts receivable
Accounts payable and accrued expenses
Other
$
Net cash provided by operations
Cash flows from investing activities:
Purchases of property and equipment, and other
Proceeds from sale of property and equipment and other
(Purchases) proceeds from sales of investments and assets whose use is
limited or restricted, net
Purchases of alternative investments
Proceeds from sales of alternative investments
Net settlement payment on derivative instrument
Net cash used in investing activities
Cash flows from financing activities:
Repayments of long-term borrowings
Donor restricted contributions
Distributions to noncontrolling interests
Net cash used in financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
2018
29.8
324.6
201.6
(0.7)
183.1
(25.4)
(2.5)
3.1
(29.2)
205.9
(5.0)
(42.2)
(106.3)
(3.2)
(1.6)
(17.8)
(52.9)
43.1
(75.7)
(32.8)
1.8
(99.6)
274.3
223.8
(299.7)
—
(197.0)
5.2
(84.9)
(31.5)
18.5
(1.5)
75.9
(93.5)
23.3
(2.1)
(399.1)
(188.2)
(34.2)
29.2
(3.2)
(30.9)
17.8
(4.6)
(8.2)
(17.7)
(133.0)
17.9
692.6
674.7
Cash and cash equivalents at end of year
$
559.6
692.6
Supplemental disclosure of cash flow information:
Cash paid for interest
$
68.8
66.3
Supplemental disclosure of noncash investing and financing activities:
Noncash purchases of property, plant and equipment
$
29.6
20.8
See accompanying notes to consolidated financial statements.
7
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(1) Description of Organization and Summary of Significant Accounting Policies
(a) Organization
MedStar Health, Inc. (MedStar or the Corporation) is a tax-exempt, Maryland membership corporation
which, through its controlled entities and other affiliates, provides and manages healthcare services in
the region encompassing Maryland, Washington D.C. and Northern Virginia. The Corporation became
operational on June 30, 1998 by the transfer of the membership interests of Helix Health, Inc. (Helix – a
not-for-profit Maryland Corporation) and Medlantic Healthcare Group, Inc. (Medlantic – a not-for-profit
Delaware Corporation) in exchange for the guarantee of the debt of both Helix and Medlantic by the
Corporation. The trade names of the principal tax-exempt and taxable entities of the Corporation are:
Tax-Exempt

MedStar Ambulatory Services

MedStar Franklin Square Medical Center (MFSMC)

MedStar Georgetown University Hospital (MGUH)

MedStar Good Samaritan Hospital

MedStar Harbor Hospital

MedStar Health Research Institute

MedStar Health Visiting Nurse Association, Inc.

MedStar Medical Group, LLC

MedStar Montgomery Medical Center (MMMC)

MedStar National Rehabilitation Network

MedStar Southern Maryland Hospital Center

MedStar St. Mary’s Hospital (MSMH)

MedStar Surgery Center, Inc.

MedStar Union Memorial Hospital (MUMH)

MedStar Washington Hospital Center (MWHC)

HH MedStar Health, Inc.
Taxable

Greenspring Financial Insurance, LTD.

MedStar Enterprises, Inc. and Subsidiaries

MedStar Family Choice, Inc. (MFC)

MedStar Physician Partners, Inc.

Parkway Ventures, Inc. and Subsidiaries

RadAmerica II, LLC
8
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(b) Basis of Presentation
The consolidated financial statements are prepared on the accrual basis of accounting in accordance
with U.S. generally accepted accounting principles (U.S. GAAP). All majority owned subsidiaries, direct
member entities and controlled affiliates are consolidated. All significant intercompany accounts and
transactions have been eliminated.
(c) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, 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. Future results could differ
from current estimates.
(d) Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three months or less are considered to be
cash equivalents.
(e) Investments and Assets Whose Use is Limited or Restricted
The Corporation’s investment portfolio is considered trading and is classified as current or noncurrent
based on management’s intention as to use. All securities are reported at fair value principally based
on quoted market prices in the consolidated balance sheets. The fair value of alternative investments is
measured based on the Net Asset Value (NAV) of the shares in each investment company or
partnership as a practical expedient, except for those institutional funds which have readily
determinable fair values (RDFV) and are disclosed separately. Purchases and sales of securities are
recorded on a trade-date basis.
Investments in unconsolidated affiliates are accounted for under the cost or equity method of
accounting, as appropriate, and are included in other assets in the consolidated balance sheets. The
Corporation utilizes the equity method of accounting for its investments in entities over which it
exercises significant influence. Under the equity method, original investments are recorded at cost and
adjusted by the Corporation’s share of earnings or losses in these organizations. The Corporation’s
equity income or loss is recognized in other operating revenue within the consolidated statements of
operations and changes in net assets.
Assets whose use is limited or restricted include assets held by trustees under bond indentures,
self-insurance trust arrangements, assets restricted by donor, and assets designated by the Board of
Directors for future capital improvements and other purposes over which it retains control and may, at
its discretion, use for other purposes. Amounts from these funds required to meet current liabilities
have been classified in the consolidated balance sheets as current assets.
9
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Investment income (interest and dividends), realized gains and losses on investment sales, and
unrealized gains and losses are reported as investment gains, net within the excess of revenues over
expenses in the accompanying consolidated statements of operations and changes in net assets
(unless the income or loss is restricted). Investment income and realized gains and losses on funds
held in trust for self-insurance purposes are included in other operating revenue. Investment returns
that are restricted by the donor are recorded as a component of changes in donor restricted net assets,
in accordance with donor imposed restrictions. Realized gains and losses are determined based on the
specific security’s original purchase price or adjusted cost if the investment was previously determined
to be other-than-temporarily impaired.
(f) Inventories
Inventories, which primarily consist of medical supplies and pharmaceuticals at many of the operating
entities, are stated at the lower of cost or market, with cost being determined primarily under the
weighted average cost or first-in, first-out methods.
(g) Property and Equipment, net
Property and equipment acquisitions are recorded at cost and are depreciated or amortized over the
estimated useful lives of the assets. Interest cost incurred on borrowed funds during the period of
construction of capital assets is capitalized as a component of the cost of acquiring those assets, net of
any interest earned on unexpended bond proceeds. Depreciation is computed on a straight-line basis.
Major classes and estimated useful lives of property and equipment are as follows:
Leasehold improvements
Buildings and improvements
Equipment
Lease term
10–40 years
3–20 years
Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support,
and are excluded from the excess of revenues over expenses, unless explicit donor stipulations specify
how the donated assets must be used. Gifts of long-lived assets with explicit donor restrictions that
specify how the assets are to be used, and gifts of cash or other assets that must be used to acquire
long-lived assets, are reported as restricted support. Absent explicit donor stipulations about how long
those long-lived assets must be maintained, expirations of donor restrictions are reported when the
donated or acquired long-lived assets are placed in service.
Management routinely evaluates the carrying value of its long-lived assets for impairment. No
significant impairment charges were recorded against the carrying value of the Corporation’s long-lived
assets during the years ended June 30, 2019 and 2018.
10
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(h) Interest in Net Assets of Foundation
The Corporation recognizes its rights to assets held by a recipient organization, which accepts cash or
other financial assets from a donor and agrees to use those assets on behalf of or transfer those
assets, the return on investment of those assets, or both, to the Corporation. Changes in the
Corporation’s economic interests in the financially interrelated organization are recognized in the
consolidated statements of operations and changes in net assets as a component of changes in net
assets with donor restrictions.
(i) Goodwill and Other Intangible Assets, net
Goodwill is an asset representing the future economic benefits arising from assets acquired in a
business combination that are not individually identified and separately recognized. As of June 30,
2019 and 2018, the Corporation had one reporting unit, which included all subsidiaries of the
Corporation, and held goodwill, net on its consolidated balance sheets of $225.0 and $220.4,
respectively. Goodwill is evaluated for impairment annually (or sooner if indicators of impairment arise)
using a qualitative assessment to determine whether there are events or circumstances that indicate it
is more likely than not that the reporting unit’s fair value is less than its carrying amount. Based on this
qualitative assessment, the Corporation determined that there was no goodwill impairment for the
years ended June 30, 2019 and 2018.
Other intangible assets are recorded at fair value and amortized over their estimated useful lives. Other
intangible assets, were $154.6 and $160.5, net of accumulated amortization of $28.6 and $22.7, as of
June 30, 2019 and 2018, respectively. The Corporation recognized amortization expense of $5.9 for
the years ended June 30, 2019 and 2018 related to identifiable intangible assets. Other intangible
assets are evaluated for impairment whenever events or circumstances indicate that the carrying value
of these assets may not be recoverable. No impairment charges related to other intangibles were
recorded for the years ended June 30, 2019 and 2018.
(j) Estimated Professional Liability Costs
The provision for estimated self-insured professional liability claims includes estimates of the ultimate
costs for both reported claims and claims incurred but not reported. These estimates are based on
actuarial analysis of historical trends, claims asserted and reported incidents. The receivables related
to such claims are recorded at their net realizable value and are included in other assets in the
accompanying consolidated balance sheets.
(k) Leases
Lease arrangements, including assets under construction, are capitalized when such leases convey
substantially all the risks and benefits incidental to ownership. Capital leases are amortized over either
the lease term or the life of the related assets, depending upon available purchase options and lease
renewal features. Amortization related to capital leases is included in the consolidated statements of
operations and changes in net assets within depreciation and amortization expense.
11
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(l) Derivative
The Corporation utilizes a derivative financial instrument to manage its interest rate risks associated
with tax-exempt debt. The Corporation does not hold or issue derivative financial instruments for
trading purposes. The derivative instrument is recorded within the consolidated balance sheets at its
fair value within other long-term liabilities. The Corporation’s current derivative investment does not
qualify for hedge accounting; therefore, the changes in fair value have been recognized in the
accompanying consolidated statements of operations and changes in net assets as mark-to-market
adjustments in other nonoperating activities, net.
(m) Net Patient Service Revenue and Net Patient Accounts Receivable
Net patient service revenue, which includes hospital inpatient services, hospital outpatient services,
physician services, and other patient services revenues, is recorded at the transaction price estimated
by the Corporation to reflect the total consideration due from patients and third-party payors in
exchange for providing goods and services in patient care. The Corporation recognizes net patient
service revenue in the period in which performance obligations are satisfied under contracts by
transferring our services to customers.
The Corporation determines performance obligations based on the nature of the services provided.
Generally, performance obligations satisfied over time relate to patients in hospitals receiving inpatient
services. The Corporation measures the performance obligation from admission into the hospital to the
point when it is no longer required to provide services to that patient, which is generally at the time of
discharge. Revenue for performance obligations satisfied at a point in time, such as outpatient
services, is recognized when goods or services are provided and the Corporation does not believe it is
required to provide additional goods or services to the patient. Inpatient goods and/or services may
include room, meals, ancillary services, etc. These services represent a bundle of goods and services
that are distinct and accounted for as a single performance obligation within a patient stay or
encounter.
The Corporation’s estimate of the transaction price includes estimates of price concessions for such
items as contractual allowances, charity care, potential adjustments that may arise from payment and
other reviews, and uncollectible amounts, which are determined using a portfolio approach as a
practical expedient to account for patient contracts as collective groups rather than individually.
Estimates for uncollectible amounts are based on the aging of the accounts receivable, historical
collection experience for similar payors and patients, current market conditions, and other relevant
factors. Settlements with third-party payors for retroactive revenue adjustments due to audits, reviews
or investigations are considered variable consideration and are considered in the determination of the
estimated transaction price for providing patient care. These settlements are estimated based on the
terms of the payment agreement with the payor, correspondence from the payor and our historical
settlement activity, including an assessment to ensure that it is probable that a significant reversal of
revenue recognized will not occur. Estimated settlements are adjusted in future periods as
adjustments become known or as years are settled or are no longer subject to such audits, reviews or
investigations. In addition, the Corporation is committed to ensuring that patients within the
communities it serves who lack financial resources have access to necessary hospital services. The
Corporation works with uninsured and underinsured patients to gain an understanding of each patient’s
12
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
financial resources prior to admission (for scheduled services) or prior to billing (for emergency
services). Based on this information and patient eligibility for charity care, the Corporation records
estimated price concessions accordingly.
Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to
net patient service revenue in the period of the change. Subsequent changes that are determined to
be the result of an adverse change in the payor’s or patient’s ability to pay are recorded as bad debt
expense. Bad debt expense for the years ended June 30, 2019 and 2018 was not significant.
(n) Premium Revenue and Medical Claims Expense
Premium revenue consists of amounts received by the Corporation’s managed care organization for
providing medical services to subscribing participants, regardless of services actually performed. As of
June 30, 2019, the managed care organization provides services primarily to enrolled Medicaid
beneficiaries in the State of Maryland. This revenue is recognized ratably over the contractual period
for the provision of services. Medical expenses of the managed care organization include actuarially
determined estimates of the ultimate costs for both reported claims and claims incurred but unreported
and are included in purchased services within the consolidated statements of operations and changes
in net assets.
(o) Grants
Grants are accounted for as either an exchange transaction or as a contribution based on terms and
conditions of the grant. If the grant is accounted for as an exchange transaction, revenue is recognized
as other operating revenue when earned. If the grant is accounted for as a contribution, the revenue is
recognized as either other operating revenue, or as donor restricted contributions, depending on the
restrictions within the grant.
(p) Contributions Received and Made
Unconditional promises to give cash and other assets to the Corporation are reported at fair value on
the date the promise is received. Conditional promises to give are reported at fair value on the date the
condition is met. The gifts are reported as restricted support if they are received with donor stipulations
that limit the use of the donated assets. When a donor restriction is satisfied, that is, when a stipulated
time restriction ends or purpose restriction is accomplished, these restricted assets are reclassified as
assets without donor restrictions and reported in the consolidated statements of operations and
changes in net assets as net assets released from restrictions. Such amounts are classified as other
operating revenue or transfers for additions to property and equipment. Donor restricted contributions
whose restrictions are satisfied within the same year as received are reported as contributions without
donor restrictions in the accompanying consolidated financial statements.
Contributions made by the Corporation to other not-for-profit organizations are recorded at fair value in
other nonoperating activities, net within the consolidated statements of operations and changes in net
assets as conditions, if applicable, are met.
13
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(q) Excess of Revenues over Expenses
The consolidated statements of operations and changes in net assets include a performance indicator
for the Corporation, which is the excess of revenues over expenses. Consistent with industry practice,
changes in net assets that are excluded from excess of revenues over expenses may include
contributions of long-lived assets (including assets acquired using contributions that by donor restriction
were to be used for the purpose of acquiring such assets), contributions from and acquisitions of and
distributions to noncontrolling interests, certain pension adjustments, and other miscellaneous items as
defined under U.S. GAAP.
(r) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment date. Any changes to the
valuation allowance on the deferred tax asset are reflected in the year of the change. The Corporation
accounts for uncertain tax positions in accordance with the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes.
(s) Net Assets
The Corporation classifies net assets based on the existence or absence of donor-imposed restrictions.
Net assets without donor restrictions represent amounts that arise as the result of operations or
contributions, gifts, and grants that have no donor-imposed restrictions. Net assets with donor
restrictions are subject to donor-imposed restrictions that must or will be met either by satisfying a
specific purpose, passage of time and/or to be maintained by the Corporation in perpetuity. Net assets
with donor restrictions primarily consist of pledges and funds received for the purposes of purchasing
property and equipment, providing health education, research, and other healthcare services, as donor
or other restrictions are satisfied.
The Corporation accounts for and presents noncontrolling interests in a consolidated subsidiary as a
separate component of the appropriate class of consolidated net assets. The income attributable to
noncontrolling interests is included within operating income within the consolidated statements of
operations and changes in net assets.
(t) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair values of financial instruments:
Cash and cash equivalents, receivables, other current assets, other assets, current liabilities and
long-term liabilities: The carrying amount reported in the consolidated balance sheets for each of these
assets and liabilities approximates their fair value.
14
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The fair values of investments, assets whose use is limited or restricted, and the interest rate swap are
discussed in note 3.
(u) New Accounting Pronouncements
Effective July 1, 2018, the Corporation adopted the FASB Accounting Standards Update (ASU) 201409, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method of
adoption. The core principle of Topic 606 is that an entity should recognize revenue in an amount that
the entity ultimately expects to receive for the services provided. As a result of the adoption of Topic
606, what was previously classified as the provision for bad debts in the statement of operations and
changes in net assets is now reflected as implicit price concessions (as defined in Topic 606) and
therefore included as a reduction to net patient service revenue. Additionally, the allowance for
uncollectible accounts of approximately $185.6 million as of July 1, 2018 was collapsed as a
component of net patient accounts receivable. Periods prior to adoption have been revised to conform
to the net presentation of a single net patient service revenue total. Other than these changes in
presentation, the adoption of Topic 606 did not have a material impact on the consolidated results of
operations for the years ended June 30, 2019 and 2018, and the Corporation does not expect it to have
a material impact on its consolidated results of operations going forward. For the years ended June 30,
2019 and 2018 the Corporation recorded $186.2 and $191.0, respectively, of implicit price concessions
as a reduction of net patient service revenue that would have been recorded as bad debt expense prior
to the adoption of Topic 606. The Corporation’s MFC insurance business is accounted for under the
FASB ASC Topic 944, Financial Services – Insurance and as a result, premium revenue is not subject
to Topic 606.
In February 2016 and modified through subsequent ASUs, the FASB issued Leases (Topic 842), the
primary impact of which requires lessees to recognize right-of-use assets and liabilities for most
operating leases. ASU 2016-02 is effective for fiscal year and interim periods beginning after
December 15, 2018. The Corporation will adopt Topic 842 effective July 1, 2019 applying the modified
retrospective approach in which the Corporation will not adjust comparable prior period information and
disclosures. The Corporation expects to utilize the practical expedients being made available,
including the package of practical expedients to not reassess whether a contract is or contains a lease,
the lease classification and initial direct costs. The Corporation estimates the amount of right-of-use
assets and obligations resulting from the adoption of ASU 2016-02 to be within a range of $325.0 to
$375.0.
In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit
Entities, which requires not-for-profit entities to revise its financial presentation of net asset
classifications, provide quantitative and qualitative information as to available resources and
management of liquidity and liquidity risk and expand disclosures on functional expenses. The
Corporation adopted the new standard on June 30, 2019 on a retrospective basis. There were no
material changes to the consolidated balance sheets, statements of operations and changes in net
assets or cash flows because of the adoption. Periods prior to adoption, which previously presented
temporarily restricted and permanently restricted net assets, have been revised to conform to the new
presentation of a single classification of net assets with donor restrictions.
15
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
From time to time, new accounting guidance is issued by the FASB or other standard setting bodies
that is adopted by the Corporation as of the effective date or, in some cases where early adoption is
permitted, in advance of the effective date. The Corporation has assessed the recently issued guidance
that is not yet effective and, unless otherwise indicated above, believes the new guidance will not have
a material impact on our consolidated financial position, results of operations, or cash flows.
(v) Reclassifications
Certain prior year amounts, aside from the items discussed in note 1(u), have been reclassified to
conform with current period presentation, the effects of which are not material.
(2) Investments and Assets Whose Use is Limited or Restricted
Investments and assets whose use is limited or restricted as of June 30 at fair value consist of the
following:
2019
Cash and cash equivalents
Fixed income securities and funds
Equity securities
Institutional funds with RDFV
Alternative investments:
Commingled equity funds
Inflation hedging equity, commodity, fixed income fund
Hedge fund of funds and private equity
$
Total investments and assets whose use is
limited or restricted
Less short-term investments and assets whose use is
limited or restricted
Long-term investments and assets whose use is
limited or restricted
16
127.0
791.1
660.6
30.8
87.6
736.7
645.8
41.9
288.6
71.3
396.1
280.5
76.3
373.5
2,365.5
2,242.3
(253.8)
$
2018
2,111.7
(227.0)
2,015.3
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Assets whose use is limited or restricted as of June 30, included in the table above, consist of the following:
2019
Funds held by trustees
$
Self-insurance funds
Funds restricted by donors for specific purposes and endowment
Funds designated by board
Total assets whose use is limited or restricted
Less assets required for current obligations
Long-term assets whose use limited or restricted
$
2018
349.6
332.6
114.8
170.3
389.1
324.1
100.0
189.2
967.3
1,002.4
(65.1)
(64.3)
902.2
938.1
Investment income and realized and unrealized gains for assets whose use is limited or restricted, cash
equivalents and investments are comprised of the following for the years ended June 30:
2019
Other operating revenue:
Investment income and realized gains
$
Investment gains, net:
Investment income, net
Net realized gains on investments
Change in unrealized gains on investments, net
Other changes in net assets:
Realized net gains on restricted net assets
Change in unrealized gains on restricted net assets, net
Total investment returns, net
$
2018
12.8
12.7
28.4
13.8
10.6
19.5
32.8
66.2
52.8
118.5
1.1
0.6
1.6
2.1
67.3
134.9
(3) Fair Value of Financial Instruments
The Corporation follows the guidance within FASB ASC Topic 820, Fair Value Measurement (ASC 820),
which defines fair value and establishes methods used to measure fair value. The fair value hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under
ASC 820 are described below:

Level 1 – Quoted prices in active markets for identical assets or liabilities at the measurement date;
17
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)

Level 2 – Observable inputs other than quoted prices for the asset, either directly or indirectly
observable, that reflect assumptions market participants would use to price the asset based on market
data obtained from sources independent of the Corporation.

Level 3 – Unobservable inputs that reflect the Corporation’s own assumptions about the assumptions
market participants would use to price an asset based on the best information available in the
circumstances.
The Corporation has incorporated an Investment Policy Statement (IPS) into the investment program. The
IPS, which has been formally adopted by the Corporation’s Board of Directors, contains numerous
standards designed to ensure adequate diversification by asset class and geography. The IPS also limits
all investments by manager and position size, and limits fixed income position size based on credit ratings,
which serves to further mitigate the risks associated with the investment program. As of June 30, 2019 and
2018, management believes that all investments were being managed in a manner consistent with the IPS.
The following table illustrates the actual allocations of the Corporation’s primary long-term investment
portfolio as of June 30:
2019
Cash
Publicly traded equities – domestic
Publicly traded equities – international
Fixed income securities
Institutional funds with RDFV
Alternative investments:
Commingled equity funds
Inflation hedging equity, commodity, fixed income fund
Hedge funds
Private equities
Total
2018
3%
28
9
15
1
2%
27
10
15
1
17
5
21
1
18
5
21
1
100 %
18
100 %
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The table below presents the Corporation’s investable assets and liabilities as of June 30, 2019,
aggregated by the three-level valuation hierarchy and separately identifies investments reported at NAV:
Level 1
Assets:
Cash and cash equivalents
U.S. Treasury bonds
U.S. agency mortgage
backed securities
Corporate bonds
Fixed income mutual funds
All other fixed income
securities
Equity mutual funds & ETF’s
Institutional funds with RDFV
Common stocks
Alternative investments:
Commingled funds
Inflation hedging equity,
commodity, fixed
income fund
Private equity
Hedge funds:
Custom hedge fund
Other hedge funds
Total assets
Liabilities:
Interest rate swap
Total liabilities
Level 2
NAV
Total
686.6
534.9
—
—
—
—
686.6
534.9
87.5
—
1.0
—
137.2
—
—
—
—
87.5
137.2
1.0
6.8
242.5
—
418.1
23.7
—
30.8
—
—
—
—
—
30.5
242.5
30.8
418.1
—
—
288.6
288.6
—
—
—
—
71.3
20.6
71.3
20.6
—
—
—
—
65.5
310.0
65.5
310.0
$
1,977.4
191.7
756.0
2,925.1
$
—
7.1
7.1
$
—
7.1
7.1
$
19
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The table below presents the Corporation’s investable assets and liabilities as of June 30, 2018,
aggregated by the three-level valuation hierarchy and separately identifies investments reported at NAV:
Level 1
Assets:
Cash and cash equivalents
U.S. Treasury bonds
U.S. agency mortgage
backed securities
Corporate bonds
Fixed income mutual funds
All other fixed income
securities
Equity mutual funds & ETF’s
Institutional funds with RDFV
Common stocks
Alternative investments:
Commingled funds
Inflation hedging equity,
commodity, fixed
income fund
Private equity
Hedge funds:
Custom hedge fund
Other hedge funds
Total assets
Liabilities:
Interest rate swap
Total liabilities
Level 2
NAV
Total
780.2
339.0
—
—
—
—
780.2
339.0
226.6
—
1.2
—
139.4
—
—
—
—
226.6
139.4
1.2
8.6
244.7
—
401.1
21.9
—
41.9
—
—
—
—
—
30.5
244.7
41.9
401.1
—
—
280.5
280.5
—
—
—
—
76.3
18.1
76.3
18.1
—
—
—
—
64.3
291.1
64.3
291.1
$
2,001.4
203.2
730.3
2,934.9
$
—
6.4
6.4
$
—
6.4
6.4
$
For the years ended June 30, 2019 and 2018, there were no significant transfers between Levels 1 and 2.
20
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The following summarizes redemption terms for the hedge fund-of-funds vehicles held as of June 30, 2019:
Fund 1
Redemption timing:
Redemption frequency
Required notice
Audit reserve:
Percentage held back
for audit reserve
Custom Hedge Fund
Fund 2
Fund 3
Fund 4
Quarterly
Quarterly
70 days
67% monthly – quarterly
33% quarterly – annually
within 95 days
90 days
65 days
10 %
up to 10%
10 %
10 %
Quarterly
The hedge funds include three hedge fund-of-funds and one custom hedge fund. The custom fund is
structured as a multi-strategy hedge fund with the Corporation as the sole investor. The investment
objective and strategies used by the hedge funds-of-funds and custom hedge fund are similar. The
investment objective is to achieve positive absolute returns with low volatility, achieved through
investments with multiple underlying managers who are investing across various strategies. Strategies
utilized within these hedge funds include, but are not limited to:

Credit/Distressed includes investment companies that focus mainly on opportunities in corporate fixed
income securities of companies that are in financial distress, or perceived financial distress, or going
through a restructuring or re-organization.

Event Driven includes investment companies that focus on identifying securities that would benefit from
the occurrence of a major corporate event.

Global Macro includes investment companies that employ broad mandates to invest globally across all
asset classes, including interest rates, currencies, commodities, and equities, in order to benefit from
market movements within various countries.

Equity Long/Short includes investment companies that maintain long and short positions in publicly
traded equities in order to capture opportunities driven by their perception of securities or industries
being overvalued or undervalued.

Relative Value includes investment companies that seek to identify valuation discrepancies between
related securities, utilizing fundamental and quantitative techniques to establish equities, fixed income,
and derivative positions.
21
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Investments in hedge funds are carried at estimated fair value. Fair value is based on the NAV as a
practical expedient of the shares in each investment company or partnership. Such investment companies
or partnerships mark-to-market or mark-to-fair value the underlying assets and liabilities in accordance with
U.S. GAAP. Realized and unrealized gains and losses of the investment companies and partnerships are
included in their respective operations in the current year. Changes in unrealized gains or losses on
investments, including those for which partial liquidations were effected in the course of the year, are
calculated as the difference between the NAV of the investment at year-end less the NAV of the investment
at the beginning of the year, as adjusted for contributions and redemptions made during the year and
certain lock-up provisions. Generally, no dividends or other distributions are paid.
The following summarizes the status of contributions to the private equity vehicles held as of June 30,
2019:
Fund-of-funds
Direct funds
Total
Total
commitment
Percentage of
commitment
contributed
Percentage of
commitment
remaining
$
30.2
31.5
94.8 %
26.4
5.2 %
73.6
$
61.7
Investments in private equity funds, typically structured as limited partnership interests, are carried at
estimated fair value using NAV, as a practical expedient, or equivalent as determined by the General
Partner in the absence of readily determinable fair values. Distributions under this investment structure are
made to investors through the liquidation of the underlying assets. It is expected to take up to ten years to
fully distribute the proceeds of those assets. The fair value of limited partnership interests is generally
based on fair value capital balances reported by the underlying partnerships, subject to management
review and adjustment. Security values of companies traded on exchanges, or quoted on NASDAQ, are
based upon the last reported sales price on the valuation date. Security values of companies traded over
the counter, but not quoted on NASDAQ, and securities for which no sale occurred on the valuation date
are based upon the last quoted bid price. The value of any security for which a market quotation is not
readily available may be its cost, provided however, that the General Partner adjusts such cost value to
reflect any bona fide third-party transactions in such a security between knowledgeable investors, of which
the General Partner has knowledge. In the absence of any such third-party transactions, the General
Partner may use other information to develop a good faith determination of value. Examples include, but
are not limited to, discounted cash flow models, absolute value models, and price multiple models. Inputs
for these models may include, but are not limited to, financial statement information, discount rates, and
salvage value assumptions.
The valuation of both marketable and nonmarketable securities may include discounts to reflect a lack of
liquidity or extraordinary risks, which may be associated with the investment. Determination of fair value is
performed on a quarterly basis by the General Partner. Because of the inherent uncertainty of valuation,
the determined values may differ significantly from the values that would have been used had a ready
market for those investments existed.
22
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Institutional funds with RDFV are commingled equity and fixed income funds, structured similarly to mutual
funds, whose fair value is considered to be readily determinable. These funds’ shares can be redeemed on
any trading day at the relevant NAV per share on that day, as reported by the funds. There are no
significant restrictions on redemption or redemption penalties.
(4) Liquidity and Availability of Resources
Financial assets available within one year of the balance sheet date for general expenditures such as
operating expenses and construction costs not financed with debt as of June 30 are as follows:
2019
Cash and cash equivalents
Investments (excluding certain alternative investments)
Patient accounts receivable
$
559.6
1,379.1
691.7
2,630.4
$
2018
692.6
1,223.1
651.5
2,567.2
The Corporation has certain board-designated assets whose use is limited which are available for general
expenditures within one year in the normal course of operations, pending board approval. These boarddesignated assets were $170.3 and $189.2 as of June 30, 2019 and 2018, respectively, and are not
included in the table above. The Corporation has other assets whose use is limited for donor restricted
purposes, debt service, and for the self-insurance programs for professional and general liability risks,
employee health and workers’ compensation. These assets whose use is limited are not available for
general expenditures within the next year and are not included in the table above.
As part of the Corporation’s liquidity management plan, cash in excess of daily requirements is invested in
short-term investments and money market funds.
(5) Property and Equipment, net
The components of property and equipment recorded at historical cost and the related accumulated
depreciation at June 30 are summarized as follows:
2019
Land
Buildings and improvements
Equipment
$
Less accumulated depreciation and amortization
Construction-in-progress
$
23
2018
90.4
1,648.3
2,110.6
88.7
1,590.1
2,020.2
3,849.3
3,699.0
(2,676.8)
(2,519.7)
1,172.5
1,179.3
260.9
141.7
1,433.4
1,321.0
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Construction-in-progress includes a variety of ongoing capital projects of the Corporation as of June 30,
2019 and 2018, including the construction of a new surgical pavilion at MGUH, an operating room
expansion at MFSMC and other capital projects at MWHC that were funded through the Series 2017A
bond offering. In connection with these projects the Corporation has total unspent commitments of $464.4
and $68.7 as of June 30, 2019 and 2018, respectively. Interest expense, net of investment earnings,
capitalized for these projects totaled $10.2 and $13.3 as of June 30, 2019 and 2018, respectively.
Depreciation and amortization expense related to property and equipment amounted to $194.3 and $200.0
for the years ended June 30, 2019 and 2018, respectively.
(6) Other Assets
Other assets as of June 30 consist of the following:
2019
Investments in unconsolidated entities
Reinsurance receivables
Other
2018
$
16.5
21.9
91.9
18.2
25.1
86.6
$
130.3
129.9
The Corporation has investments in other healthcare related organizations that are accounted for under the
equity method which total $16.5 and $18.2 at June 30, 2019 and 2018, respectively. The related ownership
interest in these organizations ranges from 8% to 50%. The Corporation’s share of earnings in these
organizations was $4.2 and $1.4 for the years ended June 30, 2019 and 2018, respectively, and are
recognized in other operating revenue in the consolidated statements of operations and changes in net
assets.
As of June 30, 2019 and 2018, other assets also include $74.1 and $64.4, respectively, of investments
associated with a nonqualified, tax-deferred compensation plan for which there is an offsetting payable
included in other long-term liabilities within the consolidated balance sheets.
24
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(7) Debt
As of June 30, the Corporation’s outstanding borrowings include the following:
2019
Maryland Health and Higher Educational Facilities:
Authority fixed rate revenue bonds:
Series 1998A 5.25% Term bonds due 2038
Series 1998B 5.25% Term bonds due 2038
Series 2011 2.00%–5.00% Serial bonds due 2012–2023
Series 2011 5.00% Term bonds due 2031–2041
Series 2012 2.19% Direct Purchase due 2017–2022
Series 2013A 3.00%–5.00% Serial bonds due 2016–2028
Series 2013A 4.00%–5.00% Term bonds due 2038–2041
Series 2013B 3.00%–5.00% Serial bonds due 2025–2033
Series 2013B 4.00%–5.00% Term bonds due 2038
Series 2015 2.00%–5.00% Serial bonds due 2016–2033
Series 2015 4.00%–5.00% Term bonds due 2038–2045
Series 2017A 3.75%–5.00% Term bonds due 2042–2047
Plus unamortized net premium
$
District of Columbia Hospital Revenue Bonds:
Multimodal revenue bonds at variable rates:
Series 1998A 1.35%–2.04% at June 30, 2019 Serial bonds
due 2008–2038 0.95%–1.55% at June 30, 2018
Multimodal revenue bonds at fixed rates:
Series 1998B 2.75%–5.00% Serial bonds due 2008–2019
Series 1998C 2.75%–5.00% Serial bonds due 2008–2019
MedStar Health, Inc. Taxable Fixed Rate Revenue Bonds:
Series 2015 0.80%–3.70% Serial bonds due 2016–2031
Notes payable to financial institutions or state agencies under
mortgages (floating rates ranging between 3.1%–8.0%) and other
Line of credit due January 2022 (0.10%–2.97% at
June 30, 2019 and 0.14%–2.54% at June 30, 2018)
Deferred financing costs, net
Total debt
2018
82.0
57.0
16.3
41.0
26.8
55.7
56.9
60.8
89.0
167.9
176.8
395.0
85.2
82.0
57.0
19.3
41.0
32.8
57.3
56.9
60.8
89.0
172.3
176.8
395.0
91.4
1,310.4
1,331.6
109.1
112.8
—
—
1.7
1.7
109.1
116.2
85.6
90.6
14.8
15.4
129.8
(11.4)
129.8
(12.3)
1,638.3
Less current portion of long-term debt
(63.9)
Long-term debt, net
$
25
1,574.4
1,671.3
(157.3)
1,514.0
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Scheduled maturities on borrowings for the next five fiscal years and thereafter are as follows:
2020
2021
2022
2023
2024
Thereafter
$
63.9
29.8
160.7
31.8
32.8
1,245.5
$
1,564.5
The Corporation, which is currently the sole member of an “obligated group” as defined in the Master Trust
Indenture, is bound by the provisions of the Master Trust Indenture for payment of any outstanding
obligations under existing loan agreements. All of the hospitals and certain other affiliates of the
Corporation are parties to a guaranty agreement pursuant to which they jointly and severally guaranty the
payment and performance of the obligations under the Master Trust Indenture. The Master Trust Indenture
requires that certain Material System Affiliates, which is defined therein as any system affiliate that
generates in excess of 5.0% of the system’s revenues, execute the guaranty agreement unless otherwise
exempt pursuant to the provisions of the Master Trust Indenture. The Master Trust Indenture has been
amended such that the Corporation’s regulated insurance entities, which may constitute Material System
Affiliates, are not required to become parties to the Guaranty Agreement due to regulatory restrictions
placed on their assets which make them unable to fulfill the obligations of a guarantor. Parties to the
guaranty agreement currently include: HH MedStar Health, Inc., MedStar Enterprises, MedStar
Georgetown University Hospital, MedStar National Rehabilitation Hospital, MedStar Washington Hospital
Center, MedStar Franklin Square Medical Center, MedStar Good Samaritan Hospital, MedStar Harbor
Hospital, MedStar Montgomery Medical Center, MedStar Southern Maryland Hospital Center, MedStar St.
Mary’s Hospital, MedStar Union Memorial Hospital, Parkway Ventures, and MedStar Visiting Nurse
Association, Inc. The obligations of the guarantors under the Guaranty Agreement are currently
collateralized by deeds of trust granted by the hospitals. Under the Master Trust Indenture and the deeds of
trust, as collateral for the payments due thereunder, the Corporation and its hospital affiliates, have granted
a security interest in their revenues subject to permitted encumbrances. As of June 30, 2019, all of the
Corporation’s Maryland Health and Higher Educational Facilities Authority Revenue Bonds, District Hospital
Revenue Bonds, and MedStar Health Taxable Revenue Bonds are secured by obligations issued under the
Master Trust Indenture.
Under the Master Trust Indenture, the Corporation is required to maintain, among other covenants, a
maximum annual debt service coverage ratio of not less than 1.10. Under the loan agreements relating to
the Series 1998 Bonds (defined below), the Corporation is required to maintain a historical debt service
coverage ratio of not less than 2.0 and to maintain at least 65 days cash on hand. In the event the
Corporation does not meet either of these requirements, it is required to fund a trustee-held debt service
reserve fund securing the Series 1998 Bonds. The amount to be deposited shall equal the lesser of: 10% of
the principal amount of such outstanding bonds, or the largest annual debt service with respect to such
bonds in any future year, or 125% of the average annual debt service of future years. As of June 30, 2019
26
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
and 2018, there were no funds required to be held in the debt service reserve fund for the Series 1998
Bonds.
In December 1998, the Maryland Health and Higher Education Facilities Authority (MHHEFA) and the
District of Columbia (District) issued bonds (Series 1998 Bonds) on behalf of the Corporation. Bond
proceeds of approximately $588.6 were loaned to the Corporation under separate loan agreements with
MHHEFA and the District upon execution of obligations pursuant to the Master Trust Indenture. MHHEFA
issued $283.5 of Revenue Bonds. Principal and interest under the Series 1998 MHHEFA bonds are
insured under municipal insurance policies with Assured and Ambac. The District issued $300.0 of
Multimodal Revenue Bonds, including $150.0 Series 1998A, $75.0 Series 1998B, and $75.0 Series 1998C.
The District Series 1998A bonds, which consist of three tranches totaling $105.3 at August 2019, trade as
uninsured Variable Rate Demand Obligations backed by bank letters of credit. The Series 1998A Tranche I
bonds which remained outstanding in August 2019 consisted of approximately $35.1 bonds trading in a
daily mode backed by a letter of credit issued by TD Bank, N.A. and remarketed by J.P. Morgan Securities
Inc. The letter of credit expires in February 2022. In the event of a failed remarketing, the Tranche I bonds
would be tendered to the bank and repaid over a five-year period, beginning 367 days following the date of
the failed remarketing. The Series 1998A Tranche II bonds totaled $35.1 in August 2019. These bonds
trade in a weekly mode and are remarketed by TD Securities. The letter of credit backing these bonds was
issued by TD Bank, National Association and expires in January 2021. In the event of a failed remarketing,
the Tranche II bonds would be tendered to the bank and repaid over a five-year period, beginning 367 days
following the failed remarketing. The Series 1998A Tranche III bonds totaled $35.1 in August 2019. These
bonds trade in a weekly mode and are remarketed by Citigroup Global Markets Inc. The letter of credit
backing these bonds was issued by PNC Bank, National Association and expires in March 2020. In the
event of a failed remarketing, the Tranche III bonds would be tendered to the bank and repaid over a
four-year period, beginning 367 days following the failed remarketing. None of the Series 1998A bonds
have been put at June 30, 2019 and 2018, respectively. The reimbursement obligation with respect to the
letters of credit are evidenced and secured by obligations issued by the Corporation under the Master Trust
Indenture.
Related to the District Series 1998A bonds, the Corporation entered into an interest rate swap with Wells
Fargo Bank, National Association in a notional amount totaling $150.0 (reduced to $63.5 at August 2019).
The swap agreement expires in fiscal year 2027. Under the terms of the swap, the Corporation pays a fixed
rate and receives a variable rate. Collateral is only required to be posted under the swap in the event that
the Corporation’s credit ratings are downgraded by two rating agencies below the BBB – or Baa2 – level.
To date, no collateral postings have been required. As of June 30, 2019 and 2018, the variable interest rate
under these agreements was 1.59% and 1.29%, respectively. The fixed rate was 3.69% as of June 30,
2019 and 2018. The variable rates are capped at 14.0%. The interest rate swap was secured by obligations
issued under the Master Trust Indenture.
Certain of the Corporation’s bonds are subject to optional redemption or purchase, as follows: (i) the
Series 2011 MHHEFA Bonds maturing on or after August 2022 are subject to redemption or purchase at
the option of the Corporation prior to maturity beginning in 2021; (ii) the Series 2013A MHHEFA Bonds
maturing on or after August 2024 are subject to redemption or purchase at the option of the Corporation
prior to maturity beginning in 2023; (iii) the Series 2015 MHHEFA Bonds maturing on or after August 2025
are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in 2025;
27
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(iv) the Series 2015 taxable bonds are subject to redemption at any time, so long as the Corporation makes
certain make-whole redemption payments; and (v) the Series 2017 MHHEFA Bonds maturing on or after
May 15, 2027 are subject to redemption or purchase at the option of the Corporation prior to maturity
beginning in 2027.
The Corporation maintains a $250.0 revolving credit agreement provided by a group of banks. The facility
was renewed for a three-year term in January 2019 and expires in January 2022. The facility is evidenced
by an obligation issued under the Master Trust Indenture. The outstanding balance on the facility was
$129.8 as of June 30, 2019 and 2018. The facility includes certain covenants, including a requirement to
maintain Days Cash on Hand of 70 days, measured semi-annually as of each June 30 and December 31,
and a Debt Service Coverage ratio of 1.25, measured quarterly on a rolling four quarters basis. In addition,
the Corporation is required to maintain a minimum credit rating of Baa2 or its equivalent from Standard and
Poor’s and Moody’s Investors Service.
In addition, the Corporation maintains a $30.0 letter of credit facility, provided by a single lender, which is
also evidenced by an obligation issued under the Master Trust Indenture. This facility is principally used to
securitize certain regulatory obligations under various insurance programs and has terms and conditions
similar to the revolving credit agreement. The facility was renewed for a three-year term in January 2019
and expires in January 2022; however, the standby letters of credit issued under the facility can be
canceled at the bank’s option each year. As of June 30, 2019 and 2018, standby letters of credit issued
pursuant to the facility were $17.4 and $15.9, respectively. No amounts have been drawn by the
beneficiaries under the standby letters of credit.
Financing costs are amortized over the estimated duration of the related debt using the effective interest
method.
(8) Retirement Liabilities
The Corporation has two qualified defined benefit pension plans (MedStar Health, Inc. Pension Equity Plan
(PEP) and MedStar Health, Inc. Cash Balance Retirement Plan (CBRP)) covering substantially all full-time
employees hired before 2005. MedStar St. Mary’s Hospital also has a defined benefit plan that substantially
covers all employees of MedStar St. Mary’s Hospital who were eligible prior to the plan being frozen.
Participation in all plans has been closed to new entrants and all plans are frozen to future benefit accruals.
Benefits under the plans are substantially based on years of service and the employees’ career earnings.
The Corporation contributes to the plans based on actuarially determined amounts necessary to provide
assets sufficient to meet benefits to be paid to plan participants and to meet the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension
Protection Act of 2006, and Internal Revenue Service regulations. Effective July 1, 2000, employees of the
Transferred Businesses (note 16) became participants in one of the Corporation’s pension plans and are
reflected in the pension information provided below.
The Corporation’s investment policies are established by MedStar Health, Inc.’s Investment Committee,
which is comprised of members of the Board of Directors, other community leaders, and management.
Among its responsibilities, the Investment Committee is charged with establishing and reviewing asset
allocation strategies, monitoring investment manager performance, and making decisions to retain and
28
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
terminate investment managers. Assets of each of the Corporation’s pension plans are managed in a
similar fashion, as the Corporation’s investments and assets whose use is limited, by the same group of
investment managers. The Corporation has incorporated an IPS into the investment program. The IPS,
which has been formally adopted by the Corporation’s Board of Directors, contains numerous standards
designed to ensure adequate diversification by asset class and geography. The IPS also limits all
investments by manager and position size, and limits fixed income position size based on credit ratings,
which serves to further mitigate the risks associated with the investment program. As of June 30, 2019 and
2018, management believes that all investments were being managed in a manner consistent with the IPS.
The following table illustrates the actual allocations of the Corporation’s primary pension plans’ investment
portfolio as of June 30:
2019
Cash
Publicly traded equities – domestic
Publicly traded equities – international
Fixed income securities
Institutional funds with RDFV
Alternative investments:
Commingled equity funds
Inflation hedging equity, commodity, fixed income fund
Hedge funds
Private equities
Total
2018
1%
27
6
16
9
1%
28
7
15
9
13
4
22
2
13
4
21
2
100 %
29
100 %
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The tables below present the Corporation’s pension plans’ investable assets as of June 30 aggregated by
the three level valuation hierarchy and separately identify investments reported at NAV:
2019
Assets:
Cash and cash equivalents
U.S. Treasury bonds
U.S. agency mortgage backed
securities
Corporate bonds
All other fixed income securities
Equity mutual funds and ETF’s
Institutional funds with RDFV
Common stocks
Alternative investments:
Commingled funds
Inflation hedging equity,
commodity, fixed income fund
Private equity
Hedge funds:
Custom hedge fund
Other hedge funds
Total assets
Level 1
$
$
2018
Assets:
Cash and cash equivalents
U.S. Treasury bonds
U.S. agency mortgage backed
securities
Corporate bonds
All other fixed income securities
Equity mutual funds and ETF’s
Institutional funds with RDFV
Common stocks
Alternative investments:
Commingled funds
Inflation hedging equity,
commodity, fixed income fund
Private equity
Hedge funds:
Custom hedge fund
Other hedge funds
Total assets
$
NAV
Total
40.5
66.6
—
—
—
—
40.5
66.6
38.9
—
2.2
131.0
—
242.8
—
65.4
12.9
—
101.8
—
—
—
—
—
—
—
38.9
65.4
15.1
131.0
101.8
242.8
—
—
140.7
140.7
—
—
—
—
45.1
23.4
45.1
23.4
—
—
—
—
52.2
184.2
52.2
184.2
522.0
180.1
445.6
1,147.7
Level 1
$
Level 2
Level 2
NAV
Total
45.1
60.9
—
—
—
—
45.1
60.9
34.5
—
3.3
148.3
—
250.0
—
65.7
11.7
—
103.1
—
—
—
—
—
—
—
34.5
65.7
15.0
148.3
103.1
250.0
—
—
141.0
141.0
—
—
—
—
48.2
21.0
48.2
21.0
—
—
—
—
51.2
182.5
51.2
182.5
542.1
180.5
443.9
1,166.5
30
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
For the years ended June 30, 2019 and 2018, there were no significant transfers between Levels 1 and 2.
The general investment strategies, fund structures, and valuation methods related to the pension plans’
investments are largely the same as those included in the Corporation’s primary investment portfolio and
discussed further in note 3. The following summarizes redemption terms for the hedge fund-of-funds
vehicles held as of June 30, 2019:
Fund 1
Redemption timing:
Redemption frequency
Required notice
Audit reserve:
Percentage held back
for audit reserve
Custom Hedge Fund
Fund 2
Fund 3
Fund 4
Quarterly
Quarterly
70 days
68% monthly – quarterly
32% quarterly – annually
within 95 days
90 days
65 days
10 %
up to 10%
10 %
10 %
Quarterly
The following summarizes the status of contributions to the private equity vehicles held as of June 30,
2019:
Fund
Fund
Fund
Fund
Fund
Fund
1
2
3
4
5
6
Total
Total
commitment
Percentage of
commitment
contributed
Percentage of
commitment
remaining
$
9.0
8.5
8.5
5.0
5.0
5.0
95.0 %
96.1
92.4
71.0
96.0
88.0
5.0 %
3.9
7.6
29.0
4.0
12.0
$
41.0
The Corporation has established a long-term investment return target of 7.75% for both the PEP and CBRP
in 2019 and 2018, respectively. These assumptions are based on historical returns achieved in the
investment portfolios and represent the return that can reasonably be expected to be generated on a
similarly structured portfolio in the future.
The Corporation recognizes the funded status of defined benefit pension plans in the consolidated balance
sheets and the recognition in unrestricted net assets of unrecognized gains or losses, prior service costs or
credits and transition assets or obligations. The funded status is measured as the difference between the
fair value of the plan’s assets and the projected benefit obligation of the plan. The measurement date for
the plans is June 30.
31
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The following are deferred pension costs which have not yet been recognized in periodic pension expense
but instead are accrued in unrestricted net assets, as of June 30, 2019 and 2018. Unrecognized actuarial
losses represent unexpected changes in the projected benefit obligation and plan assets over time,
primarily due to changes in assumed discount rates and investment experience. Unrecognized prior service
cost is the impact of changes in plan benefits applied retrospectively to employee service previously
rendered. Deferred pension costs are amortized into annual pension expense over the expected future
lifetime for active employees with frozen benefits.
Amounts in
unrestricted
net assets to
be recognized
during the
next fiscal year
Net actuarial loss
$
Amounts recognized in
unrestricted net assets as of:
June 30, 2019
June 30, 2018
30.3
1,012.2
829.1
The following table sets forth the plans’ funded status and amounts recognized in the accompanying
consolidated financial statements as of June 30:
2019
Change in benefit obligation:
Benefit obligation at beginning of year
Interest cost
Plan amendments
Actuarial loss (gain)
Benefits paid
$
Benefit obligation at end of year
Change in plan assets:
Plan assets at fair value at beginning of year
Actual return on plan assets
Company contributions
Benefits paid
$
Plan assets at fair value at end of year
Funded status/net amount recognized
32
$
2018
1,450.6
61.4
—
130.4
(58.9)
1,481.0
57.8
0.1
(26.6)
(61.7)
1,583.5
1,450.6
1,166.5
13.8
26.3
(58.9)
1,076.7
78.1
73.4
(61.7)
1,147.7
1,166.5
(435.8)
(284.1)
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The amounts recognized in the consolidated financial statements consist of the following as of June 30:
2019
Pension assets (included in other assets)
Pension liabilities
$
2018
0.7
(436.5)
5.9
(290.0)
The Corporation has estimated $25.3 for its defined benefit contributions for the fiscal year ending June 30,
2020.
Expected fiscal year benefit payments for all defined benefit plans is as follows:
2020
2021
2022
2023
2024
2025–2029
$
83.8
81.2
84.4
88.3
88.0
451.2
$
876.9
Net periodic pension income for the years ended June 30 is as follows:
2019
Interest cost on projected benefit obligation
Return on plan assets
Amortization of prior year plan amendments
Recognized actuarial loss
Net periodic pension income
33
2018
$
61.4
(89.3)
(0.5)
24.8
57.8
(87.4)
(0.5)
23.9
$
(3.6)
(6.2)
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
The assumptions used in determining net periodic pension expense and accrued pension costs shown
above are as follows:
2019
Discount rates for obligations at year end:
MedStar Health, Inc. Pension Equity Plan
MedStar Health, Inc. Cash Balance Retirement Plan
MedStar St. Mary’s Hospital Pension Plan
Discount rates for pension cost:
MedStar Health, Inc. Pension Equity Plan – July 1 – June 30
MedStar Health, Inc. Cash Balance Retirement Plan –
July 1 – June 30
MedStar St. Mary’s Hospital Pension Plan – July 1 – June 30
Expected long-term rate of return on plan assets – PEP and
CBRP
Expected long-term rate of return on plan assets – MedStar
St. Mary’s Hospital
2018
3.75 %
3.65
3.40
4.35 %
4.35
4.10
4.35 %
4.05 %
4.35
4.10
3.95
3.75
7.75 %
7.75 %
7.50
7.50
Mortality assumptions for the plans are periodically updated to reflect the most recently published general
industry mortality tables.
The Corporation also has various contributory, tax deferred annuity and savings plans with participation
available to certain employees. The Corporation matches employee contributions up to 3.0% of
compensation in certain plans. The Corporation contributed approximately $41.2 and $37.1 during the
years ended June 30, 2019 and 2018, respectively.
(9) Business and Credit Concentrations
The Corporation provides healthcare services through its inpatient and outpatient care facilities located in
the State of Maryland, the District and Northern Virginia. The Corporation generally does not require
collateral or other security in extending credit; however, it routinely obtains assignment of (or is otherwise
entitled to receive) patients’ benefits receivable under their health insurance programs, plans or policies
(e.g., Medicare, Medicaid, Blue Cross, Workers’ Compensation, health maintenance organizations and
commercial insurance policies).
34
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
A summary of net patient service revenue by major category of payor for the years ended June 30 is as
follows:
2019
Medicare and Medicare HMO
Medicaid and Medicaid HMO
Carefirst Blue Cross Blue Shield
Other commercial and managed care payors
Self-pay
2018
36 %
16
19
23
6
37 %
15
19
23
6
100 %
100 %
A summary of net patient receivables by major category of payor as of June 30 is as follows:
2019
Medicare and Medicare HMO
Medicaid and Medicaid HMO
Carefirst Blue Cross Blue Shield
Other commercial and managed care payors
Self-pay
2018
22 %
19
14
39
6
23 %
19
14
37
7
100 %
100 %
Certain Maryland-based hospital charges are subject to review and approval by the Health Services Cost
Review Commission (HSCRC). The HSCRC has jurisdiction over hospital reimbursement in Maryland by
agreement with the Centers for Medicare and Medicaid Services (CMS). This agreement is based on a
waiver from the Medicare Prospective Payment System reimbursement principles granted under Section
1814(b) of the Social Security Act. In January 2014, CMS approved Maryland’s waiver for a five year
period beginning January 1, 2014 for inpatient and outpatient hospital services. The waiver tied hospital per
capita revenue growth to the state’s economic growth of 3.58% and required growth in Medicare spending
per beneficiary in Maryland to be 0.5% below the national average. The waiver also imposed quality
measures and encouraged population health management.
Under the Maryland HSCRC rate methodology, amounts payable for services to Maryland hospital patients
under the Medicare and Medicaid insurance programs are computed at 94% of regulated charges. This
discount amount does not include managed care organization (MCO) granted discounts for medical
education. Hospital patients under the Blue Cross and approved HMO insurance programs are computed
at 98% of regulated charges. Maryland accounts receivable from these third-party payors have been
adjusted to reflect the difference between charges and the payable amounts.
In connection with the waiver, the HSCRC introduced the Global Budget Revenue (GBR) model, which
covers the Corporation’s seven Maryland hospitals. This model moves payment to hospitals from each
individual service to a total revenue for each hospital (or a combination of hospitals) to provide hospitals
35
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
flexibility in the objectives of better care for individuals, higher levels of overall population health, and
improved health care affordability. The model removes the financial incentive from increasing volume and
provides incentive to work with partners to provide care in the appropriate setting. Additionally, the GBR
model has the potential of including both prospective and retrospective rate adjustments.
In 2018, Maryland entered into a new ten-year waiver with CMS to include total cost of care benchmarks
and savings, which took effect January 1, 2019, and will be re-evaluated at the end of five years. The new
waiver is intended to shift care into lower cost settings, improve care coordination, and align incentives
among various healthcare providers.
The Budget Control Act of 2011 mandated significant reductions and spending caps on the federal budget
for fiscal years 2012 through 2021. As part of this legislation, a 2% reduction in Medicare spending, known
as Sequestration, was implemented beginning April 1, 2013 and the Corporation’s Medicare payments
subsequent to that date were reduced by the mandatory 2%. It is not possible to determine how future
congressional actions to reduce the federal deficit in order to end Sequestration will impact the
Corporation’s revenues.
Through its MFC subsidiary, the Corporation enters into Fee-For-Service and capitation agreements with
independent health professionals and organizations to provide covered services to eligible enrollees where
such services cannot be provided by its employed physicians or controlled entities. This subsidiary
participates in an annual rate setting process with the State of Maryland. During the process, the revenues
and expenses for all members are evaluated to ensure adequate funding is provided to deliver contracted
services.
MFC’s contract with the District’s Medicaid program expired September 30, 2017. As a large healthcare
provider in the District, the Corporation continues to provide medical care at our facilities for many of these
Medicaid participants who are now enrolled in other managed care organizations. In June 2018, MFC
notified CMS that it would not renew its contracts for participation in the Medicare Advantage program
effective January 1, 2019.
Annually, as of December 31, MFC is required to be in compliance with risk-based capital statutory funding
requirements, and as of the most recent measurement period, MFC is in compliance.
(10) Certain Significant Risks and Uncertainties
As a healthcare provider, the Corporation is subject to certain significant inherent risks, including the
following:

Dependence on revenues derived from reimbursement by the federal Medicare and state Medicaid
programs;

Regulation of hospital rates by the State of Maryland HSCRC;

Government regulation, government budgetary constraints and proposed legislative and regulatory
changes, and;

Lawsuits alleging malpractice or other claims.
36
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Such inherent risks require the use of certain management estimates in the preparation of the
Corporation’s consolidated financial statements and it is reasonably possible that a change in such
estimates may occur.
The Medicare and state Medicaid reimbursement programs represent a substantial portion of the
Corporation’s revenues and the Corporation’s operations are subject to a variety of other federal, state and
local regulatory requirements. In addition, changes in federal and state reimbursement funding
mechanisms and related government budgetary constraints could have a significant adverse effect on the
Corporation. Similarly, failure by the Corporation to maintain required regulatory approvals and licenses
and/or changes in related regulatory requirements could have a significant adverse effect.
Laws and regulations governing the Medicare and Medicaid programs 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. Management periodically reviews recorded amounts receivable from or payable to
third-party payors and may adjust these balances as new information becomes available. In addition,
revenue received under certain third-party agreements is subject to audit. During 2019 and 2018, certain of
the Corporation’s prior year third-party cost reports were audited and settled, or tentatively settled, by
third-party payors, which resulted in gains of approximately $12.1 and $27.6, respectively. Adjustments
resulting from such audits and management reviews of unaudited years and open claims are reflected as
adjustments to revenue in the year that the adjustment becomes known. Although certain other prior year
cost reports submitted to third-party payors remain subject to audit and retroactive adjustment,
management does not expect any material adverse settlements.
The healthcare industry is subject to numerous laws and regulations from federal, state and local
governments, and the government has increased enforcement of Medicare and Medicaid anti-fraud and
abuse laws, as well as the physician self-referral law (Stark Law). The Corporation’s compliance with these
laws and regulations can be subject to periodic governmental review and interpretation, which can result in
regulatory action unknown or unasserted at this time. Management is aware of certain asserted and
unasserted legal claims and regulatory matters arising in the ordinary course of business, but cannot
reasonably predict any particular outcomes or operational or financial effects from these matters at this
time. The Corporation will continue to monitor all government inquiries and respond appropriately.
Recent government initiatives have focused on curtailing fraud, waste, and abuse in government-funded
healthcare programs. To this end, the federal government and many states, have implemented programs to
audit and recover potential overpayments to providers from the Medicare and Medicaid programs. The
Corporation’s hospitals and providers have periodically received audit requests from Medicare and
Medicaid audit contractors, as well as the Office of Inspector General of the U.S. Department of Health &
Human Services. These audit requests have targeted, among other things, medical necessity of inpatient
admissions and provider documentation and coding practices. The Corporation’s hospitals and providers
have cooperated with each of these audit requests and implemented a program to track and manage their
effect.
As a result of federal healthcare reform legislation, rules and regulations, substantial changes are occurring
in the United States healthcare system. These include numerous provisions affecting the delivery of
37
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
healthcare services, the financing of healthcare costs, reimbursement to healthcare providers, the privacy
and security of health information, and the legal obligations of health insurers, providers and employers.
In June 2008, the Corporation received a U.S. Department of Health and Human Services, Office of
Inspector General subpoena requesting documents relating to the contractual arrangements between a
private cardiology group and MUMH and, in one instance, MFSMC. In March 2019, the Corporation,
MUMH, and MFSMC executed a formal settlement agreement with the U.S. Department of Justice under
which the Corporation paid the government a settlement amount of $35.0, which was consistent with the
Corporation’s recorded accrual as of June 30, 2018, in exchange for full releases covering the conduct at
issue as well as the dismissal of the civil actions underlying the government investigations. There was no
admission of wrongdoing under the settlement and no corporate integrity agreement was required.
(11) Self-Insurance Programs
The Corporation maintains self-insurance programs for professional and general liability risks, employee
health and workers’ compensation. Estimated liabilities have been recorded based on actuarial estimation
of reported and incurred but not reported claims. The combined accrued liabilities for these programs at
June 30 were as follows:
2019
Professional and general liability
Employee health
Workers’ compensation
$
Total self-insurance liabilities
Less current portion
Total self-insurance liabilities, net of current portion $
2018
312.4
25.2
33.4
322.9
24.4
31.4
371.0
378.7
(98.4)
(95.5)
272.6
283.2
The Corporation’s self-insurance program for professional and general liability is responsible for the
following exposures as of June 30, 2019:
(a) For professional liability during the fiscal years ended June 30, 2019 and 2018, for all MedStar entities
except MMMC and MSMH, the Corporation is responsible for the first $5.0 exposure for each and
every claim plus an additional exposure above the first $5.0 self-insured retention referred to as an
“inner aggregate.”
For the period January 1, 2017 to December 31, 2018, the inner aggregate exposes the Corporation up
to $3.0 per claim with an aggregate of $6.0 above the $5.0 per claim self-insured retention for all claims
incurred for each 12-month period ended December 31. Effective January 1, 2018, the inner aggregate
exposes the Corporation up to $4.0 per claim with an aggregate of $8.0 above the $5.0 per claim
self-insured retention for all claims incurred.
For MMMC and MSMH, during the period January 1, 2017 to December 31, 2018, the Corporation is
responsible for the first $2.0 exposure for each claim (not subject to the inner aggregate structures
38
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
noted above). Effective January 1, 2018, the Corporation is responsible for the first $5.0 exposure for
each claim (not subject to the inner aggregate structures noted above).
(b) For fiscal years ended June 30, 2019 and 2018, for general liability, the Corporation is responsible for
the first $3.0 exposure for each claim (for MMMC and MSMH, the first $2.0 exposure for each claim).
General liability claims are not subject to the inner aggregate excess retention as described above.
(c) Commercial excess re-insurance has been purchased above the self-insured retentions described
above in multiple layers and in twin towers; one tower for professional liability and one tower for
general liability. Effective January 1, 2016, each tower has 10 layers of excess re-insurance which
provides coverage of up to $175.0 per claim and $175.0 annual aggregate. The Corporation maintains
reinsurance contracts with various “A” rated commercial insurance companies.
The professional and general liabilities as of June 30, 2019 and 2018 have been discounted at a rate of
1.75%. The workers’ compensation liabilities as of June 30, 2019 and 2018 have been discounted at a rate
of 1.50%.
Assets available to fund these liabilities are held in separate accounts (see note 2). Contributions required
to fund professional and general liability, employee health benefits and workers’ compensation programs
are determined by the plans’ administrators based on appropriate actuarial assumptions. The professional
and general liability programs are administered through an offshore wholly owned captive insurance
company, Greenspring Financial Insurance, LTD.
(12) Endowment Net Assets
The Corporation’s endowments consist of individual donor restricted funds established for a variety of
purposes. As required by U.S. GAAP, net assets associated with endowment funds are classified and
reported based on the existence or absence of donor-imposed restrictions.
(a) Interpretation of Relevant Law
The Corporation has interpreted the State Prudent Management of Institutional Funds Act (SPMIFA) as
requiring the preservation of the fair value of the original gift as of the gift date of the donor restricted
endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the
Corporation classifies as net assets with donor restrictions (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. In accordance with
SPMIFA, the Corporation considers the following factors in making a determination to appropriate or
accumulate donor restricted endowment funds:
(1) The duration and preservation of the fund
(2) The purposes of the Corporation and the donor restricted endowment fund
(3) General economic conditions
39
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
(4) The possible effect of inflation and deflation
(5) The expected total return from income and the appreciation of investments
(6) Other resources of the Corporation
(7) The investment policies of the Corporation
(b) Endowment Net Assets
Donor restricted endowment funds within net assets with donor restrictions whose use is restricted into
perpetuity were $44.8 and $43.4 as of June 30, 2019 and 2018, respectively. Investment returns and
other income from these endowment funds whose use is restricted as to time or purpose were $6.4 and
$6.6 as of June 30, 2019 and 2018, respectively.
(c) Underwater Endowments
From time to time, the fair value of assets associated with individual donor restricted endowment funds
may fall below the level that the donor or SPMIFA requires the Corporation to retain as a fund of
perpetual duration. No material deficiencies existed at June 30, 2019 and 2018.
(d) Investment Strategies
The Corporation has adopted policies for corporate investments, including endowment assets, that
seek to maximize risk-adjusted returns with preservation of principal. The endowment assets are
invested in a manner that is intended to hold a mix of investment assets designed to meet the
objectives of the account. The Corporation expects its endowment funds, over time, to provide an
average rate of return that generates earnings to achieve the endowment purpose.
To satisfy its long-term rate-of-return objectives, the Corporation relies on a total return strategy in
which investment returns are achieved through both capital appreciation (realized and unrealized) and
current yield (interest and dividends). The Corporation employs a diversified asset allocation structure
to achieve its long-term return objectives within prudent risk constraints.
The Corporation monitors the endowment funds returns and appropriates average returns for use. In
establishing this practice, the Corporation considered the long-term expected return on its endowment.
This is consistent with the Corporation’s objective to maintain the purchasing power of the endowment
assets held in perpetuity or for a specified term as well as to provide additional real growth through new
gifts and investment return.
(13) Income Taxes
The Corporation and the majority of its subsidiaries are not-for-profit corporations as defined in
Section 501(c)(3) of the Internal Revenue Code (the Code) and are exempt from federal income taxes
under Section 501(a) of the Code. The Corporation’s tax-exempt businesses generate nominal amounts of
unrelated business income subject to income tax. For corporate income tax purposes, the Corporation has
two consolidated groups of for-profit, taxable entities. The parent companies of these groups are Parkway
Ventures, Inc. and MedStar Enterprises, Inc.
40
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of
2017. The legislation significantly changed U.S. tax law by, among other things, lowering the corporate
income tax rates from 35% to 21%, effective January 1, 2018. The legislation also amended the law for net
operating loss (NOL) such that in tax years ending after December 31, 2017, a corporation’s NOLs can no
longer be carried back; however they can be carried forward indefinitely (removing the 20 year limitation).
For tax years beginning after December 31, 2017, an 80% limitation of NOL use against taxable income
applies. As a result of the legislation, NOLs generated in the June 30, 2019 tax year can no longer be
carried back, can be carried forward indefinitely, and are subject to the 80% limitation. The Corporation has
reasonably estimated the effects of the 2017 legislation and recorded amounts impacting the financial
statements as of June 30, 2019.
The Corporation’s taxable subsidiaries have approximately $230.5 of net operating loss (NOL)
carryforwards as of June 30, 2019, which expire in varying periods through 2036, available to offset future
taxable income. This NOL carryforward represents $48.4 of deferred tax assets. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. During the year ended June 30, 2019, the
Corporation did not record an adjustment to its ending net deferred tax asset. The relevant deferred tax
balances have been revalued to reflect the new federal statutory rate of 21% plus the effective state tax
rate. As of June 30, 2019 and 2018, the Corporation’s deferred tax assets are fully offset by a valuation
allowance. The current tax provisions for the years ended June 30, 2019 and 2018 were not significant.
(14) Charity Care and Other Community Benefits
MedStar Health is committed to ensuring that patients within the communities it serves who lack financial
resources have access to necessary hospital services. MedStar Health and its healthcare facilities serve
the emergency health care needs of everyone who visits the facilities regardless of a patient’s ability to pay
for care; and assist those patients who are admitted through the admissions process for nonurgent and
urgent, medically necessary care who cannot pay for the care they receive.
In meeting this commitment, MedStar Health’s facilities work with uninsured patients to gain an
understanding of each patient’s financial resources prior to admission (for scheduled services) or prior to
billing (for emergency services). Based on this information and patient eligibility, the Corporation’s facilities
assist uninsured and certain underinsured patients that meet medical hardship criteria who reside within
the communities served. This assistance is provided in one or more of the following ways:

Assist with enrollment in publicly funded entitlement programs (e.g., Medicaid and Medicare programs).

Assist with consideration of funding that may be available from other charitable organizations.

Provide charity care and financial assistance according to applicable guidelines, including
considerations for patients that may be underinsured and for those that may be suffering from a
medical hardship.

Provide financial assistance for payment of facility charges using a sliding scale based on patient family
income and financial resources.

Offer periodic payment plans to assist patients with financing their healthcare services.
41
(Continued)
MEDSTAR HEALTH, INC.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Dollars in millions)
Eligibility criteria for financial assistance consider patient’s household income in relation to the federal
poverty guidelines and the equity value of real property and/or other assets. By definition, free care is
available to uninsured patients in households between 0% and 200% of the federal poverty line. Reduced
cost-care is based on a sliding-scale and is available to uninsured patients in households between 200%
and 400% of the federal poverty line. The Corporation’s hospitals utilize a cost to charge ratio methodology
to convert charity care to cost. The estimated cost of services provided is determined based on the
relationship of total operating costs to gross charges. Total operating costs for purposes of this ratio
exclude costs associated with community benefit activities. Total gross patient charges are then offset with
any related reimbursements. The Corporation provided $44.2 and $35.1 of charity care at cost during the
years ended June…

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